monitoring the abyss

Well, just go here, it will save me from writing all that.

"The way that you do it is to make really bad loans, because they pay better," he [economist Black] told Moyers.

...

"Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road. . . "

The story is also found at Raw Story and Undernews.

I've been thinking about the actual numbers of banking. With 30-1 leverage (you put $1,000 in the bank, they lend $30,000), at 10% interest the bank receives an annual income stream EQUAL to the amount you put in the bank -- and I understand European banks were allowed higher leverage rates. What about at the approximately 30% interest rate now being charged on credit cards?

That fundamental bit of flim-flam is insane to start with. Let's think what that means -- you put your life savings (eg., pension) in a bank -- and the bank is entitled to receive the equivalent of your entire retirement as annual income.

Sign me up! I want to be a bank right now!

The Ponziness of this should be apparent. Someone (hey, even me) puts $1000 in MY bank. Now, I lend $1000 to 30 friends. They all put the money in my bank. I now lend $900,000 to a bigger group of friends.

Imagine if I can get the California CALPERS pension to put their money in my bank?

In other words, I can generate an infinite amount of annual income, the only problem being to ultimately find people who will actually pay the 10% interest I am asking.

Because leverage works both ways. If I lend to people who cannot pay, I can have some whopper losses. The leveraged risk is the only caution that keeps me from going completely insane in my lending practices.

Unless I am already completely insane. In which case, I think, "well, if done cautiously, I can just keep rolling this thing over for a very long time. The hole I am in can get deeper and deeper, but with any luck, I'll be dead and gone before it crashes.

Which is why economies regularly crash on something like 60 year cycles.

I mentioned previously that Bernie Madoff, Sir Stanford and the like are not aberrations. They have merely taken banking to the logical conclusion. If all of banking is a giant ponzi scheme, why waste resources on the pretense of actual investments and accounting?

Luckily for bankers, they have an actual license for their Ponzi Schemes -- and in addition, the government views its role as the "Ponzi victim investor of last resort." Why should this party ever end?