Economic Bubbles and Wall Street


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Economic bubbles, Wall Street

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Economic Bubbles and Wall Street

  1. 1. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS ECONOMIC BUBBLES AND WALL STREET Copyright © 2009 by Shivaprasad Srikantia. All rights reserved. Contains extracts from the book titled AMERICAN CAPITALISM, AMERICANOMICS, & MULTINATIONAL CORPORATIONS - The concealed economic and political secrets of capitalism that made America a superpower in less than one century, by Shiv Srikantia. International paperback edition : 530 pages ( amazon. com ASIN: B00262NW1E) Through widespreadignorance,theunstablenatureofAmericancapitalismhadbeenadroitlyhidden from public view for nearly 50 years. The recent fiascos have uncovered holes. The Federal Reserve administration was overly dependent on mathematical models that did not reflect economic reality. The key reason for the financial fiascos in America was a financial experiment that failed. With the backing of the Federal Reserve, mathematicians, economists, and investment bankers came up with the idea of rigging the American economy and making it run according to an exotic mathematical model they created on a computer. The primary idea was to utilize the forces of speculation, deception, and ignorance of the middle classes to guide the American economy along a narrow pathway of economic illusion that would
  2. 2. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 2 make Wall Street tycoons and investment bankers richer by billions of dollars. The upper classes could get wealthier by forcing the middle classes into a debt trap. Incidentally, John Judis has written a book titled The Paradox of American Democracy : Elites, Special Interests, and the Betrayal of the Public Trust. Therefore, the structural backdrop for corporate fraud in America extends well beyond Wall Street. It extends deep into the American government machinery. Wings of the American government were covertly helping American corporations amass hundreds of billions of dollars of wealth through questionable business practices. This was being done to guarantee preeminence for American banks and multinational corporations operating in the highly competitive international business arena. When Enron’s bankruptcy was being investigated, the White House was dragged into the fray. Furthermore, the Institute of Public Policy expressed the view that at least 20 American government agencieshadassistedEnroninoverseasexpansionprojectsindevelopingcountries.Federalinvestigations revealed that even the World Bank had a hand in the Enron projects. Clearly, White House administrations and the American government had set out to help big corporations achieve financial goals through murky business practices. After Richard Nixon and Henry Kissinger began steering American policy, military intimidation, CIA sponsored assassinations, and corporate fraud to guarantee American socio-political dominance became a part of patriotic conduct. Incidentally, Henry Kissinger had stressed the importance of controlling oil supplies for American dominance in global affairs. Engaging in corporate fraud to guarantee American preeminence in the world business arena was also considered patriotic. Though middle class American citizens wish to see themselves as proud members of an equal and egalitarian society, they have allowed about 5 percent of America’s wealthiest to hold almost 50 percent of the wealth of the nation. What the Federal Reserve projects as sound fundamentals for a stable economy may actually be unsound in reality. Incidentally, research shows that stock market crashes have occurred despite low inflation, low interest rates, and low unemployment levels. This suggests that the mere presence of sound economic fundamentals do not ward off stock market crashes or obstruct the generation of economic bubbles. In economics, the solutions evolved by academic researchers are themselves a part of the problem. For the sake of analytical convenience, academicians try to construct economic theories by examining demand and supply factors. While doing so, they conspicuously ignore the influence of popular perception. This is primarilybecause demand and supply issues can be quantified toeasilyfit into a mathematical equation, while perception cannot be quantified. In the realworldscenario however, public perception, sentiments, and mood play a major role in engineering economic upturns and downturns. Sometimes, these mood changes can be ruthlessly sudden. Incidentally, the Enron scam and the real estate bubbles went undetected for several years when the financial markets had been following an uptrend. History reveals that economic wrongdoings do not get exposed when financial markets are bullish and everyone is comfortably making money while riding on the waves of optimism. Scams generally get exposed only during downturns. Federal regulators appear to become more vigilant when the economy becomes unstable. President John Kennedy was deeply suspicious of the Federal Reserve. In a vicious power struggle, the Federal Reserve had taken away vital powers from Congress in matters relating to the supply of money. John Kennedy abhorred the idea of the Federal Reserve consorting with Wall Street banking mammoths to control the supply of money. The Federal Reserve was primarily set up to covertly help Wall Street institutions amass incredible amounts of wealth through well conceived public deception. Afer John Fitzgerald Kennedy was assassinated, the Federal Reserve became an institutional apparatus utilized by the banking giants to fabricate public perception and create economic illusions. Incidentally, the Federal Reserve helped create the dotcom bubble to manufacture American wealth from thin air.
