Economic collapse and bailout predicted in 2001
Bookworm on Mar 16 2009 at 4:06 pm | Filed under: Economics
I was doing some research for a post I’m planning, and came upon an articled entitled “The optimal design of Ponzi schemes in finite economies” which Utpal Bhattacharya wrote in 2001 and published in 2002. The summary reads as follows:
As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this “too big to fail” doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed—France (1719), Britain (1720), Russia (1994), and Albania (1997).
If the language I’ve highlighted sounds familiar, it should, because it accurately predicts both the economic collapse and the bailout mentality that followed. Someone give Bhattacharya a Nobel Prize for economics, because he nailed it.
One can only wonder now if it was pure happenstance that things played out as they did, or if rational actors were gambling on the bailout Bhattacharya predicted.
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“One can only wonder now if it was pure happenstance that things played out as they did, or if rational actors were gambling on the bailout Bhattacharya predicted.”
I am betting it is the latter and that his paper received wide distribution among economists.
Well, when you get news such as this concerning AIG:
Goldman Sachs Group Inc and a parade of European banks were the major beneficiaries of $93 billion in payments from AIG — more than half of the U.S. taxpayer money spent to rescue the massive insurer.
and you remember that Henry “Hank” Paulson was Bush’s Secretary of the Treasury when the infamous socialization of investment firms happened… and Mr. Paulson has closer ties to Goldman Sachs than to any other company in the world…
and Paulson drove the AIG bailout(s)…
well it all starts to make a leeeetle bit of sense. Them that gots, gots more. Them that gots and gots power, gots everything they might ever want. It’s not just the Democrats to whom this applies, oh no, not at all.
Meanwhile, I’ve lost more than 40% of the value on my investments.
Washington DC is corrupt, utterly corrupt, 100% corrupt, Democrats and Republicans all. I’m beginning to think we must NEVER EVER vote again for anyone who was in the House Of Representatives or the Senate from 1998-present. No one. Not of either party. Not of any party.
It’s just like our public schools. Everyone knows the teachers are terrible. But EVERY parent says that their child’s teacher is pretty darn good. Uh… folks… you’ve got a massive disconnect going on there. And the same disconnect is true for Washington D.C. YOUR Congressman was part of the problem. They’re ALL part of the problem.
And that there is only one question, of any worth, to ask a candidate who is running in 2010: “Do you agree that all of Washington D.C. is massively corrupt, worse than at any other time in our nation’s history… And what precisely are you going to do to reduce this corruption in Washington D.C?”
And pay careful attention to every word of the answer.
I know, I know… it’s not the only important question. But they should be running terrified in Washington D.C. right now as the wrath of the American People rises to punish them for what they’ve done…
… but instead, we’re going to vote 96% of them back into office, same as always, same as always, same as always.
We get what we deserve.
While listening to the radio today (I admit it was NPR). I feel it is important to eavesdrop on the enemy from time to time. Prior to the AIG (no strings attached bailout) last year, a call from France was made with the warning that if AIG was not bailed out, French banks would go under.
Quicker than you can say MERDE OL’ MIGHTY … voila ze check was in the mail.
“Washington DC is corrupt, utterly corrupt, 100% corrupt, Democrats and Republicans all. I’m beginning to think we must NEVER EVER vote again for anyone who was in the House Of Representatives or the Senate from 1998-present. No one. Not of either party. Not of any party.”
I had all ready come to this conclusion and maybe we are long overdue for a third party. I all ready have the name: CLEAN SLATE PARTY.
Be assured that you are not the only one who lost 40% of their money and 100% of their confidence in D.C.
hey, here’s an idea: vote libertarian! No need to start a fictional 3rd party that doesn’t exist.
I’d like to remind everyone about fall, 2008, last year. The conservatives in the House of Representatives were formulating an alternative to the Bush-Paulson-Pelosi-Reid massive bailout/nationalization scheme. It would have consisted of loans and would have focused on unfreezing the credit markets.
The political intrigue in Wash D.C. was intense for those few days.
Henry “Hank” Paulson, Bush’s Secretary of the Treasury, and formerly of Goldman Sachs, huddled frequently with the Democrat power-brokers. He helped coordinate the effort to cut off the conservative House members at their knees, trying to ensure their efforts died, so that no one could oppose the massive bailout. Over and over again, we heard of Paulson getting together with the Democrats to coordinate strategy.
