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The "must read" article of the day - The Confidence Game

Monday, October 20, 2008, 8:07 AM

James Grant writes a keeper. I highly recommend you read the whole thing.

The Confidence Game

Quote:
In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. "Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," he said on Tuesday.

What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Under the spell of soaring house prices (and before that, of stock prices), Americans trusted the things they ought to have doubted. But markets are cyclical, and there is always a new day. In compensating fashion, people will eventually doubt the things they ought to have trusted. Investment opportunity follows disillusionment. It's complacency that precedes bear markets.

Quote:

If the confidence deficit seems so high, it's because the preceding confidence surplus was full to overflowing. People suspended critical judgment. They accepted at face value the pretensions of central bankers and the competence of investment bankers. Not one professional investor in 50, probably, doubted that wads of subprime mortgages could be refashioned into bonds that were just as creditworthy as U.S. Treasurys.

Federal Reserve Chairman Ben S. Bernanke and his predecessor, Alan Greenspan, were fine ones for believing impossible things. They propounded them, too. Never mind asset bubbles, they said. Not only can't you predict them, but you can't even recognize them after they've swollen to grotesque maturity. Better just to tidy up after they burst. Now Mr. Bernanke is likening our present troubles to those of the 1930s. The comparison is more confidence-sapping than he seems to realize. From peak to trough, 1929 to 1933, the gross domestic product was almost sawed in half, before adjusting for changes in the purchasing power of the dollar. No such mitigating fact helps to explain today's set-to. It's a crisis of competence of our financiers, of bankers and central bankers alike.

To the self-satisfied elders of the Fed, the past 25 years were a sweet validation of the art of central banking and of the efficacy of paper money. "The Great Moderation," some of them called this interlude of low inflation and subdued economic activity -- neither too boomy on the up side nor too recessionary on the down side. For these manifold blessings, the officials thanked, in good part, themselves, i.e., "the credibility of monetary policy," as the president of the Federal Reserve Bank of San Francisco, Janet Yellen, put it earlier this year.

But it wasn't the vigilance of monetary policy that facilitated the construction of the tree house of leverage that is falling down on our heads today. On the contrary: Artificially low interest rates, imposed by the Federal Reserve itself, were one cause of the trouble. America's privileged place in the monetary world was -- oddly enough -- another. No gold standard checked the emission of new dollar bills during the quarter-century on which the central bankers so pride themselves. And partly because there was no external check on monetary expansion, debt grew much faster than the income with which to service it. Since 1983, debt has expanded by 8.9% a year, GDP by 5.9%. The disparity in growth rates may not look like much, but it generated a powerful result over time. Over the 25 years, total debt -- private and public, financial and non-financial -- has risen by $45.1 trillion, GDP by only $10.9 trillion. You can almost infer the size of the gulf by the lopsided prosperity of the purveyors of debt. In 1983, banks, brokerage houses and other financial businesses contributed 15.8% to domestic corporate profits. It's double that today.
Related

Attaching a face to an issue, as the presidential candidates did in the latest debate, has a history of success and plenty of backfires. Read Forbears of 'Joe the Plumber.'

The modern financial economy requires a certain minimum leap of faith. The paper dollar is an example. There is nothing behind it except the government's good intentions, yet we hoard it as if it were gold. However, we collectively outdid ourselves in credulousness in the runup to the financial crisis. People believed the Fed's good press, as, evidently, the Fed did itself. Then there was the ever-flattering dollar. Warts and all, the American scrip is the world's top monetary brand. It is this country's leading export -- and the agent of not a little of today's financial dislocations. It is the dollar -- the world's reserve currency -- that has allowed this country to consume much more than it produces and to put the deficit on a mammoth annual running tab, about $700 billion in even this year of a much improved trade picture.

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13 Comments

tsneds's picture
tsneds
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Re: The "must read" article of the day - The Confidence Game

Excellent,especially the upbeat way he ended it:

"And the opportunities? For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale -- if the government will let it. For the entrepreneur, the silver lining in the federalization of finance is obvious. Start a bank or broker-dealer to compete with the institutions that will soon be smothered in Mr. Paulson's quarter-trillion dollar embrace. There's oxygen, still, in the free market."