  3. 3. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 3 Major banks from London, Germany, Paris, and Amsterdam influenced the Federal Reserve. John Kennedy firmly held the view that the Federal Reserve violated the spirit of the American Constitution. But common citizenry within the American democracy were kept unaware that big banks were clandestinely controlling the supply of money through the Federal Reserve apparatus. In fact, powerful banking cartels in New York managed to have politicians and legislators make laws that forbid financial analystsfrompubliclymakingnegativestatementsabouttheeconomichealthofbankinginstitutions.This censorship system was put in place to hide facts from the general public. Therefore, common citizens walking down the streets of America could not be forewarned about potential bank failures in Wall Street. Another issue hidden from the public was that the Federal Deposit Insurance Corporation (FDIC) that insured bank deposits did not have adequate financial muscle to handle multiple bank failures during a highly contagious financial epidemic. Incidentally, within a span of twelve months, nearly 50 banks in America went belly up like dying insects. Economies might actually chug along better with a small string of bubbles. Therefore, the American Federal Reserve seemed open to the idea of making the economy run with a precise set of mathematically stacked bubbles. The Federal Reserve helped create economic bubbles periodically raising and lowering interest rates. The pivotal idea was to create containable bubble cycles within well defined parameters. Perhaps, it was believed that containable bubbles would initially provide a positive impetus to the economy and later deflate without explosive violence. Bubble economies typically run through a course of 14 years. However, mid-termcatastrophes mayoccur after the first 7 years. A successfullyrun financial bubble scam can run undetected for a period of 14 years. Wall Street bankers and the Federal Reserve also evolved a brilliant financial scheme where big chunks of economic shock could be transferred to unsuspecting economies of European nations. For instance, many foreign banks had been carefully conned to make risky investments in American mortgage-backed securities. This way, banks in Europe were forced to take some of the shock from Wall Street catastrophes. In fact, in the recent financial crisis, the Federal Reserve was unwilling to publicize information on the list of foreign and local banking institutions that were a part of the AIG bailout package. The Federal Reserve wished to conceal the identities of AIG derivative counterparties. The element of secrecy clearly points to the likelihood that the Federal Reserve is being covertly used by a powerful banking cartel orchestrating speculative financial rackets on a global scale. The Federal Reserve played an indirect role in misleading investors in the dotcom bubble and the real estate bubble. In both these instances, it tried to create American wealth out of thin air. In American capitalism, the rejection of the Gold Standard for currency was part of a grander design. Republicans in the Richard Nixon administration had probably realized that severing the link between currency and gold would allowgreater prosperity through public deception. Meanwhile, wealthyRepublicans of the Reagan generation began to believe that financial markets could regulate themselves. In America, stock market crashes are typically engineered to occur in February, March, June, and September. The financial fraternityuses the services of a newbreed ofmathematiciansknownasfinancial engineers. Financial engineers are interested in studying risk and uncertainty to navigate through an economy riddled with bubbles. Instead of trying to understand how genuine free market economics actually plays out, economists and financial engineers are trying to create a virtual reality bubble game that moves away from ground reality and encourages speculation and counter-speculation. There are shrewd financial tycoons in Wall Street who know how to navigate adeptly through economic bubbles and become richer. At the time of World War II, Japan and Germany were America’s worst enemies. After the great war
  4. 4. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 4 however, bankers in America, Japan, and Germany shook hands and became partners in business. After World War II, Japan and Germany poured money into Wall Street to create economic bubbles. Wall Street became the preferred venue for orchestrating billion dollar financial scams with a transcontinental footprint. This scam structure was devised intentionally by an international cartel of bankers, business tycoons, bureaucrats, and politicians. Swiss banks were part of an extensive international setup to carry out large scale money laundering in complete secrecy. In financial circles, Wall Street executives were known for making shady deals. In many historical instances, Wall Street executives have been known to be brilliantly unscrupulous. However, at one point in time, America’s Treasury Secretary was a former Wall Street executive. The idea of allowing the American Treasury to be run by former Wall Street executives might appear distressing. But economists fromthe Chicago school might collectively point out that many types of deception and fraud actuallyhave a positive impact on the American economy. In many capitalistic societies, the very pillars that support a nation’s economy largely depend on public perception. It follows that some amount of public deception may actually turn out to be good for the economy. Wall street tycoons will claim that deception can be used effectively as a purgative to relieve economic constipation. In Japan, high savings rates gradually lead to excess funds available for speculative investments. Between 