Thursday, March 3, 2011

Financial Bubbles or the Bursts for the Rich

          On September 15th, 2008 the US public was shocked to find out from the newspaper headlines that one of the most highly rated investment banks, the Lehman Brothers, filed for Chapter 11 bankruptcy. The fear was quickly replaced by panic on the stock markets and due to America’s ties with the rest of the world the prospect of the global meltdown was imminent. The immediate reports on the status of the US economy did little good but intensified the prevailing negative attitudes thereby clouding the critical abilities of the people to discern the situation. The foreclosure rates began to rise, the workforce took a massive hit and the transfer of wealth began to take its course paving the way to usher in the age of super-rich plutocrats. The deregulation of the financial markets, the low federal interest rates and the inept financial authorities served as the causative factors behind the great crash of 2008. In the aftermath of the financial debacle the US image was tarnished and the free market ideas were mocked. What we are going to learn from the current events will determine the fate of the US economy and our place in the world.    

          The first response came from “experts” on the TV who started offering various first aid kits to fix the economy, one of them being an educational reform that could be accomplished via the reduction of tuitions to improve the accessibility to the college education. However more education does not necessarily mean a better education. America experienced recessions in the past akin to the 2008-2009 economic downturn. In 1970s the unemployment was high, citizens were getting disgruntled and CEOs received bonuses. Thus Americans have a lot to learn and the educational facilities will not grant us any insights into these predicaments, because higher educational institutions exist on grants from major corporations and philanthropic foundations which benefited from each financial crash. After the “Great Crash of 2008” we witnessed a consolidation of financial power on the scale of Germany of the 1920s manifesting in the devouring of small businesses by financial sharks. George Soros knew that the crash was coming and was laughing on his way to the bank. Even he concurs and states that we need a new paradigm for the financial markets. The financial alchemist argues in his books and lectures that the economic education in universities is inadequate and poor. The Economics and Business courses produce numerous batches of suitable prey that are usually utilized as the cannon fodder by the financial predators. America’s revered economists and financial analysts along with the FBI have warned about the massive mortgage fraud several years before the September 2008 Crash, the dangers of derivatives were recognized and discussed in many congressional hearings. However, nothing was done and Americans were left holding the bag.

          The classical economic theory that is propagated by the London School of Economics and mirrored by other higher educational institutions does not prepare the average consumer/market participator for the economic jungle of predatory lending and loan sharking. Those who do understand the reality tend to exploit it for the purposes of wealth creation and generally earn the status of “insiders”. The optimum way to make a “massive killing” in the financial markets is to detect what Soros called the far-from-equilibrium territory and charter it carefully. The University’s economic models tend to break down in the far-from-equilibrium situations when the humdrum of everyday events comes to its end and the generally accepted rules are no longer applicable. The investors who managed to get on the lifeboats, before the panic erupted due to the sinking of the financial ship, are rewarded generously by the market. 

          The events of September 2008 have caught some of us by surprise, but we can still explain them in the light of the historical context by gathering clues scattered all over the main-stream media and referring to the publications of financial gurus. To identify the root of the problem and tackle the responsible parties are the effective means to solve the current financial conundrum. On the one hand we have ignorant politicians and financial authorities who are still busy patching up holes in the economy and who are preoccupied with the treatment of symptoms of the ailing financial system. On the other hand there is the public who is always hopeful that the economy will rebound, because they put their trust in the experts who promise to take care of all the problems. Both sides as of 2010 assume that the worst is over and we can go back to business as usual, back to the happy days of consumption and entertainment. 

          The identification of the boom and bust cycle and the understanding of the appearance and formation of financial bubbles are essential prerequisites for discovering the causalities behind the economic crises. The efficient market hypothesis (EMH) and other concepts of the conventional economic theory propagated by the Universities are not sufficient enough to explain the events behind the boom and bust processes. Therefore a new comprehensive analysis of the financial markets is required to produce a new set of theories and frameworks in order to avoid the future failures. Since the appearance of the financial capital in the 12th Century and its respective financiers the constant state of crisis became an indispensable feature of the capitalistic system of the West. Whether it is the tulip bulb crisis of 1636 or the Great Crash of 2008 the events seem to follow an identical pattern of speculation, growth, profits and a rapid decline. The financial crashes sometimes translate into the economic ones thereby affecting the country’s status quo.