Remember the intense climate of fear that they stoked upon us? (Remember too that this included top Republicans.) We simply had no choice but to get those credit markets unfrozen, or within a month, maybe two, total disaster would engulf us like a two-mile-high tsunami.
Well, we’ve been through many bailouts since. All that money has ended up being used for payouts, or it’s been hoarded. The vast majority of it ended up nowhere near “frozen credit markets”. We’re six months into this mess and the games are still going on, as our overlords take care of each other – ensuring that each others’ parochial worries, concerns, and interests are resolved – without really even trying to take care of America.
It’s as if a hurricane struck your community. Everyone on your block pooled their resources and put the Smiths in charge of the money. Six months later, the Smiths have installed a new in-ground heated swimming pool and are holding massive barbeque parties for their European friends; daughter Sally is sporting a nifty new $60,000 sports-car and her college-loans have been upgraded from risky to AAA after that $10,000 payment a month ago; son Biff just got a new 60-inch plasma TV in his bedroom for his X-box.
And everyone else on the block got a package of twinkies and a can of coca-cola to help tide them through the bad times.
I still think the Dems are far, far worse than the Repubs. But the entire insular crew in Washington D.C. is first and foremost taking care of their own. All of them. They’re making damned sure that their most pressing concerns are addressed, and comfortably, before they get around to the other 300 million of US.
Below, from the platform of the Libertarian Party:
2.0 Economic Liberty
A free and competitive market allocates resources in the most efficient manner. Each person has the right to offer goods and services to others on the free market. The only proper role of government in the economic realm is to protect property rights, adjudicate disputes, and provide a legal framework in which voluntary trade is protected. All efforts by government to redistribute wealth, or to control or manage trade, are improper in a free society.
My question: How would the party address current economic issues?
This would be a perfect time to hear an alternative voice, suggestion, approach or what measures would have been in place to prevent bailouts of the proportions we have seen.
>>Prior to the AIG (no strings attached bailout) last year, a call from France was made with the warning that if AIG was not bailed out, French banks would go under>>
Ok…so _why_ would French banks go under? There are links here that I just don’t understand…I’m guessing that _maybe_ foreign banks bought derivatives that were basically something that didn’t exist – like carbon credits and/or the cap and trade credits. If you can get rid of the hot potato before the bubble bursts, then you’re ahead. If not, you’re in the tank. Since (if I’m any where’s near correct) the derivatives originated in the US, the US is being held responsible for selling worthless somethings that the foreign banks sold – so we’re responsible for bailing them out. Kind of like the Donkey joke, but lots more buyers of tickets that have to be reimbursed.
If anyone has a better explanation, I’d sure appreciate hearing it…!
This is good. Easy to grasp… Still doesn’t explain why the US has to jump in and save others who made bad choices, but it’s a step…
http://benbittrolff.blogspot.com/2009/03/ponzi-economics-in-one-easy-lesson-and.html
If you jump in and save somebody, he then personally owes you a favor. Obama will be calling on a lot of favors very soon now. Transformations require support, you know. There will be people in the way that must be removed.
“Easy to grasp”…and now that we know that Heidi is a euphemism for really bad business practices, we also know now that they’re ‘drunk’ with power.
“If anyone has a better explanation, I’d sure appreciate hearing it…!”
If anyone had a clue as to what ‘was’ and ‘is’ going on in the world of derivatives, we wouldn’t be “eating Twinkies and washing them down with a cola” (thanks Mike and sorry I paraphrased).
While we are all in the throws of it and fingers are kept pointing at the recipients of the bailouts, our fists should be in the faces of the legislators who just couldn’t wait to send out the no strings attached checks. I feel like someone stole my credit cards, check book, portfolio and wrote checks to the drunks in Heidi’s bar.
As a footnote to the popular AIG bailout, note that many of their employees, who were rewarded with bonuses are:
1) not living in the USA/nor citizens of USA, 2) not subject to the same rules 3)
and my favorite, no longer employed by AIG.
suek (#8)
>> If anyone has a better explanation, I’d sure appreciate hearing it…!
I, too, am waiting for the better explanation.