1986 and 1990, the Japanese economy supported economic bubbles that successfully inflated stock prices and land prices. Japan’s real estate industry was politically very powerful. Low interest rates created real estate bubbles that encouraged speculation. With ruthless speculation, the price of real estate in Tokyo ripped through roofs. Through economic bubbles, the Japanese added more fizz and sparkle to stock market transactions. In the last century, over half a dozen economic institutions in Japan have collapsed. However, Japanese society sees these casualties as a part of healthy competition in everyday life. Every year, thousands of factories in Japan shut down due to ruthless competition. Incidentally, history records reveal that stock market indices in Japan have witnessed an 800 percent jump in just 15 years. A great deal of share price fluctuations in the stock market and fluctuations in international currency exchange rates occur everyday. It is this type of irrational speculation that causes the price of oil barrels to rise and fall. Speculators can gradually destroy the industrial framework of a nation. There is no running away from this discomforting fact. The fixation on stock markets can ruin good companies. The fact that the share prices of General Motors sharply fell from an outrageously high $ 75 to a horrendously low $ 3 shows that there is something radically wrong with the way stock markets evaluate businesses. Companies are either overvalued or undervalued by speculators. More than inefficiency or outdated technology, random guessing by bad speculators can ruin a good engineering company. Unfortunately, the world economy is being run by speculators, while orthodox industrial production is losing meaning. Some Western economists feel that the thrift practiced by Asian nations are partly responsible for the financial crisis in the West. Emerging Asian economies experiencing high growth rates and high incomes began living frugally and stashing away enormous sums of money. Wealth accumulated through savings was then channeled into speculative investments in real estate the stock markets. Some Asian money was also funneled into America and Europe. The scene was now set to create economic bubbles. Quite simply, many banking institutions in America collapsed under the psychological weight of all this money. Perhaps, Wall Street handled the sudden influx of money from Asia in an irresponsible way. They gambled with the money. One cultural issue that makes America so different from other nations is her optimistic belief that all problems in the urban universe can be phrased as simple mathematical equations and solved elegantly by a computer. In the American banking industry, arcane mathematics and computer simulations were being
  5. 5. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 5 used in place of precious human intuition to assess financial risk. For nearly two decades, American mathematicians have been trying to discover the use of integral calculus, matrix algebra, and game theory to run civil society. Several decades ago, a mathematical prodigy named Arnold Rothstein, had dropped out of school to devote his time to evolving sophisticated success formulas for gambling, loan sharking, andracketeeringoperations.Eventually,theRothsteinalgorithmsfoundtheirwayintoinstitutionsinWall Street. Thereafter, in 1981, Ronald Reagan brought about more financial deregulation. The new objective of American capitalism was to consolidate economic and political power in the hands of a few. This was done to move political power to the rich classes. In the last century, many American business corporations went bankrupt primarily because they let computers solve business management problems. The unique power of human intuition could never be incorporatedinto computerprograms.Softwarepackagestypicallyoversimplified businessproblemsand provided a solution based on a mechanical algorithm. The absence of human intuition in decision making wrecked many American manufacturing companies. Incidentally, rigorous mathematical analysis and computer simulations at the War Room of the Pentagon had revealed that the war in Iraq could be won in a few days. The war simulation computers serving the George Bush administration oversimplified the invasion,guaranteedaquickvictory,andgrosslymiscalculatedthe cost of war. Unfortunately,thepassion for misapplied mathematics has landed the American nation in a lot of trouble. Until 1925, nations of the world looked up to America to help set higher ethical standards. At that time in history, America was perceived as a role model nation with a praiseworthy agenda. The original intent of American imperialism was to persuasively thrust industrial culture over agrarian nations languishing in poverty. The laudable goal of American imperialism was to extricate third world nations from poverty and make them somewhat prosperous. Americans from the old school were essentially imperialists with noble intentions. After 1950 however, there was a shift in values in the international political arena. After dismantling their colonies, nations in Europe wished to discover new ways of pillaging poor nations for economic gain. So, industrializing nations of the world looked up to America to help set lower ethical standards to facilitate unfair trade, business, and speculation in the markets. The story of America is an enthralling rags to riches story. Without the mandate of common citizens in the American democracy, American capitalismfirmlyhinged on the ideaofattainingeconomicprosperity at the expense of others. Though mainstream cultural values in America opposed imperialism and unfair trade, an underlying structure of political ignorance in American society allowed politicians with ties to imperialistic multinational corporations to come to power in the White House. In