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Dermot's Review of Planet Ponzi

Page history last edited by Jonathan Chambers 7 years, 9 months ago

Planet Ponzi*

 

How politicians and bankers stole your future. What happens next. How you can survive.

 

by Mich Feierstein

 

 

Mich Feierstein, practicing investment fund manager with 30 years’ experience, is no villain. Planet Ponzi is a feast of honesty and straight talking on what he sees as the core problem with the world’s financial system – the Ponzi-like lending and borrowing that had become endemic by 2007/8 and which caused the current crisis.

But is he right? Bear in mind that a Ponzi scheme dupes savers into putting their money into what appears to be a normal investment fund, whereas few, if any, investments are actually made. Profits, dividend payments and withdrawals by early entrants are made from the deposits of later entrants. Which is, of course, illegal. The now notorious Bernie Madoff is currently serving a 150-year jail term for his ‘highly successful’ Ponzi scheme after $65 billion of fictitious investments was exposed in 2009.

The Enron scandal that broke in 2001 involved a similar amount of money. Enron was a real company that exaggerated its trading profits for years by setting up dummy companies and inventing healthy profits for them. Like a Ponzi scheme, new capital was used to pay off early investors. And it too was illegal.

A crucial feature of such scams is that they cannot last forever. All bubbles must eventually burst. In these two examples, the US and world financial systems were big enough to absorb the damage. But there were consequences – apart from the thousands of savers who lost money. Following Enron, Arthur Anderson, the world’s largest accounting firm at the time, was dissolved. New laws and regulations were enacted with the aim of preventing recurrences.

 

Sadly, these regulations didn’t work: the world of high finance continued its Ponzi-like ways – with one main difference. They are legal. Nor have governments, central banks, regulators or legislators made a serious dint in this dire situation in the years since the current crisis began. And Feierstein presents a wealth of relevant statistics to support this contention.

 

Wisely, he doesn’t waste words labouring the Ponzi metaphor. But, by Ponzi-like he refers to lending/borrowing with the following features:

 

  • Little realistic chance of payment of interest and/or of repayment of capital.

  • Exaggerated, misrepresented or non-existent assets accepted as collateral.

  • Dangerously high leverage ratios on the part of the lender.

  • Creative’ and/or opaque accounting to hide the degree of risk or size of debt.

  • Further roll-overs of lending/borrowing so that new debt pays off earlier debt.

  •  

So does the world’s financial system really work like a giant Ponzi scheme?

Absolutely! Surely, few who read Planet Ponzi will be inclined to doubt it.

 

This conclusion is outrageous and shocking enough. But, reading Feierstein’s estimates for the sheer scale of the problem is little short of terrifying. Since Greece first threatened default two years ago, sovereign debt has become the focus of speculator feeding frenzy. The likelihood is that Greece will never pay off any significant proportion of its debt. This is the source of the waves of uncertainty currently sloshing throughout the whole financial system. What then the effect of even partial default by Ireland, Portugal, Spain, Italy and – beyond this nightmare scenario – France, UK and USA itself?

 

Britain, for example, has an accumulated public debt of £1 trillion. It is officially predicted to approach £1.5 trillion before it can even begin to fall. Given no sign of growth in the economy, this will be sometime between a decade and never. USA’s federal government debt is $14 trillion and its feeble economic recovery unlikely to be sustained.

So, according to Feierstein, we probably haven’t seen the worst of the crisis yet. Banking could be paralysed, money itself could cease to function, as happened in Argentina in 2001/2. And, as nearly happened following the collapse of Lehman Brothers in 2008.

 

But next time it would be the whole world’s banks that ceased to operate. And the duration would be longer – and more difficult to climb out of. Bear in mind that Japan has been in virtual economic stasis since 1990.

 

Of course, every book has its flaws. Feierstein’s praise for the likes of Margaret Thatcher, Ronald Reagan and David Cameron’s present ‘austerity’ displays a serious lack of political realism. For me, the main contribution of this threesome has been to turn a blind eye to the developing financial shenanigans over the past 30 years.

