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Archive for the ‘ponzi scheme’ Category

Here we go again…

Laura Sayer, unsure of what she wanted to do after graduating from college in 2006, figured a master’s degree was “a safe bet.”

With $5,000 in undergraduate loans from her time at the University of Cincinnati, Sayer was set back $50,000 more after completing the Interdisciplinary Master’s Program in Humanities and Social Thought at New York University. The 27-year-old now makes about $45,000 a year as an administrative assistant for a nonprofit group, a job that didn’t require her advanced degree.

More people are losing the same gamble as a 33 percent jump in U.S. graduate school enrollment in the past decade, coupled with an 80 percent surge in tuition and required fees, runs headlong into a weaker job market. Universities are fueling the trend by offering more one- and two-year programs in areas from environmental science to sports management that rarely come with financial aid other than the option for loans.

And how does that happen in a free market for loans?

It doesn’t.

Why not?  Because nobody in their right mind would loan you $50,000 for two years of school to complete a Masters if there was not a decent return on the investment, which means that your income expectations would be boosted by more the fully-laden interest-inclusive cost over the next ten years (the typical repayment period) from where you are without it.

Yet Laura was able to source the money.  Why?

Because the financial industry bribed, cajoled and scammed its way into turning that debt into something that Laura could not discharge in bankruptcy.  As such there was no risk for the lender in making the loan and they didn’t give a damn that there was no reasonable expectation that Laura would find a job that paid at least $10,000 a year more with her Masters than she had before it — a job that in addition would actually require the Masters to obtain.

Remember, the lender always has superior information because they have the benefit of all the loans they made before and how they performed.  They also have spent a lot of time and money modeling loan performance and they thus controlled all the variables that went into those models.  As such they are, on an “actuarial” (across the entire universe of these loans) basis far more knowledgeable than Laura is about whether she will be able to pay and they know what factors control for that success — and which do not.

Laura has none of this information.  She knows only one thing — how hard she is wiling to personally work, and she has some idea of her personal aptitude.  That’s all.  She’s at a severe disadvantage in this evaluation.

This is why bankruptcy was written into the Constitution and why it’s so important.  The threat of the borrower declaring bankruptcy and avoiding the debt taken on is the only market check and balance that works to restrain predatory and abusive behavior by lenders.  With it no lender intentionally makes a foolish loan because while the borrower has their credit rating ruined the lender loses their actual investment.

This intentional distortion, which the lenders and government pressed for and profit from, must be addressed.  There is no student and no family that should ever consent to a non-dischargable student loan under any circumstances and no adult worth the title “parent” should be willing to provide or file any document related to qualification for same, including but not limited to a FASFA.  Among other things it is none of the damn government’s business what income and assets a parent has in relationship to their now-adult offspring, as their obligation to provide for said offspring ended at the age of 18 years.

We will never solve the problem of out-of-control educational costs until parents and students stand en-masse and simply refuse to cooperate with this rank corporate-sponsored and government-assisted financial rape.  Neither the universities or the lenders are your friends — they’re predators, you’re their “meat”, and part and parcel of their predation is capitalizing on our youth’s inexperience and a drilled-in “trust in authority” (false and malicious) claim that has been foisted off on them during their previous years in school.

It’s that simple.

Now this is interesting….

A former MF Global employee accused former president William J. Clinton of collecting $50,000 per month through his Teneo advisory firm in the months before the brokerage careened towards its Halloween filing for Chapter 11 bankruptcy.

Teneo was hired by MF Global’s former CEO Jon S. Corzine to improve his image and to enhance his connections with Clinton’s political family, said the employee, who asked that his name be withheld because he feared retribution.

(ed: No really?  By the way, don’t go walking around Foggy Bottom…. you might get Vinced.)

Notice that the so-called “mainstream media” has not said one word about this connection or the amount of money involved here – some $600,000 annually.  That’s a hell of a lot of money, and it’s entirely reasonable to ask exactly what was provided in exchange for it.

Does anyone remember Hillary’s “exceptional” skill in trading cattle futures — with zero prior experience in the market?  The allegations surrounding that and how her “winnings” became allocated to her were quite interesting for the time, but that story got spiked too.

Gee, I wonder why.

Pension plans are based on 8% annual growth forever. What happens to these plans in a zero-interest rate world as the global economy and stock markets contract?

I’m afraid it’s time for an intervention.  I don’t enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been “rescued,” it’s once again tearfully blubbering that this time it’s all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is  going to make the pain and the addiction all go away.

It’s time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as “solutions”?  The very sources of their pain:  illusory “fixes” and more debt.Have you ever seen a  global market as dependent on rumors of “magical fixes” for its “resilience” as this one?

