The China Syndrome

When the dotcom bubble was developing I happened to be working in legal services in the historic Standard Oil Building at 26 Broadway, directly facing the brass bull on Bowling Green. When I went out onto the sidewalk for a smoke, I would see young bankers in business suits cruising down Broadway on little kiddie scooters. “This will never endure”, I told myself.

I would try to relate my misgivings to my girlfriend, Magpie, who erupted in scorn at my defeatist attitude, calling me a commie, a negativist person and a loser. “It’ll never go down”, she exclaimed. “Why don’t you seek psychiatric therapy?”

Well, we all know how that worked out. Nevertheless, the banking community soon rebounded with yet another gimmick from its bag of tricks – securitization. This scam, which more closely resembled the bookmakers’ system for spreading the risk by laying off bets to the vanishing point, showed more promise.

Look, it’s devilishly simple in its complexity. I set up a company, which sells me securities in exchange for cash. This company buys mortgages from mortgage brokers which it bundles into securities of which it sells “tranches” to other dummy entities for cash, which it uses to pay me. The proceeds from the mortgages it collects, it uses to pay the interest on the securities that it sold to the other dummy entities. As long as the losers at the front end of the process keep paying their mortgages, everybody gets paid.

This is a brilliant scheme, except that the mortgage brokers, like Angelo Mozilo of Countrywide, made a determination that as long as they could offload the mortgages for cash in a hurry, it didn’t matter who they sold the houses to, even cashiers at 7/11 Stores, who had no hope of keeping up the payments.

It’s right out of Tony Soprano and the New Jersey mafia. And they succeeded beyond their wildest expectations. They sold hundreds of billions of dollars of worthless securities to so-called smart players in the international banking system. Not only that, AIG Financial Products insured these worthless pieces of garbage for pennies on the dollar, never figuring they would have to pay off since the investment banks that underwrote the issues had paid off the ratings agencies to assign the securities with a triple-A rating.

During the years that this was going on, I was holding my head in amazement. I’m from Chicago, and I know a hustler when I see one. But who listens to me? Everybody knows that I’m crazy. Meantime, bankers were getting rich all over the place. As Chuck Prince, former CEO of Citigroup, put it, “When the music is playing, you keep dancing”.

Everybody makes a big deal out of the billions that Madoff stole, but vastly more people got cleaned out from the phony derivatives, and nobody has been indicted for that! Mozilo is still swimming in his pool ha-ha! The taxpayer is on the hook for $1.7 trillion in credit default swaps that were sold by AIG Financial Products, another $400 billion in commercial real estate securities that are coming to maturity, and what-all-else I can’t even remember. Joe Biden now admits that the Obama administration vastly underestimated the economic crisis it inherited from Bush.

What’s the solution? The deep thinkers who got us into this mess have seized upon China, yet, to salvage the world economy. This is the same China that up until recently produced rubber sandals and little kiddies’ games, until it was seized upon by Wal Mart to take advantage of the tax breaks American corporations benefited from for producing overseas.

These American overseas entities have got their own creative accountants, and they know how to game the system. Let’s say you produce a pair of sneakers in Guangjou. You sell the sneakers to yourself and that produces a profit. When the shoes finally land in the states, the distributor who receives them pays you another profit. Then you keep the overseas profits in an offshore bank until Congress votes you a tax amnesty for repatriating the profits, on the condition that you invest them, which you recycle into another structured finance vehicle, and nobody ever sees that money again.

Obama has promised to end this three-card Monty game. If he does, it will pull the plug on China, leaving hundreds of millions of square meters of redundant industrial capacity. The Chinese are aware of this. That is why the Chinese are on an acquisition spree of unprecedented proportions. They have built up $2,000 bn. of profits and they are rushing headlong into purchases of raw material resources, foreign corporations, anybody willing to sell, like survivalists stocking up on canned goods and bottled water. Once Obama cuts off the offshore tax breaks, it’s back to square one.

The only people who have not figured this out are, as usual, the capitalist class, to whom, at this point, I am not giving any credit at all for brains, considering their recent past performance. They are still all trying to squeeze through the door into China at one time like a Three Stooges movie.

In addition, China is getting set to explode like a pressure cooker. The government can’t keep the lid on the internet. Last year, Tibet, which is one-sixth of Chinese territory, erupted into critical violence. Basically, riots are erupting every day in China. Even as I am writing this the Xinjiang region, which comprises another sixth (you figure it out. Between Tibet and Xinjiang, that = one-third of the country) and the bulk of the country’s natural resources, has erupted into racial warfare pitting the majority Uighur Muslim population against the occupier Han Chinese, resulting in hundreds of dead.

Last year a Russian analyst predicted the breakup of the United States. This year American intelligence reports predicted that Mexico and Pakistan would dissolve into chaos. That’s all malarkey. Mexico just held mid-term elections and had an orderly transition of congressional power. In the meantime, China, with all its internal contradictions, suppression of liberties and subjugation of internal minorities, combined with the imminent suppression of tax breaks for corporations doing business there, appears to be another delusional opium dream indulged in by our financial boobocracy.

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Posted on 7/8/2009 ( Permanent Link )
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