Frederick Douglass

"Power concedes nothing without a demand. It never did, and it never will. Find out just what people will submit to, and you have found out the exact amount of injustice and wrong which will be imposed upon them..." Frederick Douglass

Friday, December 31, 2010

Media and Class Struggle, It's a Joke but it's not That Funny

You just cannot make this shit up!

The struggle in India is quite complex, and is being fought on many fronts. The indigenous people, popularly known as Adivasi ( 'original people' in Sanskrit ), are rebelling against the government's efforts to relocate them and give their ancestral lands over to oil, timber, and mining companies.

The history of the left in India is a study in itself. The original fault line, much like everywhere else in the socialist world, derived from the epic Stalin-Trotsky conflict. Thereafter divergent allegiances resulted in the creation of three different parties all calling themselves communist: the Communist Party of India ( Marxist ), the Communist Party of India ( Leninist ), and the Communist Party of India ( Maoist ), with the latter being commonly referred to as Naxalite after the town, Naxalbari. where they launched their first insurrection.

To make matters worse, these parties experienced further internal fragmentation with some members believing that a legal path to power was possible, with others denouncing them as mere "reformers" and warning against ideological drift. Their differing orientations clashed most irreconcilably on the issue of firearms, with the former believing they are unnecessary and counterproductive, and the latter insisting on their indispensability. As a consequence, these parties split into legal parties working within the system, and illegal parties with armed militias.

The membership of these parties rose and fell with events. When one was experiencing success, people from other parties would overcome their doctrinal reluctance and defect. If that particular party's influence waned, it would then experience a decline in membership with its defectors coalescing around another issue or figure or party.

It should come as no surprise that in largely agrarian India, the Naxalites have the largest following. With their success in the armed conflict with the Indian government over Adivasi land, their numbers have swollen tremendously. They are doing so well, and are enjoying so much popular support from Indians who believe in the Adivasi cause, that Prime Minister Manmohan Singh referred to the Naxalites as "the single biggest internal security challenge ever faced by our country." [1] Currently, they have 42 percent of that nation under their control, an area now being called the Red Corridor.

Recently, there have been a rash of strikes and suicides in Tirupur, state of Tamil Nadu. It is the center of the textile industry in India and workers have not shared in the recent boom. The strikers are calling for wage increases, shorter hours, and decent plumbing and sanitation in company-provided housing, where conditions are deplorable. Yet if one reads the mainstream media in India, one gets a distinctly different impression of the conflict.

From business magazine Tehelka:

"Alcoholism, family disputes, failure in love and extra-marital affairs are cited by experts as the main reasons for the spike in suicides." [2]

Here's The Times of India:

''In a land of migrant labourers, where the workforce is largely drawn from southern TN and north India, suicide figures are bound to be high,'' says Tirupur SP A Arun. [3]

While the Deccan Herald's reporting is considerably better, they provide this howler:

"Many of these suicides are believed to be among the depression-prone migrant workers,” says District Collector Samayamoorthy. [4]

The Hindu:

"K. Sakthivel, psychiatrist at District Headquarters Hospital, said studies indicate that the main reason for suicide in the district was vulnerable personality traits which lead a person to take a spontaneous decision to end his or her life at the slightest of provocations." [5]

You just cannot make this shit up.

Maoist website

[1] Please note that I offer this link to provide a source for the Singh quote. I do not endorse the article which is full of disinformation. It depicts the Maoists as gangsters, however you may feel about them, they are certainly not profiteers.,9171,1810169-1,00.html





Thursday, December 30, 2010

The Struggle in Tunisia

It seems that the long-simmering resentment of their government by the Tunisian people is coming to a head. In much the same way that the death of Alexandros Grigoropoulous triggered the uprising in Greece, the recent self-immolation of a college student [1], Muhammad Bouazizi, after police shut down his unlicensed street kiosk has moved many Tunisians to violent clashes with the police. [2] Unfortunately, fatalities have resulted. [3]

In response, President Zine al-Abidine Ben Ali, apparently trying to prove just how stupid he is, blamed foreign media for stirring up the protests and then mischaracterizing them; [4] fired the communications minister as a result; [5] and, most foolishly, escalated the tempest by threatening demonstrators with severe punishment. [6] He then proceeded to arrest leaders of the major opposition party. [7]

[1] (Scroll down for video)







The War on the Working Class Rolls on.

