Metaphors to understand the financial rip-off

‘All the Devils Are Here: The Hidden History of the Financial Crisis’, by Bethany McLean and Joe Nocera

This is a good read, written for the layperson.  It remains very difficult to get a grip on just why our economies have collapsed.  The metaphor in my head is that of the hopeless products left in some mug-punter’s garage after a pyramid scheme collapses.  Most countries now have wads of empty properties and people who have bought ones now worth not much.  That’s the stuff in the garage.  Pyramid schemes are now illegal in most places, but they re-emerge forever as ‘network marketing’ or whatever.  The basic scam is to be able to pretend to cops what you were doing wasn’t illegal, but just business.

I went to a few pyramid demonstrations years ago, to get the feel.  They were all the same.  I particularly remember an ex-cop (she really was) in an orange frock telling us all how unhappy the crap job was and how much she was enjoying mega-wealth.  They wheeled out loads like this and had a claque in the audience cheering.  Simples!  Some were just actors taking a fee.  No one was allowed to ask why the super-products, usually utter dross, weren’t on sale in bargain shops and so on.  One of the bastards involved told me it wasn’t illegal to take money off idiots.

I think this is the metaphor for high finance.  The questions for research remain about who ends up with the loot and who ends up with the useless crap.  One of the scams is world-wide and involves bankers and politicians getting together in Ponzi schemes.  It is organised crime and they seem involved too.  My guess is what is going on has been happening, like pyramid schemes, for centuries.

There’s a general principle in business called the value chain (after Michael Porter) – it boils down to having to make money faster than the business spends on costs.  If you could find a bookie prepared to let you bet at evens on coin tossing, you could make a comfortable living – you just double the bet each time and stop once you make what you want.  If a grand a week is enough, you bet that to start with and leave with £2K.  If you lose, you bet £2K and leave with £4K (but only winning one).  Bookies don’t allow these bets, but you could always bet fast enough to get your grand a week, even if at some point you lay out £256K to get it (that would be the ninth toss of coin).  You’d have some costs, of course, if you were borrowing the money.  Bookies and governments screw up the simple sums with transaction costs and odd favourable to them.

Bookies work on different odds, and you can even find some systems which simply take a cut of all the bets made like a Tote.  Generally, of course, the system relies on idiots who think payouts at 33 – 1 on a roulette wheel with 36 numbers and a zero are ‘good’.  The essence of the business is to get punters to cough up fast enough to cover costs and make profit.  That sum is easy.

If you analyse money systems that involve banks and governments, you find something rather like this.  In this equation the pot of money is expanding because we are making more ‘stuff’ by getting more productive and so on, but just like the bookies, the insiders are basically setting odds and so on.  And just like the bookies they lay-off and have inside knowledge of dead-certs and so on.

Generally, we have tried to make it impossible under gaming acts to allow some people to get more bets for a cheaper price than others or use inside knowledge.  Yet banking is full of such matters as ‘approved lists’ of people (often politically connected) who can buy shares cheaper than the rest of us and so on.  The German Enigma machine was invented to send information in secret to allow ‘commercial bets’ (by the Belgians I think).

I’m pretty sure, if we could open up banking, property and politics we would find little more than a dreadful network of organised, criminal betting.  I believe we know have technology that could bring about free trade – our problem with this is we have never looked as a global public (which we could now) on just what is is we would be better off free of in this term.



2 thoughts on “Metaphors to understand the financial rip-off

  1. There is an interesting rhythm in the way the “problems” in the Euro-zone are occuring. First Greece, then a few months peace, then Ireland, then some more quiet build-up time, then Portugal, etc.

    Strange, somehow, that the crises aren’t happening simultaneously, but rather in series. I’m reminded of the method pack hunters use on a herd. Worry, worry, cut out the weakest and harry it until it collapses from exhaustion. Then choose the next weak one …

    I suspect that there are concerted efforts to force large spreads in the market for national bonds, which can then be traded/gambled with/swapped over and back to make profits … all at the expense of the weakest, where the rates or highest. The pressure is kept up until the central “herd” stumps up billions to shore up the particular country under attack. This is basically the profit to be pocketed on the whole business. And then you move on to then next target and the game begins once more …

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