What’s truly remarkable is the psychotic distance between the facts–Europe’s debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China’s real estate bubble has popped and cannot be reinflated– and the heady leap of global markets on every trivial rumor of a magic fix.

Since it runs in our family, I do not use the word “alcoholic” lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn’t know it’s there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes  nowhere, and all the rest.

I seriously suspect the entire global economy is alcoholic–not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best.In all the millions of words printed about the subprime meltdown,  the gutting of the U.S. financial and housing markets and  now about Europe’s impossible burden of debt, how often have we seen anyone in the MSM or mainstream financial press confess that “borrowing our way of out  of trouble” is not just financially bankrupt but morally bankrupt as well?

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from  debt source to debt source, weaving drunkenly between “stashes” of new debt in the Fed, Treasury and private sector markets.Despite the abject failure of the magical-thinking “fix” of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.

While everyone is focused on the drunk being pulled from the pool–Europe’s sovereign debt–another drunk is teetering on the edge: public and private pension plans.Here’s the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to “spark growth.” Unfortunately the only thing being goosed is the future cost of servicing the additional  debt.

How do you earn 8% on money which yields at best 3%? You can’t. How do you reap a gain on bonds when interest rates have already hit bottom and can’t fall any lower? You can’t.

Which leaves the stock market as the only hope for pension plans.  Since the bottom in March 2009, central banks engineered a “magic solution” that generated fantastic stock market returns: by constantly lowering interest rates and increasing liquidity, central banks force-fed stock markets with demand (there was no other place to get a fat return) and the see-saw of interest rates and “risk-on” equity markets: as rates decline, equities floated ever higher.

Now that rates are near-zero, then the central banks are pushing on a string: there is no “magic” left to juice equity markets.

The equity markets are in effect living on vitamin C and cocaine:rumors of new “magic fixes” and the hit of central bank infusions.

Once rumor is no longer enough to float markets higher, then the consequences of depending on stock market returns will hit pensions with a terminal case of the DTs.

The “magic” of ramping up debt to create the illusion of a healthy economy only works  once.The “fix” “worked” from 2009 to 2011, but now the high is wearing off. The next round of rumor and debt expansion won’t even create the illusion of growth, as the global economy is already careening back into the contraction that trillions in new debt staved off for three years.

I have covered the disconnect between the promises of 8% yields forever built into public pension plans and a slow-growth/no-growth economy many times:

Yes, There Will Be Armageddon: Government Goes Bankrupt  (July 24, 2008)

How the Fed Pushed the Nation’s Pension Plans–and Local Government–into Insolvency   (May 24, 2010)

Public Pension and Healthcare Costs and Financial Common Sense   (February 28, 2011)

Every once in a while an MSM outlet addresses the issue directly, for example:

Pension issue balloons with soaring costs(S.F. Chronicle):

Pension costs  are soaring to $800 million, tripling during the last decade, as Los Angeles faces  years of projected budget deficits even with deep cuts in services and staff.The main driver of higher pension costs is the stock market crash. CalPERS (California’s primary public pension plan) gets  about 75 percent of its revenue from investment earnings. Its portfolio peaked  at $260 billion in 2007, fell to $160 billion last year and now is about $204 billion.

Why economic growth isn’t enough to fix budgets:

But under the laws now dominating government budgets, many expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, in many areas of the budget, automatic expenditure growth matches or outstrips revenue growth under almost any conceivable rate of economic growth.Now, so much spending growth is built into permanent or mandatory programs that they essentially absorb much or all revenue growth. Meanwhile, we’ve also cut taxes, widening the gap between available revenues and growing spending levels.

Consider government retirement programs. Most are effectively “wage-indexed” insofar as a 10 percent higher growth rate of wages doesn’t just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10 percent. Meanwhile, in most retirement systems, employees stop working at fixed ages, even though for decades Americans have been living longer.

Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Still other programs add to the problem, such as tax subsidies for employee benefits, the cost of which grows automatically without any new legislation.

In other words, the entire system of state and local government is now based on the same 8% “permanent high growth” of the 1990s speculative market.Funding increases are wired in, regardless of how much tax revenues fall.  That is a recipe for insolvency.

Now we get to the heart of the matter. Which institution engineered  the heady stock market bubble of the 1990s that created the illusion of “permanent high returns” and growth of tax receipts?  The Federal Reserve.Which institution has made the stock market the proxy for the economy?  The Federal Reserve.  Which institution has engineered a three-year stock market rally to put off the inevitable implosion of pension plans, entitlements and tax revenues that must grow by 8% annually while the real economy is flat-lined? The Federal Reserve.