He is explicit in his praise for the neoliberal agenda – that is, obsessive application of the so-called free market model which still dominates the policies of most governments, corporations and banks around the world:

 

That model requires free markets, competition, democracy, free speech, an openness to trade, innovation entrepreneurship and a lot of hard work.’ (p 327)

No one disagrees with the latter 5 items on this list of economic virtues. But, the first two lie at the heart of the present crisis and, indeed, at the heart of Ponzi-like thinking.

On the ‘great pensions fallacy’ (reviewer’s term), he gets right into bed with the neoliberals:

‘… there is only one way (reviewer’s italics) to fund a pension and that is to put a little money aside each and every year of your working life, so there is a pot of money waiting for you on retirement.’ (p 207)

 

In other words, invest it on the investment banking money markets!

He ignores the traditional simplicity and logic of funding pensions from current payments by those still in work. Accordingly, he adds up the estimated future US pension and other entitlements of present employees, from retirement until death – that is, up to 70 years or more into the future – and treats this as current debt.

This results in a figure between $80 trillion and $200 trillion for total US public ‘debt’. (US states can and do borrow on the money markets.)

A recent documentary1 did the same pension calculation for the UK. This came to a total ‘debt’ of over £4 trillion, four times the actual current debt.

Of course, the precision of these figures aren’t the problem. What matters is that the totals are horrendous and quite unmanageable within the financial system.

Planet Ponzi is all the more compelling because Feierstein is himself a member of the political and economic establishment.

To be fair, neoliberal thinking is criticised in other places in the book. For example:

 

‘… the theoretical perfection of the financial markets is a mirage.’ (p170)

 

Maybe Feierstein has made a deliberate decision to face both ways on neoliberalism. Maybe he reasons that praising the beliefs of fundamentalist neoliberals in places could help to penetrate their thick intellectual hides in others.

 

Just one chapter is devoted to investment advice. Its title sums up his position well, Gold, Wheat and Shotgun Shells. He desperately wants the world’s financial system to go back 25 years so that his potential clients can get a fair return on their savings without the threat of losing their capital. Sadly, his advice sounds about as effective as whistling in a thunder storm.

 

Another chapter, Mr Smith goes to Planet Ponzi, is a pun on Frank Capra’s 1939 film, Mr Smith goes to Washington. In the film a naïve country bumpkin, Jefferson Smith (the role that kicked off James Stewart’s career), is appointed state senator and immediately comes up against the corruption and cynicism of the capital. Feierstein quotes the Jefferson Smith’s most famous comment:

 

Either I’m dead right or I’m crazy.’

 

Feierstein is more right than crazy. His book is a highly readable and witty account of the chronic dilemma facing our young planet. His strings of superlatives (or ‘derogatives’ rather) on the deceit, irresponsibility and cowardliness of bankers, governments, regulators and ratings agencies would make an effective rap routine.

We should all be on the streets rapping loudly.

 

Positive Money Notes

In one or two places, Feierstein does acknowledge that excessive leverage (ie high fractional reserve banking ratios) is part of Ponzi-like thinking. But, he doesn’t prioritise this particular aspect of the whole gamut of contributory causes. I think I agree with him.

 

Personally, I see speculation as central to the present financial predicament. But, speculation is a motive for investing money, in any form, leveraged or otherwise, Ponzi-like or otherwise. It is a little difficult to ban, or even regulate, something that exists inside someone’s head. Speculation will only disappear when the whole culture changes inside the world of high finance. This will surely only happen when, and if, the culture at large changes. That is up to us, the 99%.

The beauty of the Positive Money campaign is that it identifies a relatively simple reform and backs it up with an eminently reasonable draft bill. To demand democratic control over the issuing of new money is eminently reasonable.

 

We rightly emphasise that excessive leverage in banking is a method whereby the super-rich have extended their wealth, power and privilege in recent years. This is, of course, a political, but not party-political, point.

 

Politics analysis should not be put at the forefront of Positive Money. We are a single-issue campaign, not a political party. On the other hand, we should be honest and transparent about the political ramifications amongst ourselves, and with others if challenged. We should strive to avoid the charge of political naivety.

A utopian demand for ‘peace and prosperity on Earth now’ wouldn’t be very useful. The demand to ban fractional reserve banking is.

 

Dermot Smyth

22 April 2012

 

* Bantam, 2012

 

1 Channel 4, Britain’s Trillion pound Horror Story, 11 November 2010

 

 

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