          After the bank run of 1907 the special interest groups managed to push through the legislation to establish the Federal Reserve System with the purpose to control the money supply of the United States via the federal interest rates. The members of the John Birch Society and other economic observers have long recognized the economic roller coaster, but no one was able to formulate a solid theory to explain the boom and bust cycle. The financial crises seem to follow a pattern of the gradual and slow booming stage which is usually followed by the short and rapid bust. However, there are more factors to consider when it comes to the inflationary stage of the bubble. George Soros recognized the multifaceted aspect of the bubble formation, which boosted up his confidence in the financial field. That is the reason for his bold statement in the Soros Lectures: “When I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational”. The universality of the conceptual framework, which is elaborated upon in this essay, makes it feasible for application during various debacles of the past and present generations, including the crises of non-economic nature. The depression of the 1930s, the conglomerate boom of the 1960s, the international banking crisis and the Japan’s asset bubble of the 1980s and the current financial turmoil (2008-2010) have common features and similar fallouts. The bubble theory will be approached from many different angles to create an optimum three-dimensional look and to amplify the understanding of the operations involved in the financial markets.

          After the creation of the Federal Reserve Bank, America’s Central Banking Institution, every generation went through the minor recessions and financial crashes with some being worse than others. However, the September 2008 Crash stands out as the worst case of the boom and bust cycle since the Great Depression of the 1930s. First, the financial crisis was not confined to one segment of the economy but affected the entire system. Second, it is the first global financial crisis since the globalization of financial markets began in early 1980s. In the midst of 2009 turmoil the Newsweek and Time magazine headlines were adding fuel to the fire by announcing the looming demise of globalization and its utter failure to prevent the crisis. The resilient economies of the world also suffered great losses, but as the global picture is becoming more lucid we can see that China and India have weathered the storm, came through relatively unscathed and actually benefitted economically.            

          Between 2001 and 2006 one could easily notice that the printed and visual media was hyping the new opportunities in the housing market for eager investors. The public was encouraged to invest into the newly build homes, “flip” them every five years and make a large profit. Everyone seemed to be going into the real estate sector as agents and/or investors. The “experts” on the TV were giving us a rosy picture of the future and were predicting the housing prices to go up. It was argued continuously that everyone had to invest into the growing housing market to make a fortune of the lifetime. After several years of the heightened activities in the housing market many lost their livelihoods and only few stood to gain.

          In the aftermath of September 11, 2001 terrorist attack and the bursting of the technology bubble the Feds lowered the interest rates and removed restrictions on credit expansion. As a result of that the financial institutions began to inject an abundant torrent of sophisticated financial instruments. In order to expand further the mortgage industry developed intricate techniques to lure the less credit worthy customers into their offices. The aggressive subprime mortgage companies began to spring up like mushrooms after the rain offering loans at subprime rates in the pursuit of profits thereby increasing the US household mortgage debt by more than twofold since 2001. The financial institutions knew the risks involved in such schemes and took cover under the sophisticated financial creations, such as the credit default swaps and the collateralized debt obligations. The risky loans were “sliced and diced” into various securities and sold to profit minded investors without them realizing the cheapness of the sources of the revolving capital. The idea was to create a perception of protection from the increasing debt by diversifying the loans and repackaging them into a new set of contracts with other banks and institutions. The low-income families and people with poor or no credit histories were encouraged by the media and mortgage companies to take on the loans at subprime rates and thereby artificially inflating the value of homes. The moment of truth came during the spring of 2007, when families found themselves unable to make payments on the mortgages and discovered that their mortgage balance was worth more than the market value of their homes. The excessive use of derivatives and other types of securities created an unsustainable situation in the household sector. The climax point was reached in August 2007, when the American Home Mortgage, one of the largest home loan providers in the US, declared for bankruptcy laying off the majority of its staff. The financial institutions were becoming insolvent and the credit quality was deteriorating in the process of aggressive lending by mortgage originators. The panic ensued in the stock markets resulting in the financial fallout of 2009. For more details read the January/February 2009 Issue of Foreign Affairs.