the American democracy, citizens had voting rights but very little political influence. For over 70 years, American multinational corporations in search of crude oil and mineral deposits have engaged in industrial banditry. Subsequently, the corporate tax scheme funneled apartof the pillaged wealth into the American Treasury. Therefore, the American government was utilizing multinational corporations as middle men in a gigantic scheme of looting third world nations. The critical point to note is that governments are not sacrosanct organizations as widely believed. All over the world, governments are manipulated by special interest groups and the ruling elite. The opulence visible in American cities and the White House banquet halls was fundamentally wealth pillaged from poor nations in South America. The enormous sums of money the American government invested in scientific research, medical research, and NASA apace programs was actually money ilegally annexed from weaker nations. With the key idea of reviving faltering economies after World War II, America was chosen to lead industrial societies in Europe down a fresh pathway of consumerism, crafty trade politics, rouge warfare, and corporate fraud. One distinct cultural advantage America had over European nations was that she did not have a critical pool of left wing intellectuals who would stand up
  6. 6. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 6 and raise issues of ethical propriety. So, American corporate executives could perfect the art of economic deception and corporate fraud without hindrance from high brow intellectuals. In December 2008, the former Chairman of NASDAQ was arrested by law enforcement agencies on suspicion of running an illegal $ 50 billion pyramid money scheme. At present, about 50, 000 cases of corporate fraud are under Federal investigation in America. In modern societies, rapid industrialization hadcreatededucationsystemsthatfocusednarrowlyonteachingtechnology,medicalscience,accounting, and money management. Industrial societies neglected liberal arts education that could have brought a greater level of social civility in a world of ruthless competition. Wall Street bankers without a good liberal arts education have clearly exhibited a lack of inner conscience. They have also failed to discover that there is more to a civilized society than just financial transactions. Psychoanalysts have been researching the complex behavioral patterns of American chief executives. Psychologists have observed that narcissistic traits can propel executives to high positions of power. In managementboardrooms,narcissismandhaughtinessareactuallyconsideredleadershipqualities.Lately, top executive talent is being more closely equated with the ability to conceive new accounting schemes and engage in financial gimmicks that help boost share prices. American executives measure their self worth by the perks they receive. Top executives have to flaunt their corporate perks to gain political clout within their fraternity. In corporate boardrooms, executives who travel in sleek corporate jets and choppers command more respect than those who travel first class. Executives who practice austerity run the risk of eroding the brand image of American companies. A former executive of Merill Lynch had to spend over a million dollars to remodel his office while his company was in dire straits. Obviously, the remodeling was an urgent attempt to help boost the sagging image of the company and help restore confidence. Quite often, corporate executives ofailingbusinessesinAmericaintentionallyflaunt their perks to restore public confidence. Incidentally, when Citicorp experienced financial problems, the executives clinched the idea of buying a corporate jet to boost the company’s image. Perhaps, with the honorable intention of restoring faith in American financial institutions, the executive board of Citicorp was willing to cough up $ 50 million for a brand new corporate jet. However, the ploy backfired when President Barack Obama expressed extreme displeasure at the way Federal bailout money way being inappropriately allocated for corporate perks and bonuses. The practice of paying undeservedly high salaries and bonuses for underperforming corporate executives in Wall Street suggests that the elitist classes have formed their own financial club. Boys of this fortune club are insulated from the vagaries of economic recessions. Members of the fortune club are entitled to generous bonuses and golden parachutes even when dark clouds appear over the nation’s economic horizon. American executives of the fortune club can pay themselves hefty bonuses and uncork champaign bottles even when their businesses are going bankrupt. Furthermore, tax payers money in the form of Federal bailout packages can be legally utilized for paying bonuses to corporate executives of sinkingbusinesses.Infact,duringtherecenteconomicdownturn,incompetentWallStreetexecutivestook home nearly $ 18 billion in bonuses. Perhaps, the fortune club might point out that the bonus packages were stimulus packages intended to motivate underperforming executives in the fortune club. In America, the paranoiac obsession with building personal wealth precipitated the crisis. In European societies that have been hammered by socialistic ideologies, the craving to build personal wealth is not so intense. In fact, French philosopher Tocqueville pointed out that money making was not very important in the European culture. Incidentally, Alexis de Tocqueville had once observed that hard work and money making had become critical to the American democracy. Alexis de Tocqueville had also