JMCSwan's picture
JMCSwan
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Re: The "must read" article of the day - The Confidence Game

My SYRIANA Analysis of this 'Confidence Game' Article:  

1. To the Ignorant: It's a Pump and Dump Financial Warfare Tactic. They are trying to suck money into the stock market, prior to it's eventual outright collapse.

2. To the Elite: It's a Message: Read Between the Lines...

March 17, 2005 

Because Federal Reserve Notes are irredeemable in silver or gold, or any commodity other than the Treasury’s base-metallic slugs (and even then at no permanently fixed ratio of exchange), their purchasing power in the free market ultimately depends upon public confidence--or, more realistically, public gullibility. That is, the Federal Reserve System is a confidence game, in both senses of that term. What should give every American pause is that the powers that be--who are most intimately acquainted with the problem because they are its cause and the reason it is not being solved--lack confidence themselves.

For the most pertinent example, a statute recognizes and provides for the possibility, if not the likelihood, of a recurrence of what happened in 1929-1933:

[D]uring such [financial] emergency period as the President * * * by proclamation may prescribe, no member bank of the Federal reserve system shall transact any banking business except to such extent and subject to such regulations, limitations and restrictions as may be prescribed by the Secretary of the Treasury, with the approval of the President. Title 12, United States Code, Section 95(a).


As this statute proves, the political and economic Establishment is prepared for banking and currency crises so severe that a national financial dictatorship will be necessary to deal with them.

The Federal Reserve System is a confidence game, not only domestically, but on a global scale as well, because of the status of Federal Reserve Notes as the premier world reserve currency and preferred medium of exchange in international trade. This status, however, is becoming increasingly tenuous--as even a cursory study of today' financial media will disclose. If unsophisticated Americans allow themselves to be misled by rosy propaganda flowering from the Federal Reserve and the Treasury, the rest of the world does not. The instability of Federal Reserve Notes and the Federal Reserve System as a whole is becoming increasingly apparent to foreigners. And knowledge of this increasing instability is itself further increasing instability in the vicious circle characteristic of the break-up of all Ponzi schemes. This auto-catalytic process threatens to generate an accelerating downward spiral of crises, until America’s monetary and banking systems are either reformed or self-destruct.

Source: 1984-2-1776 ['Buying stakes' in the various banks, via the 'bailout' allows the FED to shut down those banks, when they decide it is time to 'TURN OUT THE LIGHTS' ON THE DOLLAR, and implement the AMERO.]

PONZI SCHEMES:

Energy, Economic and Population Ponzi Schemes to Rip Off the Feebleminded:

Social Security (1935-) and Medicare (1965-) are the two preeminent examples of the utopian socialist business model in the US. They owe their heritage to Italian immigrant Charles Ponzi. In 1920 Ponzi introduced an investment scheme in Boston that amounts to an expanding game of musical chairs, in which one must buy a chair for someone else in order to join the game, the price of a chair is ever rising (so that eventually, it will be unaffordable), the last people to join the game never get a chair, the number of players always far exceeds the number chairs, and none of the players create anything of worth by way of participation.
~ The Energy Economics of Feebleminded Addicts to Politically Correct Religious and Corporate $lave and €annon Fodder Breeding Economics and Religion.... ~ (includes Chris's CRASH COURSE, plus some other additional info)

Source: Exponential-Yewgenics 

PUMP & DUMP & HELIUM BOOKKEEPING:

It's a simple scheme really. The mafia knows it quite well. By whatever means necessary, drive a stock's price higher and higher. Make it look like a mover, even if it's a dog. Cook the books and get suckers to buy in, helping to drive the price even higher. When you think the balloon will pop, call all your buddies and sell your shares. That effectively steals all the money that the suckers put in. When the stock crashes, the suckers who weren't part of the scheme will take the loss, whether they be individual investors or the New York City police and fire pension fund. 

At the core of all these accounting problems is a non-transparent form of corporate bookkeeping called "pro forma." As opposed to the more transparent and rigid practice called GAAP (Generally Accepted Accounting Practices), pro forma bookkeeping allows for all kinds of manipulations like hiding debt as income, double booking revenues and sneaking drug money onto the bottom line. What has yet to be fully explored by any of the major media is which other major corporations use pro forma bookkeeping. The reason is that all of the major media companies use it too. Also on the pro forma system are GE (NBC), AOL/Time Warner (CNN), Microsoft (MS-NBC), Viacom (CBS), Disney (ABC), IBM, Intel, Cisco Systems, Sun Micro, Tribune (the Chicago Tribune and the L.A. Times), the Washington Post (Newsweek) and the New York Times. 

