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Causes of the Financial Crisis

What are the causes of the financial crisis that manifested in 2008, got worse in 2009, and promises to melt down in 2010? How has "casino finance" made losers out of everyone except the elites at the top?

The Causes of the Financial Crisis—Curse of the Financial Wizards

In Bill Clinton's 1992 presidential election bid, the campaign strategy boiled do to a four-word phrase: "It's the economy, stupid!" Today, amidst the worst financial meltdown in a century, we can see that the apt phrase is actually: "It's the money system, (which is) stupid." This article will explain the causes of the financial crisis and why the design of the money system made the problem inevitable.


The Debt-Based Money System Slams Into
Greed and Peak Oil

Our system is built on debt. To pay back old debt or to create "new money," new debt must created. That requires never-ending economic growth. (Now you know why politicians always talk about "growing the economy"...) This system has been humming along, more or less, for quite a while now, but recently it ran into two problems:

  • Peak Oil — Cheap, abundant energy is what really got the economic engine revving in the 20th century, and the economy became highly dependent on "black gold"—a plentiful, versatile, energy-dense gift from the ground. Oil production curves always went up, as necessary, to support whatever economic expansion the other factors in the economy allowed. Except for two brief periods in the 1970s, energy supplies were never a constraint on global economic growth. That has changed. Peak oil has arrived, and because we were foolish enough to leave long-term energy planning solely to "the wisdom of the markets," peak oil also means peak energy. For a system that must grow to sustain itself but now can't grow because of energy constraints, peak oil is a mortal danger.
  • Greed — At some point, those in the banking and finance business decided that taking deposits and making loans just wasn't profitable enough, and they started getting creative. All sorts of schemes were cooked up that allowed them to profit at higher rates than normal; that is, at higher rates than can be supported by activities related to the actual production of useful stuff. Thus were born such moneymaking wonders as leveraged buyouts, structured finance, credit default swaps, and derivatives. This is the stuff of "casino finance." As the chips got raked in, the desire for even higher profits grew, and so did the risks associated with the ever more extraordinary financial chimeras the money wizards were creating.

The gamblers' game is now over, the casino is on fire, and the players are desperately searching for ways to cover their bets and get out before the walls cave in. In some cases, they've had to cash in all sorts of investments they'd rather not, which for a while depressed the prices of stocks and commodities. Some major companies have found themselves insolvent, saddled with revenue streams that were falling and debt payments that weren't. More recently, the big players, in collusion with the Federal Reserve, government regulatory agencies, and credit-ratings bureaus, have colluded to hide the huge loads of junk assets and unpayable debt still on the books. Some have dubbed this the "pretend, extend, and pray" policy.

The most egregious part of it all is that the big bettors convinced the casino owners to make all the low-pay employees-that's us, the taxpayers-help cover the players' bad bets. The Powers That Be have thrown almost 24 trillion in bailouts and loan guarantees at the problem, all of which is backed by future tax dollars. They know it won't work, but hey, why not take the remainder of what the little guys have (or will have) while the opportunity is there?

This melding of Bugsy meets Wall Street meets Towering Inferno would almost be comical if the consequences were not so serious. Some say we are now facing a problem that is "as bad as the Great Depression." But it is actually far worse. Why? There are some stark differences between the 1930s and today:

  • THEN: US production of oil was rising. We were self-sufficient in oil; we were even an oil exporter.
    NOW: We are the world's largest importer of oil, with an economy and way of life that are totally dependent on a minimum daily requirement of petroleum fuels.
  • THEN: We had the world's largest industrial economy and were self-sufficient in most important metals and resources. Many more people knew how to make physical things of actual value.
    NOW: Much of our industrial base has been offshored or otherwise lost, and we are a net importer of most essential metals. Most people are employed in the service sector and usually don't make things that are essential to the basics of living.
  • THEN: A majority of people were still working on farms, with many urban dwellers still growing a substantial portion of their own food.
    NOW: Almost all of us are highly dependent on the centralized food system and wouldn't know how to grow a substantial portion of our own food if it were to become necessary due to persistent interruptions in the supply chain.
  • THEN: We were the largest creditor nation on the planet, with a high personal savings rate.
    NOW: We are the largest debtor nation on the planet. The personal savings rate has fallen to 0 and many people have dangerous levels of debt. We also have extraordinary amounts of debt at all levels of government and in most of our businesses.


How We Got Here

It is essential that everyone has a crystal clear understanding of what is going on in this financial situation. To do that, we must understand a few things about our money and economy.

We have an economic system where the #1 paradigm is never-ending growth. We have a money system that is debt-based, where the survival of the system requires ever more debt (sort of like running ever faster so you don't fall down). The problem with infinitely scaling up these trends is that we live on a finite planet with a finite resource base.

We also have a "parasite class" that makes vast amounts of money by doing nothing more than manipulating money—call it skimming on a grand scale. The elites at the top of this rigged game vacuum huge amounts of wealth from below by making sure all monetary flows lead back to the banks and the stock markets, which are their primary conduits for channeling the enormous profits generated by the world's labor force (where actual work is done) to the lofty heights above (where the most strenuous effort undertaken is to lift a glass of Dom Perignon to toast the genius of their scam).


