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Quants: The Alchemists of Wall Street (Marije Meerman, VPRO Backlight 2010)

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Financial Alchemy and the Road to Chaos

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Financial Alchemy and the Road to Chaos

March 1st, 2011

Frank Koeksal

“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.” Thomas Jefferson (1743-1826), 3rd US President. It is a basic law of physics that one can neither create of destroy energy. If one assumes that money is energy then the world of finance has a date with destiny. A lot of verbiage has been released about the Banker engineered financial implosion that brought about the “Great Recession” 2008 and the current US housing depression. What has not been discussed is how a banking system based on a fiat digital currency could generate 1.64 Quadrillion dollars worth of financial vehicles known as derivatives, and how these financial cluster bombs have eroded our way of life.

First it is a useful exercise to understand how money is created and where it comes from. Money is created simply out of thin air by the various Central Banks around the world. This money is backed by nothing more than fiat, or the government’s word that you can trust the government to back its currency through the taxation of the citizens. If taxation does not generate the basis for the fiat then government ability to seize property in the name of preserving the fiat is also an option. One has to look at history to see examples of the above; most profound was the prohibition of gold ownership in the USA by common citizens during the Great Depression.

This fiat currency is then loaned out by the Central Banks at an extremely low interest to other banks who in turn loan out the “money” to various customers with a higher rate of interest attached to it, of course. This is called fractional reserve banking and it is basis by which our financial system is structured and in time, doomed to fail.

So how do these 1.64 Quadrillion Dollars in derivatives enter the discussion? Once you get past the technical jargon of Collateralized Debt Obligations (CDOs) and Asset Backed Commercial Paper (ABCP) you come to financial alchemy. Here is how this worked. The Central Banks lowered interest rates so low that their constituent banks could borrow “cheap’ money and loan it out to Joe consumer for say a house mortgage. As this process went along the inflationary pressure on housing forced up prices. A clear example of supply and demand, demand for housing went up as to do the prices. What the financial community did next was to take money created out of thin air, chop up these loans into pieces and wager that the asset on which this loan was made out of would keep on going up in value. The final step was to sell these pieces of loan on the open market as a security. This would be the catalyst of how the financial community would “derive” its wealth accumulation, hence the derivative from these new securities based on loans given to the average Joe.

Here is where it gets interesting because as the paper value of homes raised so too did the value of these derivatives. As this happened speculation entered the market and forced the derivative value even higher, in fact much higher than the value of the original loans. Now the problems began to arise, and before you knew it the market crashed and all of these derivatives with inflated values were no longer worth the paper that they were written on.

Then these financial magicians did something inventive, they froze these investment vehicle in time on the balance sheets of various banks so these intuitions would not imploded due to the devaluation of these derivatives. Hence the large infusion of fresh cash into these banks to foster liquidity because the banks liquidity was tied up in a depreciating asset that they could not admit to because this would result in bankruptcy.

The above is the reason why the government gave tax payer money to the banks and let the printing press of money go into over drive. This is the reason why gold prices are exploding, food inflation is causing revolutions in the world and why our economic system is on its last legs. We are also witnessing the world population standing up in protest and anger. From Athens to Tripoli, from Wisconsin to Ireland the citizens of the world have been forced to foot the bill for the bankers’ bad investment.

Market Capitalism is about the Moral Hazard, risk versus reward. Capitalism under the new model of Banker bail outs is that the people assume all the risk and Bankers assume all of the rewards, hey they even get rewarded when their investment risks lose. So what does this mean over the longer term? We will witness of what appears to be an economic recovery only to fall right back into recession. We will witness more austerity measures in the forms of tax increases and reductions of services. The central banks will print more money to infuse into the banks in order to prevent this massive fiscal black hole from imploding them, this will result in higher inflation and increases in interest.

In the end we can expect the Western Leaders to push us into war on the scale of a World War in order to divert attention of the real situation that we are in. Unfortunately this will result in great loss of life, loss of infrastructure and a New World Order. I surmise that the New World Order will not be the one the Bankers and Globalists were hoping for, perhaps neither are we.

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Frank Koeksal lives in Calgary Canada with Degrees in Political Science and Psycholgy as well as Sociology. In recent years his attention has shifted to the effects of Globalization on Economics and Finance.

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