Source: Financial Tsunami Revolution: Enronesque Helium Bookkeeping, Ponzi Scheme Derivatives and Pump and Dump Chickens Come Home to Roost 

 Regards

JMCSwan

 

Davos's picture
Davos
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Re: The "must read" article of the day - The Confidence Game

Yah just can't spend 654% more than yah make.

The more they print, the more they hurt their bases buying power - which is already maxed out.

Like Enron this to will crash. 

aczop's picture
aczop
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Re: The "must read" article of the day - The Confidence Game
[quote]On the contrary: Artificially low interest rates, imposed by the Federal Reserve itself, were one cause of the trouble.[/quote]I've read this a number of places, and I don't doubt one bit that it's true, but I'm trying to put together in my head exactly how these low interest rates (by the Fed, right?) helped to contribute to the problems we are seeing today.  Would anyone care to explain real quick the basic idea here?
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JMCSwan
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Re: The "must read" article of the day - The Confidence Game

aczop (Mon, 10/20/2008 - 13:08)

Personally, in my opinion, that's just an additional symptom they added (like cherries to icing of a cake). But by artificially lowering the interest rates, they enabled an additional amount of money to be lent into the system [See Chris's Crash Course: How Money is Created sections, or for more in depth article, read The Creature from Jekyll Island, particularly THE MANDRAKE MECHANISM] (since at lower rates there would be more buyers for low interest rate mortgages), and thereby they created the housing bubble; by flooding the market with low interest loans for mortgages; and everyone and their dog thought it would be a good idea to get a mortgage (invest in building a home -- 'thinking asset'), and so on.....

It has been further alleged by two respectable sources (to my knowledge, there may be more), that there are approximately three times the number of paper mortgages in the 'mortgage market' to the number of REAL HOUSES. I suspect a significant amount of that was -- like the massive put options trading prior to 9-11 on American Airlines, by various CIA related stock broker agencies, etc -- intentional (a sorta mortgage bubble pump and dump kind of thing), not to mention illegal.

The problem being that when 'the people' do not remain vigilant, they lose their liberties; and secondly, when they don't know the difference between a demockery and a republic -- then the demockery oligarchs will spin them wonderful stories about 'freedom' in a 'democracy' (they will NEVER CALL IT BY ITS REAL NAME -- DEMOCKERY OF OLIGARCHS), and they certainly will not explain the difference between a republic and a demockery.....

IN A REPUBLIC: any, and I mean ANY law made by Congress CAN BE RULED UNCONSTITUTIONAL OR NULL AND VOID, IN ANY CASE, BY ONE JUROR!!

In a Republic, not only CONGRESS, but the STATE PROSECUTOR has to GET PERMISSION FROM THE COMMON MAN, IN ORDER TO IMPLEMENT EVERY SINGLE LAW, TO PROCEED WITH THE PROSECUTION THEREOF IN A COURT OF LAW......

The 'citizens' of the 'Demockery' however have abdicated their rights to a preference for ignorance, and toys from their nanny goverment; who are not only ripping them off left, right and center, but very effectively encouraging them to fight each other, over scraps from the table, while NANNY robs them blind of THEIR CHILDREN, GRANDCHILDREN AND GREAT, GREAT, GREAT GRANDCHILDREN'S FUTURE AS FREE MEN AND WOMEN!!

JMCSwan

 

Davos's picture
Davos
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Re: The "must read" article of the day - The Confidence Game

Aczop:

 http://www.scribd.com/doc/192230/GOLD-AND-ECONOMIC-FREEDOM-Alan-Greenspan

This says it all. 

Davos's picture
Davos
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machinehead's picture
machinehead
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Scared Sheeple Stampede Into Savings

Jim Grant points out that in an era of overconfidence, debt exploded while savings plunged. Today Bloomberg climbs on to one of my favorite hobby horses from long-ago Macroecon courses -- the savings rate:

------------

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, Commerce Department figures show. [But the savings rate] was less than 1 percent in each of the last three years.

