Home Switchboard Unix Administration Red Hat TCP/IP Networks Neoliberalism Toxic Managers
May the source be with you, but remember the KISS principle ;-)
Bigger doesn't imply better. Bigger often is a sign of obesity, of lost control, of overcomplexity, of cancerous cells

Financial Sector Induced Systemic Instability, 2011

2014 2013 2012 2011 2010 2009 2008

[Oct 08, 2012] What Really Happened

Economist's View

This is from David Warsh (note that, despite Dodd-Frank and other regulatory measures instituted since the financial crises, we are still susceptible to the shadow bank run problems described below):

What Really Happened - Economic Principals: ...the best economics book on the fall calendar ... (to be published next month) is a slender account about the circumstances that led to that near meltdown in September 2008, and an explanation of why they were not apparent until the last moment. Misunderstanding Financial Crises: Why We Don’t See Them Coming (Oxford University Press), by Gary Gorton, of Yale University’s School of Management ... can be viewed as an answer to the question famously posed to their advisers, in slightly different ways, by both George W. Bush and Queen Elizabeth: why was there no warning of a calamity that was warded off only at such great expense? The answer is that, lulled by nearly 75 years without one, economists had become convinced that banking panics had become a thing of the past. The book is probably better understood as the successor to Charles P. Kindleberger’s 1977 classic, since updated many times, Manias, Panics, and Crashes: A History of Financial Crises. This time, I think, the message won’t be brushed aside.

Not that building the near-certainty of periodic crises back into economics’ analytic framework will be easy. Gorton is an economic historian by training, and the economists with whom he collaborates mostly have monetary, financial or organizational backgrounds. This means they are up against macroeconomics, one of the most powerful guilds in ... virtually all of macro, from Edward Prescott on the right to Olivier Blanchard on the left, in the form of models of that describe economies in terms of dynamic stochastic general equilibrium (DSGE). More on that in a moment.

But Gorton, 61, possesses several advantages that Kindleberger (1910-2003) did not. He is an expert on banking, for one thing. (Kindleberger specialized in the international monetary system.) He’s mathematically adroit, for another, a quant. Most significantly, he is an insider, the economist whose models and product concepts were at the heart of insurance giant AIG’s Financial Products unit, whose undoing amid a stampede of competing claims was one of the central events of the crisis. As such, he had a front row seat.

Gorton’s case is ostensibly simple. Where there are banking systems, he says, there will be periodic runs on them, episodes in which everyone tries to turn his claim into cash at the same time. He sets out the pattern this way:

The problem is that, starting in the 1970s, many economists convinced themselves that bank runs were something they no longer had to worry about, or even think about. They thought because the measures implemented during the Great Depression – deposit insurance, careful segregation of banks by line of business, and close supervision – had ushered in what Gorton calls “the quiet period.” Between 1934 and 2007 there were no financial crises in the United States. (Expensive as it was, the savings and loan debacle of the late 1980s and early ’90s, doesn’t meet the definition of a crisis. Some 750 of around 3,200 institutions failed, in slow motion, over a period of several years, but there was no run on any of them, because depositors expected that the government would make them whole.)

It was in these years that new models began taking over macroeconomics. These new models are said to be dynamic, because in them things change over time; stochastic, because the system is seen to respond to periodic shocks, factors whose origins economists don’t try to explain as part of their system, at least not yet; and general equilibrium, because everything in them is interdependent: a change in one thing causes changes in everything else. Best of all, such models are set to rest on supposedly secure microfoundations, meaning the unit of analysis is the individual or firm. One trouble was that no one had succeeded in building banking or transactions technology into such a model (though some economists had begun to try). Another was that the behavioral aspects of those microfoundations were anything but secure.

It turns out the villain in the DSGE approach is the S term, for stochastic processes, meaning a view of the economy as probabilistic system ... as opposed to a deterministic one... It is ... when economists begin to speak of shocks that matters become hazy. Shocks of various sorts have been familiar to economists ever since the 1930s, when the Ukrainian statistician Eugen Slutsky introduced the idea of sudden and unexpected concatenations of random events as perhaps a better way of thinking about the sources of business cycles than the prevailing view of too-good-a-time-at-the punch-bowl as the underlying mechanism.

But it was only after 1983, when Edward Prescott and Finn Kydland introduced a stylized model with which shocks of various sorts might be employed to explain business fluctuations, that the stochastic approach took over macroeconomics. The pair subsequently won a Nobel Prize, for this and other work. (All this is explained with a reasonable degree of clarity in an article the two wrote for the Federal Reserve Bank of Minneapolis in 1990, Business Cycles: Real Facts and a Monetary Myth). Where there had been only supply shocks and demand shocks before, now there were various real shocks, unexpected and unpredictable changes in technologies, say, or preferences for work and leisure, that might explain different economic outcomes that were observed. Before long, there were even “rare economic disaster” shocks that could explain the equity premium and other perennial mysteries.

That the world economy received a “shock” when US government policy reversed itself in September 2008 and permitted Lehman Brothers to fail: what kind of an explanation is that? Meanwhile, the shadow banking industry, a vast collection of financial intermediaries that included money market funds, investment banks, insurance companies and hedge funds, had grown to cycle and recycle (at some sort of rate of interest) the enormous sums of money that accrued as the world globalized. Finally, there was uncertainty, doubt, fear, and then panic. These institutions began running on each other. No depositors standing on sidewalks – only traders staring dumbfounded at comport screens.

Only a theory beats another theory, of course. And the theory of financial crises has a long, long way to go before it is expressed in carefully-reasoned models and mapped into the rest of what we think we know about the behavior of the world economy. Gorton’s book is full of intriguing insights, including a critique of President’s Obama response to the crisis, and glimpses of a pair of reforms that might have put the banking system back on its feet much more quickly had they been widely briefed and better understood: federally charter a new kind of narrowly-funded bank required to purchase any and all securitized assets; and regulate repo (the interest-bearing repurchase agreements through which financial giants created the shadow banking system), to the extent that there would be limits on how much non-banks could issue (a proposal recently defeated at the Securities and Exchange Commission after massive lobbying by the money-market funds).

There is going to be a long slow reception to Misunderstanding Financial Crises. Let’s see how it rolls out. I’ll return to the topic frequently in the coming months.



{GG: why was there no warning of a calamity that was warded off only at such great expense? The answer is that, lulled by nearly 75 years without one, economists had become convinced that banking panics had become a thing of the past. }

What the above does not say and is not further considered in the post is that America had (and still has) a highly consolidated banking system.

In our rush for "bigger is better", our attitude towards Banking Regulation became lax. It was willful because banking oversight policy presumed that markets could not fail since supposedly "smart bankers" would not allow that to happen.

Not "smart", rather "smart-ass".

The banking industry, starting with Summers and Rubin who convinced Clinton to put an end to the Glass-Steagall Act, saw full well the glorious fortunes to be made in banking.

If only they could get their hands on the funds to collateralize bank-borrowing in order to invest in market ventures - many of which were of a highly dubious nature.

The whole edifice came down like a house of cards as, sensing the Toxic Waste, debt-owners scrambled feverishly to cash-out by invoking their insurance-policies.

Which were also worthless. The retribution for their folly was swift and unforgiving. The edifice came down like a house of cards. And TARP was rushed in to save some sorry asses.

Maybe we should have let it all crumble and, like a Phoenix, build a new one upon its ashes?


Who says it cannot happen again? One day, when the Recession is behind us and a younger group of Golden Boys ‘n Girls (with "the sky's the limit!" in their hearts) takes control of the financial levers? Who's to stop them? What is to stop them?

My answer: The sort of Tax Code that prevents any incentive for quick and immense riches. Nip the hallucinatory greed in its bud.


I just found out about this working paper which reports favorably on the Chicago Plan. One feature of the plan is that there are no bank runs. :)


"the assets of the banking system cannot be sold en masse without their prices plummeting."

In 2006 "assets" of the "banks" were highly inflated (bubble), the run was caused by the marks recognizing this.

The "assets" of the banks, store front and shadow, remain highly inflated, and the austerians want deflation to crush the banks.

But the fed........


It seems to me that the building of a model starts with a few prerequisites, like "The model must permit the rich to accumulate ever more money". Okay, this requires everyone else have access to debt to borrow that money into existence. Okay, what government agencies and systems do we need in place to assure that the masses have access and ability to go ever further into debt, to create the money needed to allow the rich to accumulate ever more money....

And then we seem shocked that eventually the debt hits a maximum carrying capacity and begins to collapse under its own weight.

Reply Monday, October 08, 2012 at 05:59 AM


[Jul 01, 2012] Mitt Romney and the New Gilded Age the GOP could put up someone for president who so brazenly epitomizes the excesses of casino capitalism that have nearly destroyed the economy and overwhelmed our democracy.
June 30, 2012 | Robert Reich                                                         I

The election of 2012 raises two perplexing questions. The first is how the GOP could put up someone for president who so brazenly epitomizes the excesses of casino capitalism that have nearly destroyed the economy and overwhelmed our democracy. The second is why the Democrats have failed to point this out.

The White House has criticized Mitt Romney for his years at the helm of Bain Capital, pointing to a deal that led to the bankruptcy of GS Technologies, a Bain investment in Kansas City that went belly up in 2001 at the cost of 750 jobs. But the White House hasn’t connected Romney’s Bain to the larger scourge of casino capitalism. Not surprisingly, its criticism has quickly degenerated into a “he said, she said” feud over what proportion of the companies that Bain bought and loaded up with debt subsequently went broke (it’s about 20 percent), and how many people lost their jobs relative to how many jobs were added because of Bain’s financial maneuvers (that depends on when you start and stop the clock). And it has invited a Republican countercharge that the administration gambled away taxpayer money on its own bad bet, the Solyndra solar panel company.

But the real issue here isn’t Bain’s betting record. It’s that Romney’s Bain is part of the same system as Jamie Dimon’s JPMorgan Chase, Jon Corzine’s MF Global and Lloyd Blankfein’s Goldman Sachs—a system that has turned much of the economy into a betting parlor that nearly imploded in 2008, destroying millions of jobs and devastating household incomes. The winners in this system are top Wall Street executives and traders, private-equity managers and hedge-fund moguls, and the losers are most of the rest of us. The system is largely responsible for the greatest concentration of the nation’s income and wealth at the very top since the Gilded Age of the nineteenth century, with the richest 400 Americans owning as much as the bottom 150 million put together. And these multimillionaires and billionaires are now actively belection—and with it, American democracy.

The biggest players in this system have, like Romney, made their profits placing big bets with other people’s money. If the bets go well, the players make out like bandits. If they go badly, the burden land taxpayers. The 750 people at GS Technologies who lost their jobs thanks to a bad deal engineered by Romney’s Bain were a small foreshadowing of the 15 million who lost jobs after the cumulative dealmaking of the entire financial sector pushed the whole economy off a cliff. And relative to the cost to taxpayers of bailing out Wall Street, Solyndra is a rounding error.