A Ponzi scheme is a scam where unrealistically high returns are paid to current investors by using funds acquired from new investors. Eventually, the operation runs out of new investors and cannot pay the same high returns to its old investors. Thus the scheme is exposed, and lots of people lose lots of money.

The phrase "Ponzi scheme" derives from an actual case early in the 20th century. Loosely defined, a generic equivalent would be "pyramid scheme." Because the global money system is debt-based, with ever increasing levels of debt required for continued functioning of the system, it is essentially a Ponzi scheme. When the supply of new debt takers runs low for too long, the system falters. That is what we are seeing now.

Globally, governments and central banks have thrown more than ten trillion at the current financial problem. That the economy's trajectory is still radically down tells us something: They are wasting their time—and our money. They are only delaying (and heightening) the inevitable pain when their plans finally fail.

Our leaders will not be able to solve the financial crisis by applying solutions conceived within the same corrupt, doomed money system. You can't fix a Ponzi scheme with "more Ponzi." Trying to do so only makes the ultimate crash—and recovery—that much harder.

Related reading:

Mike Whitney, writing on Counterpunch: "Card Check"

For any of you non-millionaires out there who just had the gut reaction, "Hey, that's just 'class warfare' talk!" ... we say: Yes!, there is a class war, and you've lost! Do you really want to keep believing the elite's propaganda that this is a fair system, based on hard work, merit, and ingenuity, when all the evidence points to the game being rigged? Since 1973, the average income of the top 1% of Americans doubled and the income of the top 0.1% tripled. In the last two decades, CEO compensation packages increased more than 20-fold. The rest of us experienced no increase in "real wages." We were able to increase our apparent standard of living only by going deeply into debt.

In 2008, President Bush and the Congress rushed through a $700 billion bailout bill despite the fact that 93% of Americans were against it. (That should tell you whose bidding our leaders are doing.) Worse still, if one adds in all the related bailout activities—things like the money for the Bear Stearns collapse; the inital Freddie/Fannie fix and the recent blank check the US Treasury gave them to backstop the balance sheet; and especially the torrent of new money being created by the Fed—taxpayers are looking at a multi-trillion-dollar transfer of wealth from us working stiffs to the elites and the parasite class—potentially $24 trillion at the time of this update in January 2010).

image of bear with empty pockets And to cap it all off, one needs to understand that this is an intentional harvesting of wealth, not a rescue plan. Henry Paulson, Ben Bernanke, Timothy Geithner, and the rest of the gang know the bailouts will not work, cannot work. The size of the derivatives market, which is the undercurrent of this whole mess, is estimated to be 700 to 1,400 trillion dollars. The sum of all these casino-finance bets is far more money than exists on the planet. Even though the financial chaos has already taken down many of the world's biggest companies, the derivates bomb has yet to implode. Once the ticking stops and the unwind begins in earnest, the relentless black hole will continue sucking in our money until we wake up and demand that the plug be pulled.

It's time for us to shake off the illusion, realize we've been had, and push back.

We want to state something one more time because the free-market apologists keep trying to lie their way out of their medicine. The cause of this crisis was not poor people and irresponsible people who got mortgages when they shouldn't have. The overall financial system is plenty big enough that it would be able to handle even a large number of mortgage defaults—if that were the only problem. Nor was the cause of this crisis "too much regulation." Inept regulation or lack of regulation or corrupt regulation, yes, but certainly not too much.

The real cause of the financial crisis is the set of money games created by the financial wizards whose greed was not satisfied by the paltry returns of the "normal economy." They placed bets they could not cover—and then bets on those bets. It is the casino-finance con artists and their cronies in key government positions that have caused this problem. Period.


The time is here for each of us to decide where our priorities lie. Sporting events, CD collecting, paperback novels, favorite TV shows, scandal fixations, and similar "hobby activities"—or lending a hand to correct the gaping hole in our democracy, to establish a truly fair economic playing field, and to ensure the right of free speech and self-determination for our children's generation?

What does it take for us to be willing to "pull a founding fathers"—to put aside our personal pursuits and petty differences long enough to put this great nation back on track? If we agree that there is a problem, let's accept that we must be part of the solution. As Edmund Burke said: "The only thing necessary for the triumph of evil is for good men [and women] to do nothing."

Time is growing very short. The money system and the political system have been and continue to be controlled by elite and corporate interests. Our wealth is being stolen while we look on with befuddled disinterest. Our civil liberties will not be far behind—history is an excellent predictor of this pattern. There is a closing window of opportunity for us to join together, focus fully on our responsibilities as citizens, and push those changes in a positive direction. Other people, newly elected or otherwise, will not do it for us.

Read, watch, learn. Join online discussion groups. Start local discussion groups. Get active. Please.

Updated: 01-JAN-2010
(Original: 04-JAN-2009)

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Causes of Financial Crisis

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The Crash Course is a 20-part series of free video clips that explains what's going on with debt and the money system, but also relates the financial crisis to peaking energy supplies and resource scarcity. Chris Martenson does a masterful job of making dry but important concepts easily understandable. The animated graphs and other features, combined with the clear explanations in the voiceovers, make this one of the best presentations we've ever seen. We highly recommend it to anyone who wants to understand the financial meltdown in the larger context of debt and constrained energy supplies—and who wants to better understand the approaching storm. Go there

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