          With proceeding paragraphs the author will present the boom and bust model devised after the meticulous examination of the works written by one of the most successful speculators of the 20th Century, George Soros. The financial alchemist specialized on making money during the crisis period because he was “more stimulated by the bust” than the boom part of it. For instance “The man who broke the Bank of England” made £1 billion on Black Wednesday in 1992 by betting on the devaluation of the pound (“George Soros, the man who broke the Bank, sees a global meltdown”, March 28, 2009, The Sunday Times). Soros’ financial success from the application of the boom and bust model is a vivid indicator of its objective value. On many occasions he welcomed intellectuals to the critique of his theory of bubbles and the general conceptual framework, because the contributions by other intelligent minds can greatly enhance the understanding of how financial markets operate. Furthermore, the proactive measures can advance these ideas into the University classrooms. Being the active part of the first generation of hedge fund managers Soros utilized the boom and bust model for his benefit. The crises theories have been largely ignored by the main-stream Academia due to the serious challenge that the new paradigms for financial markets are posing on the classical economic theory. The modern Economics formulations are veiled under the guise of being scientific, but since the practice of Economics is an art therefore its principles cannot be modeled after the Newtonian physics. The conceptual framework devised by George Soros can be found in several books including The Alchemy of Finance (1988), The Age of Fallibility (2006), The Crash of 2008 and What it Means (2008, 2009) and The Soros Lectures (2010). The author of this article will contribute to the project of propagating the new paradigm for financial markets.  

          In order to understand the boom and bust cycle the concrete philosophical foundation needs to be constructed because it will grant the researcher the proper insights into the workings of the financial markets. Under the theory of reflexivity George Soros examines the two-way relationship between thinking and reality. The person who studies the course of events and participates in them at the same time has a direct and indirect influence upon them. For example, the actions taken by the market participants determine the outcome of the prices of stocks, bonds and other underlying assets. As opposed to the natural world the social affairs cannot be based on principles and axioms derived from the study of nature, because the subject of economics involves a human factor which shares the elements of uncertainty and fallibility. The formulas stemming from the study of nature are not applicable in the fields of social sciences. Human actions are generally unpredictable and henceforth the overarching model cannot be superimposed to predict the future of social affairs. Therefore the economic theories cannot be modeled after the laws of physics and chemistry.

          To understand social affairs one must study the workings of the human mind and be engaged in the study of man. In a brief summation the information that enters into the minds of people contributes to the formation of their belief system which in turn influences the decision making process. Human understanding of the world is inherently imperfect and during the relevant situations when the making of the decision is required the gaps in the intellect are automatically filled with information derived from instinct, previous experience and bits and pieces from the main-stream media accounts. Therefore an incomplete idea of reality is an innate feature in the field of social affairs including the stock markets. The distorted views inevitably lead to inappropriate or erroneous actions. Taken on the massive scale the incorrect decisions can mutate into the nationwide debacles, e.g. the bursting of the US housing market bubble in 2007-2008. Those who understand the mental processes and the power of perception can utilize their manipulative functions to change the perception of the reality to their advantage.

          Ron Suskind reported in The New York Times, October 17, 2004, “Faith, Certainty and the Presidency of George W. Bush”, that the Bush administration had created a propaganda machine that worked on creating various versions of reality for the general public for political persuasion purposes. The senior adviser to George W. Bush was quoted saying that their group operates in “the reality-based community” that plays with the opinions of the public. Upon the attempted refutation by Ron Suskind the adviser stated unequivocally: “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do”. The groups who control the formation of public opinion mold it in the shape that will be financially beneficial to the elites. Furthermore, according to the father of modern propaganda—Edward Bernays: “The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds molded, our tastes formed, our ideas suggested, largely by men we have never heard of.” (Propaganda, p. 1). Therefore the manipulation of people’s attitudes in the desirable direction is a highly efficient art that aids in the harvest of the fruits of the working class. The current public persuasion techniques are developed by marketing firms, who sell their services to politicians and various industries.

