Cons, Casinos, Housing and Trump
August 3, 2016
by William P. Meyers

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Not all losses are in rigged systems

Not all, but many, con games have the same psychological strategy. Pick a few people and make them winners of your game. They will tell other people about their winnings. Those people will play the game. Some may become losers, but they will be embarrassed and keep quiet about it. Each level has more winners. Until the game is played out, and everyone who plays at the last level loses.

Con artists take advantage of two basic human attributes: greed, and shortsightedness.

There are two basic variations on the con game. In one people are winning something tangible, if they are one of the winners. A slot machine spewing out coins is a good example. If you are a winner the machine give you back more coins than you already put in. The casino con is that most people most of the time get less out than they put in, more than making up for the occasional winning payout. More modern machines don't use coins, they just suck money out of debit cards. I'll call this the Casino Model

In the other variation everyone appears to be a winner, but the winnings are intangible. The classic case is the investment swindle in which the con artist never invests the money, but hands the investors a piece of paper saying their investment has grown in value. Everybody wins, and as long as new investors join in, the old investors can cash out. Meanwhile the con artist spends the money, or moves it to a hiding place. When too many people try to cash in, the con is over and the pyramid collapses. I'll call this the Ponzi Model.

Investment bubbles, whether the South Sea Bubble or the Tulip Bubble or the Internet Stock bubble form a separate class. Investors really do own shares in the South Sea Company or an actual tulip bulb or Internet Stocks, they just pay way to much for those investments. The con is that such investments can keep going up, forever, regardless of their relationship to ordinary business realities.

Ordinary investments, in real estate, stocks, and other things, can go wrong; that is the nature of risking money while trying to make money. It's no different, except in abstract, from risking your own money on your own business. If you invest $200,000 in a restaurant, and not enough people dine there, you can lose your investment, and if anyone conned you, it was yourself. A legitimate broker may invest money in stocks or bonds for you, and it you lose money, it feels the same as if you lost it to a con artist. But the difference is important. You always lose money you entrust to con artists. You usually make money on honest investments.

The real estate bubble between 2001 (after the Internet Bubble burst) and 2007 combined aspects of both the Casino Model and the Ponzi Model, but in most ways it was an ordinary Investment Bubble.

Houses are real enough. They cost money to build. They have value in that you can live in them. If you own one, you don't have to pay rent to a land lord, or you can rent it out and be a landlord, or you can sell it to the next owner. Because they are real, banks are (usually) happy to loan money to people who want to buy a house. It is usually a good deal for both parties. The buyer usually pays less in the mortgage than they would for rent, and after enough time end up owning the house, and so pay nothing but tax and utilities. That used to be the goal for the vast majority of homeowners. The bank, of course, gets the interest on the loan, and if the owner fails to pay, gets their principle back in the form of the house.

No one was forced to buy houses at bubble prices. People bought houses for the usual reasons, but the driving force was greed. Banks and mortgage companies made the astonishingly stupid assumption that house prices would continue to go up, so they could not lose money on a mortgage. Buyers made the same stupid assumption, so that their worst case scenario was they could always sell the house for more than they bought it for, pay off the mortgage, and come out ahead. Derivatives buyers made the same assumption.

The houses were real. You really had a house you could move into. The early winners were real, they could tell you, truthfully, that they had bought a house, or a set of houses, and sold them later and had become wealthy in a few years with very little effort.

There was lying, but their really were not con men involved. If the banks or mortgage companies had been the con men, they would have made money on the scheme, but they lost money to the point of either going bankrupt or losing most of their market value.

If the banks are to blame, it is in that they should not have loaned money to idiots to buy overpriced houses. The Federal Reserve did not con anyone or benefit from the bubble, but it should have raised interest rates sooner and higher to stop the bubble before it became dangerously large.

Donald Trump has spent his life developing real estate, including casinos. Is someone who owns a casino a con artist? Doesn't everyone know that casinos exist to make you poor, not to make you a winner? Don't they know that every single casino game is rigged to produce an occasional payoff, the only purpose of which is to encourage the customers to lose even more money?

Donald Trump is far from being the richest man in America, but he certainly projects the image of being the King of the Grandiose. He's a crony capitalist from way back, and his alleged honesty, or at least frankness, is part of his con. He has a track record of cheating both partners and contractors. His main business, his real business, is licensing his name to other business people who use it to attract suckers and marks. To put it more bluntly, his business is lying, and helping other to lie.

In normal times and places buying a house makes more sense than renting. Renting means paying the landlords until the day you die. Buy a house and if you can stay there long enough to pay off the mortgage, and then you live close to rent free (you still have to pay taxes and maintenance).

But sometimes buying a house, and paying off a mortgage, does not make sense. It is actually cheaper to rent, even in the long run. It pays to pay attention to specifics, not just to generalities.

The system is rigged? The main way the system is rigged is that you begin life at the economic level of your parents, with all the consequences.

The system is rigged in favor of the Trumps of the world, because the ruling class are not just born to money and power, but can do each other favors even as they fight over money.

There is another type of rigging to the system: the rigging you can climb up. Hundreds of millions of people have climbed out of poverty in the United States, even if many took a couple of generations to do it. There are a lot of ways to do it, but they all require applying yourself, and getting back up if you get knocked down. Whether taking a hard knock was an accident, or from your own foolishness, or because some con artist took advantage of you.