Circular Looting

Please click on the image to see the model

“Looting” is a concept in economics developed by two American economists called George Åkerlöf and Paul Romer. This term was recently put into the framework of the current crisis by David Leonhardt of the New York Times, and I believe that it is very helpful to do so.

I also believe that there is more to the story than the original concept of financial looting, namely that of collaboration from politicians, which creates a type of perpetual motion of looting that I call Circular Looting.


The concept of looting in economics is rather simple:

It means that corporations that know that they will be bailed out by the government if they are at risk of going bankrupt, act irresponsibly in order to make as much short-term profit as possible, without regard to the long-term consequences.

In other words, corporations “loot” the economy instead of trying to make a profit with an investment strategy that they genuinely think will work. Corporations always know that the looting business strategy will fail eventually, but when it does, it’s the government’s problem.

What comes to mind first is obviously sub prime mortgages. In Vallejo, California, a man whose profession was to be a strawberry picker, was in 2006 approved for a $720,000 mortgage for a house. Needless to say, this man did not meet the traditional requirements for such a large mortgage, and defaulted on the mortgage rather quickly.


This particular mortgage makes for a good example of what has been happening over the last few years. As the strawberry picker signed up for the mortgage, there was a string of people who were given large fees, going all the way back to Wall Street itself.


These fees, and the overall profit from all the investments related to the sub prime market, are what constitutes the “loot” in the looting cycle that has been going on over the last decade or so.


Here’s what most likely happened in the Vallejo example:


- the bank received mortgage origination fees


- the bank sold the mortgage to an investment bank (like Lehman Brothers), and got a fee


- Lehman Brothers packaged the strawberry picker’s mortgage with others, created a “mortgage-backed security” and sold that to Wall Street, and received a fee


- Wall Street traders bought and sold the securities, and received large commissions


Obviously, everybody in the chain knew that a strawberry picker was not going to be able to pay this mortgage, but everyone was making money in the meantime, so the looting was a win-win situation, for a period of time.


This describes how looting is a good idea for corporations that engage in it, while being ready to run for the hills when everything comes falling down. Now we’ll move on to the political connection.


There are not that many companies in the United States that can depend on being bailed out by the government, but the exception to the rule is the financial sector. In other words, large banks, investment banks and any other financial institutions that are deemed to be important enough for the local or national economy, can usually count on being bailed out.


Bailouts don’t only concern the institutions that are considered “too big to fail”, which is evidenced by Åkerlöf and Romer’s report, “Looting”, which describes the looting behavior of smaller, local banks in Texas.


The financial industry in the United States donates enormous amounts of money to virtually all politicians in Congress and those running for President. This has been going on for so many years that it is now a Washington institution.


This behavior obviously creates a dependency on the part of politicians on the financial industry, without which they would not be able to become elected.


This, along with the promise of a bailout when the financial institutions are about to go under, creates an utterly symbiotic relationship between politicians and the financial industry.


This symbiotic relationship is described by the following four stages of the Circular Looting that you can see in the model at the beginning of the text:


1. Donations from the financial industry to every imaginable political campaign.


2. The donations force politicians to create and perpetuate a business friendly climate with low taxes, virtually no financial regulation or oversight, and the absence of labor rights.


3. In such a “business friendly” climate, corporations are free to engage in whatever kind of business they desire, because they are left alone, and because of extremely low taxes, they can reap all the rewards instantly. Looting is created on a massive scale.


4. There is only so much looting that can go on until the market is depleted. Eventually the bubble has to pop, either because of inflated values, or because of exposed fraud. It is then that the politicians come back and help their friends in the financial industry with bailouts.


If looting is to be successful in the end, individuals who are working for the financial institutions must be sure to not invest in their own companies too much, and cash bonuses are essential to the scheme.


What AIG recently did when executives were given bonuses after the bailout had already happened is remarkable. Even after the looting was done, the executives were able to extract bonuses directly from taxpayer money. This must surely be unprecedented prior to this crisis.


Looting, bailouts and political donations make American society eerily reminiscent of the feudal society of Europe during the middle ages, where most people were serfs, and everything and everyone was controlled by the aristocracy.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

AIG Bankrupting Cities Across America?

Although the news about AIG bonuses yesterday was disturbing, it was not nearly as disturbing as some of the other news that came out at the same time.


Up until a few days ago, the names of the institutions that AIG had paid with bailout money were kept secret, but when we found out who they were, there was one category that stood out starkly: municipalities in California.


