Financial Bubbles Track Capitalism

by Milo Clark

February 11, 2002


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Sometimes called "Dot.coms," "Savings and Loan Scandal," "Recessions;" other times maybe "Depressions" if not "Collapses," but rarely "Failures of Fantasies:" They all share the quality of bubbles; that is, something fragile or ephemeral given apparent substance and blown far out of size and then bursting. It is the bursting that is inevitable although not always accurately predicted or predictable.

Each new succession of bubbles float off in great numbers, bursting in similar numbers at random intervals. Random intervals are the key to the gambles involved with the gambols. Each new technology spews forth vast numbers of bubbles, some of which have greater lasting power than others but never the capacity to survive indefinitely.

The corporations who were the Dow Jones Bellweathers of sometime back are not still existing or, if existing, not the same companies now that they were then. AT&T, Lucent, mini-Bells back on the way to maxi and so forth and so on.

Look at the immense restructuring charges levied throughout corporate books in very recent times. Look at the overt and covert bailouts engineered from on high and tagged to any handy excuse: airlines got $15 billion with terrorism as the cover. Watch the fluctuations of money supply and FX transactions. Ask who benefits from lowered interest rates.

An analogy is that of unbacked paper money. "Unbacked" in this sense means without reserves or other valuables such as gold or silver for which the paper money may be exchanged. Paper money of this type, viz. United States of America Dollar, exists and is accepted based solely on faith or belief in its value. Which works, up to the point it doesn't. Argentina is going through one of those moments in which it doesn't now. The old adage was, "Bad money drives out good."

Bubbles over history have had names like East India Company, Virginia Company and Plymouth Company, Dot.com or Biotech more recently. These first ones are only some of the early limited stock companies which sought to enrich investors through establishing and exploiting distant lands and peoples, now distant concepts and technologies. Eventually many of them became better known as colonies when governments took over from the limited stock companies. In time, most of them failed. The patterns of ol' boy bailouts were established very early.

A limited stock company sent Walter Raleigh to Virginia to establish tobacco plantations, to put down his cape and to become Sir Walter. They set up European expansions from Japan to Goa to Rio and back around through Africa, Asia and South America. They are the prototype global capitalists.

By the 1700s, they were "Mercantilists." Adam Smith, a Professor of Moral Philosophy at Glasgow, wrote his Wealth of Nations in a fit of moral outrage against the excesses of mercantilism. [see "Adam Smith is on Our Side"] Somehow, his work got twisted so thoroughly that he is called, "Father of Capitalism." However, no one that I know about has elected to call capitalism a "Smith Scheme."

Operating in the 1920s' US of A, Charles K. Ponzi lent his name to fill that gap. Today, Ponzi schemes have a run of names: Pyramid, Multi-level-marketing [MLM], Womens' Gifting Circle, Enron... Wouldn't it be simpler to use the proper generic name for such contrivances of manipulation? Capitalism does just fine and is generally accepted whereas Ponzi is not.

What it boils down to is that there are legal Ponzi Schemes and illegal Ponzi Schemes. Legal Ponzi Schemes seem to be associated with high degrees of political influence. As political influence is simply a commodity available for purchase, buying it is a necessary cost of doing business, tax deductible, no less. Why the fuss?

It is only a short logical step to recognizing that the taxpaying, trusting investor public almost inevitably gets saddled for the losses and has little participation in the gains. Trickle-down theory aside, of course.

As an aside, I will note that individual and family taxpayers now are burdened with approximately 90% of taxes collected by the Internal Revenue Service. Corporations pay the rest. However, corporations also get more through deductions and "corporate welfare" than they pay. Few taxpayers, except very wealthy taxpayers, get more than they pay.

The core of capitalism is a promise of future benefit which sucks money from investors into a scheme the object of which is to enrich (a) the promisers, (b) the operators (c) the investors (d) the general public (e) the government(s) (f) none of the above or (g) some of the above some of the time -- timing itself being a key variable.

Pyramid schemes are relatively easy to track: the mathematics of involving new suckers to pay off prior investors before they become suckers show that after a very few rounds, the world population of suckers is quickly exhausted. There are, however, few limits to taxation. The secret is said to be to get in early, get out fast and you may become an investor rather than a sucker. Question is, how to know when to get in and when to get out? Master that conundrum and Mr. Fed will have you to lunch or for lunch. Master that one and start mutual funds for the fearful.