Connect the dots of casino capitalism, and you get Mitt Romney. The fortunes raked in by financial dealmakers depend on special goodies baked into the tax code such as “carried interest,” which allows Romney and other partners in private-equity firms (as well as in many venture-capital and hedge funds) to treat their incomes as capital gains taxed at a maximum of 15 percent. This is how Romney managed to pay an average of 14 percent on more than $42 million of combined income in 2010 and 2011. But the carried-interest loophole makes no economic sense. Conservatives try to justify the tax code’s generous preference for capital gains as a reward to risk-takers—but Romney and other private-equity partners risk little, if any, of their personal wealth. They mostly bet with other investors’ money, including the pension savings of average working people.

Another goodie allows private-equity partners to sock away almost any amount of their earnings into a tax-deferred IRA, while the rest of us are limited to a few thousand dollars a year. The partners can merely low-ball the value of whatever portion of their investment partnership they put away—even valuing it at zero—because the tax code considers a partnership interest to have value only in the future. This explains how Romney’s IRA is worth as much as $101 million. The tax code further subsidizes private equity and much of the rest of the financial sector by making interest on debt tax-deductible, while taxing profits and dividends. This creates huge incentives for financiers to find ways of substituting debt for equity and is a major reason America’s biggest banks have leveraged America to the hilt. It’s also why Romney’s Bain and other private-equity partnerships have done the same to the companies they buy.

These maneuvers shift all the economic risk to debtors, who sometimes can’t repay what they owe. That’s rarely a problem for the financiers who engineer the deals; they’re sufficiently diversified to withstand some losses, or they’ve already taken their profits and moved on. But piles of debt play havoc with the lives of real people in the real economy when the companies they work for can’t meet their payments, or the banks they rely on stop lending money, or the contractors they depend on go broke—often with the result that they can’t meet their own debt payments and lose their homes, cars and savings.

It took more than a decade for America to recover from the Great Crash of 1929 after the financial sector had gorged itself on debt, and it’s taking years to recover from the more limited but still terrible crash of 2008. The same kinds of convulsions have occurred on a smaller scale at a host of companies since the go-go years of the 1980s, when private-equity firms like Bain began doing leveraged buyouts—taking over a target company, loading it up with debt, using the tax deduction that comes with the debt to boost the target company’s profits, cutting payrolls and then reselling the company at a higher price.

Sometimes these maneuvers work, sometimes they end in disaster; but they always generate giant rewards for the dealmakers while shifting the risk to workers and taxpayers. In 1988 drugstore chain Revco went under when it couldn’t meet its debt payments on a $1.6 billion leveraged buyout engineered by Salomon Brothers. In 1989 the private-equity firm of Kohlberg, Kravis, Roberts completed the notorious and ultimately disastrous buyout of RJR Nabisco for $31 billion, much of it in high-yield (“junk”) bonds. In 1993 Bain Capital became a majority shareholder in GS Technologies and loaded it with debt. In 2001 it went down when it couldn’t meet payments on that debt load. But even as these firms sank, Bain and the other dealmakers continued to collect lucrative fees—transaction fees, advisory fees, management fees—sucking the companies dry until the bitter end. According to a review by the New York Times of firms that went bankrupt on Romney’s watch, Bain structured the deals so that its executives would always win, even if employees, creditors and Bain’s own investors lost out. That’s been Big Finance’s MO.

By the time Romney co-founded Bain Capital in 1984, financial wheeling and dealing was the most lucrative part of the economy, sucking into its Gordon Gekko–like maw the brightest and most ambitious MBAs, who wanted nothing more than to make huge amounts of money as quickly as possible. Between the mid-1980s and 2007, financial-sector earnings made up two-thirds of all the growth in incomes. At the same time, wages for most Americans stagnated as employers, under mounting pressure from Wall Street and private-equity firms like Bain, slashed payrolls and shipped jobs overseas.

The 2008 crash only briefly interrupted the bonanza. Last year, according to a recent Bloomberg Markets analysis, America’s top fifty financial CEOs got a 20.4 percent pay hike, even as the wages of most Americans continued to drop. Topping the Bloomberg list were two of the same private-equity barons who did the RJR Nabisco deal a quarter-century ago—Henry Kravis and George Roberts, who took home $30 million each. According to the 2011 tax records he released, Romney was not far behind.


We’ve entered a new Gilded Age, of which Mitt Romney is the perfect reflection. The original Gilded Age was a time of buoyant rich men with flashy white teeth, raging wealth and a measured disdain for anyone lacking those attributes, which was just about everyone else. Romney looks and acts the part perfectly, offhandedly challenging a GOP primary opponent to a $10,000 bet and referring to his wife’s several Cadillacs. Four years ago he paid $12 million for his fourth home, a 3,000-square-foot villa in La Jolla, California, with vaulted ceilings, five bathrooms, a pool, a Jacuzzi and unobstructed views of the Pacific. Romney has filed plans to tear it down and replace it with a home four times bigger.

We’ve had wealthy presidents before, but they have been traitors to their class—Teddy Roosevelt storming against the “malefactors of great wealth” and busting up the trusts, Franklin Roosevelt railing against the “economic royalists” and raising their taxes, John F. Kennedy appealing to the conscience of the nation to conquer poverty. Romney is the opposite: he wants to do everything he can to make the superwealthy even wealthier and the poor even poorer, and he justifies it all with a thinly veiled social Darwinism.

Not incidentally, social Darwinism was also the reigning philosophy of the original Gilded Age, propounded in America more than a century ago by William Graham Sumner, a professor of political and social science at Yale, who twisted Charles Darwin’s insights into a theory to justify the brazen inequality of that era: survival of the fittest. Romney uses the same logic when he accuses President Obama of creating an “entitlement society” simply because millions of desperate Americans have been forced to accept food stamps and unemployment insurance, or when he opines that government should not help distressed homeowners but instead let the market “hit the bottom,” or enthuses over a House Republican budget that would cut $3.3 trillion from low-income programs over the next decade. It’s survival of the fittest all over again. Sumner, too, warned against handouts to people he termed “negligent, shiftless, inefficient, silly, and imprudent.”

When Romney simultaneously proposes to cut the taxes of households earning over $1 million by an average of $295,874 a year (according to an analysis of his proposals by the nonpartisan Tax Policy Center) because the rich are, allegedly, “job creators,” he mimics Sumner’s view that “millionaires are a product of natural selection, acting on the whole body of men to pick out those who can meet the requirement of certain work to be done.” In truth, the whole of Republican trickle-down economics is nothing but repotted social Darwinism.

The Gilded Age was also the last time America came close to becoming a plutocracy—a system of government of, by and for the wealthy. It was an era when the lackeys of the very rich literally put sacks of money on the desks of pliant legislators, senators bore the nicknames of the giant companies whose interests they served (“the senator from Standard Oil”), and the kings of finance decided how the American economy would function.

The potential of great wealth in the hands of a relative few to undermine democratic institutions was a continuing concern in the nineteenth century as railroad, oil and financial magnates accumulated power. “Wealth, like suffrage, must be considerably distributed, to support a democratick republic,” wrote Virginia Congressman John Taylor as early as 1814, “and hence, whatever draws a considerable proportion of either into a few hands, will destroy it. As power follows wealth, the majority must have wealth or lose power.” Decades later, progressives like Louis Brandeis saw the choice starkly: “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

The reforms of the Progressive Era at the turn of the twentieth century saved American democracy from the robber barons, but the political power of great wealth has now resurfaced with a vengeance. And here again, Romney is the poster boy. Congress has so far failed to close the absurd carried-interest tax loophole, for example, because of generous donations by Bain Capital and other private-equity partners to both parties.


In the 2012 election, Romney wants everything Wall Street has to offer, and Wall Street seems quite happy to give it to him. Not only is he promising lower taxes in return for its money; he also vows that, if elected, he’ll repeal what’s left of the Dodd-Frank financial reform bill, Washington’s frail attempt to prevent the Street from repeating its 2008 pump- and-dump. Unlike previous elections, in which the Street hedged its bets by donating to both parties, it’s now putting most of its money behind Romney. And courtesy of a Supreme Court majority that seems intent on magnifying the political power of today’s robber barons, that’s a lot of dough. As of May, thirty-one billionaires had contributed between $50,000 and $2 million each to Romney’s super-PAC, and in June another—appropriately enough, a casino magnate—gave $10 million, with a promise of $90 million more. Among those who have contributed at least $1 million are former associates from Romney’s days at Bain Capital and prominent hedge-fund managers.

To be sure, Romney is no worse than any other casino capitalist of this new Gilded Age. All have been making big bets—collecting large sums when they pay off and imposing the risks and costs on the rest of us when they don’t. Many have justified their growing wealth, along with the growing impoverishment of much of the rest of the nation, with beliefs strikingly similar to social Darwinism. And a significant number have transformed their winnings into the clout needed to protect the unrestrained betting and tax preferences that have fueled their fortunes, and to lower their tax rates even further. Wall Street has already all but eviscerated the Dodd-Frank Act, and it has even turned the so-called Volcker Rule—a watered-down version of the old Glass-Steagall Act, which established a firewall between commercial and investment banking—into a Swiss cheese of loopholes and exemptions.

But Romney is the only casino capitalist who is running for president, at the very time in our nation’s history when these views and practices are a clear and present danger to the well-being of the rest of us—just as they were more than a century ago. Romney says he’s a job-creating businessman, but in truth he’s just another financial dealmaker in the age of the financial deal, a fat cat in an era of excessively corpulent felines, a plutocrat in this new epoch of plutocrats. That the GOP has made him its standard-bearer at this point in American history is astonishing.

So why don’t Democrats connect these dots? It’s not as if Americans harbor great admiration for financial dealmakers. According to the newly released twenty-fifth annual Pew Research Center poll on core values, nearly three-quarters of Americans believe “Wall Street only cares about making money for itself.” That’s not surprising, given that many are still bearing the scars of 2008. Nor are they pleased with the concentration of income and wealth at the top. Polls show a majority of Americans want taxes raised on the very rich, and a majority are opposed to the bailouts, subsidies and special tax breaks with which the wealthy have padded their nests.

Part of the answer, surely, is that elected Democrats are still almost as beholden to the wealthy for campaign funds as the Republicans, and don’t want to bite the hand that feeds them. Wall Street can give most of its largesse to Romney this year and still have enough left over to tame many influential Democrats (look at the outcry from some of them when the White House took on Bain Capital).

But I suspect a deeper reason for their reticence is that if they connect the dots and reveal Romney for what he is—the epitome of what’s fundamentally wrong with our economy—they’ll be admitting how serious our economic problems really are. They would have to acknowledge that the economic catastrophe that continues to cause us so much suffering is, at its root, a product of the gross inequality of income, wealth and political power in America’s new Gilded Age, as well as the perverse incentives of casino capitalism.

