The subtitle of James Rickards’s book The Road to Ruin promised “the global elite’s secret plan for the next financial crisis”, and Brian Rose knew it would get attention. In this clip from their 2017 London Real interview, he asks Rickards directly: are the elites conspiring, or do they just know something we don’t?
Rickards’s answer is more interesting than either. There’s no secret society, he says, and no secret either.
▶ Watch the full episode: James Rickards – The Road To Ruin
No hooded robes
Rickards dismisses the image of an Illuminati in hooded robes around a mahogany table, like a villain’s meeting in a James Bond film. “It doesn’t work that way,” he says. The people who run the international monetary system aren’t hidden at all.
He names them: the heads of the IMF and the European Central Bank, central bankers and finance ministers, Harvard economists, and public intellectuals. Several hundred people worldwide, he says, run the system through the institutions they lead or move between.
Like-minded, not coordinated
Why don’t they need a conspiracy? Because they already think alike. In Rickards’s account, most of them went to the same six or seven universities, and in many cases supervised each other’s PhDs. He points to Stanley Fischer, a former MIT professor and later vice chair of the US Federal Reserve, who taught many of today’s central bankers.
The problem, he says, is that what they all learned is wrong. They aren’t uneducated, they’re “miseducated”: their models of risk are outdated at best and dangerously flawed at worst. They aren’t trying to wreck the system, but in his view they are wrecking it anyway, while knowing enough to see that nothing was really fixed after 2008.
Markets behave like earthquakes
Rickards, who worked at the hedge fund Long-Term Capital Management, argues that a financial panic follows the same mathematics as any complex system collapsing in nature: earthquakes, avalanches, forest fires. With one difference: in a man-made system, policy can interrupt the collapse. But interrupting it doesn’t release the pressure. It just leaves it building for next time.
He describes 2008 as dominoes falling, with officials dropping a steel wall between Lehman Brothers and Morgan Stanley by guaranteeing deposits, money market funds and currency swaps.
What he says should have happened
Rickards doesn’t argue for letting everything collapse. His alternative is temporary nationalisation: take over the big banks, move bad assets into a trust for taxpayers, wipe out shareholders, impose losses on bondholders, then sell the clean banks back to private owners.
Instead, he says, TARP became “the greatest bait and switch in history”: money that was pitched as a way to buy bad assets was given to banks as capital. When the banks recovered, the profits went to bankers rather than taxpayers. Nobody went to jail, he notes, and he calls it cronyism.
What to take from it
Rickards’s argument replaces a cartoon conspiracy with something harder to fix: a small, like-minded group using the same flawed models. Whatever you think of his solution, the clip is a clear explanation of why he expects future crises to be bigger than the last.
This clip reflects James Rickards’s views and is not investment advice.
Who is James Rickards?
James Rickards is an American lawyer, investment banker and author. He was general counsel at Long-Term Capital Management, the hedge fund rescued in 1998, and has advised US government and intelligence agencies on financial threats. His books include Currency Wars, The Death of Money and The Road to Ruin.
In the full 2017 episode, he talks with Brian Rose about the global monetary system, gold and the risk of the next financial crisis. You can also watch his later interview: James Rickards – Countdown To Crisis.
See everything James Rickards has done with London Real on his guest page: James Rickards on London Real.
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Transcript
Transcript: James Rickards – “The Illuminati” Exposed: Who Really Runs The Monetary System
0:00 Brian Rose: You knew this subtitle was going to get some people’s attention: the global elite’s secret plan for the next financial crisis. What are you saying about the global elites? Are they doing certain things before this crisis, like stockpiling cash or doing certain things with their trades? Are they doing it because they know better, or are they conspiring with each other? What can we learn?
0:22 James Rickards: I don’t think it’s a conspiracy in the sense that there’s a small group of Illuminati in hooded robes sitting around a mahogany table, like a scene from SPECTRE in a James Bond movie. It doesn’t work that way.
0:37 Brian Rose: Of course, you used to hang out with those Illuminati.
0:38 James Rickards: That’s another story; we’ll get to that later. But the way it does work, and I talk about this in the book: first of all, it’s not a secret who they are. It’s Christine Lagarde, head of the IMF, her first deputy managing director, David Lipton, professors like Larry Summers and Ken Rogoff at Harvard, public intellectuals here in the UK like Adair Turner and Anatole Kaletsky, Mario Draghi, head of the European Central Bank. It’s a collection of central bankers, finance ministers, academics, think tankers and public intellectuals, several hundred of them around the world, who collectively run the international monetary system, because they run the central banks or the multilateral institutions, or they move in and out of finance ministries. So there’s no secret. We know who they are.