Nearly all the bailout money has ended up being hoarded by the recipients. It *may* be the case that the hoarding itself is what has ended up saving many of the investment firms and banks from collapse.
But we were told that it was imperative that the credit crunch itself be unlocked, and we were told that if the credit crunch freeze wasn’t solved within DAYS, the entire system would collapse with unimaginable consequences for everyone.
Well – the credit crunch freeze was NOT unlocked, not unfrozen – and instead we got cash hoarding.
Six months later, we’re all still here. The long-term consequences of the bailouts, along with the Obama administrations leftist “solutions”, will eventually lead to grave crises down the road. Add in the unfunded Social Security and Medicare shortfalls, what we’ve just been through is a spring breeze compared to the financial-debt hurricanes to come. But they’re likely a decade or more into the future… I want an explanation for the Sept-Nov Republican-driven fear, and the Jan-Mar Obama-driven fear, that has led us into catastrophic decision after catastrophic decision.
What has disgusted me is the realization that our overlords in Washington D.C. have gone out of their way to protect themselves and their closest compadres from financial problems, and have done little for the rest of America.
Then there are the horrifying Democrat policies that will make everything worse, and the Republican quislings led by Arlen Specter who appear to have no souls or principles as they sell out, over and over.
Yes. I’m disgusted.
Mike, I suspect at least part of the problem is that most of them are just lawyers, and simply don’t understand it either. Unlike McCain, they are either unwilling to admit it, or are arrogant enough to assume that “of course, they understand it”. As I said – the words used to discuss the situation are words we commonly use – but they’re used in ways we don’t commonly use them and as a result, don’t mean what we _think_ they mean. As a result, we’re all blithering idiots, and they’re the worst of the lot. You’re right that they take care of themselves, because a) they have financial advisors who _do_ know what they’re talking about and who see to it that they’re protected, and b) they really aren’t ethical in the sense that most of us interpret ethical.
When my husband was in the military, he was involved with firms that contracted with the government. Any time they went out for negotiations, reviews – whatever – the contractor – who usually had a company cafeteria and who usually supplied lunch – was supposed to give them a cost for whatever food they ate because they were not allowed to accept the lunch free. They had to pay for the lunch in cash, and then submit a request for reimbursement if their costs exceeded the per diem they were allotted. Obviously also true if they went out to eat. These are the rules put into place by Congress for the military. But for themselves??? The hypocrisy is staggering.
>>most of them are just lawyers>>
What I mean by that is that they do _laws_. They deal with words…they don’t deal with numbers. I suspect that many of them – including most of all our new president have little if any math or science in their educational repertoire. In other words, they’re both educated and ignorant. And arrogant enough to not know it.
Those people who think they know everything are a great annoyance to those of us who do.
— Isaac Asimov
This is a link to the comment page for the graphic I posted a few days ago (not the one above). There’s a comment that’s worth reading. _Very_ long – I copied and pasted it to Word, and it was 16 pages. Lots of double spacing, but still very long. If you have time, you should read it. If you’d rather, you can email me and I’ll send you an attachment with the whole thing. For an email, send it to “aroundabout06 at yahoo.com”…without spaces or quotation marks.
If you go to the link, you won’t have any trouble figuring out which comment it is – but it’s the eighth comment of nine. For an indication of the conclusion, I saved the article as “Global Monetary Authority”.
>>https://www.blogger.com/comment.g?blogID=1258979445050968882&postID=1961570080102137111>>
Which raises a huge specter…New World Order. I’m not much of a conspiracy theorist, but I’m aware of chess players out there. I think this falls more into Ymar’s strength, but maybe I need to be more aware. Are there _really_ people out there working on this? I don’t know….
[...] Economic Collapse Predicted in 2001 Anatomy of a giant Ponzi Scheme [...]
Trying to become even somewhat knowledgeable about economics is difficult.
Today, there’s more news to hurt the head (”hurt the head”, meaning, trying to stretch my brain to figure out more economics that I just can’t yet grasp.)
First, news on the Federal Reserve, from link:
http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14679757.html
The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt.
At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year.
Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s.
What does this mean? How serious is this first-of-its-kind intervention in the last 50 years? Where will the Federal Reserve get this $300 billion? Who has the authority to turn on the money printing presses? I certainly don’t know… yet.