Yet this admission would require that they propose ways of reversing these trends—proposals large and bold enough to do the job. Time will tell whether today’s Democratic Party and this White House have the courage and imagination to do it. If they do not, that in itself poses almost as great a challenge to the future of the nation as does Mitt Romney and all he represents.

(I wrote this for this week’s “The Nation” Magazine.)

[Jun 25, 2012] Predator Nation


When Charles Ferguson accepted the Academy Award in 2010 for his documentary film Inside Job, he told 30 million people viewing the award ceremony that “three years after a horrific financial crisis caused by massive fraud, not a single senior financial executive has been prosecuted and that’s wrong.”

Two years later, still no prosecution.

So, now Ferguson is out with a book – Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America (Random House, 2012.)

It reads like an indictment. Check that. It reads like a number of indictments. And Ferguson is hoping that federal prosecutors will pick up the book and get some ideas.

And why exactly have there been no prosecutions of high level Wall Street investment bank executives? Politics? “Not exactly,” Ferguson says.

“It’s important to bear in mind the direct personal incentive structures of many of the people involved,” Ferguson told Corporate Crime Reporter last week. “The revolving door phenomenon now effects the Justice Department and federal prosecutors to a very substantial extent.”

“The previous federal prosecutor for the southern district of New York, Mary Jo White, now does white collar criminal defense and makes a great deal more money than she did as a federal prosecutor. I think that phenomenon is very well entrenched, very thoroughly entrenched.”

“Indeed Lanny Breuer, the Assistant Attorney General for the Criminal Division was head of the white collar criminal defense practice at Covington & Burling. They represent most of the major banks and investment banks in the United States.”

And his boss, Eric Holder, the Attorney General, came from the same firm.

“Exactly,” Ferguson said. “So, when you say politics, you sort of think of Republicans, Democrats, ideology, large scale political and policy debates. I don’t think that’s the only thing going on here. I think you have to consider incentives – individual, personal, financial and professional.”

When Rudy Giuliani was U.S. Attorney, he had no qualms about prosecuting Michael Milken. What has changed?

“One thing that has changed is that the amount of wealth and political power held by the financial sector has gone up by at least an order of magnitude,” Ferguson said.

“Another thing that’s changed is the amount of money that the financial sector spends on politics and acquiring political power and influence has also gone up by at least an order of magnitude.”

“And thirdly, the divergence, the difference between public sector salaries and incomes and private sector salaries and incomes has widened enormously.”

“So again, for those at the level of large scale political behavior and at the level of individual incentive, things have changed dramatically since the 1980s.”

As an undergrad, Ferguson studied mathematics at the University of California Berkeley and went on to study political science at MIT.

He then went on to organize an early software company – Vermeer Technologies – which was sold in 1996 to Microsoft for a reported $133 million.

He was an early fan of President Obama.

“I donated my legal maximum to his campaign in 2008,” Ferguson says.

But at a press conference in October 2011, Obama addressed the question of why no high level Wall Street executive has been prosecuted.

“So, you know, without commenting on particular prosecutions– obviously, that’s not my job, that’s the attorney general’s job – you know, I think part of people’s frustrations, part of my frustration, was a lot of practices that should not have been allowed weren’t necessarily against the law, but they had a huge destructive impact,” Obama said.

Here is how the banker's game works

Here is how the banker's game works:

  1. Get the government to issue some currency (cash -- paper or reserves at the central bank -- reserves are government issued cash central bank deposits).  Government issued cash is around 5% of the currency (money) supply.  The government issued currency is put into circulation by the government simply spending it
  2. The rest (95%) of the currency is issued by the private banks.  Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy.  Note that this newly created money (currency) is put into circulation by the borrower spending it.  Most currency (about 95% America's currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation.   The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means less currency in circulation in the economy.

    Accumulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans.  Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).

  3. The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.
  4. The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid.  Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.
  5. Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable.  The recession becomes a depression now.
  6. The bankers then have to decide how to "reset" the system.  One way to reset the system is to let the depression takes its course.  But of course this path is very chaotic because people lose jobs and may become violent.  Once most debts are cleared lending can start again and the currency supply is replenished.   Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again.  This is the great depression scenario.
  7. Another way to "reset" the system is to get the government to print too much money and spend and destroy the currency and blame it on the government.  This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again.  For example, the Argentine economic crises with hyperinflation (1999 - 2002).
  8. The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people.  By the way this is a global game.  This is the only system around no matter what country you are in.   The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).
  9. We need a currency system where money is spent into existence and does not need to be lent into existence so the economy is never starved of currency in circulation.

For more details on this stuff please read the following articles in order listed below:

Mansoor H. Khan

greg said...
This is a nice summary. The power of finance is really naked now, and it is ripe with the stink of fraud. Also, finance is overextended, and its institutions no longer able to support themselves without the fraud, and other help. Thus the necessary co-opting of the government. See:
Will the people open their eyes, or more correctly admit to seeing what has been before them the whole time?

For a nice video exposition of the problems with the current system, see:

Money as Debt:


Money as Debt II:

(Meant to publish this here the first time!)

November 8, 2011 1:23 AM  
George May said...
Excellent summary. The matrix is real. You are only a battery to them. They own the media. They put the population to sleep through media monopoly. For them, the meaning of your life is to be born and then to borrow for mortgage, borrow for consumption, borrow for business and pay them interest for a lifetime for money that they create out of nothing when you borrow. It is financial slavery! You work for them your entire life. The taxes you pay mostly goes to pay interest!

Any government that does not let them do this to their people is the enemy! Economic sanctions will be applied and when their economy fails because of isolation, they will be pointed out as a failure. If they don't crumble economically, then it is war that topples them.

Google for "How do banks create money" to understand the world wide slavery.

Entire money supply is debt. It is the principal we borrowed. But banks demand that it is paid with interest. It is not possible for every borrower to be employed at levels that enables them to earn principal + interest. Because the interest portion is not created yet. It is only created with more borrowing. The inflation created by money creation of banks punishes savers and forces more people to borrow. New money is used to pay old debt. When we run out of borrowers, it crashes.

New money that is created in a society should belong to the society. It should not belong to private bankers. Thus, if any interest is to be paid, it should be paid to the people, not to the private bankers. A solution is to require 100% fractional reserve. Let treasury print principal + interest when a loan is made. Principal is loaned out to the borrower. Interest portion is spent in place of taxes. principal + interest is available to earn. When interest is paid back, destroy it.

Current system requires perpetual debt since existing debt cannot be paid without further borrowing. Banks can at will withold loans and create a depression. Then they will make loans to their friends and withold loans from competitors. When competitors who cannot access loans go bankrupt, they are bought by the friends pennies on the dollar. This way the banking cartel gains control of the media and other industries. This is a ponzi scheme but when it goes bust, they get bailed out at tax payer expense because they have the congress and the government in their pocket.

Last but not least, if banks did not create money out of nothing when they made loans, then home prices would be lower and savers would afford them cash down. This is because when 30% of the population works in financial services, the other 70% has to work harder to feed the 30%. If financial services is reduced to 1% just like farming, then they will be employed at more productive tasks (building homes?) and the burden on the 70% will be reduced.

This usury scheme is the reason why we want democracy when a dictator goes out of line. What we have is the dictatorship of the rich. Using their media monopoly they ensure that all presidential candidates are on their boat. Without their blessing, nobody can get elected to the public office!

Those of you who are defending this system really are defending your own slavery.

No one is more of a slave than he who thinks himself free without being so. - Goethe

Google for "How do banks create money" if you don't know about money mechanics.

November 14, 2011 6:47 PM  
George May said...
Here is how banks create money:

November 14, 2011 6:50 PM  
Martin Gercsak said...
Resetting the system is not that easy and the bankers don't have that much control over it as stated. Japan is a good example how money printing and stimulus with bridges to nowhere doesn't help.

The credit system is based on a willing borrower and a willing lender. The trick is to exploit the general population while they willingly participate. But when people become pessimistic about the future and don't want to take loans this breaks down.

Hyperinflation has nothing to do with a credit bubble. In all the hyperinflation events in the past the government just printed money to pay its bills. In a credit based system it's not a solution because central banks create new money by buying IOUs and not literal printing. There is a tipping point where central banks buy too much worthless IOUs and the bond market panics. This results in everybody dumping their bonds which means very high interest rates and money supply contraction. There is no solution other than the depression running its course. Either by a crash (1933) or by a thousand cuts (Japan since 1989).

The bankers just do what seems to be their best short term interest. But they are just as clueless as the general population. Most Lehman executives lost everything they had (by taking loans against their Lehman stock holdings). Now how stupid is that from a risk management perspective?

November 16, 2011 5:53 AM  
Mansoor H. Khan said...
I left the following comment on Martin Gercsak blog in response to the above comment:


thanks for commenting on my blog.

did you read about an alternative financial system I proposed that is NOT based on lending?

We do not have to live this way where our currency supply is "borrowed" into existence where we must continually pay rent on it (interest charges). We can simply have our government spend currency (not lend) into the economy. We don't need to suffer deflation (reduction of circulating currency) to "reset" and have a disaster.

Banker's want us to live in this matrix where we must borrow our own currency into existence. We can and (god willing) one day we will break out of this matrix.

Mansoor Khan

November 16, 2011 6:40 AM  
Mansoor H. Khan said...
I made the following comment Rodger Malcolm Mitchell's recent very relevant blog post:

Mansoor H. Khan says:
November 16, 2011 at 3:53 pm
You should think of yourself as doing what Martin Luther (1483 – 1546) did to the Church (reformation). The global banking cartel is just as powerful. Prominent orthodox economists are priests on their payroll or at least too scared to speak up.
This stuff is not that hard to get. Keynesian Economics + MMT + MS are all very clear and consistent. I find it very hard to accept that prominent economists and president’s advisers are that stupid.

Mansoor H. Khan

November 16, 2011 7:16 PM  
Mansoor H. Khan said...
I made the following comment on Naked Capitalism today:

mansoor h. khan says:
November 16, 2011 at 6:37 pm

glass steagall and low quality lending is part of the game:

read how the game works:

Mansoor H. Khan

November 16, 2011 8:25 PM  
Mansoor H. Khan said...
F. Beard made the following comment and I responded to it today:

F. Beard says:

November 16, 2011 at 7:58 pm

Yes, inter-bank lending creates a banking system. So eliminating a government provided lender of last resort and government deposit insurance is essential to crushing the counterfeiting cartel. As for the need for the public to store its fiat safely that should be provided by the government itself since it creates fiat and is thus a risk-free place to store it.

mansoor h. khan says:

November 16, 2011 at 8:43 pm

F. Beard,


I can feel the countdown to cartel’s day of judgement.

Mansoor H. Khan

Additionally (I would like to add):

Ravand (the evil banking cartel which has stolen from the common man for centuries) is about to get an arrow in its heart (the arrow is modern monetary theory, MMT, knowledge spreading through the internet).

Just like the power of the church was destroyed by the Gutenberg printing press. The power of this evil global cartel will be destroyed by the internet (god willing).