Sunday, December 26, 2010

Editor's Note

New articles for the Grand Deception series are on the way. Recently, I've experienced some health problems and with going back and forth to specialists and therapy, I've been quite busy. Throw in my work schedule and the holidays and I have had no time to write. Fortunately, my medical situation is not too serious and I'll be back in the saddle soon.

The next three articles will be on collateralized debt obligations, naked credit default swaps, and proprietary trading. Once those are done, what will follow will be a chronological replay of the crash; who, what, when, and, most importantly, why.

My thanks to those who inquired, best wishes for the new year to all.

The Struggle Continues in England

Interview with a British university occupier and former AWSM member

Great interview:

Interview: The Irish Struggle Against Austerity By Mike Harris

Taken from Ideas and Action website: []

Q: Thank you, Kevin, for doing this interview with the Workers Solidarity Alliance’s on-line journal ideas & action. Before we begin the interview, I must say, it almost seems like yesterday you out-migrated to NYC for a bit, and we were sitting face-to-face discussing anarchist politics and the world around us. All this, of course, before the “Celtic Tiger” started to roar. Must seem a bit odd, having been back in Ireland all these years to now see the growth in the out-migration movement again.

A: It is strange. The crash has happened very quickly and taken many people by surprise; the scale of it has been beyond what anyone expected.

To put things in perspective though. As many of your readers will know, emigration out of Ireland to places like the States has been a feature of Irish life going back generations. I first met you in New York back in the early 80s when Ireland was last in a harsh recession. So I remember that period well and I know that it was hard for many of us – there was a lot of unemployment here and of course with that came poverty and displacement.

The boom here, the so-called Celtic Tiger era, came against that background. Short lived though it was, it was welcomed by many people. Some imagined that as a country we had turned a corner and that we had banished the ills of mass unemployment and emigration for good. That was not the case – as we now know.

Here we are now, in 2010 and we have been plunged into a new and desperate economic period, one where the costs will, in large measure, be borne by the Irish working class – once again I might add. Unemployment has shot up. And employers are using the new climate to attack wages and conditions. It is a period of high insecurity for people once more.

Q: The Irish financial crisis seems to have come to a head recently. But it was a while in the making – is that so?

A: Yes. The roots of the problem go way back. Of course there is a specific Irish context to what is happening here right now. But it is worth noting also that what is happening in Ireland right now is linked to the generalised crash that broke over the world’s economy in 2008. The old cycle of ‘boom and bust’ is at play here – classic capitalism, I suppose.

Q: Can you please tell us how Ireland came crashing down from being the “Celtic Tiger” to its current situation. It seems like all the “right” social and economic ingredients have been in place for a long while (for example, a very low tax rate and a docile trade union movement which long ago bought into the “social partnership” concept)

A: A lot has been written about this. There are a number of aspects to the situation but I will try to be brief and as accurate as possible. I would recommend a particularly good article in the current issue of the Irish Anarchist Review by Gregor Kerr called ‘Bubbles, Booms and Bust’.1 It gives a lot more detail than I can here.

First off the Irish economy is a peculiar entity. Indigenous industry here has been historically weak – the legacy of British imperialism. Ireland’s economic elite in an effort to get around this attempted to reposition Ireland as a tax haven for multinationals in the latter quarter of the last century. Ireland adopted a very low ‘corporate tax’ rate for those who ‘invested’ here. Similarly, other inducements were offered – educated English speaking workforce and so on; lax environmental oversight also.

Ireland became a very ‘competitive’ location for capitalism from the mid 90s onwards and investment flowed in. ‘Competitive’ here of course is neo-liberal speak for a ‘low-tax location with a compliant workforce’. That was what Ireland was offering to the multinationals.

