Wikipedia defines a "confidence trick" as "an attempt to defraud a person or group by gaining their confidence. The victim is known as the mark, the trickster is called a confidence man, con man, confidence trickster, or con artist, and any accomplices are known as shills. Confidence men exploit human characteristics such as greed and dishonesty."
Ever hear a business reporter on the evening business news say, "Today, investors drive up the price of commodities to create a hundred billion in new value," or some such? Sounds great, almost implying we should offer thanks to these champions of the public good who are risking their fortunes to expand the pool of wealth to enrich us all. The reporter is manipulating the language to set us up as marks in the Wall Street con.
A more honest report might have said, "Today, hedge fund traders speculating with other people's money walked away with multimillion dollar commissions for inflating the commodities bubble by a hundred billion dollars." In a more honest world, the report would clearly distinguish between real investors creating real wealth through real investments and speculators creating phantom wealth with financial games. People who bet on the price of pieces of paper would be called "gamblers." Those who hold the bets and distribute the winnings would be called "bookies."
Boil it down to the basics and you see that Wall Street is in the business of operating four sophisticated, large-scale confidence games.
In a more honest world, business news would clearly distinguish between real investors creating real wealth through real investments and speculators creating phantom wealth with financial games.
- Securities fraud: Selling shares in asset bubbles that are maintained solely by the constant inflow of new money is, in effect, a Ponzi scheme.
- Reverse insurance fraud: Insurance fraud, by common definition, occurs when the insured deceives the insurer. In reverse insurance fraud, the insurer deceives the insured. In Wall Street practice this involves collecting premiums to cover risks the insurer lacks adequate reserves to cover and then refusing to pay legitimate claims.
- Predatory lending: Using a combination of extortion, fraud, deceptive promises, and usury, predatory lenders lure the desperate into perpetual debt at exorbitant interest rates.
Because of Wall Street's hold on lawmakers, these may all be perfectly legal, but phantom wealth is still phantom wealth, and these are all forms of theft. In three-card monte the dealer shuffles the cards so fast you can't follow them, while talking even faster. Complex derivatives are a fast shuffle that makes it virtually impossible to follow the connection to any real value.
What makes the Wall Street con so much better for the dealers than a typical street con is that Wall Street dealers bet on their own game using other people's money and then manipulate the market outcome in their own favor, rewarding themselves with huge bonuses when they win and taking billions in taxpayer bailouts when they lose.
Real financial reform would render unproductive speculation either illegal or unprofitable. Here are a few suggestions:
- Prohibit selling, insuring, or borrowing against an asset not actually owned by the seller, and issuing any security not backed by a real asset--all common Wall Street practices.
- Place strict limits on how much a financial institution can borrow in order to buy a property, and establish conservative reserve and capital requirements for institutions in the business of selling insurance of any kind.
- Regulate bond-rating agencies and impose strict penalties for fraudulent ratings.
- Impose a small financial-speculation tax of a penny on every $4 spent on the purchase and sale of financial instruments such as stocks, bonds, foreign currencies, and derivatives. This would have no consequential impact on real investors making long-term investments in real businesses and assets. But it would discourage short-term speculation and arbitraging.
- End the obscure tax loophole that allows hedge fund managers to report their billion-dollar compensation packages as capital gains, taxed at only 15 percent.
- Assess a 100 percent capital gains surcharge on profit from the sale of assets held less than an hour, 80 percent if held less than a week, and perhaps falling to 50 percent on assets held more than a week but less than six months. This would render most forms of speculation unprofitable, stabilize financial markets, and lengthen the investment horizon without penalizing real investors.
- Eliminate debt slavery by raising the wages of working people and the taxes of the moneylenders.
Opponents will claim that such regulation and taxes will stifle financial innovation. Good. That is the intention. Wall Street's financial innovations are mostly ever more sophisticated and deceptive forms of theft. They should be discouraged. Keep the casinos in Vegas. The need to rebuild financial institutions that meet our needs for basic financial services will be the subject of next week's blog.