Mansoor H. KHan

November 16, 2011 10:24 PM  
Mansoor H. Khan said...
On November 14 I made the following comment on the New Arthurian Blog:

Mansoor H. Khan said...

you are correct but only partially. Fewer net loans cannot continue for too long unless the government continues to deficit spend which it will not as much if the tea party republicans get their way.
The bankers will reset the system soon since the whole idea for them is to not let the gov issue much currency so they can issue as much as they can and get interest income on it.

[Apr 01, 2012] How a Financial Products Agency Could Protect Investors By

March 31, 2012  |

THE Food and Drug Administration vets new drugs before they reach the market. But imagine if there were a Wall Street version of the F.D.A. — an agency that examined new financial instruments and ensured that they were safe and benefited society, not just bankers.

How different our economy might look today, given the damage done by complex instruments during the financial crisis.

And yet, four years after the collapse of Bear Stearns, regulation of these products remains a battleground. As federal officials struggle to write rules required by the Dodd-Frank law, some in Congress are trying to circumvent them. Last week, for instance, the House Financial Services Committee approved a bill that would let big financial institutions with foreign subsidiaries conduct trades that evade rules intended to make the vast market in derivatives more transparent.

Which brings us back to the F.D.A. Against the discouraging backdrop in financial oversight, two professors at the University of Chicago have raised an intriguing idea. In a paper published in February, Eric A. Posner, a law professor, and E. Glen Weyl, an assistant professor in economics, argue that regulators should approach financial products the way the F.D.A. approaches new drugs.

The potential dangers of financial instruments, they argue, “seem at least as extreme as the dangers of medicines.”

They contend that new instruments should be approved by a “financial products agency” that would test them for social utility. Ideally, products deemed too costly to society over all — those that serve only to increase speculation, for example — would be rejected, the two professors say.

“It is not the main purpose of our proposal to protect consumers and other unsophisticated investors from shady practices or their own ignorance,” they wrote. “Our goal is rather to deter financial speculation because it is welfare-reducing and contributes to systemic risk.”

It is a refreshing rejoinder to the mantra on Wall Street — and in some circles in Washington — that financial innovation is always good and regulation is always bad. Bankers often argue that complex financial products are among America’s great inventions.

But given that exotic instruments played a central role in the credit crisis, it is worth questioning the costs and benefits of such financial innovations. The paper by Mr. Posner and Mr. Weyl provides a basis for what could be a productive dialogue.

“We tried an experiment with a very radical form of deregulation that has very little basis in sound economic science,” Mr. Weyl said in an interview last week. “What we’re advocating is to do the best we can to put the genie back in the bottle.”

FIRST, their paper says, we should distinguish between financial markets — where institutions lend money, trade securities and make investments — and the real economy, where people trade goods and services.

“It is tempting to think that if the real economy should be largely unregulated (as it is), then the financial markets should be as well,” the professors wrote. But that view, they went on, is wrong.

Instead, they advocate testing new financial products for social benefits. For example, financial instruments could be judged by whether they help people hedge risks — which is generally beneficial — or whether they simply allow gambling, which can be costly.

The instruments could also be measured for how they affect capital allocation, and whether they might add useful information to the marketplace.

The professors note certain instruments that they say have added little to society. Among them are credit default swaps, which were devised in the 1990s and became enormously popular.

The paper concludes that credit default swaps have considerable drawbacks. Those who use swaps to hedge their debt holdings, for example, assume the risks of dealing with counterparties. Swaps also contribute little to the appropriate allocation of capital, the professors say, because investors use them to take positions on debt that is already outstanding. And the paper dismisses the notion that such swaps provide significant information to the market about the safety of underlying debt.

Imagining a credit default swap being brought before a financial protection agency, Mr. Posner and Mr. Weyl wrote: “We would expect the F.P.A. to treat it skeptically.”

Alternatively, the professors point to a type of derivative that lets homeowners hedge exposures to real estate. These derivatives are potentially good for society because they can offset losses if housing prices fall, Mr. Posner and Mr. Weyl say, reckoning that the instruments have had a positive effect for those who have used them. But unlike credit default swaps, they have gained little traction in the market.

The professors also question the central tenet of the nation’s financial regulatory framework — that full disclosure provides enough protection for investors.

“My major concern about Dodd-Frank is that the basic philosophy behind it is to improve disclosure, the traditional way of addressing market failures in a way that is thought to be helpful but not too intrusive,” Mr. Posner said last week.

But disclosure alone isn’t enough in the pharmaceutical industry, he said, and the same view should be applied to finance.

“In pharmaceuticals, we could allow a company to sell whatever it wants as long as it tells people the product might work but also might cause your head to fall off,” Mr. Posner said. “We don’t do that because people will ignore the information, so we draw the line and say, ‘You can’t buy that product.’ ”

Mr. Posner and Mr. Weyl say they know full well that their proposal will upset the wizards of Wall Street and their fans, which include many in the regulatory arena. The professors also recognize that their proposal, if enacted, would encourage financial activity to move overseas in order to evade oversight.

But this challenge faces any type of financial regulation, and the professors suggest that it could be solved by coordination with other countries having large financial centers.

THE proposal by Mr. Posner and Mr. Weyl is unlikely to get off the ground anytime soon. But if their ideas open a discussion about measuring the social costs of our financial products, that alone would be a step forward.

[Sep 28, 2011] Michael Hudson Debt Deflation in America

naked capitalism

Is the European Central Bank part of the government, or is it privately owned?

It’s government-owned, but Europe’s governments themselves are being privatized by a financial oligarchy. The Europeans can’t imagine a private central bank – at least, not yet. So it is a government body, but it’s independent of the government. It’s run by bank officials, not by elected officials or by parliament, although its heads are appointed by parliament. So the situation there is very much like the Federal Reserve here. Bankers in effect have a veto power over any bank officer that does not act as a lobbyist to defend their interests vis-à-vis the rest of the economy.

The kind of administrators that are going to get appointed either to the U.S. Federal Reserve or to the European Central Bank are those with financial experience that can be got only by working for the big banks. Heads of the Federal Reserve, for example, are basically appointed from Goldman Sachs to act as their lobbyist, as Tim Geithner did when he ran the Federal Reserve Bank of New York. His first concern was to bail out the big banks and Wall Street, shifting the loss onto taxpayers.

The kind of people who are appointed to any central bank are former bankers who have the worldview of the financial sector – or brainwashed professors such as Ben Bernanke at the Fed. Their worldview is that no matter what happens, the banks have to stay solvent for the economy to operate. But this view shrinks the economy keeping the debts in place, so that is the basic internal contradiction at work.

Well, the banks now, if they’re buying a bond of Greece or somewhere else, all of a sudden they have to pay huge risk insurance premiums in order to protect themselves against the fact that Greece may simply say, “Look. We don’t have enough money to pay the bonds.”

And this brings up the other moral issue that’s being talked about here. To what extent should a country impose austerity and even depression on itself – more than a great recession, an entire lost decade on itself – simply to pay interest to bondholders who’ve been financing a fiscal system that hasn’t really taxed the rich in Greece?

The countries that are in trouble were fascist at one point – Spain under Franco, Portugal, Greece under the Colonels. Right-wing military dictatorships put in place tax systems that favored the rich and avoided taxing real estate or financial wealth. You could think of these tax systems as the Republican Party’s dream, or for that matter that of the Obama Administration’s Wall Street backers. Shifting the tax burden onto labor and industry seems to be the direction in which the world is heading these days. That is what is causing such trouble for countries going neoliberal, that is, favoring a financial oligarchy.

[Jul 23, 2011] Matt Stoller Dodd-Frank Made No Structural Changes to Banking System « naked capitalism

By Matt Stoller, a Roosevelt Institute fellow (on Twitter at @matthewstoller). Cross posted from New Deal 2.0

A former Congressional staffer sees Dodd-Frank as a lost opportunity to rebuild a financial system in line with public needs.

I was a staffer on the Dodd-Frank legislative package, and the whole process seemed odd from the very beginning. There was no attempt initially to ask the question, “what happened and what should we do about it?” There was no examination of the purpose of a banking system, and how to rebuild a system that aligns the public with the financial industry. There was no attempt to build legitimacy through a public education campaign about what Congress and the administration was doing, and why. Instead, legislators and very serious men in suits started throwing around terms like “systemic risk regulator” and “resolution authority”, and then used the idea of a Consumer Financial Protection Bureau as a palliative for liberals.

My specific focus on the bill was the provision to audit the Federal Reserve, which was one of the bright spots (another could be the Consumer Financial Protection Bureau). This provision opened up the Fed’s emergency lending facilities and its discount window to the spotlight, allowing for the beginning of a real debate over our monetary system. But overall, the Dodd-Frank bill was significant for its lack of significance.

In retrospect, this was by design. Congress created a panel — the Financial Crisis Inquiry Commission — to examine the cause of the financial crisis. But this panel had a mandate to deliver its recommendations after the passage of Dodd-Frank. In other words, Congress and the administration did not design Dodd-Frank to prevent another financial crisis. So what was the purpose of the bill? I suspect this can only be answered by looking at the overall policy thrust of the government since the beginning of the financial crisis.

The clearest explanation is by Roosevelt Institute Fellows Tom Ferguson and Rob Johnson in their series on the Paulson Put. While a shadow bailout took place through the Federal Home Loan banks and the Federal Reserve from 2007 onward, eventually a fiscal and regulatory solution would become necessary. The first significant legislation in this thrust was the famous Bazooka bill (or Housing and Economic Recovery Act) signed in June 2008 that allowed Treasury Secretary Hank Paulson to take over and pump unlimited sums into Fannie and Freddie. The second was the TARP. Both of these bills were pivotal to providing the government with enough firepower to overcome the solvency crisis.

After the immediate crisis was contained, losses were socialized, and profits returned to financial executives, Congress had to put together a “solution”. It would have a giant bite at the apple in restructuring our regulatory apparatus. But in order to perpetrate the oligarchic banking structure, it would be important that no structural changes to the industry be implemented. Not one regulator was fired for his or her part in the crisis. The Justice Department adopted a posture of legalizing financial control fraud by refusing to prosecute anyone involved in the meltdown, and continues to allow millions of cases of foreclosure fraud to continue. Ben Bernanke was renominated, and the administration fought a bitter below-the-radar battle to secure his confirmation. With a few modest exceptions, the risk-taking and leverage in our financial markets continues apace, and the deregulatory neoliberal mindset is still dominant. The Federal Reserve has been audited, but the system is now accountability-free for high level operatives in finance and politics. And now that Elizabeth Warren has been thrown overboard by the administration, the lockdown of the financial system is nearly complete.

And mostly, that’s what Dodd-Frank accomplished. It rearranged regulatory offices and delivered a new set of mandates, but effected no structural changes to our banking system. Congress never asked what happened, or why, or even, what kind of banking system do we want? And that’s because Obama’s Treasury Secretary already had the answers to these questions.