With this foreign investment, unemployment here decreased and with that, for the first time in a generation, the indigenous construction industry revived. Irish property values were low relative to our European neighbours and our hosing stock was also old. In effect a construction boom took hold in this environment. A key aspect of this was land speculation: massive money was made by ‘developers’ linked to Flanna Fáil party and others. It was a heyday for some and the industry swelled out of all proportion to requirements. To give your readers one figure: 750,000 housing units were built between 1995 and 2007.

The banking sector is at the centre of the current crash. In truth it is this sector that has driven the Irish economy to the wall. To understand why we need to appreciate that a few factors were at play. First of all the banking sector grew disproportionately during the boom as a result of the boom in property values and the building spurge. Some of this growth was legitimate, but most wasn’t.

As the building/ property boom took hold wild speculation on land and valuations became the order of the day. It seemed at one point that Ireland would be covered in housing and buildings! I’m exaggerating of course but it is true to say that there was frenzy. Massive money was being made by the greediest of elements in society – many of whom had the ear of the Government and main political parties.

Secondly there had been deregulation in the banking sector – this was government policy and facilitated a lot of shady dealings at the Irish Financial Centre in Dublin. As a result there was no serious oversight and caution was thrown to the wind in terms of the lending criteria. A particular important ‘player’ in all of this was a bank called Anglo-Irish Bank. This bank is credited with over €60 billion in bad debts now – and we still don’t know if that is the full extent of the losses at that one bank.

During the boom the adage (among the bankers) was ‘Where Anglo goes others follow.’ Anglo had close links to Ireland’s economic elite. It lent recklessly – in Ireland and more importantly abroad. Its CEO, Fingleton, is now widely acknowledged to be a crook – and that is being kind to him. He appears to have lent vast sums of money to those who were his friends. As Anglo-Irish began to sink he even lent a fortune to the directors of the bank to buy shares in the bank to shore up the bank’s share price!

All this was big trouble – very big trouble. But the Irish government then got involved and they made it a lot, lot worse. Anarchists have little respect for governments – well here is an example of why we don’t. Clearly a big element of stupidity was involved but, of course, it would be naive to not point out also that the Irish government was also looking after its friends in the Golden Circle.

Q: What is this – the Golden Circle?

A: Here in Ireland we call the moneyed elite, the Golden Circle. This is because the elite in Ireland are confined to a relatively small number of identifiable people. They all know each other personally and have close connections to the key decision makers in government. If a lucrative situation is developing they tell one another about it. They are people who creamed off the big profits in what went on here over the years.

Q: So what was it the Irish Government did that was so stupid?

A: When the crash occurred in the international markets in 2008, the Irish government ‘guaranteed’ all bank debts. The problem was the Government had no idea when it issued the guarantee how large the debts were in the Irish banking sector. Crucially it guaranteed the debts in Anglo Irish Bank.

Now two years on from that time, we are finally getting to the bottom of a very deep hole. It has transpired that the debts in the banking sector were significantly larger than expected. The debts at Anglo Irish Bank were astronomical.

The current Government has nonetheless stood by its ‘word’ and as a result the Irish State has been sucked into the banking disaster.

And there you have it: now we are being asked to pay for all of that!

Q: How would you compare, if possible, the Irish situation to the Greek? Are the EU “bailout” plans the same?

A: I cannot admit to knowing enough to offer you a detailed view but in broad terms they are similar. At the root of the problem is the need for the Irish and Greek government to borrow to meet current needs. These debts have exceeded the budgetary limits set by the European Union.

There are different reasons though for why Ireland and Greece have ended up in this place with this particular problem. In other words we arrived at this place by different routes. And of course as we speak, both Portugal and Spain are also facing trouble. So there is a broader problem as well.