          During the formation of the bubble there are two reinforcing agents in the play: the prevailing trend and the prevailing misconception. The misconception or the misunderstanding of the reality can be dissected into two parts as well: the views of the reality and the course of events. The public’s incorrect perception influences the course of events thereby accelerating the overall trend. For example, during the expansionary stage of the subprime bubble the American consumers were able to borrow more money and they did due to the rise of the property prices with the value of loans sometimes exceeding the value of homes. During the upward trend the market participants expect to receive high returns from the constantly rising prices of commodities. Meanwhile the politicians and credit rating agencies keep their mouths shut because they receive a large cut from the investment banks who are given the high ratings to attract more public’s savings. Thus the cycle reinforces itself and gains momentum until it comes to the period of dissatisfaction and the situation when the investors are reluctant to buy more unfamiliar financial products. The excessive use of debt and equity leveraging inflates the prices and affects the market fundamentals.

          The above narrative is in direct violation of the efficient market hypothesis principle which assumes that the markets tend toward equilibrium and are not bubble prone. The market participants usually look at the market prices before they make buy and sell decisions on the stock market. Under the classical economic theory lies a premise that market prices accurately reflect the underlying reality or market fundamentals. However, nobody bothers to look at the sources of the inflating capital.  

          The political and economic arms act in concert together during both phases. When the trend reaches its highest point the public’s perception of reality changes due to the rising suspicion about the credit quality and that process destabilizes the financial system further which results in the sudden and sharp drop in the stock market prices. The financial crisis erupts capturing many segments of the economy, the implosion occurs resulting in the financial fallout. The political arm rushes in to help with bailouts and rescue packages thereby draining the taxpayers’ purse and transferring wealth to the pot-belly financial industry. The misguided participants suffer great losses, lose their tangible assets and stand in disbelief from the shock and awe they have just experienced. 

          For instance during the formation of the subprime bubble the speculation, the securitizations and the use of derivatives were making the financial capital thinner, rotting it from the inside with the injection of the so-called toxic assets. Cheap sources of money and the high availability of credit caused the real estate prices to soar. However, nobody thought that eventually these practices would create an unsustainable and credit worthless situation.  The maxim “for whatsoever a man soweth, that shall he also reap” did escape the minds of participants. Unfortunately the positive thinking and the pursuit of luxurious living were the emblems during the booming stage of the housing bubble. Various crime reporting agencies were warning the financial regulators prior to the 2008 debacle about the abuses and excesses in the industry responsible for the collapse, but the financial authorities remained silent.

          “The authorities consistently ignored or underestimated the abuses and excesses in the mortgage industry and their effect on the real economy. That is how the Federal Reserve fell so far behind the curve. The Federal Reserve had the legal authority to regulate the mortgage industry, which it failed to exercise. The Treasury also remained totally passive during this period and became active only when the crisis was well advanced.” (The Crash of 2008 and What it Means, p. 121)      
          Nevertheless, the true reality eventually catches up with the participants’ thinking and the dirt that was swept under the rug is discovered. The financial authorities usually plead not guilty and begin to claim that they have not foreseen this course of events.

          According to the prevailing theory of the EMH the financial markets tend toward equilibrium and deviations occur randomly whose origins can be traced back to the extraneous shocks. However with the introduction of debt and equity leveraging and the sophisticated methods of credit creation the financial markets could actually affect the fundamentals that the market prices are supposed to reflect. The first stage in which the bubble gains the momentum is defined by the prevailing trend and a prevailing misconception. The prevailing misconception reinforces the upward trend because the market participants’ biases are proven to be right. The participants continue to invest in the same fashion due to the inflated expectations, the underlying hope factor and a herd mentality. The factors that substantiate that trend can be found in the assumption taught in all Economics courses that the market prices accurately reflect the reality. Soros explains in his The Crash of 2008 and What it Means: “Market prices usually express a prevailing bias rather than the correct valuation. In the majority of cases, the valuations are proven wrong by subsequent evidence, and the bias is corrected, only to be replaced by a different bias.” (p. 71)    

          The identification of the prevailing trend can be done by noticing the rush of investors to a particular segment of the economy. Sometimes the market trends can be caught by witnessing the tactical bombardment of information conducted by the common media outlets, because these actions inevitably contribute to the formation of people’s opinions on certain topics. After the identification of the prevailing trend is completed, one can ride it to the safest point and pull-out before the trend reverses itself and market prices plummet. After the prevailing trend reverses itself the majority of investors are left holding the bag while the few walk out relatively unscathed and actually benefit from the bust. After each crisis the financial authorities intervene and issue rescue packages to the failing institutions on behalf of the taxpayers. The squeezed taxpayers grumble and large banks and corporations enlarge themselves by swallowing the smaller and/or unlucky firms. 