The one dangling thread, and this is what worries the administration, is the housing market. But we’ll save that problem for another day.

[May 01, 2011] Sachs: The Global Economy’s Corporate Crime Wave

Economist's View
Jeff Sachs says rich countries should not be "pointing the finger at poor countries" over corruption:
The Global Economy’s Corporate Crime Wave, by Jeffrey D. Sachs, Commentary, NY Times: The world is drowning in corporate fraud, and the problems are probably greatest in rich countries – those with supposedly “good governance.” Poor-country governments probably accept more bribes and commit more offenses, but it is rich countries that host the global companies that carry out the largest offenses. ...
Hardly a day passes without a new story of malfeasance. Every Wall Street firm has paid significant fines during the past decade for phony accounting, insider trading, securities fraud, Ponzi schemes, or outright embezzlement by CEOs. ... There is, however, scant accountability. ... When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price. ...
Corporate corruption is out of control for two main reasons. First, big companies are now multinational, while governments remain national. Big companies are so financially powerful that governments are afraid to take them on. Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or ... beneficiaries of corporate profits. ...
Even if governments try to enforce the law, companies have armies of lawyers to run circles around them. The result is a culture of impunity, based on the well-proven expectation that corporate crime pays. ...
So the next time you hear about a corruption scandal in Africa or other poor region, ask where it started and who is doing the corrupting. Neither the US nor any other “advanced” country should be pointing the finger at poor countries, for it is often the most powerful global companies that have created the problem.

[Mar 29, 2011] Complexity and War or How Financial Firms Wreck Economies for Fun and Profit

There’s a great post up, “Human Complexity: The Strategic Game of ? and ?,” by Richard Bookstaber, former risk manager, author of the book A Demon of Our Own Design and currently an advisor to the Financial Stability Oversight Council. As insightful as it is, Bookstaber does not draw out some obvious implications, perhaps because they might not be well received by his current clients: that the current preferred profit path for the major capital markets firms is inherently destructive.

I suggest you read the post in its entirety. Bookstaber sets out to define what sort of complexity is relevant in financial markets:

The measurement of complexity in physics, engineering, and computer science falls into one of three camps: The amount of information content, the effect of non-linearity, and the connectedness of components.

Information theory takes the concept of “entropy” as a starting point: essentially, the minimal amount of information required to describe a system. Related to this is a measure called thermodynamic depth, which looks at the energy or informational resources required to construct the systemic. The idea is that a more complex system will be harder to describe or to reconstruct, though this is problematic because it will look at random processes as complex; for example, by these sorts of measures a shattered crystal is complex….

Non-linear systems are complex because a change in one component can propagate through the system to lead to surprising and apparently disproportionate effect elsewhere, e.g. the famous “butterfly effect”….

Connectedness measures how one action can affect other elements of a system. A simple example of connectedness is the effect of a failure of one critical node on the hub-and-spoke network of airlines. Dynamic systems also emerge from the actions and feedback of interacting components….

The definition you use depends on the purpose to which you want to apply complexity. For finance, several of these measures of complexity come into play. There are non-linearities due to derivatives. Connectedness comes from at least two sources: the web of counterparties and common exposures. Exacerbating all of these is the speed with which decisions must be made.

So far, so good. Then we get to this:

Also, because economics and finance deal with human-based rather than machine-based systems, our tendency to operate based on context will invariably lead the conventional tools used to solve complex physical systems to miss the mark.

I’m not at all certain that context is the most important driver. What seems to be germane is limited cognitive capacity. Herbert Simon (who Bookstaber invokes elsewhere in this piece, but not on this issue) was keenly interested in the limitations of human intellectual capabilities: that we could only consider a limited number of issues at the same time, that it takes a certain amount of time to access long-term memory, etc. As a consequence, humans are inherently severely reductivist in the way we approach reality. We are strongly disposed towards storytelling as a way to organize information; models are another compensatory device.

Back to Bookstaber:

But another important point for finance which makes complexity differ from its physical counterparts is that in finance complexity is often created for its own sake rather than as a side-effect of engineering or societal progress. It is created because it can give a competitive advantage.

This is arguably true but is actually far too kind to financial firms. “Competitive advantage” implies that they need to offer newer, better, fancier gizmos just as cell phone makers have sought to meet or better yet leapfrog the iPhone. But “better” in terms of market share and appeal to customer, would in many cases imply simpler rather than more complex.

As we wrote in ECONNED:

But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.

Complexity is central to financial services firm rent seeking. And it is pervasive. It’s not just CDOs or customized derivatives. A credit card agreement in 1980 was one pretty understandable page. With all the relevant sections, they are now thirty often incomprehensible pages.

And the reason complexity is bad is that system-wide, it creates unknown unknowns:

A complex system is one that is difficult to understand and model; as complexity increases, so do the odds of something unanticipated going wrong. This is the driving characteristic of complexity that is most important for finance and economics: complexity generates surprises, unanticipated risk. “Unanticipated” is the key word: it is not simply that more complexity means more risk — we can create risk by walking on a high wire or playing roulette. Rather, it is that complexity increases risk of the “unknown unknowns” variety. And the risks that really hurt us are these risks, the ones that catch us unaware, the ones we cannot anticipate, monitor or arm ourselves against. Simply put, a system is complex if you cannot delinate all of its states. You may think you have the system figured out, and you might have it figured out most of the time, but every now and then something happens that leaves you scratching your head. This is an epistemological interpretation of complexity. It defines complexity as creating limits to our knowledge. Neoclassical economics does not admit such complexity.

If the states in a system can be determined in a sufficiently short time frame, it is not complex, even though doing this may require more analytics and computer power. So complexity is measured by the increased risk of surprising modes of failure and propagation. This means a complex system can be defined as one that cannot be solved, whose effects under stress cannot be anticipated….

We cannot think about complexity without reference to time frame. A problem might be complex if we only have a few seconds to respond, but not complex if our time frame is one or two months. If we have enough time to solve a problem and understand and anticipate all of its possible outcomes, then it is no longer complex even though, to restate the point, it might be costly to solve and monitor, it might have random results (random but where we can know all of the possible states and assign probabilities to each one), but it no longer can lead to surprises.

This importance of time frame is the reason we have to look at complexity and tight coupling jointly. Tight coupling means that a process moves forward more quickly than we can analyze and react….

A second characteristic for complexity in economics, and finance in particular, is that it is not exogenous, simply sitting out there as part of the world. We create it ourselves, indeed often create it deliberately, and create it expressly to harvest the attendant unanticipated risks.

Bookstaber goes from this to argue that game theory is inadequate to describe the resulting interactions because games always have rules, whereas in markets, participants often break rules or understandings (insider trading, securitization sponsors failing to adhere to the terms of pooling and servicing agreements, major banks giving big institutional investors crappy execution on foreign exchange transactions, to barely scratch the surface). He contends that the best model is warfare, which of course appeals to the macho self image that most Wall Street denizens harbor.

But what are the characteristics of war? Unless the engagement is via proxies or a mere skirmish, it involves a serious commitment by both parties, usually so substantial that neither side can readily withdraw (both that it has put its prestige at risk, so that the usual “sunk cost” analyses are put aside, or that withdrawal is tantamount to capitulation and allows the enemy to inflict additional costs (via conquest or a punitive peach treaty) which could be catastrophic, at least as far as the leaders are concerned. War by its nature is potentially a test to destruction. And that is precisely how the banks have played it. And they can escalate their degree of commitment and the damage ultimately done, by virtue of having state guarantees.

So Bookstaber’s analysis provides further confirmation for what we have long said: the only way to allow banks to have their activities backstopped is to have their risktaking severely constrained. They need to be operated like utilities, with extensive regulation and oversight, and excess profits should be seen as probable evidence of rule breaking and investigated. You don’t want a terribly efficient financial system; highly efficient systems are prone to breakdown. Formula One cars only run one (at most) race, and reader vlade reminded us that cheetahs have the same problem:

You’re the fastest meanest thing on earth (and with the least fat), but if you don’t eat for three days, you die.

If a kick from your next meal breaks your leg, you die (of hunger). If you run for too long, you die (of overheating). If you run and can’t rest afterwards, you die (of overheating). If (a lot of things goes here) you die.

Cheetah is sexy, hyena isn’t – but if I was to bet on a long-term survival of one, I’d back hyenas (in fact, a cheetah will give up its kill to a hyena, because it cannot afford any injury in a fight)

The people who are close to the problem, like Bookstaber, keep providing compelling information that we need radically different approaches to managing financial firms than the ones we have now. But it is pretty clear that the officialdom has decided the time for action has past (except in the UK, where an epic battle is underway, much to the consternation of banksters). We can only hope in the wake of the next crisis (because crisis is the inevitable result of the current model) that the nation’s leaders have the will to leash and collar the banks.


Another great posting, Yves. Thanks for your ongoing efforts.

I agree with your call for controlling many aspects of banking as a utility. You said, which bears repeating: “They need to be operated like utilities, with extensive regulation and oversight, and excess profits should be seen as probable evidence of rule breaking and investigated.”

This is true for the communications businesses also. The utility or “bit pipe” service they provide needs to be separated from the “value adding” programming and controls.

My solution to keeping government evolving as society evolves is to make voting mandatory and “voluntary” social/government service and some level of education mandatory as well. We have shown as a society that we can make progress but then complacency sets in and what was a groove becomes a rut.

As you said, we can only hope.

[Mar 26, 2011] Do We Need Big Banks? by Mark Thoma

March 18, 2011

As I've noted in the past, there is little evidence that we need mega-size banks, but they do come with costs, so why allow them?:

There is no convincing evidence that banks need to be as large as allowed under the Dodd legislation for the financial system to function efficiently. However, limits on bank size may not protect the financial system from a meltdown. If small banks are exposed to common risks or sufficiently interconnected, then many small banks could fail simultaneously and mimic the failure of a large bank, something that has happened in the past.

Reducing size is no guarantee of safety. But limiting bank size does limit the political power of financial institutions. Imposing regulations such as strict limits on leverage is much more difficult when banks are politically powerful, and that alone is sufficient reason to enact strict limits on bank size.

Do we need banks to be as large as they are?:

Do we need big banks?, by Asli Demirgüç-Kunt and Harry Huizinga, Vox EU: In recent years, many banks have reached enormous size both in absolute terms and relative to their national economies. By 2008:

Large banks tend to be too big to fail, as their failure would have hugely negative repercussions for the overall economy.

Saving oversized banks, however, may ruin a country’s public finances (Gros and Micossi 2008). Take the example of Ireland; this country provided extensive financial support to its large banks and subsequently had to seek financial assistance from the EU and the IMF in 2010. The public finance risks posed by systemically large banks suggest that such banks should be reduced in size.