One characteristic of corporate Ponzi schemes is that the key people usually are among the get in early, get out fast genre. Some of them also believe themselves and lose a little while winning a lot. A cursory glance at the many elegant structures falling faster than Humpty Dumpty at the moment, Enron, et al., shows the pattern. When your bosses start selling, cash out and polish your resume.

Sane and rational folks will point out that there ain't no such thing as a free lunch. If'n it looks too good to be true, most likely it is. Sane and rational people aren't much fun.

My favorite con man, I'll call him Kenny, had as many personas as a sack of Cracker Jack prizes. He could flip personalities faster than I could track. A self-taught engineer with a mind for financial manipulations, schemes fell out of Kenny like Cheerios cascade from their boxes.

Kenny was physically a little guy, came up about to my chin as a rule, weighed little more than 100 lbs. Sharp dresser. Took care of himself. He had a simple rule: Show me someone's greed and I got 'em! Kenny insisted that everyone was driven by greed. All he needed to do was to find their greed button. He was more than just good at it, too.

Seized by a scheme, Kenny would grow and glow before my eyes. His fist would strike out to clutch his scheme. He would wave it fiercely like a tomcat shaking a mouse. Like a cat, he would play his mice, filling them with illusions and slyly feeding their greed.

Smart guy, Kenny. Very smart. Always good for setting up rounds of drinks at any bar and then sidestepping the tab. Always good at attracting a rapt crowd who he quickly snared by his theatrics. Never lacked for a buck. Politicians really loved Kenny and tried to learn his strategies and practices. I loved Kenny and bailed him out of some tough ones now and then.

Kenny specialized in mini-ponzis. He knew when to start them, when to end them and how to walk away with lots of friends and strangely enough, few enemies. He never really pissed off even the ones who lost. People were always asking Kenny to start another one.

Kenny's secret was control. He understood the dynamics of his manipulations, the theatrics of his games and the lust and greed which he knew lurked in everyone. Kenny was a model of capitalism. He was pure street person....which, I am sure you recognize, could be Wall Street as well.

Multiply Kenny over and over again and call it Enron or Savings and Loan Scandal or Florida Land or Tulips. Same same.

Trouble is, sometimes the control slips, the manipulations get tripped up. That's why taxpayers were invented.

At no time in financial history have the manipulations in place been more complex, more expansive and more overt than now. Ponzi to the 100th power, let me tell you!

Leopold Kohr, philosopher-economist, mentor of F. L. Schumacher, came to a simple conclusion: Kohr said the problem is size. Everything has its right and natural size. Whenever that size is exceeded, sooner or later the resulting entity will implode. Enron, Tyco, Global Crossing, K-Mart... recession, depression... bubble. Blewttttt.

Bush II claims he is going to defeat this recession just like he is going to defeat terrorists. Out-manipulate the financial markets and bomb out the nasties. Loot the treasury and buy more weapons or pay off early investors. A kickback or kickout on every turn of the multipliers until.... Not bad for a privileged son of a privileged son's privileged son.

Be aware. Be prepared. No matter how bad things may get, some folks always come out okay. Plan on being one of those. Was Ponzi screwed up or screwed?

Next questions:

Why do the banks of the world continue to make bad loans time and time again, over and over again? Is there yet another, another, another, another banking bubble in process? With the massive financial mergers, acquisitions and takeovers rolling onward and upward, will Kohr prove right . . . . again? What does implosion look like? Feel like?


       Milo Clark, a founding member of Swans, had it all: Harvard MBA, big house, three-car garage, top management... Yet, once he had seemingly achieved the famed American dream he felt something was missing somewhere. As any good executive he decided to investigate. Since then, he has become a curmudgeon and, after living in Berkeley, California, where he was growing bamboos, making water gardens, listening to muses, writing, cogitating and pondering, he has moved on to the Big Island in Hawaii where he creates thought forms about sunshine. Milo can be reached at Swans.

       Please, DO NOT steal, scavenge or repost this work without the expressed written authorization of Swans, which will seek permission from the author. This material is copyrighted, © Milo G. Clark 2002. All rights reserved.

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Published February 11, 2002
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