Yet another good article supporting my thinking.

Is The American Banking System A Ponzi Scheme In Disguise?

Posted: June 25, 2009 10:35AM by Derek Simon

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Buzz up!

Filed Under: Banking, Hedge Funds, Loans, Mortgages, Regulations

On Friday, June 19, 2009, Texas billionaire Sir Allen Stanford, who was knighted by Antigua in 2006, was indicted by a federal grand jury in Houston for allegedly attempting to defraud investors through his Antiguan-based Stanford International Bank (SIB).

In what the SEC has called a "massive Ponzi scheme", Stanford is alleged to have "misused and misappropriated most of" the $8 billion entrusted to him by SIB's 5,000 to 6,000 investors, including more than $1.6 billion that went to Stanford himself in the form of personal loans, the indictment asserts. (For background reading, see The Biggest Stock Scams Of All Time.)

Not surprisingly, Stanford has denied any misconduct. In a tearful and sometimes defiant interview with Brian Ross of ABC News that aired April 6, the financier promised to fight what were then just allegations "with everything in me."

"I will die and go to Hell if it's a Ponzi scheme," Stanford told Ross. "It's no Ponzi scheme. If it's a Ponzi scheme, why are they finding billions and billions of dollars all over the place?"

Shut up; just shut up, Sir Allen. You had me at "I will die and go to Hell."

The Blame Game
Seriously, as egregious as Stanford's crimes are purported to be, how different was his organization from many of today's more, uh, "traditional" banks? According to that same ABC report, government officials claim they have "found only $500 million of the missing $8 billion in the alleged scheme." If I'm doing my math correctly (and if I'm not, I'm sure I could still find work as an SIB accountant), that amounts to a $7.5 billion shortfall - far less than the $33.9 billion that Bank of America (NYSE:BAC) was required to raise as part of the Fed's "stress test" back in early May.

The sad truth is, not since the blundering Uncle Billy nearly busted Bailey Savings & Loan in the classic 1946 film "It's A Wonderful Life" have financial institutions been so careless with their customers' money. If, in fact, a Ponzi scheme simply entails paying investors with other people's money, rather than profits, haven't some of our nation's largest banks been just as culpable as SIB?

After all, Washington Mutual (OTC:WAMUQ) was still cashing checks when it was losing money hand over fist, wasn't it? Yeah, the company was eventually shut down, but no one accused former CEOs Kerry Killinger and Alan Fishman of any wrongdoing. Yet, in 2007, while Killinger was taking home a $14 million salary, WAMU was taking a $67 million hit to its bottom line, thanks in large part to Killinger's aggressive - dare I say "irresponsible"? - lending strategies. Worse yet, according to The New York Times, Killinger and other WAMU executives "were excluding mortgage losses from the computation of their bonuses." (For related reading, see Executive Compensation: How Much Is Too Much?)

And how about Fishman? In less time than it would've taken WAMU shareholders to put their hands over their heads and lay face down on the bank's cold, tile floor, he was in and out as the company's chief executive officer. Nonetheless, for just 17 days of work, Fishman was paid approximately $20 million, according to FoxNews.com.

Someone Else's Money
Of course, WAMU wasn't the first bank to spend money it didn't have, and it probably won't be the last. For years, bank reserves, the amount of liquid assets some countries (like the U.S.) require financial institutions to keep on hand for withdrawals, have been dwindling. In an April 2008 blog entitled "Myths About The Monetary Base And Bank Reserves", Swedish economist Stefan Karlsson notes that "bank reserves in early 1990 were $60 billion as compared to $42 billion now."

At least in the United States, this practice of fractional-reserve banking continues to flourish, undoubtedly because the U.S. government continues to insure deposits - now for up to $250,000 - thanks to legislation signed by President Barack Obama on May 20. With such guarantees in place, is it any wonder that banks are lending depositors' money to practically anyone with a pulse? (For more on FDIC insurance, see Are Your Bank Deposits Insured?)

Heck, in Ohio, you don't even need a functioning ticker to get a loan. In March of 2007, Ohio mortgage brokers Mark S. Edwards and Mark D. Musselman were both convicted of 48 felony counts of mortgage fraud, which included using the "identities of recently deceased individuals to purchase properties," court documents revealed.

The Bank of the U.S. Government
Such abuses have led some to question the government's role in the banking industry.

"I believe the government needs to exit both the both banking and monetary arenas," said Douglas French, president of the Ludwig von Mises Institute, the self-described "world center" of Austrian economics. "Deposit insurance should be abolished."