—–
And an American Thinker article quoting Tom Maguire at length on how the AIG bailout money fiasco can be broken down. (And note, this has nothing to do with the irrelevant bonuses issue, which are a Gore-like Man-Bear-Pig deliberate distraction!)
http://www.americanthinker.com/blog/2009/03/insurance_commissions_failed_t.html
In there, I need to dig to find out what is behind the use of $44 billion of the bailout money as payoffs for “Securities Lending”. This is different from Credit Default Swaps, apparently. I don’t know the difference… yet.
But in that article, I clearly can see the payouts to good ol’ Henry “Hank” Paulson’s Goldman-Sachs, and the European banks… and there’s certainly a reason Hillary and Obama are kissing China’s a$$es right now, because we need to go far, far further into debt to SOMEONE, and the Federal Reserve Bank can only cover so much of it.
Thought question for the day: If someone, or a company, TRULY is “too big to fail”, and we have to bail them out with our taxpayer monies, or enslaving your grandchildren to massive debt… why are those companies not being broken up into smaller companies, so that “too big to fail” can’t be used against us again?
Just wondering aloud… and also wondering about that rotten smell…
Sigh.
Just reading the comments has given me a migraine! I will get to all the suggested reading and polish off the day with a margarita.
I remember when ‘they’ thought Ma Bell was to big and broke down the company into Baby Bells. My phone bill was about $10-12/month once upon a time. We all know what our phone bills look like today – a mortgage payment circa 1960 something. Of course, way back then, the talking heads were not playing a game of the Fear Factor.
I was under the impression (obviously, I am impressionable and gullible ) that the SEC was suppose to oversee the ebb and flow of money, deals, etc.
As for Credit Default Swaps…I figured it out…
Bad decisions, poor management, delusions of grandeur, over paid executives, more than questionable politicians keep the real money/power and the rest of us poor slobs are incurring debt, paying off their bad decisions into the not foreseeable future.
They ’swapped’ places with us. They still have credit and the tax papers will be in default.
I guess when the word ‘billion’ is not in the headline it’s hardly worth a mention. Nevertheless, I consider 700 million should certainly get at least a blip on the radar.
How many more are out there on the loose???
http://www.theepochtimes.com/n2/content/view/13834/
Wow.
Trying again to make the above link an active one.
https://www.blogger.com/comment.g?blogID=1258979445050968882&postID=1961570080102137111
Or this:
http://benbittrolff.blogspot.com/2009/03/2008-financial-crisis.html and go to the comments.
If you go to the link and read through all of the article, then this one is enough to top it off:
http://www.themoscowtimes.com/article/600/42/375364.htm
Relevant material in the article:
” The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.
The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a “superreserve currency accepted by the whole of the international community,” the Kremlin said in a statement issued on its web site.
The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.
The Kremlin has persistently criticized the dollar’s status as the dominant global reserve currency and has lowered its own dollar holdings in the last few years. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have repeatedly called for the ruble to be used as a regional reserve currency, although the idea has received little support outside of Russia.”
Testing…
my comments seem to be dumping into moderation or spam or wherever – but not onto the comment roster…
>>I remember when ‘they’ thought Ma Bell was to big and broke down the company into Baby Bells. >>
My parents gave us some shares of AT&T for a wedding present. I remember my mother telling me “whatever you do, don’t sell the AT&T”. I don’t even remember what happened to the stock when they did that.
Pffft. AIG bonuses … big deal. Fanny Mae and Freddy Mac??? oh well. No doubt they deserve bonuses. They work so hard, you know.
http://www.qando.net/?p=1567
[...] writing this article for a couple of weeks and then a friend sent me the following link form Bookwormroom.com: I was doing some research for a post I’m planning, and came upon an articled entitled [...]
This thread seems like a perfectly suited place to share the attached.
The U.N. trade chief said Thursday there is a “missing link” in the international financial system that is becoming more critical as the global economic crisis drags on: What happens when a country is bankrupt and can’t pay its debts?
Marcellus: Something is rotten in the state of Denmark.
Sadie: Well…did you get a whiff of what’s on the global economic agenda.
http://news.yahoo.com/s/ap/20090626/ap_on_re_us/un_un_financial_summit_6