View Full Version : Venezuela's oil: From the Devilís Excrement to The Politicianís Trap

09-12-06, 11:27 AM
Venezuela's oil: From the Devil’s Excrement to The Politician’s Trap (http://blogs.salon.com/0001330/2006/09/09.html#a3040)
September 12, 2006 (Salon.com)

The term Devil’s Excrement, was created by Juan Pablo Perez Alfonso to dramatize the difficulties that a country may have in implementing the necessary economic measures for its development when a natural resource exists which strengthens the currency and allows policy makers to postpone unpopular measures because their urgency can be hidden by the wealth itself. In The Netherlands it is referred to as the Dutch Disease, because of the effect that natural gas prices had in that country’s economy in the 60’s.

But it may more properly be named the Politician’s Trap, because it allows them to postpone important decisions in order to boost their short term popularity, but somehow it always ends up blowing up on their faces, with dire consequences which are always paid first by the people via devaluations, unemployment and inflation.

AntiSpin: The writer describes the basket case that the Venezuelan economy is today. A closer look and you can see in this description a possible future for the US economy if current trends continue. The Venezuelan economy is an example of how not to run an economy and holds some lessons for the US. A couple of substitutions are necessary to make the comparison stick.

The US government does not rely on oil revenues to pursue unsustainable economic policies to keep voters happy, it relies instead on foreign central bank borrowing and on fooling foreign investors into purchasing risky mortgage backed securities. Otherwise, the difference between Venezuela's economic mess and the US mess is a matter of scale and degree; if you extrapolate current US economic policy trends out another ten years or so, you're there.

Three of the greatest Financial Distortions of the Venezuelan economy that the author identifies already apply to the US economy:
"Imports will likely reach US$ 30 billion this year. (Whatever happened to endogenous development?)"
Today the Washington Post reports: "Trade Deficit Hits $68B Record in July. (http://www.washingtonpost.com/wp-dyn/content/article/2006/09/12/AR2006091200522.html)" This will likely improve, however, as consumers cut back on purchases of everything as the housing bubble continues to collapse, and demand for energy and other imports decline.
"Growth in the first half was 9%, but Government spending was up by 85%, not very efficient, no?"
GDP growth is expected to be around 3% this year in the US but you have to go back to the Johnson administration to find the kind of increase in real government spending that the US has seen under the Bush administration.


But the most damning comparison is how the US banking system works as compared to Venezuela's.
"Banks have so much excess money that they are giving people credit without checking any credit history, salary or record. It is better to lend it with risk, that not have it doing anything. Just today someone told me that getting such a loan was so easy, that she got it within a day and would be unable to pay it based on her cash flow except that her insurance company owes her the money. Perhaps the funniest gimmick is the “Surgery with your plastic” campaign. Yes, it is simple, get an instant loan to have your plastic surgery done. Billboards even show which part of your body you may want fixed, sort of obvious, no?"
Here in the US, it's getting hard to distinguish between commercial banks (http://www.businessweek.com/magazine/content/05_18/b3931085_mz020.htm) and the PayDay Loan chop shops (http://www.union-bulletin.com/articles/2006/09/04/opinion/daily_editorial/edit01.txt). But the really large scale banking fraud is in mortgage lending. New York Times reported last week: "Mortgages Grow Riskier, and Investors Are Attracted (http://www.nytimes.com/2006/09/06/business/06place.html)."

Wonder if foreign investors have any idea what they're really buying when they purchase these securities. The Denver Post reported last month, "Big profits oil the wheel of loan fraud (http://www.denverpost.com/business/ci_4234236)."
Former prosecutor Anthony Accetta cleaned up mortgage fraud 34 years ago - or at least, he tried.

In 1972, as an assistant U.S. attorney in New York state, Accetta prosecuted rampant mortgage fraud. Subsequent trials convicted 70 people and companies. Even the regional director of the Federal Housing Administration went to prison.

"We closed down nine mortgage banks," Accetta said. "Presidents of various mortgage companies went to jail, mortgage brokers and credit analysts went to jail, lawyers and accountants - they all went to jail. The whole system was corrupt."

Today, Accetta is a private fraud investigator based in Colorado. When he read The Denver Post on Thursday, he was reminded that not much has changed in the mortgage business, particularly in this state, which has posted the highest foreclosure rate in the nation for five months.

Mortgage brokers close loans, bag fees and move on. Lenders then sell the loans to investment banks, which bundle them with hundreds of millions of dollars' worth of other loans and sell them to investors. The investors who buy these bundles are not on the hook, either. That's because the investment banks they buy them from will replace bad loans with performing loans to preserve values.

The bad loans are ultimately sent back to the banks that made them, but the banks are either covered by FHA insurance or a reserve fund that they've set aside for bad loans. Lenders charge premium interest rates for high-risk loans, and with loose lending requirements, they generate huge loan volumes.

"Loan losses are offset by profits that are so outrageous that the banks don't care," Accetta said.

Accetta said that since the 1970s, the government and the lenders have made it easier to commit mortgage fraud. Today, the industry thrives on "No-Doc" loans - as in no documentation.

"It's a real tragedy, and it's been going on for 40 years."