The Great Global Ponzi Finance Con

Oh-Oh-Oh, someone's really smart
Complete Control, let me see your other hand
Total C-O-N
Control
Total C-O-N
Control
That means you!
-- The Clash

A classic Ponzi scheme always need new money. Once new money stops flowing in, the whole con collapses. During decades of "innovation", the Great Global Ponzi Finance Con classified the need for new money as "liquidity." In 2008, just as in any good Ponzi scheme, once the new money -- liquidity -- dried up, the whole thing began collapsing. So, the Fed, the planet's leading liquidity provider, stepped in, providing trillions of dollars of liquidity. Sure, there's always a thin line between the healthiest banking system and a Ponzi effort, and the Fed was established to provide liquidity in times of crisis. However, the line between a healthy banking system and full-on Ponzi scheme was obliterated with Wall Street's innovations. The Fed's unprecedented and extraordinary liquidity flows make the American taxpayer the last pocket in the Great Global Ponzi Finance Con. Today, the only question is how long will the American taxpayer remain the final patsy.

Many financial "innovations" created more and more liquidity in the financial system. One important scheme that has added more liquidity, and just as importantly added greatly to the system's instability, has been the growth of the tri-party repo system, with JP Morgan and the Bank of New York Mellon as middlemen. Now simply, the system allows someone to borrow on securities before their maturation, making them liquid, and increasing leverage in the system. Plus, it is short term borrowing, increasing systemic instability. The Fed has a readable paper, if you want to know the intricacies of the system. The important point isn't how it works, or in the case of 2008, when it completely collapsed, how it doesn't, the important point is prior to the mid-1980s this system didn't exist. The Fed writes:

The tri-party repo structure developed in the mid-1980s in response to the desire by Cash Investors to have collateral held by third party agent. The tri-party market continued to grow as the Clearing Banks invested in infrastructure advancements that allowed Dealers and Cash Investors to optimize their use of the platform. At peak levels in 2008, over $2.8 trillion in securities were being financed through the U.S. tri‐party repo market.

That's $2.8 trillion of liquidity, short term liquidity, growing from less than a trillion in 2002 to almost 3 trillion in 2008. Add to this; securitization, derivatives, low interest rates, and mortgage refinance, all in one way or other helping flood the financial system with liquidity. We now have a system addicted to liquidity. Excess liquidity is detrimental to both the financial system and the real economy. Most importantly, it blows bubbles in asset pricing. No one wants to let that excess liquidity just sit there, you want to "invest" it, and that greatly distorts the pricing system. Once the pricing system is completely distorted, you get plenty of malinvestments. Once not only the financial system, but the real economy becomes addicted to excess liquidity, problems begin to occur. You have an increasingly difficult time distinguishing between what might be simple problems of short-term finance and what are very much issues of insolvency. If you just keep pumping more and more liquidity into an insolvent entity, you only further distort the economy.

This is the great problem we currently face with the global financial system. In order to avoid dealing with any sickness, we keep adding more liquidity, increasingly clogging the system with more dead money. The great liquidity bubble has distorted global assets, the real economy, and now it is creating problems for currencies. We increasingly can't tell what is healthy or solvent, from what is sick or insolvent. It is difficult to tell good debt from bad, thus good money from bad. In Europe, we watch the liquidity pushers trying to solve the problems caused by excess liquidity with more liquidity, once again revealing the underlying Ponzi nature of the system. The US is the largest liquidity pusher, the Fed the greatest culprit. With the dollar as the global reserve currency, this has exasperated the Ponzi bubble across the globe, no greater place than Europe.

The Bank of International Settlements has an excellent report(tx zerohedge) from a few months back, which shows how reliant the Europeans remain on the dollar. Meaning in times of crisis such as 2008 and now, Europe desperately needs the US Fed, so much for the Euro. BIS states:

The funding difficulties which arose during the crisis are directly linked to the remarkable expansion in banks’ global balance sheets over the past decade. Reflecting in part the rapid pace of financial innovation, banks’ (particularly European banks’) foreign positions have surged since 2000...European banks’ need for short-term US dollar funding was substantial at the onset of the crisis, at least $1.0–1.2 trillion by mid-
2007.

Events during the crisis led to severe disruptions in banks’ sources of short-term funding. Interbank markets seized up, and dislocations in FX swap markets made it even more expensive to obtain US dollars via swaps.

So, two things here, first, along with the great rise in liquidity has come, as shown with the tri-party repo scheme, a great rise in short-term lending. Secondly, Europe and the rest of the world remain completely dependent on the dollar, or more accurately, the American taxpayer, who remains the last pocket for the Great Global Ponzi Finance Con.

The most amazing statement in the BIS report about the banks piling on debt is, "the associated currency exposures were presumably hedged off-balance sheet." Hedging, derivatives, the idea of "investing insurance" are all the final and essential components of the our Great Global Ponzi Financial Con, all the more ludicrous as the processes themselves make the system more unstable. It misleads all into thinking no one need take losses, and that folks is Ponzi thinking.

The question is how to end the Great Global Ponzi Finance Con. Two things need to be done and they must be done simultaneously. First, the financial system needs to be shrunk by at least half, and the best way to do that is to drain the liquidity out of the system. This means making things less liquid -- less trade-able -- a greater reliance on long-term opposed to short-term finance, less securitization, and finally an ending of the too prevalent practices of hedging and derivatives. We are doing none of this.

Secondly, the system must be brought into account, meaning a lot of bad debt needs to be destroyed. This will be deflationary, but the way to mitigate its impact is as money is destroyed in the Ponzi system, create more and put it directly into the real economy, keep people employed, and begin to invest in the future. In the end, Ponzi finance benefits only one group, Wall Street. The American taxpayer needs to quit playing the last patsy.