          The development of the US housing market bubble fits perfectly with the boom and bust cycle. Along with the frenzy of new construction the mortgage industry was willing to lend to anyone and practically on any terms. The credit was easy and cheap and sometimes no down payment was required. There was an opportunity for everyone to live the American dream consisting of the home ownership, the private automobile and other material possessions. And if you couldn’t make the payment the freshly baked firms were offering the delicious packages to refinance or remodify your mortgages. Not only people were living the American dream but they were given a chance to make additional money from selling their homes every 5 years. The housing prices were rising to reflect the expansion of the credit market and thereby reinforcing people’s confidence in the prevailing trend. The cheap money sources of the house market inflation were largely ignored, because the middle class was focused on making petty cosmetic renovations in their homes and flipping them when the price was right. As the situation progressed further into the credit crunch area, the mortgage creators became relentless and the deregulated financial institutions were injecting more sophisticated financial instruments, whose risks involved were not even understood by the financial authorities, because they relied on the risk assessments provided and conducted by the institutions that were spawning them in the first place. These laissez-faire policies were inspired by Ronald Reagan’s idea called the “magic of the marketplace” resting on the belief that the market is self-correcting and should be left to its own devices.

          The suitable economic conditions produced the perfect storm and after the events of August 2007, when American Home Mortgage went into bankruptcy, the subprime mortgage bubble burst triggering a chain reaction through the entire economy. According to Merrill Lynch reports a large percentage of the US economic growth in early 2000s was due to the housing market. Thus the housing bubble served as a detonator for a larger explosion affecting many segments of the US economy and taking on the systemic proportions.

          In order to finance their predatory activities and receive the necessary capital from the federal government the financial institutions resorted to the cleansing of their balance sheets from the mortgage-backed securities and other toxic assets. The risky loans and subprime mortgages were repackaged into various financial vehicles, such as securities and derivatives, which eventually were sold as bonds on the stock market. The deregulation of financial markets accelerated since 2001 clearing more room for the new financial instruments and upping the profits. The investors who sought high returns in the shortest period of time quickly entered into these intricate financial schemes perpetrated by the mortgage industry. In the process of inflating the money supply via the low federal interest rates the financial capital was getting thinner and was deteriorating in value. The entire system was bound for a controlled implosion. Meanwhile the investment banks were building a façade of safety and prosperity by hiding their toxic products under various pseudo-insurances. Whenever an investor decided to purchase a securitized product the bank would cover it with an additional layer of insurance to minimize the risk and make it seem safe to purchase. 

          The uncontrolled hedge funds played a substantial role in purchasing the securitizations and disseminating them all over the world. These schemes were formulated by the group of very clever financial players, who expected to receive high bonuses by catching the public savings in their complex nets. Ultimately a casino type of environment emerged, where as a rule the house always wins. 

          From 2006 the number of people who ran into trouble making monthly payments on their houses began to rise and the mortgage originators started to panic because their accounts were permeated with empty promises. The systemic risks were recognized by bank regulators, and the FBI has warned that the mortgage fraud was escalating and reaching “epidemic” proportions, which was fueled by the low interest rates and increasing home prices (“FBI warns of mortgage fraud “epidemic”, September 17, 2004, CNN). William K. Black, a former bank regulator, has been instrumental in sounding the alarm bells about the massive mortgage fraud and the impending disastrous consequences. In May 2005 the FBI released the “Financial Crimes Report to the Public” that summarized various frauds and their impact on the nation. Section D of that report lists financial crimes associated with the mortgage fraud stemming from financial and non-financial institutions, including the artificial inflation of the property value and the issuance of loans on the fictitious properties. According to the March 08, 2007 FBI Press release “FBI issues Mortgage Fraud Notice in conjunction with Mortgage Bankers Association” the mortgage fraud was becoming a problem that required “the unified efforts of law enforcement, regulators, and industry…because mortgage lending and the housing market have a significant overall effect on the nation’s economy.” 

