How an Unconscious Conspiracy Stole Our Individual Liberties, Restricted Free Markets

How That Theft Created and Burst the Real Estate Bubble

Preamble…

The ASSertion is (OOPS! Keyboard malfunction), “The conventional wisdom says the 1999-2006 residential real estate “bubble” in the U.S. and the subsequent collapse of global financial markets were caused by a failure of the free market.”

That raises the question, “What’s wrong with that assertion?”

That is, of course a loaded question.  The question assumes that something is wrong with the ‘assertion’ and invites only answers that agree with that conclusion.  However, since I believe the ‘assertion’ is invalid, a loaded question is OK with me.

The Basic Argument…

My unequivocal answer to the question is, “Individual liberties create and nurture free markets. Free markets are an outcome and cause nothing unless they have been manipulated to reduce or eliminate individual liberties.” – The Author

Free Markets emerge and prosper only when government, financial structures, and social institutions protect and preserve individual liberties.  A summary review of historical precedent – Mao’s China, Castro’s Cuba, or the USSR – and current events – Iran, North Korea, and countries in South America and Africa – confirm this statement.

A basic knowledge, understanding, and appreciation of the repression of individual liberties by the British, which gave birth to United States of America as an economic powerhouse, demonstrate clearly that individual liberties create and nurture free markets.

However, the practical answer to the question – “What caused the ‘bubble’ and the collapse?” – emerges when we look at the personal economies of Americans during the last thirty years.  My conviction is that the culprit in the collapse is the compromising of individual liberties by dysfunctional government, financial structures, and social institutions.

An Unconscious conspiracy…

Since 1974, there has been an unconscious conspiracy to limit the individual liberties of Americans.  Big government, big unions, big business – especially financial businesses, big non-governmental bureaucracies, and all of their minions – I call them Behemoths – knowingly and/or unknowingly embraced the aim of this unconscious conspiracy.

Some Behemoths, like the current administration in Washington, do so in the name of “change.”  Others like the US Congress, which falls short educationally and intellectually when it comes to economics and historical context, do so out of ignorance, greed for money and power, and their inability to comprehend basic economic principles and historic precedent – not to mention their lack of common sense.

What Benjamin Franklin wrote 250 years ago or so is still true today.  When you give up control of your money, “you give to another power over your liberty.”

All of the Behemoths in the unconscious conspiracy share a single aim.  They all want to gain control of the individual American citizen’s money – income, savings, home equity, legacy, etc.  The unprecedented success of this unconscious conspiracy reduced or, in some regards, eliminated individual liberties.  That’s what created the bubble and the collapse of 2006.

Success for Behemoths = Liberty Lost for Americans…

Unfortunately, the Behemoths have had and continue to have a great deal of success:

• The various government Behemoths have increased their take of Americans’ wages and savings through multiple levels of taxation…
• payroll withholding (city, county, state, federal)
• social security
• Medicare
• sales
• property
• gasoline
• tobacco
• alcohol
• telephone
• natural gas
• electric
• heating oil
• cell phones
• corporate taxes passed on to consumers
• and on, and on…

• Financial Behemoths – investment companies, mutual funds, retirement plans, stock insurance companies, banks – have tightened their grip on the money Americans rely on to deal with life’s surprisingly unsurprising surprises, their future income needs and their legacies.
• Mortgage lenders, credit card companies, big box stores’ charge cards, auto lenders, same-as-cash businesses such as furniture stores, cosmetic medical and dental practices, and other business that promote every conceivable credit opportunity have lured Americans into a financial swamp that restricts their liberty by relieving them of control of their money.

The Steady Erosion of Individual Liberty…

ERISA…

ERISA passed in 1974.  The Behemoths held ERISA out (among other things) as salvation for working Americans whose employers couldn’t or wouldn’t provide them with a pension plan.  ERISA intended – we were told – to give individuals control of their retirement destinies.

The effect of ERISA was, and remains, quite the opposite.  Financial Behemoths today control trillions of dollars that working Americans rely on for retirement income.  This is retirement income that Americans believe they will not have to work for and they cannot outlive.

When the markets in which those retirement funds are invested crash, the minions of the Behemoths exhort the Americans they have misled (they promise only that they promise nothing) to “stay the course” and leave their money under the control of the same folks who just decimated the retirees’ incomes.

The true outcome of ERISA is that the money that Americans give the Behemoths to put aside in IRAs, 401(k)s, and their equivalents is ending up in speculative securities that the Behemoths characterize as investments.

The entire retirement income scheme that ERISA established is like a casino that financial Behemoths – especially the IRS – own and operate.  The Behemoths are the house.  They always profit from the money that Americans gamble there.  Meanwhile, Americans are at the mercy of the gaming-table markets that hypothetically but unrealistically promise to deliver secure life-long income.

Worst of all, their future-income is at the mercy of the future-whims of the IRS.

The Coach – A.L. Williams

1977 introduced America to The Coach, A. L. Williams.  The Coach bears a distinct resemblance to Ali Hakim – the traveling salesman in Oklahoma! – who has the skill to convince even in the absence of evidence.