1:30 James Rickards: Then what about the hooded robes part? The answer is, they don’t need that. Conspiracies fall apart, and they’re easy to spot most of the time. It’s more the case that they’re like-minded individuals. They don’t need top-down organisation, because they’ll agree with each other. They all went to the same schools: Oxford, Cambridge, MIT, Harvard, Chicago, Stanford. Six or seven schools in the whole world. In many cases they supervised each other’s PhD theses. Stanley Fischer, the vice chairman of the Federal Reserve, a former MIT professor, a little older than the rest, was the thesis advisor to a lot of the other central bankers.
2:04 James Rickards: I know a lot of these guys. I hung out with the 16 PhDs and two Nobel Prize winners at Long-Term Capital. I shared an office with Myron Scholes for six years, so I know this milieu. So they’re not only like-minded, they taught each other, and they all learned the same thing, and it’s all wrong. They’re not uneducated, they’re miseducated. The models they’ve taught themselves, and that they’re teaching to younger scholars, are at best obsolete and at worst dangerously flawed, in ways that are setting the system up for a new crisis that will be worse than the last two.
2:45 James Rickards: So they’re in control, they’re like-minded so they don’t need a lot of coordination, they’ve got badly flawed models, and they never see it coming. Are they trying to wreck the system? No. But they are wrecking it, through their own ignorance and misapprehension of the statistical properties of risk. Meanwhile, they’re smart enough to know that this is going to happen again. They can see it coming. They don’t actually understand why, but they know nothing got fixed in 2008.
3:20 James Rickards: One way to think about this, Brian, is that the dynamics and the mathematics of a financial panic are exactly the same as the collapse of any complex system in the natural world: earthquakes, volcanoes, forest fires, avalanches. They’re not just metaphors. I use them as metaphors in my writing, but the dynamics are identical, with one difference. In a man-made system you can truncate it with policy. In the natural system you cannot. An earthquake is a release of energy, and once it starts, you can’t stop it in the middle. But imagine if you could: the energy would be unreleased, but it would still be there, the pressure building up.
4:15 James Rickards: Bring that over to the man-made system. When the release of energy starts, you can truncate it. You have dominoes falling, and you know the last one’s going to fall, unless you drop a steel wall between two dominoes. That’s what they did in September 2008. They dropped a steel wall between Lehman Brothers and Morgan Stanley, and Morgan Stanley didn’t fail, because they guaranteed every bank deposit, money market fund and currency swap in the world, when nature would have let it fail.
4:49 James Rickards: Now, I don’t think we should have allowed ourselves to go into something worse than the Great Depression. But there was a solution on the table that they never pursued, because of cronyism. Now we’re getting into the gangster side of it. What they should have done, and the legal authority was there, was nationalise all the big banks by executive order. Not permanently, because I’m not in favour of socialism, but temporarily. Rip out the bad assets and put them in a trust for the American people. It might take 20 years to sell them, but the money goes to the taxpayers. Wipe out the equity. Bondholders: how big’s the hole in the balance sheet? 20% haircut, 40% haircut, whatever it takes. Put the losses on the stakeholders in the institution, who deserve it. Then IPO the clean bank, raise new equity, and start over with Citibank and Goldman and all these guys private, with new owners and clean balance sheets, and get the economy moving again.
5:55 James Rickards: That is not what happened. They took the TARP money, and TARP was the greatest bait and switch in history, because Hank Paulson, our Secretary of the Treasury, went to Congress and said, I want this money so I can buy the bad assets from the banks. That’s not what he did. He took the money and gave it to the banks as capital, and they kept the bad assets. Which meant that when they recovered, the bankers got the profits, not the people. So this was cronyism. Nobody went to jail. None of the big banks failed, other than Bear Stearns and Lehman.
6:27 Brian Rose: And Paulson was ex-Goldman.
6:29 James Rickards: Right. So they bailed out their buddies. All these guys kept their jobs, they got their million-dollar bonuses, their stock prices came back, and when things recovered the profit didn’t go to the taxpayers, where it should have. It went to the banks. Everything about it was corrupt. They could have nationalised, cleaned up, IPO’d, privatised and moved on with clean banks. That was the other option, and it wasn’t done.