          In the past the financial authorities would intervene before the start of the economic crisis to prepare the platform for a safe landing. However that was not the case during the autumn of 2008 when the Lehman Brothers and other big institutions were allowed to go bankrupt without proper preparations. Consequently the global financial system was brought on the verge of collapse. Furthermore the investors were not warned by credit rating agencies prior to the beginning of the recession about the dangerous toxic assets on the balance sheets of investment banks. As a result the financial avalanche was approaching and nothing could stand in its way. The bubble that was inflating for several years burst in a deafening explosion sending the entire economic system into one crazy spin and shaking off the unlucky elements.         
          Thus one can identify four main aspects of the financial bubble: the prevailing trend, the prevailing misconception, the uncontrolled credit expansion and the belief in the conventional economic theory.

          In the aftermath of each economic crash one can usually observe the emergence and the clash between the two major forces that advocate for the remedial change. Government intervention is an anathema to the ardent followers of the free market idea, because they believe that an independent and a powerful market will be able to solve major problems on its own. That the market should be left to its own devices is the central theme of their ideology. As a result of that any hint of nationalization or state capitalism will be strongly opposed by the devoted followers of the laissez-faire market approach. On the other side of the battlefield there is a force adamantly decrying the deregulation of the past several decades and blame everything on the lack of the regulatory regime which allowed for the abuses and the excesses in the mortgage industry and encouraged other aggressive lending practices. Consequently millions of Americans found themselves in the precarious situation unable to make the payments even on the subprime level and were forced into the foreclosure status. And since the housing market had such an overarching influence on the economy the crash of September 2008 was felt across the entire continent. It is interesting to note that in the aftermath of September 2008 events the Time magazine published peculiar articles stating that the large corporations were lobbying for years for the deregulation of financial markets and were demanding that the risk assessment prerogative should be left in their hands. The advocated solution by the global regulation protagonists is to impose a planetary financial regulatory institution on par with a strengthened IMF and World Bank. The adherence to the rule of law needs to be enforced globally along with the fair redistribution of the world’s wealth. Incidentally these proclamations are in tune with the agenda of the Communist International groups.

          Nevertheless both propositions are elitist in nature and rewarding to the most aggressive players. Whether it is the free market or the planned economy both assume a predatory dominant group which exploits the masses and profits from the suffering. A more humane system can be devised but no one will have the guts to stand up behind it. The simplest solution is to stop participating in the stock market, which is known to crash every generation followed by the wealth transfer to bankers and corporation overlords. One can never profit in the long run in the casino-type of environment. For instance, the 1987 stock market crash devastated the lives and destroyed the savings of many hard-working Americans. On September 15, 2008 Lehman Brothers filed for bankruptcy and many people lost their homes. If you still want to play the Wall Street roulette do not grumble when your 401(k)s, pension plans and social security benefits, which are highly dependent on the stock market, vanish in the mid air and go to the “money heaven”. What are some of the practical steps one can take to protect him or herself from the unknown events of the future? You may do your own investing and/or raise a good solid family that will support you in the latter stages of life. You are a fool if you believe that your savings will be held by someone else until your day of retirement. 

          The rationale of the regulation advocates is that if the financial markets are given free rein to decide the allocation of wealth and other financial resources they will prove incapable of sustaining equity and fairness in the society, because the profit motives are not virtuous by any means. Jacques Attali, George Soros and other eminent economic advisors and hedge fund managers insist that the financial markets need to be regulated to ensure the adherence to the rule of law and to prevent the misappropriation of financial capital by leading institutions. With the grand motto of universal liberty, equality and fraternity the planks of the Communist Manifesto are being propagated before our eyes, e.g. the redistribution of wealth. Along with the followers of Karl Marx’s philosophy the Fabian Society has been instrumental in promoting the creation of the universal socialist system via the distribution of wealth across the globe. The idea of global wealth diffusion can be traced back to British Lords; Lord Bertrand Russell underscored its necessity for world peace and justice in his book The Impact of Science on Society.  