  7. 7. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 7 wondered how a civilized society in southern America had allowed slavery. Tocqueville expressed the view that slavery had tarnished America’s glory as it was an act of degradation of man. In the twenty first century, French philosophers might wonder how a civilized society in America allowed financial fraud on such a grand scale and allowed the image of American investment banks to be tarnished. The recent financial crisis had Hillary Clinton do a reality check and discover that the economies of America and China were gravely intertwined. In reality, during her recent visit to China, Hillary Clinton urged China communists to support instruments of the American Treasury. Chinese communists hold $ 650 billion worth of American securities. At times of economic distress, when communists buy American Treasury bills, they would essentially be bailing out the American government. Therefore, the trade relationship between China and America is actually a laughable financial relationship of dependence between communists and capitalists. Interestingly, the economic success of communism in China is tied to the economic success of capitalism in America. The corollary also holds true. Certain varieties of capitalism in rich countries are sustainable only when cheap labor, cheap minerals, and cheap consumer goods imports are available from impoverished countries. Many American companies cannot survive in business unless they out source high skill jobs to low wage countries and cut payroll costs. Their business models are not sustainable with wages prevailing in America. In industrial societies, rapid economic growth and inflation benefit the rich faster than they benefit the poor. In other words, when rapid economic growth begins to occur, economic components that benefit the rich rise more steeplythan the components that benefit the poor. This phenomenon widens the economic divide between the rich and poor. Therefore, most communist governments intentionally seek gradual economic growth. Unlike capitalist states, socialist states wish to control key industries and carefully restrict economic growth to smaller increments. To communists, GDP and economic growth rates are ideologically less important than the welfare of the starving proletariat. Therefore, it would be inappropriate to compare growth rates in parallel while evaluating the performances of capitalist and socialist economies. Neither communism nor capitalism in their present forms have the functional sophistication to be able to help nations maintain independently sustainable economies. In fact, both types of economic operating systems have their share of glitches, and bugs. However, until a better economic system is devised, communism and capitalism should both remain as unviable alternatives within the world’s ecological system. In the last century, economic research was hampered by politicians who failed to see communism and capitalism as purely economic issues. By about 1960, the economic issues relating to capitalism and communism began to be politicized in international circles. Instead of amicably sitting down at a round table and objectively examining the pros and cons of these two economic systems, politicians were trying to find a military solution. Here was an economicissuethat politicians were tryingto solve usingmilitarymight.Insteadofgettingtopeconomists from America, Europe, and Asia to take a serious look at the flaws within capitalism and communism, Henry Kissinger was busy closing the missile gap between America and the Soviet Union. There have been serious allegations from socialist groups that governments in third world countries are being corrupted by multinational corporations. Fanatics of socialismoften pointed out that capitalists had played a major role in corrupting socialist governments of third world nations. Poorly paid bureaucrats in socialist states had been found to accept bribes from capitalists. Due to widespread capitalistic corruption in the international political arena, socialism was never given a fair chance to succeed. Dr. Albert Einstein of Princeton University had said that the value of an education is in training of the mind to think something that cannot be learned from textbooks. Obviously, there is a rare body of
  8. 8. 4CROYDON BOOKS PROGRESSIVE LITERATURE TO PROVOKE YOUR INTELLIGENCE AND UPLIFT YOUR GENIUS 8 intuitive consciousness that subliminally resides outside the body of knowledge crammed into the pages of a college textbook on economics and financial engineering. European intellectuals of the nineteenth century had claimed that the average human mind was entirely capable of generating knowledge and constructingusefultheoriesthroughindependentscrutiny.Inmanysocieties,villagefolkwithhighschool diplomas demonstrated better abilities in deductive reasoning than urban citizens with college diplomas. According to British philosopher Bertrand Russell, man is born ignorant, but is made stupid by education. Brooks Atkinson, an eminent American journalist, had pointed out that it took five years to recover from a college education. Many of the financial management techniques that eventually resulted in financial catastrophesinWallStreetwereoriginallydevelopedbyAmericancollegeprofessorswithPh.D.degrees. Incidentally, it has become fashionable for top business schools all over the world to teach shady business managementtechniquesevolvingfromHarvard,Wharton,andWallStreet.Thereisnorunningawayfrom the fact that graduates of top business schools in America have been orchestrating corporate frauds on a grand scale in Wall Street. Fractured values have precipitated financial catastrophes and lead to the closure of American businesses. Though American businesses management practices have bankrupted the automobile industry in Detroit and banks in Wall Street, no lessons will be learnt from this. For worldwide indoctrination, the American book publishing industryexports millions of books on corporate management to third world countries.