In a June 11 post on the Mises Web site, French argues that "there is no incentive for bank depositors to go to the trouble of determining a bank's soundness if the government is going to guarantee deposits."

To bolster his point, the Mises Institute president cited a recent column by Forbes.com contributor Bernard Condon entitled "The Reverse Bank Run." In the piece, Condon notes that "in a curious twist to the traditional bank run, Americans seeking high yields on their money are causing deposits at struggling banks to mount in seeming lockstep with their troubles." (To read more about this debate, see The Government And Risk: A Love-Hate Relationship.)

"The problem is," Condon explains, "it's the banks in bad shape that often offer the highest rates on deposits."

Somewhere, Charles Ponzi has got to be smiling.

A Lost Decade for Jobs

Posted by: Michael Mandel on June 23

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support. I’ve been talking about the HealthEdGov sector. Take a look at this table:

10-year Job Growth: HealthEdGov Sector Dominates


Industry	Change, May 1999-2009
	(thousands of jobs)*

Private healthcare	2898
Food and drinking places	1567
Gov educ	1390
Professional and business services	885
Gov except health and ed	843
Social assistance	796
Private education	772
Arts, entertainment, and recreation	188
Gov health	148
Mining	133
Financial activities	130
Utilities	-40
Transportation and warehousing	-43
Retail	-91
Accomodations	-119
Wholesale	-166
Construction	-238
Information	-525
Manufacturing	-5372

*Gov health and gov educ based on April 2009 estimates
Data: BLS

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.

Let me finish with a final chart.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

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Reader Comments

Christine

June 23, 2009 02:28 PM

Does this incorporate real estate industry-related data? (I don't see it, but RE drove quite a bit of growth for several years...)

CompEng

June 23, 2009 02:39 PM

I'm not sure how to translate this information into a story, or especially a policy response.

Is it, like the conservatives would say, that government spending and healthcare subsidies are sinking the rest of the economy?

Would you continue your interpretation that we are failing to find the next big economic growth area?

Is it the populist story that opening the floodgates to globalization is bringing our job market down to sea level?

I don't necessarily see a contradiction among these.

Brandon W

June 23, 2009 02:53 PM

Not even so much the past 10 years as the past 8. It's fallen off a cliff. While I'm all for cutting government spending as a principle, it makes you wonder what would have happened (or what WILL happen) with cuts in government spending rather than the growth we've seen. Where would we be?

lark

June 23, 2009 03:31 PM

Whee! I love rollercoaster rides, and the real fun is when you go down...

Seriously, how much of this is due to the economic fads of offshore outsourcing and unlimited globalization?

Because this chart is incomplete. Think of all the job growth going in in low wage countries e.g. India and China. Compare their job growth, to ours. That is the true picture.

lark

June 23, 2009 03:34 PM

Whee! I love rollercoaster rides, and the real fun is when you go down...

Seriously, how much of this is due to the economic fads of offshore outsourcing and unlimited globalization?

Because this chart is incomplete. Think of all the job growth going in in low wage countries e.g. India and China. Compare their job growth, to ours. That is the true picture.

Hugo van Randwyck

June 23, 2009 03:37 PM

As the trade deficit increased, and manufacturing jobs declined, so did the jobs that people, who worked in manufacturing, spent money on decline. How about a graph showing the real, after inflation, increase in house prices, and change in manufacturing jobs. As house prices/rents increased, manufacturing companies couldn't afford to pay people a living wage, to cover housing expenses. Wall street/bankers irresponsibility helped drive out manufacturing jobs. The health care business is easily fixable, with competition. Google: health tourism usa savings, for info on 50-80% savings. There is even an association. What would happen if health spending fell from 14% of GDP to 8%? There would also be a big increase in airline business, and improved manufacturing opportunities. Some of the health tourism companies also offer corporate programs. Apparently medical tourism is a $20 billion market, with expectations it could grow to $100 billion, by 2012. Renewable energy is in a growth phase.

GW

June 23, 2009 03:50 PM

You don't think this could in some small way contribute to our current economic problems, do you? Is it possible that if people can't get jobs and wages are down, that could possibly hurt their ability to pay for houses, college, cars, and other stuff? Or is the last 8 years of that chart what Republicans mean by "trickle down".

Dailydubya

June 23, 2009 04:02 PM

Why, it's almost as if you're saying that the Bush years weren't really that great for working families. How can that be?

Doug

June 23, 2009 04:05 PM

The past eight years have been a disaster.