"Consumers are starting to realize that they've been living in a fantasy world,'' says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington. "They will have to begin salting away money for retirement, their children's education and other reasons.''

http://www.bloomberg.com/apps/news?pid=20601109&sid=axsUMrc.liiE&refer=home

------------

Here's what's ugly. If that sub-1% savings rate rises back to 9% (an average that included boom times -- savings rates during recessions hit double digits), it will subtract 8% from GDP. An 8% hit to GDP would easily be the worst downturn since 1929-33.

Be afraid. Be very afraid. Then shop like you mean it! Wink

 

john50's picture
john50
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The Confidence Game - It is Over

Agreed. Feds wonder why there is a crisis in confidence, well....

Stop lying to us would help. Here some of many Hank Paulson examples of cognitive dissonance:

[quote]

All the signs I look at show the housing market is at or near the bottom. The U.S. economy is “very healthy” and “robust.” (4/20/07)

"I do believe that the worst is likely to be behind us". (5/7/08)

Treasury Secretary Henry Paulson moved swiftly Thursday to defend Fannie Mae and Freddie Mac from critics who have called them insolvent. “Their regulator has made clear that they are adequately capitalized.” (7/10/08)

"The American people have every reason to remain confident that the U.S. banking system is sound." (7/22/08)

"I believe we can get to the point within months where we turn the corner on housing." (7/22/08)

[/quote]


Stop lining their own pockets would help to, Goldman is protected because Paulson has 550,000 shares of Goldman as I recall, a bit of a conflict of interest - illegal in Canada.

Stop swindling savers to transfer their wealth to corrupt bankers. Let the banks be owned by the tax payers and receive reduced taxes or divident repayment for the use of their money.

Stop trying to save face and win votes. Politicians are in conflict with assuaging symptoms, and avoiding any painful dealing with root causes. The system needs to be broken to rebuild it again, eliminate the Fed - not needed, let elected Treasury print money, and have all powerful watch dogs over them that can be above the lobby and self enriching interest.
.
Stop hiding toxic assets off the balance sheet in level 3. Banks do not trust other banks, (nor should we), because there is inadequate transparency to show the risk is not excessive, (loss of principle), for a small reward.
.
Stop Yelling Fire in the Global financial theater. Paulson has no clue how negative the World viewed the attemps to pass his 'Plan' - it seemed desperate because it was desperate. He scored a goal for the bankers and will have his personal reward.

The Founding Fathers have been betrayed by a treasonous banking Cabal, and keep in power by a public sold a consumer lie ("buy a SUV - preferable a Navigator"), and immoral degeneration of family values. Something has to change, unless America wants to be the tenant and worker for Asian masters.
Surprised

salvadorveiga's picture
salvadorveiga
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Re: The "must read" article of the day - The Confidence Game

Hey Chris,

 

I have noted that US Libor these last days has been declining a lot... it now stands below the FED rate at around 1.43%.

 If the interbank credit is starting to regain confidence, couldn't this be that the turmoil is over '

 Can we expect starting a new bull ? 

gyrogearloose's picture
gyrogearloose
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Re: The "must read" article of the day - The Confidence Game

Have you listened to the entire "Crash Course" ?

Also read  http://www.peakprosperity.com/page/preview-chapter-20-or-navigating-martenson-report

In it Chris contends that within 4 to 10 years there will be government insolvency, the death of the dollar and massive social reorganisation. The chart also states   " 0 - 2 years  Recession (Bad for stocks)"

Any Bull market will most likely be a short lived " suckers rally "

 

salvadorveiga's picture
salvadorveiga
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Re: The "must read" article of the day - The Confidence Game

so what can we do then ?  Yes i've watched the course... but so many times throughout history dooms have beem claimed and the market surprised everyone to surpass the low expectations or the doom scenarios...

 If there's a such a doom scenario on the making and if it really comes true, then what should we do put our money under the matress ? Buying all gold ? Gold itself isn't as safe as its suppose to be... many people that bought gold in the 80's have lost a ton of money... I can't buy groceries with gold, at least for now...

 

If stock's are going such out of favor what can one do in investment ? I don't wnat my money yielding 2-3% a year in money markets !

 

best, 

 

sal 

ajparrillo's picture
ajparrillo
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Posts: 72
Re: The "must read" article of the day - The Confidence Game
If you read, understand, and concur with the Crash Course then this is not about investment, but preparing for a whole range of 'sruvival' scenarios.  What you do is really dependent upon your own mindset.  In the end, it does not hurt to prepare...look at it as "Crash Insurance."

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