What is most significant and illuminating though is that the medicine that Ireland and Greece are now being asked to swallow is almost identical. Surprise, surprise! In both countries it is the ‘public sector bill’ that has been targeted. What this means is that cuts are targeted at social services – welfare, education and hospitals. Cuts are proposed for workers in those eras and pension entitlements and job numbers are also being reduced. As your readers will know this agenda is the agenda of neo-liberalism.

Q: How is the generalized fight-back coming along against the proposed austerity measures?

A: In the aftermath of the crash in 2008 the Irish government led the pack of wolves when it came to imposing cuts on the population. ‘Tough times require tough medicine’ and all that rubbish was the order of the day.

Ordinary people were in shock though. Unemployment grew rapidly; the scale of the unfolding building bubble fiasco was emerging. Building work, a huge employer, collapsed. Many people found themselves in immediate debt as houses they had paid excessive prices for were down valued overnight. There were mobilisations in the public sector – among teachers and there was one day public sector strike. But overall people were reeling and they accepted what they were told.

In the last year though the true scale of corruption among the elite has come to light. In particular the massive corruption and back-slapping in the banking sector has been exposed. The Anglo-Irish debts have got bigger with each passing week. Many of those responsible for outright thievery are still in their jobs! In the meantime, the Government has had one message: you, the ordinary worker, must bear more pain.

We have just had a march of 100,000 workers in Dublin. It was organised by the ICTU and was a very positive showing. I am not exaggerating to say that there is massive anger. The IMF and the ECB – the EU’s bank – have now signed the ‘bailout deal’ with the disgraced government. A budget outlining exactly what cuts will take place is imminent. The question is what is going to happen.

Q: What is your impression? Is there a “unified” trade union and left mobilization on-going?

A: There are signs of mobilisation and of some grassroots organising. I stress, some. But I think we need to be hopeful here because any sign of organising at a grass roots level is crucial and very healthy. As your readers will appreciate, the Irish trade unions are very top-down structures. Rank and file participation dwindled during the ‘partnership’ era which spanned from the late 80s until today. ‘Partnership’ gave a big role to union full-time officials – the union leadership I suppose you could call them – and in effect led to rank file involvement ending. But to take an example: at the march just mentioned in Dublin, the head of the largest union, Jack O’Connor was booed when he spoke. There is anger among workers that the unions are not doing enough. The old story, the union leaders talk the talk but that is all – they are sheep in wolves clothing.

So officially the trade union movement is opposed to what is happening. But the leadership is scared of any big mobilisation and not being able to control it. Also the leadership has no real plan. All they have called for so far is ‘a longer period’ of payback to the international banks. In other words: ‘we will take the pain if you deliver it over a longer period’. Lunacy!

So the key question is, will the rank and file rise? I do think there are positive signs. We have to remember that workers are taking the brunt of what is being done. And this is a scenario that is not going to go away soon. One group who resisted so far are the pensioners – and they won! So fighting back works and deep down people know that. But against that unemployment is high and people, naturally, are cautious. There are also big debt problems for many. Thirdly the Irish media has played a significant role in saying ‘there is no other way – you must accept the situation’. We’ll see.

Q: What role has your organization, the anarchist WSM, been playing in this fight-back?

A: We wish we were a lot larger and that we had much more influence at a time like this. But that said we are doing as much as we can to make ourselves heard. There are a number of different areas in which the crisis is being fought. Among the workers in their unions, among students and also in the various ways at a community level – where many of the cuts are already being felt first hand.

The main thing we are pushing of course is the idea that we must fight back and that we must resist; the sooner that we do this the better. This may seem like an obvious point to be making but the media and the Government really bang on and on that people should accept the situation that we are now in. So there is a role here for us as anarchists at a very basic level. Fight, resist!

Secondly in all areas, but particularly in the workplace where it is crucial, we argue for ‘taking back the unions’. As mentioned above rank and file involvement is very low now. But it is becoming clear to a minority of union members that the union leadership will do nothing – unless pushed. So at this moment putting ideas out there about self-organisation and about democracy in the unions is very important. In all areas there is a need to push for this.