We can ask the same questions of Europe and get the same answer there, too: the European Central Bank (ECB).

Addiction is a terrible disease, founded on the illusion that the pain of facing reality can be put off forever by dulling the pain of addiction itself with ever-higher doses of self-destruction. We are witnessing the self-destruction of economies and machines of governance that have chosen denial, illusion, rumor and magical thinking over facing reality. The drunk has been pulled from the pool once again, slobbering self-piteously and promising to really, really  change tomorrow, and we believe the lie, at least until morning, because  hope is so much easier than reality.

Charles Hugh Smith – Of Two Minds

Some day people will demand that commentary have some sort of intelligent basis behind it.

Yet, the current system is falling apart. Medicaid, which funds almost half of all paid long-term care, is under immense financial pressure. Few Americans have saved for their long- term-care needs in old age — half of retirees have less than $55,000 in financial assets, barely enough to pay for nine months in a nursing home, or two years of limited daily help from a home health aide. And hardly anyone buys private long- term-care insurance — only 7 million Americans own policies.

Despite the death of CLASS, the challenge of long-term care financing is not going away. So, how can we fix a badly broken system?

The best way is probably through universal long-term care insurance. Every major developed country on the planet — except for the U.S. and the U.K. — has already gone this route. Here, insurance could be offered by the government, or by private carriers in a regulated national marketplace (much like the Medicare Part D drug benefit or Medicare Advantage managed-care plans).

Utter nonsense.  Here we are with another “plan” to simply play ponzi for a few more years.

Health care has expanded in cost at an average of 7.9% from 1990 through 2010 for individual “coverage.”  Family coverage has expanded at 8.2%.

This is what you’re trying to “provide”, assuming the “young person” buys at age 25 and continues through age 65, a period of 40 years.  We will assume that the care today costs $4,000/month, which is well under the average actual cost, or $48,000/year.  In short I’m being “polite” about the numbers, giving you the maximum benefit of the doubt.

To Bloomberg: Would you please stop publishing utter and complete crap under the rubric of “opinion”, when said “opinion” is an argument for that which is mathematically impossible?

Alternatively you can explain how we’re going to pay (through any mechanism) $931,274 annually for each insured person 40 years hence to cover this “long-term care.”

The claims of “solutions” that are in fact the incessant selling of Ponzi Schemes must end right now.

Further, any government or private party setting up, maintaining or promoting such a scheme must face immediate prosecution as Ponzi schemes are illegal under existing law.

  We’re all aware (at least those of us who care, and thus are worth two cents) of our ballooning national debt. As of this writing –latest Treasury figures dated Oct. 6 — Total Public Debt stands at $14.836776T dollars. That is, rounded to the nearest million (chump change) 14 trillion, 836 billion, 776 million dollars. That figure is what the (in)famous debt ceiling applies to. Such a sum is hard to visualize, but remember the succession of “-illions” goes by factors of one thousand. A billion is a thousand million, and a trillion is a thousand billion, one million million. An astronomical sum.

But it turns out that Total Public Debt consists of two components. One component is known as “Debt Held by the Public”, which is sort of easy to confuse with “Total Public Debt”, but the two are different things. Debt Held by the Public stands, again as of Oct. 6 at  $10.126447T, 10 trillion, 126 billion, 447 million dollars, again rounded the nearest million. Debt Held by the Public represents “real money” that the federal government has borrowed, the form of Treasury securities, from the “public”, which consists of Americans as well as foreign governments and central banks. All the money we owe China is included in this component.

But what of the rest, the other component, which is known as “Intragovernmental Holdings”, which as of Oct 6. stands at $4.710329T, 4 trillion, 710 billion, 329 million? What is this? Well, it turns out this really something of an accounting scam, something that would make Enron and Bernie Madoff proud. What they did was illegal, however what the governement does is completely legal, because the law not only allows, but creates the whole thing.

Let’s consider a married couple. The husband is a spendthrift ne’er do well whose pockets quickly have holes burned in them by money. He blows everything he makes on booze, strip joints, and similiar. His poor wife works, making a salary of her won, yet she is responsible. She wants to put away savings to handle their retirement as well as their future medical care and the general rainy day that might come. That is, she wants to invest it.

Her husband makes her a deal. “Hey Honey, why don’t you invest your money with me”, he suggests. “I’ll even pay you interest, more interest than you’d make at the bank!”. And so she takes him up on it. She hands her paycheck, less current needs for groceries, and he writes he IOUs. She puts those IOUs in a  “lockbox” and counts those as her nest egg retirement investment. Hubbie just takes the money and blows it on more booze, hookers, and everything else. Every six months, he pays his wife interest just as he promised.