Doug

June 23, 2009 04:05 PM

The past eight years have been a disaster.

Tad

June 23, 2009 04:16 PM

Being in manufacturing for the past 22 years thats my I went in for business for myself.chek out my site at www.JustVerve.com for your health

chusaberliner

June 23, 2009 04:17 PM

What does this mean? That the private sector jobs were greatly inflated due to
"illusory profits" based on loose credit expansion? Now it appears the federal government is taking on all the private sector debts and creating its own debts by having more outlays than tax income (i.e. to create unproductive, non-income producing government jobs). It is obvious that the US government has monetized its debts in large part by pawning them off to foreign governments who hold about 40% of all US government debt. Now the Asians and Europeans are afraid to sell their dollar holdings in fear that the same "in and of itself" will devalue the holdings of their dollars. (i.e. for every dollar you sell, you decrease your remaining dollars by a certain percentage). I suggest we allow the foreigner to buy anything they want in the US. This will create jobs but also demand based inflation.

shadrak

June 23, 2009 04:19 PM

So much for free unprotected trade, is that the way to look after your people? And where exactly do you think all the jobs went?

Hugo van Randwyck

June 23, 2009 04:35 PM

Maybe an interesting graph could be the pay, or maybe % of GDP these sectors are taking. I'm not sure how Wall Street irresponsibility is included in these numbers. I feel they are a bigger threat to American security, than China or Russia. Here goes. The finance companies/Wall Street allow people to buy houses above three times earnings. So without any extra work, they/Wall Street earn more money. Since people need to live, manufacturing employees need more pay, to pay for higher rents etc. The manufacturing companies lose money, so they merge - so earning fees for Wall Street. House prices go higher - so businesses move manufacturing offshore - so earning foreign exchange fees for Wall Street. Also the trade deficit increases, so WS earning fees for America borrowing more money overseas. As economy performs lower, there is a budget deficit, that Wall Street helps fund, so earning more fees. Where are the ethical people in Wall Street, who care about America? Lower house prices, and clear out the stable in Wall Street, and let manufacturing prosper, and create jobs.

JohnB

June 23, 2009 04:36 PM

Christ Michael, congratulations on just having realized what many of us have been trying to tell you for years. As an industrial engineer who had a career change to IT in the supply chain space, I could have told you just how much trouble we've been in. Facts are, a housing bubble created a 'fake' manufacturing and construction era, and now that's crashed and burned, leaving government and healthcare as the only decent sectors left. And they can't grow without some other form of industry supporting them. The wholesale outsourcing and offshoring thats occurred in the last decade has been unprecendented; and guess which 2 sectors that impacted most? I'd actually like to see a chart of the construction industry job gains/losses for each year over the last 10 years. I'd bet, you would have been amongst those trumpeting what a success that was. Until we get some proper coordinated industrial investment and strategy going in this country, to fight what's been going on overseas, this country will continue going down the crapper. Green is the industry to do it with; but only if you refuse to hand over the keys to the Chinese. And that means telling GE and others to stop exporting the technology as fast as its being developed.

sam

June 23, 2009 04:41 PM

This is a surpise? We needed Mike to figure this out? We know where the job growth went: India and China. So tell me hot shot, how ya gonna fix it?

sam

June 23, 2009 04:44 PM

This is a surpise? We needed Mike to figure this out? We know where the job growth went: India and China. So tell me hot shot, how ya gonna fix it?

sam

June 23, 2009 04:47 PM

Tell us something we don't know. I'm sure I have lost $100's of thousands in income during the last 10 years because of off-shoring. That's money I didn't spend on the goods and services produced by the companies that shipped the jobs out.

econguy

June 23, 2009 04:59 PM

So much for the presumption that the economy would grow no matter what corp tax rates are even after the 10k pages of special legislative gimmicks,liability and regulatory costs, mandated private sector-paid benefits, minimum wage, and double taxation efforts were piled on. Sure it doesn't matter to those with short attention spans and win-the-day PR specialists and Clintons. But is does matter over time and especially during major shake outs.

Kartik

June 23, 2009 05:02 PM

I don't think the public sector is a savior. Rather, it is the parasite that is killing the host.

Government spending has been rising to create these jobs. This causes rises in tax rates AND deficits, which choke off the private sector.

Just look at the jobs situation in high-tax states (CA, MA, NY), vs. low-tax states (TX, NV). That says it all, even though all fall under the same Federal taxation.