Q: How does the WSM differ from, say, other leftists and the militant wing of the trade union movement during this crisis?

A: The clear and overwhelming direction of the left and even the militant left at the moment is towards electoralism. I haven’t mentioned this so far but it is a very important aspect of the current crisis. The current Government – a collation of Flanna Fáil and the Greens – will fall soon. It is becoming clear also that in pure electoral terms the voting public are moving left-ward. So the Irish Labour Party is set to do very well.

Political parties to the left of Labour are eyeing up this situation too. What’s new? A new electoral block linking the Trotskyist parties and some independents has just been formed. It is called the United Left Alliance. Their efforts are now directed at getting TDs elected to the next Dáil (parliament). It is the old story – they are playing the electoral card to the detriment of grass roots fight back. They will of course use any grassroots network for their own electoral ends – and damn the consequences.

Look, as anarchists, we know this story and it happens again and again. So we must counter this and we must do what we can to build an independent anti-electoral opposition. This is our aim.

Q: As anarchists, we agree that the final goal is workers and community self-management. In the meanwhile, are there any constructive immediate and medium solutions that the WSM may be posing to address the crisis and suffering?

A: The downside of all this is that there is a long way to go. As we do this interview, the IMF/ECB bailout has been in effect signed into a reality. This means a four to five year period of attacks lies ahead. The upside of this though is that we have time to make inroads and build resistance. I think this can be a period in which the anarchist movement makes a breakthrough. As they say, now or never. But it will not be easy and our numbers are small against the general forces that face us.

Q: In closing, on a personal note, let me hope that you and your family won’t be devastated by the crisis. On behalf of our organization, we wish our Irish sisters and brothers good luck and success in your fight-back.

A: Thank you and I will pass on your good words of solidarity to our comrades. I might add that we appreciate the interest that you take in what is happening here. The reality is we cannot make a real impact without international solidarity. And an important part of that process is that we get the information out that this is just more of the same old business of greed and capitalism. This is the second major recession I have now seen and it is worse than the last time. There is a better way to live and we need to build it for ourselves and our children and our brothers and sisters. Thanks and solidarity to the WSA.

Images of the Protests in Spain

UGT is a Marxist trade union.

Some Images from the Protests in Italy

Violence in Greece over Austerity Measures

Greeks take vengeance on Parliamentarian who betrayed them by voting for latest round of punitive cost-cutting.

Seasons Greetings

Blessed indeed are the peacemakers, but maybe we should overturn the the tables of the money-changers first.

Wednesday, December 22, 2010

Follow-up to War on Public Employees...

Please note that the article below quotes Meredith Whitney who is mentioned in my The Grand Deception series ( and will be again ). It is she who, as an accountant for Citigroup, was the first to state publicly that the sub-prime mortgage bonds were worthless, thus causing the race to the exits which precipitated the collapse. Now here she is sounding the alarm on the municipal bond market. ( "Municipal" is a misnomer in this case as all non-Federal government bonds are traded in this market. )

It's important to keep in mind two things:

1, Making such predictions can hasten, exacerbate, or even cause the market to collapse. If investors believe the city, county, or state cannot pay the debt, they wont buy the bond. As FDR said, fear is the problem.

2, Our Federal government's cutting off of support for local governments is an expression of its subversion by capital as it will spend about thirty trillion dollars bailing out Wall Street, but denies three trillion to the states. Bank of America is too big to fail but California isn't.

Can the argument that the bailout was to avert systemic failure any longer be made when the far greater hazard of large numbers of states and cities going under is ignored? Is this draconian action a matter of a cash-strapped Federal government reluctantly doing what it must to survive, as they would have us believe, or is it simply following the orders of its Wall Street masters? Which would have the worst systemic consequences for the residents of L.A.: BoA going into bankruptcy with all depositors insured up to $100,000, or the inability of their city, county and state governments to function? Which would adversely affect the greater number?!+Mail

Sunday, December 19, 2010

Saturday, December 18, 2010

Violence against Austerity Protesters Escalating in England

Paralyzed protester pulled from wheelchair, then harried on television by broadcast goon who tries to discredit him. Has to be seen to be believed:

Please note that the "impartial" journogandist tries to get him to say something incriminating to undermine his complaint, potentially a legal case, against the police.

