Do you think the housing scam did wonders for banking? Cap-and-trade is designed to do the same thing for the energy industry.

Here's how it works: Back in the bad old days, banks needed assets to back up their operations. Usually, it was a ten to one ratio. If someone wanted a loan of $100 thousand to buy a house, the bank could synthesize it out of thin air, as long as they had $10 thousand in assets to back it up. The assets had to be something real, like savings account deposits. This procedure limited the size of banks to their ability to draw in customers and entice them to deposit their money.

Deregulation changed all of that. It allowed banks to synthesize artificial assets through a pyramid scheme. These assets were typically guarantees of something, such as the weather or price of commodities. They were called derivatives. First their value was jacked up through buying and selling. Then they would be used as supposed assets for lending on a ten to one ratio. The derivatives could then be discarded, because more money would be made on lending than on their original value.

Consider this analogy: Say you have $100,000, which allowed you to loan Sam a million dollars. Sam also had $100,000, so he loaned you a million dollars. Your books balance, and you each gained a million dollars. People can’t do that, but banks can. This is what the banking scheme has been since deregulation, and it is what drives the derivatives markets.

Derivatives have become a dirty word in banking for obvious reasons, and they were replaced by a new scheme which started with supposedly real assets (real estate), which were then jacked up in price through the same scheme as derivatives, and then they were used as assets for borrowing.

These new fangled derivatives were given more respectable names, like Mortgage Backed Obligations (MBOs) or Structured Investment Vehicles (SIVs). They to had no real value when brought to the surface through the collapse of the housing bubble. The claim is that their value was lost due to "sub-prime mortgages." Bull roar. Only a small percent of the mortgages in a bundle were sub prime.

The real problem is that morgages were bundled and bought and sold the same way derivatives were, jacking up their price as high as possible to create assets for borrowing. It was the jacked up price that made the new instruments worthless, not sub-prime mortgages. Banks buy and sell the fake instruments from each other to give them an artificially high value based on the assumption that they will make enough money to discard them afterwards.

Banks do not need to buy and sell all of the derivatives to give them a fake value; all they need to buy and sell is a small sample. Then they claim that the rest are of equal value. This gives derivatives an artificially high value. In fact, they have no value when they have to be cashed in due to bankruptcies.

Synthesizing assets is extremely important to banks, because they are allowed to create loan value out of thin air, as long as they have a certain percent in assets. (It's now 8%.) They get to keep all that they collect on the magically created money. Afterwards, they have worthless derivatives, MBOs or SIVs, but they serve as fake assets for the operations which make real money for the banks.

Of course, there are never enough mortgages at the starting point to feed the insatiable appetite of the banking industry. This is why banks promoted sub-prime mortgages and related scams. It is also why they are pushing for cap-and-trade. Buying and selling energy schemes is a method of filling the need for new Structured Investment Vehicles.

Do you really want the energy industry to go down the same rat hole as the housing industry?

With cap-and-trade the companies which use a lot of energy, such as utilities or steelworks, are supposed to pay in some way. The general scheme is for high energy users to buy carbon credits from companies which use little energy, such as Google or Microsoft. After giving their money away, the high energy users are supposed to buy new technology for reducing their CO2 output. How is giving their money away going to improve their technology? If it were the other way around, there would be more apt to be an improvement. If Google and Microsoft were giving money to the utilities for new technology, there might be improvements.

There is an underlying implication to the cap-and-trade scheme which is extremely fraudulent. The implication is that if energy use is more expensive, there will be less energy used. Conservatives established the underlying ethic based on the assumption that the way to deal with a problem is to make it worse, and then someone will solve it. Problems don't get solved. Making them worse only creates social turmoil.

While it is true that results follow incentives, the ethic which conservatives promote, and which underlie cap-and-trade, are not real incentives, because they are based on coercive force. (It may seem ironic that supposed liberals who promote carbon dioxide schemes use conservative ethics, but corruption is always the same, whether its called liberal or conservative.)

Coercion is nothing resembling an incentive, because it has no relation to reality. Corrupters assume they can pound something down someone's throat and get any result they want. It doesn't happen. Solutions to problems are extremely complex, and they are not solved by coercion any more than a television is fixed with a hammer. All coercion does is create unsolvable problems which increase expense and waste more resources.

Europeans are destroying their competitiveness because of cap-and-trade which they began several years ago. The promoters of cap-and-trade are ignoring the proven disaster in Europe, because they are driven by ulterior motives and stupidity.