          Jacques Attali, who was the first president of the European Bank for Reconstruction and Development and a special advisor to Francois Mitterrand, has eloquently summarized the notions behind the push for a greater planetary regulation in his most recent book After the Crisis: How did this Happen?: “…the subprime crisis, the first real globalization crisis, could considerably hasten the realization that one day it will be necessary to set up a socialization of the most important monetary markets, which are the instruments of sovereignty, with an equal access to knowledge, a stable world market, a world minimum wage, and a world rule of law, as a prelude to an eventual world government.” (p.18)     
          The Soros Lectures contains carefully placed clues which point to the understanding that the Economy is run by clever individuals who utilize their manipulative functions to distort the public’s perception of reality in order to change the situation to the advantage of the financial industry giants. Jacques Attali speaks about the “insiders” in After the Crisis who exploited the low federal interest rates and utilized the borrowed money for hefty profits without any consideration of the well-being of others.  
          The boom and bust cycles precipitated the globalization forces which began to solidify the markets of the world into a one giant financial network of global financiers and corporate overlords in the 1980s. Precisely as it was envisioned by the Georgetown professor Carroll Quigley in his 1966 magnum opus Tragedy and Hope “…the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.” (p. 324)

          The Foreign Affairs journal and other magazines dealing with the American foreign policy subject ran a series of conspicuous advertising pages featuring two elegant women standing in front of the United Nations headquarters in New York City. One of the versions of the ad poses a rather radical and anti-nationalistic question: “As a global citizen, to whom do I pledge allegiance?” The NYU SCPS offers a large number of courses to improve the diplomat’s perspective and understanding of the increasingly globalized planet. In addition to declaring that today’s educated class is composed of global citizens the NYU Center for Global Affairs offers a “global passport” for shaping the future. The two women dressed in the office outfit appear to be of Oriental and Caucasian descent, thereby illustrating the new global partnership between the East and the West which was endorsed by the community of nations in 1980s. The leading educational institutions that specialize in the field of international affairs have been offering the classes on global citizenship for many years, thus preparing both the diplomatic and bureaucratic classes for the emergence of the more unified global order.

          The indirect result of these consuming globalizing forces has been the widening of the gulf between the global rich and the global poor and the appearance of new sets of haves and have-nots, winners and losers. The increasing foreclosure rates and the prices of consumer products act as the exacerbating drivers of the hostile division between the wealthy few and the poor plenty. Consequently these new global developments produced the new class of plutocrats, which is composed of the small number of super-rich people enjoying both the political and economic power and possessing the ultimate sway over the questions of national policy. The plutocrats are generally indifferent to the mourning of the struggling wage-earners of the developed world. The new cosmopolitan elite, which is no longer bound to any nation, has no empathy towards their own countrymen living on the bottom of the food chain. The Darwinian principle of evolution, the survival of the fittest, has found its application in the realm of Economics as well, where many competing financial groups struggle for survival or profits. In that predatory marathon the American consumers are used as the cannon fodder to achieve various goals in the economic and political fields. The Atlantic magazine, January/February 2011 issue, rightfully contends that the new global super-rich class differs from the ruling-elite of the past in that the nouveau rich are the successful product of the global competition and have no obligation to be faithful to their countries of origin. The profits are global, the financial capital has been liberalized and now is able to move all over the world and so is the “transglobal community of peers”, who have formed various clubs and world groups wielding global influence. For the first time in the history of civilizations it is practically possible to create a planetary empire due to the improvements in communication technologies and the liberalization of global trade, i.e. the regional and global integration of national markets via free trade agreements.

          The fast pace of the current changes renders many to become incompetent and unable to adapt to the new realities of the day. The Council on Foreign Relations (CFR) has been candidly warning through its Foreign Affairs magazine that those who will not be able to unlearn the obsolete ideas of yesterday and pick-up the new ones will be left behind in the new era of Global Competition.