He pays those with more of those IOUs, of course, which the wife dutifully puts in her lockbox. On paper, she’s doing good. Her “investment” with her husband is paying her a nice interest rate and her little “trust fund” in her lockbox is doing well. On paper.

Now, even with his own salary, and his wife’s, the husband is still spending more than he takes in. He runs up the difference on the credit card. Let’s consider the household debt in the situation. The household owes the outside world the credit card balance. But the IOUs in the lockbox are something the husband owes the wife, a type of “intrahousehold debt” we might call it. One part of the household owes the other part.

Now is this arrangement between our husband and wife here worth anything? It’s a scam, a joke, you say, and there’s  no way the wife can consider those IOUs to be worth anything. And that’s true.  The only way the wife can get her money back is from the husband. And where will he get it? He’ll either have to somehow increase his own income or borrow it from the credit cards to pay her back. Are those IOUs any sort of real asset the wife  could sell to someone else for cash? Hell no. No one in their right minds would take those IOUs.

The whole thing is just a little Ponzi scheme the husband is running on his wife, blowing her money and tricking her into thinking it’s an investment. This is what Bernie Madoff did of course.

Who is this couple running this Ponzi finance scheme? Well, they’re relatives of ours, turns out. The husband is an uncle of ours, Uncle Sam to be exact, and the poor naive wife is Social Security, Medicare, military and federal civil service pension funds, and some other stuff.

This is exactly how the “trust funds” of Social Security, Medicare, and the rest are financed. The payroll taxes that come in are put in the general fund and spent, with Uncle Sam writing IOUs to the trust funds for the difference between what they had to pay out and what they took in. He makes interest payments every six months on these IOUs, in the form of yet more IOUs.

This is that intragovernmental debt. It is where the “lockbox” for Social Security and Medicare and the rest all live accounting wise. It is debt one part of the government owes another part. You may protest, surely that can’t be. The trust funds claim they hold US Treasury bonds, the “safest investment in the world”.  Well, they are called Treasury bonds, but a “special” kind, called Government Account Series (GAS).

These GAS bonds are only for the purpose of government accounts, and are non-marketable, which means they can’t be sold on the open market. Just like our wife above can’t sell her pile of IOUs, so Social Security and the other trust funds can’t sell any of their GAS bonds. Thus they are nothing but IOUs as worthless as the sorry husband wrote his wife.

So Debt Held by the Public is like the credit card debt the husband has run up, and Intragovernmental debt is the pile of IOUs he wrote to his wife.

The only way those GAS bonds can be made good is to be redeemed by the US Treasury. But where is it going to get the money? Only by borrowing from the public or raising tax, or both, (or worse printing money to pay for it).

There are no “trust funds”, just a pile of IOUs with fancy names. And the only funding for those trust funds going foward is the federal government’s ability to tax and borrow from the open market.

And incidently, something even more Enronish has been going on with the trust funds the last couple of years. Remember the payroll tax cuts which were part of the various stimulus bills that were supposed to be the medicine our economy needed and which failed miserably? Well, that’s like our sorry husband asking the wife take a pay cut. But he says he’ll make up the difference and pay her back he lost pay. How does he pay her back? Well, as I’m sure you guessed now that you’re wise to the game, he pays her back with more of the same IOUs.

Publius-SC - FedUpUSA

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It is one thing (what thing that is we are not sure, but we have heard others say it, so like all good lemmings we will say it too) for Rick Perry to call Social Security a ponzi scheme. After all he is some crazy, foaming in the mouth conservative, as uber-Keynesian liberal Paul Krugman may call him. And that’s fine. What confuses us, however, is why Social Security would be called a ponzi by the same liberal noted previously: none other than Paul Krugman himself.

Exhibit A, from a distant 1997, which perhaps one would have expected to remain buried (source):

 

 Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

This coming from the same person who a year ago said the following much anticipated truism, and has in the interim become a caricature of himself:

 

 So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.

 It would be easy to dismiss this bait-and-switch as obvious nonsense, except for one thing: many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.

 And having invented a crisis, what do Social Security’s attackers want to do? They don’t propose cutting benefits to current retirees; invariably the plan is, instead, to cut benefits many years in the future. So think about it this way: In order to avoid the possibility of future benefit cuts, we must cut future benefits. O.K.

 What’s really going on here? Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution. But they receive crucial support from Washington insiders, for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness, never mind the arithmetic.

 And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause.

The only question we have for the Nobelist: is some form of affective disorder a necessary and sufficient condition to espouse the virtues of government dumping endless capital in what said Nobelist himself calls a Ponzi scheme, and just how would the overlord, John M. Keynes, fell about this?

h/t John Poehling

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