Further evidence against big banks can be found from studies on banking technologies. Berger and Mester (1997) estimate the returns to scale in US banking using data from the 1990s, to find that a bank’s optimal size, consistent with lowest average costs, would be for a bank with around $25 billion in assets. Amel et al. (2004) similarly report that commercial banks in North America with assets in excess of $50 billion have higher operating costs than smaller banks. These findings together suggest that today’s large banks, with assets in some instances exceeding $ 1 trillion, are well beyond the technologically optimal scale.

The public finance risks of large banks and findings on banking cost structures together present a strong case against large banks. All the same, further evidence on how large banks perform relative to small banks is warranted to inform the debate on bank size. Additional insight is useful before one passes judgment on whether systemically large banks should be regulated or taxed out of existence.

» Continue reading "Do We Need Big Banks?"

[Feb 03, 2011] Josh Rosner and Yves Smith on Radio Free Dylan Dylan Ratigan

It's much better to listed to actual interview. "Yves you get the last word as we wrap this up. Can it be addressed? YVES:  In theory it could be, in practice it gets to a point where you were saying about how embedded what amounts to this financial all the gooks are, I don’t see the political will..."

DYLAN:  Welcome to episode 25 of Radio Free Dylan. This perhaps the most controversial pairing that we’ve had at this point and two of the folks that I would say who have been not only the smartest but the most granular. They have been the most effective not only at educating people like myself but I believe educating our politicians and anybody who has taken the time or the interest to understand just how deep the dysfunction corruption, fraud and distortions are in our banking system, in the relationship between our banking system and our government. And I m delighted to be able to not only welcome one of them but both of them into the same room.

I truly think that if you haven’t  have a type to truly understand the core dysfunction of the root whether it’s in the accounting domain or the incentives, the relationships between the government and the banking system, these two people are better informed and more effective at articulating it than any two I know. Not just me, they would offer this endorsement if you listen to our most recent podcast with Brad Miller who serves obviously in our congress out of North Carolina. When asked who he looks to for guidance to understand legislatively, how to approach the American banking system and of course Congressman Miller made the point that so few of the people in our congress in 2008 had a clue as to how the financial system had been constructed. Brad Pointed to Josh Rosner and Yves Smith.

And Josh and Yves join us now, Josh is of course the managing director, Gram Fischer & Company and author of my favorite paper 50 years at 50 Bases points, A Simple Solution to the Global Financial Stress, although I don’t think it’s going to happen anytime soon. Yves Smith runs one of the most successful, most widely read by the most influential people in this country including Brad Miller, Naked Capitalism. She is also author of Econ, How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. And I am pleased to both of you.

Before we get into this sort of rude aspect of this Josh, get us up to speed today as to where we stand in terms of the level of dysfunction in our current system.

JOSH:  Well we stand with the housing market that still has over 11 million homes that are going to ultimately have to be foreclosed, resold, modified worked out. We have a government that has spent the better part of three years not really addressing either a holistic approach to help keep borrowers in their homes or make sure that investors who owned mortgage backed securities backed by those were protected from harm by the banks who service those and may also own second leans that they’re carrying artificially high values. We’ve got a government that theoretically is investigating document fraud, robber signing fraud and origination issues and servicing fraud who to my understanding has really not done any granular investigation over mortgage loan files.

There has been very little discussion. We’ve got 50 state AGs who are in the process of doing an investigation and looking for a settlement even though again there have been very few subpoenas. And my understanding is there’s been very little actual granular investigation of behaviors of the parties involved. And that’s where we are which is a wonderful attempt to put lipstick on a pig as it’s said and not really addressing the underlying problems which keeps our economy in peril and the ultimate cost of finally coming to resolution rising.

JOSH:  If you could connect the dots for us between the massive wave of unemployment in this country, the massive disruption in the housing market in this market in this country and the exquisitely high bonuses that continue to be collected at the top of America’s biggest banks.

YVES:  So you almost have to go back 30 years to see the roots. We used to have an economic system in which the primary goal of policy was to make sure that we had rising average worker wages and things like growing trade deficits would have been seen as a course for alarm because that would basically mean that US demand was leaking to employment overseas and not supporting US workers. It sort of started in the Carter administration but it really came flow blow in the Reagan administration and has continued till today that we now have a philosophy that anything that happens is a result of market activity is good and will somehow be rationalized.

In fact Reagan ironically wasn’t always nearly true to his doctrine and some later president would have been. When unemployment went over 8%, he in fact became quite alarmed and engaged in radical market interventions among other things to drive the dollar which was very high at the time back down.


But what’s happened is we’ve had over the last 30 years what was first a gradual increase in consumer debt and then a much more rapid increase in consumer starting in 1999, the curve goes parabolic. And it was primarily housing debt and that was the solution for stagnant average worker wages that people were given more access to credit and therefore had improved lifestyles even though they actually weren’t in aggregate making more money. And the problem with consumer debt is that it’s unproductive debt. You get, X possibly investing in education. And effectively consumers hit the point where they could not, that it wouldn’t take much to put them into debts to solve these problems.

We had a time in the early; repeatedly we had times in the early 2000s where the savings rate household savings were zero to negative. That should have been an enormous red flag to policy makers and it was ignored. Instead you saw Greenspan and later Bernanke rationalizing this saying, oh its fine the consumer balance sheets look okay. That doesn’t solve the debt service problem, it doesn’t this so the people will have a way to pay and if anything goes wrong they’re going to be in trouble.

DYLAN:  Josh?

JOSH:  Well this is a bigger piece of the issue which is all of the legislation, all of the rule making, all of our policy goals have really been almost a full departure, 180 degree departure from the traditional notion of the roots of our capitalist experiment. Which is that we that actually save for our economic freedom and instead what we’ve got is we’ve got a society where the regulatory process and the political process has created incentives for people to become indebted. And frankly that’s been a 30 year process I think, Yves is right. And it’s been supported by three secular trends that have been massive trends. Two of them came out of the inflation of the late 70s, one of them is demographics.

So we’ve got the largest generation in American history, the baby boom generation who really was reaching their prime earning capacity coming out of the early 1980s recession. That boosted consumption as the inflation of the 70s we saw wages being outstripped by asset prices. That gave a growth or an impetus to increase the move from one income families to two income families by necessity. And the third is in the late 70s we moved from the old fashioned notion of  charge cards and the old fashioned notion of you do not live beyond your means, you only borrow what you can pay back to consumer revolving credit.

And if you look at the consumer flow for funds data at the Fed it’s really takes off in the late 70s, those three secular trends have been supportive of consumption for the past 30 years, they’re all have reached their terminus. Now we are on the other side of that. Democratization of credit is done, the baby boomers have gone from consumers to having to become generally net savers and we’ve already got two incomes per family and we’re losing those jobs moving back to one. So what are we going to do from here? Are we going to create incentives for people to live beyond their means and imperiling their financial future but also making them wards of the state as they retire with no income and no savings as example the house which is historically has been the largest saving asset for retirement in intergenerational wealth transference asset, which is going to put the Treasury at further peril when those people reach retirement.

Or we’re going to create incentives and turn the incentives backwards from what they’ve been to create a society of people who can afford their own lives rather than binge on debt.

DYLAN:  Yes and we’re going to get into the solution in a second back with Josh and Yves. But for now I want to focus a little bit more on the origins of the problem and specifically Yves how much of a variable has it been in the political culture where one seeks to basically  spend more and tax less as a concept for keeping your own job. In other words the ability for a politician to keep his or her job by empowering policies that allow people to raise their lifestyles while not doing anything to raise productivity and at the same time looking at how profitable that has been for the banking institutions to create that credit an ensure that credit and speculate and gamble around that credit. Just how sinister is that combination of the profitability of credit gambling that was invented in the late 90s under Bill Clinton and the political culture of giving people something to entertain themselves with easy credit while not demanding any productive use of capital?


YVES:  Well you really saw the big shift happen in the 1990s. That was the time when you saw much more aggressive and active financial lobbying and a lot of it was simply not very visible to the public. For example one fact that isn’t widely known is that we had massive derivatives in 1994. In fact the losses across the financial system were actually bigger than in the 1987 crash and there were a whole series of, there was at the time the whole series of investigations and some noise about derivatives reform. And this is well before the creation of credit 00:10:44 which was the sort of centerpiece, one of the centerpieces of this crisis.

And it all came to naught. In fact one of the chief industry lobbyist, Mark Burtell actually drafted some of the subsequent legislation around derivatives. That was when you really saw the embedding of industry lobbyists in the legislative process in a much more fundamental way. And as a consequence we’ve had, you’re correct to say that we’ve heard a legislative policy that has favored financialization. We saw to some degree in response as Josh correctly points out to the inflation sort of overdoing the banks need to have better ways to respond to changes in interest rates that was something banks just had been equipped to do in this old heavily regulated regime. But they went way further than what was necessary to respond to that. [0:11:35] [inaudible] accelerated in the  90s with the sort of no regulation, light to no regulatory  policy is the bias which allows banks to create very complicated products. But frankly the uses of them both the retail uses of those products as well as even sophisticated institutional uses don’t really understand.

The other part of this bias we’ve had in policy has been has unwittingly allowed for corporations to become effectively net savers. The other part that isn’t told is the normal we like to think of an economy working is that how households save because households need to save for retirement and the business sector is supposed to invest. And that’s why we don’t; there is a sort of reflexive response to government money deficit because the fear is it’s crowding out the private sector. But the flipside is that the private sector isn’t doing its job it’s acting like a proper capitalist society. Then you need government to deficit spend because otherwise you’ll have the economy start to contract.

And in fact you have seen big corporations in the United States since the 2000s become net savers and even though small businesses have to some degree taken up the slack they’re just not stable enough enterprises.  They’re the canaries in the coal mine when there is a downturn. So that’s part of why we have such a bad unemployment picture now is that big companies have not become drivers of employment. They have shed jobs basically from the mid 90s onwards.

DYLAN:  How much of this in your view Josh is criminal?

JOSH:  Not [0:13:10] [inaudible] went on TV in terms of the behaviors? Look I think it’s become so embedded in the process. Interestingly it points out Mark Bricked as one of the creators of legislation. He came out of one of the big banks and yet he helped draft some of the derivatives language. We should go one step further because it answers your question. He was then later nominated to become the head of OFEA which was the regulator of Fannie and Freddy who, by the way, would have been the head of the largest users of financial derivatives, who was out of the banks and therefore was very favorable to treatment of derivatives.

So it’s criminal, well I think the system is corrupt. Criminal versus corrupt are two different things. I think we have as we hear from so many including ironically so many in the international financial community, the IMF which I think is starting to have a more realistic view of the problems in the US.  We have become almost a traditional third world relationship between our financial sector and out government sector which is that they are so meshed with each other that the separation of the two is necessary but it’s almost impossible to effect at this time.

Unfortunately Yves as we all know when you go down the third world pathway of integrating the captains of finance in this case with the government then they act collectively in the interest of their own self preservation. That frequently comes at the expense of the vast majority of the people who populate the country in the form of either diminished wages, no housing, no jobs, rising food prices, rising energy prices and ever expanding percentage of the population that’s being exposed to that which is a classic third world corrupt, again chronic capitalist architecture.