          The elites are no longer silent about their extraordinary positions of power. The international conferences, such as the Bilderberg Group and the Trilateral Commission, used to be the taboo topics for the main-stream media, but now the references to them appear regularly in the magazines and newspapers. The members of the Council on Foreign Relations are making themselves public by appearing on the television channels to share their expert opinions. For example, The Economist January 22nd-28th 2011 issue included a special report on the global elite mentioning the world’s most influential meeting places and conferences in the article “The world’s water-coolers”. The author of the article starts with a bit of humor in that the Bilderberg group is “an evil conspiracy bent on world domination”, and swiftly dismisses that notion by saying “that is what numerous websites allege”.  To dispel any negative thoughts about the international economic conferences the article goes on to state that the Bilderberg group is merely “an annual conference for a few dozen of the world’s most influential people”. The global think tanks are simply making suggestions and providing useful information in the foreign policy field and the national governments still reserve the right to not accept them. Therefore the public can go back to deep slumber, because they can trust the experts who have everything under control. Nowadays the national governments conduct their domestic and foreign policies on the basis of the findings by major think tanks, which in turn operate under the sponsorship of the private business giants. For instance, the Goldman Sachs Group has been supplying for decades the personnel to the US Department of the Treasury. Furthermore, every Presidential Administration since Nixon has been primarily composed of the CFR and the Trilateral Commission members. The major societal shifts are no longer directed by the elected national governments, instead they are debated and discussed during various world meetings, the ideas are exchanged during international conferences and the global conclaves are becoming the new bodies of global governance.

          The America’s moguls 100 years ago used to go by the name “robber barons”, because they have accumulated their wealth at the cost of exploitation and suffering of the many. Apparently the period of the crisis is the ideal time for the rich to become richer. The Rothschild family who made a fortune on the Napoleonic wars was credited with the phrase: “the time to buy is when there's blood in the streets”. Nevertheless, after several PR jobs the industrial tycoons had a face lift under the benevolent title of “philanthropy”. In order to gain social acceptance the philanthropists distribute their fortunes on the public works projects that supposedly alleviate global poverty. 

          However for some strange reason the massive influx of the philanthropic money cannot do anything beneficial to the devastating situation in Africa. Where does the humanitarian aid go to? Dambisa Moyo has given a bold account in her latest book on the African Aid that never gets to the people it is intended to help. The author of the book Dead Aid was educated at Harvard and Oxford, worked for World Bank and Goldman Sachs and won numerous awards from the world’s top economic groups. Dr. Moyo frankly explained the dreadful situation surrounding the fate of the western aid in Africa. Not only Africans are denied the right to distribute the funds according to their own judgment, but it mostly ends up in the hands of the authoritarian rulers. For example the Emperor Jean-Bédel Bokassa of the Central African Republic squandered the monetary aid to purchase a gold-plated bed and there have been many accounts of the dictators’ wives flying to Singapore on the shopping spree. The conclusive argument was made in favor of terminating the aid to Africa within five years. The longer the West mingles with the African affairs the harder it will be for them to raise their standards of living. Since the colonial times the African situation has gotten worse and the entire land is on the verge of becoming the lost continent. Leaving Africans to their own devices could be the best, but unfortunately it is still the unthinkable, solution.

          When the plutocrats of America have no sympathy for their own countrymen, what makes you think they have the best intentions for someone on the other side of the globe. The financial bubbles are exploited successfully by the richest class in America to the detriment of the entire country. Honor, integrity and honesty are the dusty archaisms in the financial sphere, which solely depends on the gullibility of the American public. 
          As long as the financial cycles are facilitated by the financial elites and supported by the gullible public the boom and bust processes will not cease in their destructive agenda. As we have seen from the events of 2008-2010 the perpetrators of the financial catastrophe were not prosecuted according to the law and order of the land. Instead they were rewarded for crashing the economy. Therefore the only sensible solution would be to stay on guard and avoid running into the Wall Street casino. There is no law against people’s stupidity who enter into the manipulative constructs and play the roulette with their savings. Read the cited materials in this essay and start thinking critically about the business world. Learn how to identify the ponzi schemes and financial pyramids which operate freely behind the curtain of the scientific economic theories. Approach with caution the current money making frenzies and stay alert in the financial fields which promise you high yields. If you are going to play the stock market games anyway, then good luck to you and may the Fortune smile at you abundantly.    

Written by Arseniy A. Kozlov 

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