The Coach developed the idea that Americans should reallocate their money – real money that the individual American controlled – from whole life insurance contracts and other traditional savings vehicles

• and use some of it to buy expensive term life insurance (that pays high commissions)
• and use the rest of their money to buy mutual funds owned and operated by Behemoths (these also pay high commissions).

With all those commissions floating around and a sexy but entirely unproven idea, The Coach easily recruited sales reps.  However, most of his recruits only worked part time to supplement their full time employment, lacked significant financial or economic training and had little or no experience as advisors.  Like so many since, they believed they had found the holy grail of financial success.  They, like their master and mentor, believed (and still do to this day) that the flawed model The Coach developed would work in practice the way it appeared to work in theory.

Regardless of the credentials these advisors claim, the model didn’t, doesn’t, and won’t work. (If only Dave Ramsey and Suzie Orman would figure that out…)  The result is that millions, perhaps billions of American dollars drifted out of the secure savings programs, which individuals controlled and that offered – surprise – security, and into the accounts of Behemoths.

A. L. Williams’ business diminished the liberty of the American public accordingly.

When E. F. Hutton Speaks…

In 1979, E. F. Hutton introduced the insurance industry and the American public to another new and sexy approach to saving and insuring – universal life insurance.  Just imagine, you can deposit your insurance premiums in an insurance policy and hope to earn high returns on the portion of the premium that the insurance company doesn’t need to support the life insurance contract.  It’s The Coach’s “buy term and invest the difference” strategy repackaged.

Countless millions of American dollars flowed out of secure savings programs – whole life insurance policies in particular – and into universal life insurance policies. The results of this flawed model still plague America today.  Over the past three decades, universal life insurance has contributed to the de-mutualization of companies like Prudential, MetLife, Principal Financial Group, and John Hancock.  In addition, universal life was a major contributing factor in the failure in 1991 of Executive Life of California and of Mutual Benefit Life (the oldest insurer in America).

In the experiment that is universal life insurance, the money of American families “saved” in universal life policies simply disappeared into thin air when the policies did not fulfill their promises.

The loss of money means the loss of liberty.

Where the Transfer of Money Leads…

During the ‘70s and ‘80s, universal life insurance, A. L. Williams, and the Behemoth bandwagon-followers that adopted the product, the strategy, or both managed to suck a huge portion of the savings out of American pocketbooks.  When the savings ran out, the Behemoths discovered that they could convince Americans to sacrifice not only their savings but also their incomes.

They found two equally effective ways to do that.

First, the Behemoths convinced Americans that they could have everything they needed and anything they wanted as long as they had enough credit. They accomplished this with an onslaught of advertising and promotion for credit schemes ranging from simple credit card solicitations to inculcating the belief that lots of credit created superior credit ratings and that allowed for more credit, better ratings and a circular spiral into a dungeon of debt.

The Financial Behemoths also convinced Americans that the best place for their money was in investments and – worse – that giving the IRS control of the future value of those investments was an equally good idea.  Defined contribution retirement plans multiplied like fleas on a stray dog.

Liberty lost.

Then there was ’99 through ’06.

“Show Me the Money…”

Here comes the bubble.

The Disorganized Conspirator Behemoths had just about decimated the savings accounts of Americans.  They had encumbered American paychecks with debt payments and retirement plan contributions.  Where, the Behemoths wondered, would they find more money for their greedily bulging accounts?

Enter dozens of pseudo financial gurus with “just-like-the-wealthy-do-it ” schemes to transform American homeowners’ equity into money for the accounts of the Behemoths.

• Doug Andrews created the Missed Fortune Myth that relied on steadily increasing home values (OOPS!) and year upon year actual – not average – market returns of seven or eight percent in “investment grade” equity indexed universal life insurance policies (OOPS! Again.)
• Mortgage lenders like Money Tree and others encouraged homeowners to refinance in order to solve their money problems when they got “in debt up to [their] eyeballs”.
• Other mortgage hucksters promoted buying homes to “fix and flip” using the equity in a residence as seed money.
• The Federal government’s Fannie and Freddie, relying on deeply flawed conventional wisdom, burdened Americans with mortgages and payments on homes they couldn’t afford.  (I call this “idiot compassion” – a phrase adapted from Chogyam Trungpa Rinpoche.)
• And, the list goes on…even today VP Joe is telling us “Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said, “The answer is yes, that’s what I’m telling you.”

What makes it worse, the Behemoths themselves believed their gospel.  They bundled and traded 125% debt to equity loans as if they were gold.  They built and fortified their Jericho but to no avail.  “The walls came tumbling down.”

“And the Beat Goes On…”

Free markets did not fail.  The failure lies with the Behemoths that are supposed to protect the liberties of individual citizens and the free markets that arise from those liberties.  The failure manifests the deceptive, subtle, and persistent erosion of those individual liberties by the Behemoths for their own gain but in the name of free markets.  Today, the Behemoth of Behemoths, the Federal Government, is openly promoting the transfer, reduction, and elimination of individual rights in the name of bailouts, health care, ecology, union jobs, and saving GM.

The bubble that burst in 2006 has allowed a much more pernicious cancer on free markets than the Unconscious Conspiracy that initially caused the failure.

“Without individual liberties, there are no free markets.  Period.” – The Author

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