DYLAN:   Which we’re watching by the way right now so we’re starting to have a discussion about what are we going to do about the GSE’s going forward? Fannie and Freddy? And the industry, the banks, who for a decade argued that Fannie and Freddy having this special relationship with the government and implied government guarantee was wrong have now, ceded the discussion. They are the only voices in the room.  You’ve got the financial service roundtable, the Center for American Progress, the New York Fed, Mortgage Bankers Association, all of them putting forward positions which are very supportive of a bank view that there needs to not be an implied government guarantee of some part of the mortgage market.

But it needs to be explicit and that the gatekeepers ultimately need to be the private industry i.e. largely the banks. Which is neither good, it seems for the public nor for the investors but they are the only voices being heard in Washington. They are the only voices in the room in Washington. And that actually really needs to be part of the discussion because frankly it sounds great to the public that there is a mortgage market that’s explicitly guaranteed but then why would we have to have private intermediaries that are taking the event?

DYLAN:  Aren’t there really just two theoretically in a purest view if only two ways to run a banking system. either you have a state run banking system that has no accounting standards and no capital requirements but it is run by the government and they decide to rush it up or diminish credit based on the political views whoever is in charge again versions of it in china and other countries or you can have a private banking system in which there are accounting standards and there is integrity for capital and the bankers are responsible for the management of the risk in that capital in what Josh just described and what I have been observing for a few years now is, we appear to have the worst of all worlds and then we have a state run banking system with no accounting standards for which private individuals collect the compensation for running. Is that a fair characterization?

YVES:  There actually is the third, there actually is a third model and we had a version of that in America in after the depression. Unfortunately to your point, we have basically made a decision in advance to economies that we do not let banking systems fail. And we used to have an idea of a bank be much more narrowly defined in terms of an institutions that took deposits from the public that used to be – if you had asked somebody in 2005 if we would have a government bailing out, you know firms like Golden Sachs and Morgan Stanley they would have looked at you crossed eyed, they would have thought that was the most deranged thing you could ever have posited. But we now we’ve flown safety net under a whole bunch of activity because they’ve now been deemed some of them not correctly to be a center to the functioning of the economy. What happed is we shifted a lot of activity, a lot of activity was shifted from traditional banks into credit markets and then when those credit markets started to fail, we wanted to back stopping them but that’s point of whether alternatives, is this the alternative to regular banks like utilities.

We used to regulate financial institutions extremely aggressively and the result was that bankers didn’t make very much money and you didn’t see this brain drain we have of talent from mathematics and the sciences to Wall Street. I mean if you look at the relationship of banker payer, financial services industry pay, to the pay from industry up through ironically up through about 1990, sorry the early 1980s, it was on a par. Literally with the deregulation you saw in the 1980s, you start to see the pay levels and financial services move up in relationship to that of other things you can do in the economy and the gap is just become wider and wider and wider. And this is across all financial…

[0:19:00] [cross talk]

DYLAN:  But isn’t that as they would argue because they create a lot more value for Americans and anybody else?

[0:19:08] [cross talk]

YVES:  The best debunking of that comes from a paper that says everybody ought to read the one stop shooting of that, comes in a paper from the bank of England of all folks by a fellow named Hodain, called the 100 billion dollar question when he says, well we have a financial crisis, they seem to happen about 20 years and the close to this last financial crisis was at least one times global GDP, some people say its about five times but lets just stick – lets be conservative and stick with the one times global GDP because that’s how much it costs in terms of not, all the unemployment and the other non effects that we’ve seen. Well we should really tax the banks for what these losses cost.

That’s what economic said you should do. If we were to tax the largest banks for the cost of the global financial crisis, over 20 years, it would cost over $1.5 trillion a year, the market capitalization of the biggest banks of the world is less than that. That says that they actually destroy value on a massive basis, massive. Their net value destroyers, they are extractive, they are not productive in their current form.


DYLAN:  Quickly then I am going to take a break, we will come back. All right let me take  a quick break here, we are going to come back with what we can do about this if you again weren’t alarmed a few minutes ago when you started listening to this, I hope you are alarmed now. Because its only through coming to truly understand how corrupt the relationship between everybody from the White House in this country, the Democratic and Republican leadership and the head of the financial institutions who are preserving themselves at the expense of American fairness prosperity and future generations and absent interventions collectively by the people outside the political process. It has been made very clear by Barak Obama and his cabinet and everybody in Democratic Republican leadership they have very little to no intention of doing anything other than to continue to lie about this and cover it up unfortunately with modern communication being what it is. I suspect that that is going to be a gross miscalculation on their part in time. We take a break; we are back with Josh Rosner and Yves Smith right after this.

We are back with Josh Rosner and Yves Smith. Josh a Managing Director of Graham Fisheries, Yves runs the incredible financial blog Naked Capitalism, author of Econned; How Unenlightened Self Interest Undermines Democracy and Corrupt a Capitalism. Yves was just telling us Josh that the mathematics when you talk about the necessary subsidies that are paid into the financial systems to pay off the gambling debts that are incurred in this financial crisis that the math works out that this a massive extraction of wealth not just from the American people but the people that is basically being conducted in collaboration with the American government who receives by the way 40% of its political donations from the financial services industries as if the drug dealers in Mexico are buying off the Mexican government. It is not as if, it is, it is and in fact one of the things that’s interesting is we have these notions of well the banking system is so important or the banks are so important or these institutions are systematically significant. Let’s actually stop, step back and drool down on that for a quick second. The historic role of banks were going back to the middle ages to aggregate the capital within a society through deposits taking and allocating that capital for productive ends i.e. the development of the society, farming, whatever it might have been.

JOSH:  Exactly.

DYLAN:  And so there was the value and the understanding and the creation of a central banking community and the central banks job was really to say look, we’ve got capital, we’ve got allocation of capital, the bankers have a special role in our society, they should have a right to earn a fair return for their activity of aggregating and allocating capital. But they also have a social responsibility in that to make sure that the capital is allocated to productive use.

JOSH:  And thus they get massive subsidies from the government and all

[0:23:12] [cross talk]

DYLAN:  Historically correct. What we are talking about is over the past 20 years with the regulation, with the growth of what had previous or prior to this crisis been the emergence of capital markets, what we saw is the banks actually became less and less important because what used to be held in deposits at the banks, ended up being moved over to your pension account, moved over to your market account, to your stock account and so where the banks historically managed your money and allocate, aggregated and allocated it, you became more in control of that. But the interesting thing was that the bank was both a warehouse where there was a whole other risks effectively so it would make this allocation to the firm, to the factory whatever it is and then the risk would reside inside the bank. What you are describing is an environment where now the banks could transfer the risks of default to the capital markets, to the investors…

JOSH:  No, no, I am not even going to securitization yet. What I am saying is the banks used to have your deposits and over the past 20 years, you ended up moving your deposits to Fidelity, The Wellington, to Putnam to the large asset management complexes.

DYLAN:  Understood.

JOSH:  Okay and the banks role therefore was greatly diminished in terms of the aggregation and allocation of capital. As the bankers decided that they were going to do more and more balance sheet lending, which is one with this other consolidation of investment banks into banks, they felt that they didn’t even need the traditional higher value, higher margin intellectual capital advisory businesses where they would do advisory on MNA and then you had mergers and acquisitions et cetera. All of that ended up going to the by side. And so we’ve got a central banking community that doesn’t even understand that the banks ended up because of the fact that they were loan margin players ended up having to take more and more risk to make up for the loss of importance that they had in their core roles.


They became nothing more than utilities too the aggregators and allocators of capital, the big asset managers and so they needed to take more and more risk. We don’t really need the traditional or I should say the new fangled version of the one stop bank or supermarket that we had, it failed and the banks today really have the ability, we put back in their traditional role of the deposit takers, narrow banking. Okay so the notion that they are so vitally important to the system, we keep hearing the bank say but if you don’t have large globally capable banks, then we wont be able to do investment banking deals for large banks. We are used to have very small investment banks and they would syndicate deal.

DYLAN:  Isn’t that what they used to call the syndicate desk?

JOSH:  That is exactly right.

DYLAN:  Isn’t that why there were all those little names on the prospectors?

JOSH:  Bottom of prospectors.

DYLAN:  That was funny.

JOSH: And we can and we should recognize that the proper roles for the banks and the investment banks, is back in narrow banking and even in terms of the investment banking, we don’t need global banks to achieve those ends.

DYLAN:  Can we talk Yves for a second about the President of the United States and his Treasury Secretary? What is your view of how the president and the Treasury Secretary have managed their custody over America finance and financial regulations?

YVES:  Well my personal view is that despite the fact that Obama gets up and occasionally makes comments about – very supportive comments of banks, that he really does not have much interest in those issues. That he – and I am not saying that to defend him in the slightest because you know you show up as your president a disaster happens on your watch, it would be the same to say if a pasifist president showed up and a war happened he better take interest in the war. Instead it appears that Obama significantly dedicated, not significant but pretty much completely abdicated his financial policy to a Larry Summers protégé of Bob – they were both protégé of Bob Rubin. Larry Summers and Geithner, and Geithner is a very much a status quo don’t rock the boat, everything he learnt about banking, he learnt from the banks. He has never been – the closest he has come to be a financial market person is through his time as the New York Fed and New York said, gets all its information from the major dealer bank.

DYLAN:  Right.

YVES:  So he’s always he has grown up being said being educated by the very largest financial institutions in the world and he’s emerged – the kindest you can say about the policy is implemented is that they are a classic victim of what William Buddha a former Central Banker calls a cognitive regulatory capture. They honestly believe what [0:28:04] [inaudible] and the best interpretation you can have and I suspect this is charitable but the best interpretation is that he’s dropped the industry CoolAid and he honestly believes the nonsense they feed him which makes him actually quite dangerous, somebody who is sincerely deluded is much more dangerous than somebody who is cynical and knows that they are talking a line that is politically convenient.

DYLAN:  Your opinion of the treasury, the white house and political leadership on both sides of the island, Josh?

JOSH:  Yeah so they are wonderful at actually talking about how they intend to resolve the crisis. At the same time I had a meeting at the white house towards the end of last year in which we had discussions about the need to force or recognize the problems with second leans and the fact that the…

DYLAN:  Explain what that is quickly.

JOSH:  Well we’ve got a lot of borrowers who are under water in their homes we’ve got a lot of borrowers who frankly if we offered them principal write downs or if we were to expand and support let’s say the FHA short reified program which is to say re-underrate borrowers to a 30 year fixed rate mortgage an LTV of 97% because that could qualify for FHA. FHA is underwriting standards and we do a principal write down that could keep a borrower in their home and get them back to performing. That would be a worthy outcome I would think in most people’s eyes. Now interestingly as much as we talk about Wall Street…

DYLAN:  Including for the lender.