Chart government spending as a percentage of GDP, relative to private sector job growth, and THAT will tell the whole story.

Kartik

June 23, 2009 05:05 PM

5 million jobs lost in manufacturing were jobs mostly held by men.

The job growth in Health/Ed is in jobs held by women.

5 million blue-collar men out of work, and 5 million women who have gained cushy, well-paying jobs. Top that off with anti-male media bias and divorce laws. Note the increase in gun sales over the last few years (women aren't the ones buying those either).

Gee... what could possibly go wrong?

GLL

June 23, 2009 05:12 PM

All of our leaders regardless of party are on the "globalist" express. We are being economically strip mined of our industrial base. Our standard of living is to high to compete with exploited labor in other nations so our labor force shrinks. Meanwhile, we buy all the things that we used to make by borrowing money from the countries we outsourced our industrial base to, this will go on until we are eventually bankrupt and our standard of living drops to the level to be competitive if we stay on our current course.

Kartik

June 23, 2009 05:14 PM

Everyone is blaming India and China for capitalizing on opportunities created by US arrogance and socialism.

They have done nothing wrong.

Official government policy is to transfer wealth from men (manufacturing) to women (HealthEdGov).

Whether through divorce court, welfare, sexual harassment laws, affirmative action, or economic 'stimulus' policies, the State wants to transfer wealth from men to women, and make men second class citizens.

When the last straw breaks the camel's back, the backlash won't be pretty. More men are earning less than women, more men are moving overseas, divorces are rampant, gun sales are rising.....

tilly

June 23, 2009 05:28 PM

Bah Humbug

June 23, 2009 05:32 PM

We have sold our souls to the Asian manufacturers, just like Europe did to the US 100 years ago. It's now so late, that American workers can't sew a button on a shirt anymore.

gabe, san diego

June 23, 2009 05:39 PM

Thank you Globalisation!

dw

June 23, 2009 05:58 PM

This describes the real cause of this mess. had jobs kept growing, then wages would have been up, and the need for easy credit wouldn't have been needed by so many. but that was wall streets plan. they kept jobs down (all the while saying every thing was great and every thing they suggested would create jobs!) so they could make those loans and get their killer incomes. and now that we have seen the whole mess blow up, business are desperate for customers who can buy their goods. but no longer exist.

dw

June 23, 2009 06:00 PM

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June 23, 2009 06:00 PM

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lancest

June 23, 2009 06:12 PM

This is why I no longer reside in US. Places like California are still expensive to live in despite NO JOB GROWTH.

Bob Melvin

June 23, 2009 06:12 PM

The number of jobs available will shrink in the next 10 years, just as we bring in more people. We will successfully outsource the US economy to permanent + 15% unemployment within the next 15 years. During down times the numbers will hit %20. It is inevitable. The question is what the future will look like as far as social stability. I see a disaster coming.

Laurent GUERBY

June 23, 2009 06:16 PM

A data point: from OECD, employment rate from 2000 to 2007

- Men aged 25-54
France 87.1 to 88.3 = +1.2
USA 89.0 to 87.5 = -1.5

- Women aged 25-54
France 69.6 to 76.1 = +6.5
USA 74.2 to 74.5 = +0.3

- Both sexes aged 25-54
France 78.3 to 82.1 = +3.8
USA 81.5 to 79.9 = -0.6

Note: "35 hours" work week laws were passed in 1998 and 2000 in France with delayed application in time.

j

June 23, 2009 06:25 PM

While unskilled jobs are down, skilled professional jobs are up. Globalization has resulted in more high paying skilled jobs in the USA. I and my peers have never done better.

Brandon W

June 23, 2009 06:37 PM

Kartik,
You often cite corporate tax rates as being the fault of anything bad that happens. Corporate taxes only provide about 5% of the tax revenue, so it's not that corporate taxes are overwhelming. What's more, if the tax rates in the United States are so very ominous, why aren't corporations leaving in droves; why aren't they relocating wholesale to low-tax countries?

...

Urban Survival...

Wither the Markets?

Had a nice conversation with my friend Robin Landry who manages well into 9-figures from his office up in Shawnee, Oklahoma. Robin, you may recall, got onto the short side early a number of weeks back, and actually had a small loss (his first in the last eight trades, which is so far above most of us as to not even be funny). He's patiently watching for the Dow's drop further after a bounce/possible entry short today. Here - paraphrasing as best I can - are some of the main points he made after the close Monday when we talked....

"If we get down under 8,250, then it's a 70% chance that we'll test the 7,800 range on the Dow..."

