September 1, 2008

The Great Financial Bubble Scam: How Wall Street Plays Average Investors for Chumps

By In Essays

I don’t throw darts at a board.
I bet on sure things.
— Gordon Gekko

In the 1990s, Wall Street brokers told average investors to buy stocks and mutual funds in the high-tech sector because high-tech stocks were the next big thing and investors would make a killing with them. And average investors did– for a while.

Then the high-tech bubble burst and many average Americans lost one third to one half of the money they had invested in their retirement funds and 401K plans. Not to worry, they were told by Wall Street, real estate is the next big thing, so buy property and you’ll make up the difference you lost in stocks.

Which a lot of people did, buying properties they couldn’t afford with adjustable rate loans that should have never been made by mortgage brokers who were in it for a quick buck. But it didn’t matter because prices were sky rocketing; even average investors were flipping properties for big profits.

But then the real estate bubble burst when interest rates reset and went substantially higher. As a result, home owners couldn’t pay the higher rates and began to walk away from their homes. Also, those investors who bought real estate at the top of the market (including those greedy little flippers!) were now left with negative equity, so they walked away from their properties as well, causing huge foreclosure rates.

In the meantime, average American home owners who bought their homes years ago with traditional loans have lost anywhere from 20-40% of their home equity thanks to all the homes on the market in foreclosure. This phenomenon has hit baby boomers particularly hard because they had planned to use the equity in their homes for retirement.

Don’t sit around and mope, commodities brokers advised disenchanted home owners, put your money in gold and silver. They’re the next big thing! Their prices are sky rocketing! And they were– for a while, but as of this writing gold is down about 20% and silver is down about 30%. So should investors sell or hold? Is this the end of the bull market in metals and commodities generally, or just a temporary retracement with much more upside potential?

No one knows for sure, since no one can predict the direction of a commodity with absolute certainty (as the fine print warns on any speculative contract). But forget absolute certainty. The big players on Wall Street (the hedge fund operators, the billionaire corporate raiders, the big guns at investment houses like Goldman-Sachs) may not know with absolute certainty about the future price of a commodity, but they have a pretty damn good idea which way the price is headed when they buy or sell huge blocks of commodities on the open market. And once they make their move, all their friends, associates, fellow speculators and day traders will hop on board and help push the price higher or lower, which creates a sudden price spike. And this is where they make their easy money.

It’s usually at this point that average investors hear about the “big move” and enter the market because the commodity is “hot.” But by then it’s too late; the big players take their profits and hang average investors out to dry.

This is essentially what happened with the price of gold and silver. Gold had shot up over $1,000 an ounce and silver had gone over $20– until the sudden spike down. Now gold is trading in the $800 range and silver in the $14 range.

But here’s what’s been happening behind the headlines. Last month, when gold and silver took a huge tumble, there was no fundamental reason for them to lose so much value so quickly. In other words, the fundamentals in the economy had not changed very much at the time of the plunge: inflation was still on the rise, home foreclosures and layoffs were getting worse, and the political conditions in the world were still precarious.

There was one change, however. During that same time frame, the price of oil, a commodity that influences the price of metals, had also fallen about 20%. But that begs the question: What made the price of oil suddenly change course so quickly? Less demand? True, Americans were driving less and using less gas, but that was a gradual trend, not something that happened overnight.

Was there a sudden scarcity in the supply of oil? No, not at all. So why did the price spike down? According to a report by Martin Vander Weyer in the British Telegraph, the price of oil “has finally revealed itself not as the fundamental reflection of scarce supply that its adherents liked to claim, but as a simple, speculative bubble that was always going to burst.”

The same could be said for gold and silver. In fact, when the price of silver fell, there was a shortage (real or manipulated?) of physical silver on the open market (and there still is), and even if you want to buy silver bullion or ingots from metals dealers you have a long wait.

So wouldn’t that make the price go up? If we follow the laws of supply and demand that would certainly be the case. But remember, this is Bush/Cheney America, where black is white and up is down and the normal rules of economics don’t apply. So if it wasn’t supply and demand, then what caused the sudden plunge in the price of oil and gold and silver?

Well, if you rule out Satan, then the logical deduction is market manipulation by the heavy hitters and big speculators who sold those commodities short and made huge money on the sudden spike down in price. It’s a pretty good scam; technically, it’s illegal, but the truth is, there’s market manipulation of commodities all the time.

For example, as of October 25, 2007, the Department of Justice “filed more than 60 civil enforcement actions and at least 33 criminal indictments against individuals and firms that fraudulently operated multi-million dollar commodity pools and hedge funds. These actions have resulted in numerous criminal convictions and fines and restitution totaling almost $400 million.” And those are just the ones that got caught!

As a result, average investors get played for chumps and lose big time whenever the heavy hitters decide to cash out. But hasn’t this always been the case? Yes, to a degree, but from the days of FDR until the 1980s, there were much tighter rules and regulations and more government oversight in the financial markets, as well as in the banking and real estate industries.

All that changed, of course, when Ronald Reagan became president and his gang of free market crooks took over the government (remember the savings and loan scandal in the 1980s?) and made capitalism a rigged game for the benefit of the wealthy and well-connected.

Following in Reagan’s footsteps, the Bush administration has done its best to remove or ignore government regulation and oversight of the financial markets, thus creating an ideal environment for big players to create artificial price spikes and bubbles to enrich themselves and their friends and associates.

The question is, how long can the elite class of investors keep bilking the system before it collapses of its own weight? Jim Rogers, a former partner of George Soros and one of those elite billion-dollar investors that financial analysts love to quote, is talking nothing but gloom and doom these days and has pretty much given up on America as a lost cause. In fact, he’s already moved to China, and it wouldn’t surprise me if a lot of other big players are already beginning to bail out on the good old USA and stash their cash in Swiss bank accounts and the Cayman Islands.

After all, they know the score better than anyone else. They know our country’s financial system is basically a glorified Ponzi scheme that is not only broke but over $9.5 trillion in debt. And this year there have already been runs on some federally insured banks, including one of the biggies, the IndyMac Bank of California.

Not a good sign! But are we in for a lot more bank failures in 2009? And can Americans still be confident that the FDIC will back their personal savings accounts if more banks go under and the system begins to unravel? Or will this be the next– and maybe the last– bubble to burst?

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