I decided to do some research on how much money belonging to cities and municipalities AIG is holding. What I found out was frightening.


Municipalities all over the country have evidently handed over money to AIG from their municipal bonds. This means that cities across America are at risk of losing billions of dollars, and risk going bankrupt if AIG does!


AIG states on its website that it directly manages $72 Billion of these assets that belong to cities across America.


At the end of the day, these assets are actually made up of schools, hospitals and libraries in towns everywhere. It is almost for certain that we’re talking about much more than $72 Billion being at risk, which is a staggering number to begin with.


In addition to handing over immense amounts of cash to AIG, cities have been making extremely risky financial bets through Credit Default Swaps, which is evidenced by the payments to municipalities in California, as I mentioned in the beginning.


AIG owes a lot of people money for these swaps and is like a bookmaker who can’t pay the people who all bet money on the winning horse that nobody thought was going to win. The difference here is that all those people who are supposed to be paid money by AIG have decided to keep quiet about it, presumably so as to not create a panic.


With respect to all the cash that was handed over, everyone may not know what the so-called “municipal bond market” is, or how that relates to AIG, but it works something like this:


- individuals or corporations give money to, for instance, the city of Los Angeles for the construction of a school


- Los Angeles promises to pay a 5% return on the money 10 years in the future. That is “the municipal bond”


- Los Angeles hands over the money to AIG, in order for AIG to make that 5% for the bond holders. The section of AIG that does this is called the “Fixed Income” unit


You may realize where I’m going with this: AIG hasn’t exactly been the best or wisest investor over the last few years. AIG is now a black hole of losses, and it almost doesn’t matter how much taxpayer money you put into the company, most people who are owed money by AIG will not be paid.


For now, AIG is on life support with taxpayer money and with the temporary illusion peddled by Washington and Wall Street that everything is going to be just fine. It won’t.


There is a strong possibility that problems with municipal bonds will add a whole new dimension to the crisis, and that cities across America will have to choose between closing schools or paying bond holders when AIG eventually files for bankruptcy.


I have argued before that the main difference between the United States and other industrialized countries is that the U.S. does not safeguard a standard of living for its citizens, and that basic services are, like everything else in this country, a gamble for everyone. If the gambles at 70 Pine Street in New York (the AIG building) don’t work out, kids in California may not go to school.






Moreover, I advise that the winner-takes-all voting system should be destroyed

AIG Can't Believe We're Letting Them Do This

As several newspapers have reported, AIG has as of Sunday, March 15, paid out an additional $165 Million in bonuses to its executives and other employees.


This money is obviously coming right out of the pockets of taxpayers, and the situation has now gone from ridiculous and criminal to something worthy of a march with flaming torches.


When will the American people wake up!!?? The United States is being robbed in the most real sense of the word. The executives of AIG have no intentions of cleaning the mess up, nor could they, nor would they ever even know where to begin.


What is happening now is pure and simple theft, and it is happening as the amount of unemployed Americans is nearing 15% (counting those who have given up looking for work, who are curiously not included in most official statistics), and the number of Americans without health insurance is nearing 100 Million.


America’s big corporations have been laughing working Americans in the face for decades, and are continuing to do so even as those Americans lose their jobs, their homes, their health insurance, their very way of life and hopes for the future.


How far are working and formerly working Americans willing to go in order to protect the incredible transfer of wealth to the top 1% of the population?


How far are they willing to go to stand up for the right of robber barons to rip everyone off by staving off regulation, labor rights and consumer rights?


Pretty far it seems, if you are to believe what the Obama administration is saying. Even though Obama received the strongest of mandates for change in decades, particularly with respect to social justice, he has apparently decided that that mandate meant something completely different.


Obama’s mandate apparently meant galvanizing the rights for robber barons to rob, not giving Americans an actual healthcare alternative (this can be solved by private means alone, according to Obama) and continuing bonus payments to bankers who brought the world economic system down (don’t even think about firing them, they must be retained with bonuses for their great skills…).


AIG has received $170 Billion in taxpayer money already, which is money that will definitely never be seen again. That money went to satisfy claims for a fraction of the speculation insurance payments called “credit default swaps”.


AIG could be on the hook for, literally, trillions of dollars for these swaps. What is important to understand is that AIG has, for a long time, not had any intention of running a successful business.


When you run a successful business, you carefully consider the pros and cons of a certain investment, and act accordingly. AIG, Lehman Brothers, Bear Sterns and many others had a different plan: shuffle money through the company, take a fee, and let the government hold the bag when the party’s over.