---

"Then if we go below 7,800 any distance, then we come to a 50-50% chance of a retest of the March lows in the 6,626 area..."

---

"The thing to watch now is in [today's] trading whether the 50-hour moving average drops below the 200-hour moving average. That would put the market in great danger of accelerating to the downside."

---

"If we take out the 6,626 level by a couple of standard deviations, then 4,400 on the Dow comes into view..."

So that's how the market sets up this morning. We're likely to see a little pop early as the bulls try to rally things back up. Landry's hoping a decline will halt around 7,800 which would set up one more fling up over the 8,800 area, although he admits that the size of the present advance has already filled minimums, so there's no technical reason for the market not to go down from here.

---

About the only number that has significant weight is the Existing Home Sales which comes in an hour - half hour into the trading day. The problem with this number, like so many others, is that it's an imperfect indicator. I've been hearing stories, for example, that people who are not putting 50% cash down on homes are still writing contracts, but the banks aren't closing on those.

You can see how that can distort things: The people think they have purchased a home, but then the financing sits on the bank's desk and eventually peters out. Statistically it is a 'sale'. Reality: don't bother asking.

---

That the forces of deflation are still out there in a meaningful way hasn't escaped Landry. He's still expecting one more big push down on the precious metals (which I take by extension to include things like oil and other commodities, too) before the big you-know-what kicking hyperinflation digs in. His target for gold? $660 an ounce in his work.

But, I'm not selling my gold coin in any event, since deliveries are still hard to come by without - in some cases - weeks of waiting. I don't do buy now delivery later on anything. Someone gets my money, I want my product. Simple as that.

With headlines about like "U.S. credit rating a "solid triple-A": Moody's" it's easy to see how a run on the gold investors could be shaping up over the next few weeks. That would set off another round of 'good times just ahead' which could get the market to bounce of 7,800 and rally into August, which is Landry's ideal count.

While the dollar is making one last advance, and that might push gold down some, the longer term outlook is for gold and silver to make a moon shot, along with commodities and energy issues. But these things never move as fast as I'd like them too...I just want it all to pop now and get 'er done.

Landry, being more patient than me, and managing well into 9-figures for clients, just follows his indicators and trades accordingly. So we should get a 'dead cat bounce' today in the market, a possible short entry, and sure enough, "Stock futures up modestly ahead of home sales data" reports an AP story out in the last half hour.

To me it's like watching a slow-motion train wreck.

Economics in the 2nd Depression and Beyond

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Friday, June 26, 2009

06/26/09 thoughts

Thursday, June 25, 2009

06/25/09 thoughts

Is The American Banking System A Ponzi Scheme In Disguise?

Tuesday, June 23, 2009

06/23/09 thoughts

A Lost Decade for Jobs

Reader Comments

Christine

June 23, 2009 02:28 PM

CompEng

June 23, 2009 02:39 PM

Brandon W

June 23, 2009 02:53 PM

lark

June 23, 2009 03:31 PM

lark

June 23, 2009 03:34 PM

Hugo van Randwyck

June 23, 2009 03:37 PM

GW

June 23, 2009 03:50 PM

Dailydubya

June 23, 2009 04:02 PM

Doug

June 23, 2009 04:05 PM

Doug

June 23, 2009 04:05 PM

Tad

June 23, 2009 04:16 PM

chusaberliner

June 23, 2009 04:17 PM

shadrak

June 23, 2009 04:19 PM

Hugo van Randwyck

June 23, 2009 04:35 PM

JohnB

June 23, 2009 04:36 PM

sam

June 23, 2009 04:41 PM

sam

June 23, 2009 04:44 PM

sam

June 23, 2009 04:47 PM

econguy

June 23, 2009 04:59 PM

Kartik

June 23, 2009 05:02 PM

Kartik

June 23, 2009 05:05 PM

GLL

June 23, 2009 05:12 PM

Kartik

June 23, 2009 05:14 PM

tilly

June 23, 2009 05:28 PM

Bah Humbug

June 23, 2009 05:32 PM

gabe, san diego

June 23, 2009 05:39 PM

dw

June 23, 2009 05:58 PM

dw

June 23, 2009 06:00 PM

iLovecars007

June 23, 2009 06:00 PM

lancest

June 23, 2009 06:12 PM

Bob Melvin

June 23, 2009 06:12 PM

Laurent GUERBY

June 23, 2009 06:16 PM

j

June 23, 2009 06:25 PM

Brandon W