In case you are interested, here's a link to the victim's blog:

Monday, December 13, 2010

Sunday, December 12, 2010

The Grand Deception ( part five ), The Ticking, Ticking, Time Bond

As stated in a previous article in this series, my intention is not only to describe the crisis of '08, but to prove that the collapse was no accident but a carefully calculated act of class war against working people. The unprecedented shift of wealth from the working class to the super affluent was not the unintended result of bad policy, incompetence, regulatory indifference, or the excessive greed of rogue elements on Wall Street, although each of these were essential parts, it was rather the criminal act of those on the very top of the economic pyramid. I believe that a familiarity with the circumstances can lead only to that conclusion. The "financial weapons of mass destruction"[1] which decimated our economy were brilliantly configured to maximize effect, and targeted precisely those institutions where that effect could not go unremedied without dire, systemic consequences, both political and economic.

The sub-prime mortgage bond was the Wall Street construct whose detonation brought the economy down like wounded game. These securities were of a type which made them attractive to pension funds and mutual funds. Often workers who participate in 401Ks will invest money in stock funds until they near retirement and then switch to the usually safer bond funds. The elimination of retirement savings caused by the implosion made it politically impossible for government to let investors suffer their losses as the political party making such a decision would become quite unpopular with voters. It is hard to conceive of a better way to sabotage an economy and compel government thereafter to respond in your favor.

As we saw in the last article, the mortgage bond became quite popular with long-term investors like retirement funds because of their perceived safety. Prime loans were backed by Fannie Mae and other GSE who were in turn backed by the government of the United States. They were as close to a certainty as is possible. However sub-prime loans were not backed by the government, and were anything but a sure thing.

The sub-prime mortgage bond mimicked its prime antecedent in that it was tranched, and that it too adopted the pay-as-you-go method of redemption. Now the danger wasn't that the underlying mortgages would be paid off too soon, but that they wouldn't be paid at all. So the first tranches, like their prime counterparts, would pay a better rate of interest, but contained the riskiest mortgages in the bond.

Despite these new bonds having a reduced credit rating, they sold well, with most non-professional buyers not realizing that a sea change in the quality of the underlying loans had occurred. Alan Greenspan and the Fed had green-lighted these new securities, so they must be okay, or so the argument went.

Given that the ever-dependable Fed chief was keeping interest rates at all time lows,[2] and that big investment banks were buying these sub-prime mortgages as fast as they were written, the market took off. There was no risk to the lender so long as they could pass these mortgages along to Wall Street. Predictably, they adopted an originate-and-sell policy. As they did, their criteria for assessing risk weakened in proportion to Wall Street's demand for product for their MBS business. With the bubble having not long before burst, Wall street needed new and, putatively at least, less risky investments, MBS, with their reputation for reliability, was just what the banks needed. Soon the sub-prime mortgage bond became a large part of Wall Street's business. Eventually, MBS would constitute ninety percent of the financial industry's bond revenue. In fact, the day came when the housing industry could not keep up with the finance industry's demand for mortgages, and new and even more esoteric MBS were fashioned by Wall Street to offset the decline. Thus was the CDO born.[3]

The housing market went into overdrive. With Wall Street egging them on, mortgage originators found new ways to make loans. The one incentive which mattered most but was insufficiently understood by sub-prime borrowers, was the variable-rate mortgage. This meant that the rate of interest one had to pay on a mortgage was pegged to the prime lending rate. The borrowers debt would increase when rates rose, and decrease as rates declined. This feature was particularly attractive in the low-rate environment created by the Fed. As an added inducement, most sub-prime loans offered a low "teaser" rate for the first three years or so. It was a great deal: You didn't need any money down; you got a really low starter rate; and it appeared that the Fed wasn't going to raise rates any time soon, if ever. It must have seemed too good to be true.