JOSH:  Well that’s where it’s going to go. So we talk about Wall Street in this monolithic view and I would suggest we stop using that word the way we do because when we talk about Wall street, we forget that there’s investors, buyers and sellers of securities who by the way are fuditiaries to the people who’s money they manage and they tend to manage our money. They manage pension assets, they manage – okay that’s very different from the banks, the banks are a little more than weapons suppliers in a war.


That’s what we are talking about when we say Wall Street. So the mortgage bonds investor who owns the your pension fund, who owns the pool of mortgages that would actually be exposed to the loses of that principal right down program I just discussed, they actually – they really understand that a 30% loss on the principle write down that gets to the borrower to re-perform, is better than the 70% plus loss that they will end up taking out of foreclosure.

So why isn’t that happening, why isn’t the Federal Government supporting that happening, why isn’t the administration actively quoting that as a solution and it seems pretty clear that the reason is that the banks who service those mortgages for that investor also owns second lean mortgages on their own balance sheet which is a home equity line of credit, a closed in second lean of subordinated interest that they are carrying an artificially high values in many cases.

DYLAN:  But they are basically pretending is worth something when it is not.

JOSH:  Right, now lets nail that down, if your first mortgage, if your property is under water in other words you have no equity or negative equity in your house, how can your subordiated mortgage, your subordiated lean on that home have any equity in it? Okay now it’s a cooption. If your home price starts appreciating or your income goes through the roof, maybe at some point it will be work something again but the banks are carrying this very high values, why because those mortgages tend to be more like credit cards. You only have to make the minimum payment due. And so they get to carry this current even though the truth is it’s unclear that you are going to continue to pay that as a borrower.

So the White House seemed held bent on supporting the bank’s fiction of their overall second lean

[0:31:57] [cross talk]

DYLAN:  Accounting fraud.

JOSH:  Well you can’t say fraud but certainly accounting question because there are problems in the accounting rules that allow them to justify this as such.

YVES:  And there are another sort of issues too which is as the regulators are giving what they call forbearance to the fact that the reg – this is again back to your point Dylan of the incestuesness, the fact that the regulators are allowing them to get away with this marks also is a justification for validating this. and the magnitude, the reason for the treasury and the administration playing so hands off, is that the magnitude of this lawsuits would be so great is if they will put them way below regulatory compliance, they would have to go back into the TARP I mean…

JOSH:  Probably more importuning, it would actually put egg on their face, demonstrating that the stress test that they presented to us last March, March of 2009 was…

DYLAN:  A fraud.

JOSH:  Yeah at very least it was a nonsensical exercise to artificially boost confidence in something that wasn’t worthy of our…

[0:32:55] [cross talk]

DYLAN:  But I guess this is my question and you kind of addressed this I guess Yves. There’s only two ways to look at this either because I am somebody whose history as a financial reporter, somebody who has spent a lot of times talking to people like yourselves and other people in the financial industry for a couple of decades. But I am not a financial maestro, I couldn’t run a bank, I am not – I couldn’t run the New York Federal Reserve, I do not have the level of sophistication or expertise…

JOSH:  I could argue you could run New York Fed but that’s…

DYLAN:  Thank you. but the point is I don’t – well I view myself as somebody who is attentive and intelligent and clearly invested in understanding this, I don’t view myself nor do I view by the way my staff on the show at MSNBC who has none of my financial prior history and now has a very thorough understanding of this financial structure that you are both describing, they are smart kids who are ambitious to learn and understand. But they didn’t go to Harvard Business School, they don’t have ambition to run a bank, they understand about what the two of you are describing as sort of ambitious and hard working 27, 28, 29 year olds here in New York. And so as I look not only at my own ability to digest a lot of what the two of you described. But if I look at those who have far less sophistication than I have far less of a history than I have that are new to me and this is people that were assigned to me when I came to work at MSNBC  and NBC.

When I go out on the road and talk to people, they spent a little time; they’ve read on your blog, they’ve read some of Josh’s writing, they’ve read perhaps the Big Show from Michael Lewis where there has been plenty of literature published and plenty of talk about this. They understand what you are describing that the pensions were used to create this credit casino, that the banks are covering this whole thing up and that the government is doing nothing about it. In fact in some ways I feel like the only people who claim to not understand it is the president of the United States, the Treasury Secretary and his Economic Advisors whether it is Bill Daily, James Sparling known or whether – excuse me whether it was Larry Summers before.


And so either myself and my staff and my colleagues are geniuses who are able to pick up incredibly sophisticated financial content and should be running the central banking system or there is a conscious denial of the fact, starting with the president of the United States, that is creating a disastrous and incredibly paralyzed economic structure for the current and future reality in this country. Is that unfair Josh?

JOSH:  No, or there is another option which is they really genuinely believe that given time and given patience, the banks will be able to grow out of their problems and so all they have to do is forebear and hope that they can actually…

[0:35:52] [cross talk]

DYLAN:  Weighted it out. Now the problem with that is one we’ve seen that that didn’t work very well for Japan. Two the percentage of GDP, the losses here are far larger. Three as we talked about before, we had three very strong circular tail winds that supported consumption and economic growth and frankly healthy levels of economic inflation for the past 30 years, we now have some disinflationary trends as whereas on the other side of the democratization of credit to income households, baby boomers moving into retirement and the likelihood of us being able to play that kick the can down the road and grow out of it is a very unlikely scenario and puts us in an incredibly precarious situation where the largest generation in America history is going to be come depend upon the treasury a decade from now for social security, Medicare, Medicate because they don’t have savings, they’ve depleted their savings at the same time as our foreign creditors are starting to tell us to rain back on our debt bins spending. And that puts out into a very dangerous future if we don’t address it now of looking a lot like the crisis that we are seeing in Europe.

JOSH:  Yves you get the last word as we wrap this up. Can it be addressed?

YVES:  In theory it could be, in practice it gets to a point where you were saying about how embedded what amounts to this financial all the gooks are, I don’t see the political will and we see the…

JOSH:  But it could be done?

YVES:  I mean it could be done

[0:37:28] [cross talk]

JOSH:  Technical if we resurrected Tony Roosevelt.

YVES:  What we had in – the funny thing about the depression is that we wound up is through a disorganized process of having that write down. You had bank tell, you had a lot of people credit sale individually and the result is that you had a lot of credit write downs and it was an incredibly disruptive process, you had to overshoot on the down side. But we’ve had other economies where they had a much more organized process towards realizing, recognizing the losses, you know the poster child of that is what they did in the North State when they had a very bad financial crisis in the early 1990s and they went through and they forced the banks to write down the debts. They threw out management, they set up asset management companies to try not just oddly work out but actually for some of that, for some of the loans even had the authority to extend new credit to borrowers  were viable so it wasn’t just the liquidation.

DYLAN:  Just to be very clear Josh the way you would solve this would be to reduce the debt principle write downs…

JOSH:  On the housing side.

DYLAN:  On housing side and break out the financial institution or in some way resolve these large banks that are in control of our government.

JOSH:  Too big to fail has to end. More importantly we like to think of ourselves as the broadest deepest markets in the world, we like to think of ourselves as the leader in rule of law and the leading capitalist player. Well capitalism says that when an institution is bankrupt, you have the opportunity to move assets from weak hands to stronger hands. We had this discussion at the beginning about nationalizing the banks. The FTIC nationalizes banks for a living. You do a good bank, bad bank resolution. You keep the good assets of it and the good parts of it and you essentially wipe out the bad. We are unwilling to recognize that that’s the process that some of our big banks will have to go through as we do recognize its not nationalizing that some of them will still remain quite unhealthy and there is value there but you need to recognize the losses so that what comes out the other side is viable and healthy and not saddled with the problems of that unhealthy side of the institution.

DYLAN:  On a spiritual level, on a psychological level, on a physical level, it is a lack of a resolve.

JOSH:  Absolutely.

YVES:  Yes.

DYLAN:  Both resolve in political leadership and literally resolve in resolving or resolution for the banking system and our diminished character as men, our diminished character as women, our lack of resolve is really what is at the heart of it.


JOSH:  And the saddest part is that those people who claim most loudly to believe in free markets and the ability of markets to function and resolve crisis are the ones who have demonstrated the least willingness to rely on those traditional tenets of capital structure, bankruptcy resolution and Adam Smith’s invisible hands.

DYLAN:  As grim and atrocious as all of this information is as dirty our laundry maybe, I remain an optimist in so far as I believe the degree to which this is understood today is substantially higher than it was a year ago or two years ago, I believe the understanding will only continue to escalate until the news of the truth  if you will is so tight around our political leaders and our banking leaders that they are forced into a position in where resolve can be exhibited and this country can be free.

Once again I thank both of you for being teachers for myself and for being advocates for the truth and helping to shine a way forward for not just people like myself in the media but for our political leaders and elsewhere as those with good intentions, seek to try and find a road forward for something for which many people do not see that road and I think that the two of you are most instrumental in shinning the flash light into the dark and murky forest of this problem and showing people in fact that there is another way, that there is a path that is not to close your eyes and to hide under the bed and hope away and the more that people can understand that and see that there is another path and a path that leads to more freedom, more prosperity, more equality and more opportunity for more people in this country, I believe the easier it will be for this change to happen and for the resolve necessary in the characters of our souls and the resolve in the function of our financial institutions to take hold.

Josh Rosner thank you so much, Graham Fisher and Yves Smith from Naked Capitalism thank you both so much for your time today.

JOSH:  Thanks for having us.

Yves:  Thank you.

2014 2013 2012 2011 2010 2009 2008



Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy


War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes


Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law


Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D

Copyright © 1996-2018 by Dr. Nikolai Bezroukov. was initially created as a service to the (now defunct) UN Sustainable Development Networking Programme (SDNP) in the author free time and without any remuneration. This document is an industrial compilation designed and created exclusively for educational use and is distributed under the Softpanorama Content License. Original materials copyright belong to respective owners. Quotes are made for educational purposes only in compliance with the fair use doctrine.

FAIR USE NOTICE This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to advance understanding of computer science, IT technology, economic, scientific, and social issues. We believe this constitutes a 'fair use' of any such copyrighted material as provided by section 107 of the US Copyright Law according to which such material can be distributed without profit exclusively for research and educational purposes.

This is a Spartan WHYFF (We Help You For Free) site written by people for whom English is not a native language. Grammar and spelling errors should be expected. The site contain some broken links as it develops like a living tree...

You can use PayPal to make a contribution, supporting development of this site and speed up access. In case is down you can use the at


The statements, views and opinions presented on this web page are those of the author (or referenced source) and are not endorsed by, nor do they necessarily reflect, the opinions of the author present and former employers, SDNP or any other organization the author may be associated with. We do not warrant the correctness of the information provided or its fitness for any purpose.

The site uses AdSense so you need to be aware of Google privacy policy. You you do not want to be tracked by Google please disable Javascript for this site. This site is perfectly usable without Javascript.

Last modified: September 12, 2017