The largest banks and financial institutions in the U.S. knew that they would be bailed out when the shit inevitably hit the fan, and that is what Lehman Brothers was counting on, but didn’t receive.


These companies acted accordingly: they enriched themselves for as long as they could, and would run for the hills as soon as it all came crashing down.


AIG is still in the process of being bailed out, so naturally, the executives are still trying to enrich themselves until the very end. They probably can’t believe that we’re still going along with this.


What the hell is wrong with people? Is there nothing left of self-respect in Americans? Is there no sense of justice left? Is there no pride?

It is your duty to claim your right.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Upholding the Illusion

Upholding the illusion that America’s financial system is simply going through a crisis which can be resolved is becoming increasingly more difficult for the U.S. government. After an enormous bailout package, a stimulus package worth about 6% of GDP and guarantees of bad assets worth much more than that, the government has nothing to show in terms of recovery.


It is also an illusion that many U.S. financial institutions are not already nationalized. AIG has received $150 Billion from taxpayers. The company has far more in losses, and it will report what is expected to be the biggest losses in U.S. financial history on Wednesday.


AIG has now asked for more taxpayer money, although the government already owns 80% of the company.


Citigroup has received $45 Billion from taxpayers, and is now asking for much more. Citigroup is only worth about a fourth of that, around $10 Billion, so why the hell are there any shareholders left other than the U.S. government?


The U.S. government’s ideological opposition to nationalization has wound up costing American taxpayers 4 or 5 times more than what a nationalization would have cost.


Citigroup’s shares are as I just mentioned worth $10 Billion, yet taxpayers have paid the company $45 Billion just so that the shareholders won’t lose their investments (of which there is only 10% left since Citigroup’s stock lost 90% of its value), and so that the executives won’t have to be fired.


It would have been a lot cheaper to simply buy all the stock. Cheaper yet would have been the only morally sound thing to do: wipe out shareholders and nationalize the bank.


Furthermore, banks are failing across the United States every week now, and the FDIC (which nationalizes such banks every week so that they can be liquidated and/or sold off) has had to hire more staff, and is currently bringing people back from retirement.


The U.S. government also has a secret list of which banks are in serious trouble, and are in imminent danger of failing. Many have called for this list to be made public, but the government refuses.


In addition to all this, the U.S. government is engaging in the sort of “creative accounting’ that played a large role in creating this crisis. It is trying to sweep all the losses of big institutions under the rug by “not estimating assets too conservatively” as Geithner has stated.


What that means is that when the government has given taxpayer money to big banks and other institutions, it has valued their assets much higher than the market (which values them at zero), creating the illusion that these institutions are much better off than they really are.


Also, the government has helped institutions like AIG to set up “special purpose entities” where the company can hide bad assets away from the balance sheet, again creating the illusion that things are much better than they really are. This is what Enron did, and a lot of people went to jail after that…


All these efforts are obviously counterproductive and ultimately detrimental. The government is lying about many things relating to the financial crisis, but most people don’t realize it. Why is the government doing this? Well, I think it feels that it MUST uphold the illusion that the system can indeed go on as it has before. If it cannot, what is the alternative?


They know what the alternative is: a European-style regulated society where citizens are guaranteed a standard of living rather than being left to hope for that standard amidst cycles of boom and bust. In a country where all politicians are either right or right-wing, this is a terrifying prospect.


I recently realized that the upholding of illusions is exactly what Keynes based his theories of spending and crisis management on, and that’s why it makes perfect sense for Keynes’ theories to be back in the spotlight.


It is widely believed that Keynes developed his theories in response to the Versailles Treaty after World War I, and the treatment of Germany in economic terms.


The Versailles Treaty made it so that Germans’ standard of living went lower and lower each year after it was enacted. This, according to Keynes, destroyed confidence among Germans, and the economic crisis started feeding off itself (which is something that was echoed by Ben Bernanke in a speech before Congress today).


So, after the war, Germans were obviously bankrupt. Even so, thought Keynes, they should keep spending, and if they could not, the government should enable them to do so. Even if you don’t have money to spend, you must uphold the illusion that you do, by borrowing money to spend, otherwise the economic crisis will get worse. That is in essence what Keynes thought.


Expressed in that way, Keynesian economics sounds like a really bad case of “keeping up appearances”, don’t you think? Upholding the illusion is what it is all about.






Moreover, I advise that the winner-takes-all voting system should be destroyed.