In the 1980s, the big investment banks came up with a new option for bond issuers called the interest rate swap ( never reduced to abbreviation as those letters were already in use, and would not have been helpful for their sales staff ). This enabled bond issuers to exchange a fixed rate for a variable one. The investment banks are making a bet that they will benefit from future rates being favorable to them. If so, the swap will be profitable. If the market turns against them, they can take a loss.

The interest rate swap turns the bank from broker to interested party in the transaction, and thus exposes it to risk. Unfortunately for the banks, government regulation required that they keep sufficient assets in reserve against the possibility of losses. They had an option: They could take out a CDS ( credit default swap, essentially an insurance policy against investment losses ) in which case the insurer would then be obligated to maintain the required reserves. They found an insurance company willing to write such policies in AIG ( American Insurance Group ). The significance role that this company with deep links to the intelligence services would play in the crash will be discussed in later articles in this series.

There were those who recognized that the new sub-prime mortgages, and the bonds upon which they were based, would not be viable in the long term, and resolved to bet against them. The problem was that, unlike stocks, these bonds were impossible to short. One could buy a credit default swap against them but one needed to own the underlying bond in order to do so. One's potential gains from the insurance company's pay-off were offset by the need to buy the bond ( or tranches thereof ). As if by the intervention of Providence, the introduction of the "naked" credit default swap occurred thanks to the good offices of our friends over at J P Morgan Chase, a bank owned in part by the Rothschild banking dynasty, who would be the chief beneficiary of the stock market crash and subsequent bailout.

Naked, at least in the investment sense, means that one didn't own the bond or other financial instrument one was insuring. It's simply a wager one makes with an insurance company. If the bonds tank, you get paid, even though you don't own them. Like any insurance policy, you had to pay the premiums. So the question one had to answer is when you thought the housing market would disintegrate. Since the teaser rates for the variable-rate mortgages lasted three years, the likelihood of default was negligible until then. Thereafter, it depended upon the Fed and what it would do with the prime lending rate. As it happened, a coincidence I'm sure, Fed chief Alan Greenspan began raising rates just about three years after the sub-prime mortgage bonds hit the market.

These naked credit default swaps were approved by Greenspan, although now he expresses regret. Our government doesn't share the former Fed chief's remorse though, the Senate voted against a ban on these Las Vegas style wagers which were the "toxic assets" that brought the global economy to a lurching halt and drove tens of millions into unemployment and despair.[4]

The stage was now set. The Fed allowed these derivatives to enter the market and did nothing to regulate their exchange. Predictably, new mortgage lenders sprang up like weeds--Aames, Loomis, Greentree, The Money Store--and went public just as fast. Wall Street cashed in by buying these mortgages and selling them as bonds to their clients. When the housing market couldn't originate fast enough to slake Wall Street's inextinguishable thirst for loans for its new best-selling product, they replaced these first-generation sub-prime mortgage bonds with new MBS of ever-increasing complexity and vulnerability. The market kept turning because the major players were not exposed to risk. The lenders sold to Wall Street. Wall Street sold to the public or insurers. The people at risk were the mortgage borrowers, bond buyers, and the end-of-the-line insurers who were buying based on the evaluations of ratings agencies which were now owned, thanks to deregulation, by the banks who were making money hand-over-fist from selling these bonds.

Expecting, as Alan Greenspan now claims he did, that the market would police itself by refusing to deal in dubious investments, was expecting Wall Street to put ethics ahead of profit. Nobody is that stupid, not even Greenspan. These bonds were ticking, and thousands involved in their creation and distribution heard them tick. Nobody, or very few at least, were willing to call attention to the turd in the punchbowl when everybody was having such a good time at the party.

[1] Warren Buffet

[2] The subprime rate is linked to the prime lending rate, traditionally it's three points higher.

[3] collateralized debt obligation. This will be discussed in detail in an upcoming article.