|May the source be with you, but remember the KISS principle ;-)|
|Contents||Bulletin||Scripting in shell and Perl||Network troubleshooting||History||Humor|
|News||Recommended Links||Insider Trading||Bonuses as Money Laundering||Mayberry Machiavellians|
|In Goldman Sachs we trust||Citi - The bank that couldn’t shoot straight||AIG collapse||Lehman Failure: was it Hank Paulson who said "Bolivar cannot carry double"?|
|Lobbying and the Financial Crisis||Derivatives||Control Fraud (crisis of corporate governance)||Financial Humor||Etc|
TBTF became just criminal hackers of financial system engaging in mostly socially useless activities(Newyorker, 2010/11/29):
Other regulators have gone further. Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as “socially useless activity”—a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled “What Do Banks Do?,” which appeared in a collection of essays devoted to the future of finance, Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth—payments that economists refer to as rents. “It is possible for financial activity to extract rents from the real economy rather than to deliver economic value,” Turner wrote. “Financial innovation . . . may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori.”
That should be stopped and like regular hackers heads of TBTF institutions need to serve jail time for their "achievements". For example Goldman Sachs convert itself into hedge fund, reliant on trading. Between July and September of 2010, trading accounted for sixty-three percent of its revenue, and corporate finance just thirteen percent.
This financial masturbation makes Wall Street the financial equivalent of slumlords or toll collectors in pin-striped suits. Reopening Alcatraz would do quit a bit to make the rest of economy healthier.
...Financial institutions that react to market incentives in a competitive setting often end up making a mess of things. “I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” Financial markets, far from being efficient, as most economists and policymakers at the time believed, were grossly inefficient. “And once you recognize that markets are inefficient a lot of things change.”
One is the role of financial intermediaries, such as banks. Rather than seeking the most productive outlet for the money that depositors and investors entrust to them, they may follow trends and surf bubbles. These activities shift capital into projects that have little or no long-term value, such as speculative real-estate developments in the swamps of Florida. Rather than acting in their customers’ best interests, financial institutions may peddle opaque investment products, like collateralized debt obligations. Privy to superior information, banks can charge hefty fees and drive up their own profits at the expense of clients who are induced to take on risks they don’t fully understand—a form of rent seeking. “Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.”
... ... ...
a recent study by the research firm Ibbotson Associates, which shows that during the past decade investors in hedge funds, over all, would have done just as well putting their money straight into the S&P 500. “The amount of rent capture has been huge,” Woolley said. “Investment banking, prime broking, mergers and acquisitions, hedge funds, private equity, commodity investment—the whole scale of activity is far too large.” I asked Woolley how big he thought the financial sector should be. “About a half or a third of its current size,” he replied.
Artificially created demand for financial services due to privatization of pension plans created pay premium for financial sector and it started to suck in talent from other industries. Talent that is completely wasted on criminal or semi-criminal activity of hacking the financial system. People in the financial sector are grossly overpaid. In most industries, when people are paid too much their firms go bankrupt. But this not the case with financial industry (which make them pretty close to mafia) which relies of its capture of government to continue to extract exorbitant rents from the society.
November 16, 2015 | naked capitalismRedHope November 16, 2015 at 3:20 amcrittermom November 16, 2015 at 6:34 am
She will say anything to win and not care about meaning bc she knows the Democratic base will accept anything.
If you read, at least anecdotally, about the responses of base voters, it seems to be similar to what the GOP does: brush off the discussion as boring, irrelevant, a conspiracy or some combo.
The Democratic base is solely focused on Denial, delusion and hating the Republicans. She will survive this and will likely win with people defending her bat shit extremism.
I completely agree with you in that she will say anything to win. Like a pinball, she will take to whatever side necessary to keep from falling into that hole of defeat.
But please, please let's not give any energy toward thoughts of her winning!
She showed her true colors during the debate, & I still wanna believe–despite being continuously proven wrong, that most folks are smarter than that & were able to see through her. (Probably the only transparency in this current govt?)
oho, November 16, 2015 at 8:53 am
she knows the Democratic base will accept anything.
If you read, at least anecdotally, about the responses of base voters, it seems to be similar to what the GOP does: brush off the discussion as boring, irrelevant, a conspiracy or some combo.
just because the GOP 'accept anything' doesn't make it right if the 'good guys' are dogmatic too.
and my hunch is that right now everyone on in the Democratic Beltway is feeling smug cuz of the GOP clown car. But my gut is that in 2016 if HRC wins the nomination, HRC's load of manure is gonna stink a lot more than the GOP clown car's.
on election night I'll be sitting at home cheering on the makers of humble pie.
Crazy Horse, November 16, 2015 at 11:40 am
Come on people, what is the point of wasting energy and time talking about the two political parties participating in the charade that is called Democracy in the US? In reality there is only one political party - the Oligarch Fascist Party - and the National Election Circus is played out to keep people who mistake it for democracy divided and confused.
Hellary or Chump- do you really believe the choice of figurehead will change the machinery of permanent warfare or diversion of wealth to the favored few?
Malcolm MacLeod, MD , November 16, 2015 at 7:21 pm
Crazy Horse: You speak the unvarnished truth, which is always rather confusing in this day and age.
jgordon , November 16, 2015 at 4:29 am
Any serious analysis of the central drivers of the crisis necessarily lead you to the largest banks as the focal point for the interconnection and risk buildup.
Well if we're concerned about serious analysis it seems a bit odd that we aren't starting with the largest bank of all: the Federal Reserve. If not for the deliberate policy of the Fed to inflate the housing bubble in the early 2000s after the dotcom crash, certainly 2007/2008 wouldn't have been such a mess. Though admittedly government corruption (and for all intents and purposes the Fed is a government appendage) certainly played a part.
The main problem is that there are just way too many zombies and criminals infesting the financial system right now, and they are all being lovingly coddled by the Fed with ZIRP and QE. The only way to slay these undead legions is to end the ceaseless Fed-facilitated blood transfusions from the exhausted living to the dead parasites.
Well I suppose one could claim that its thanks to the zombies that our economy is able to function at all. But come on, is it really a good idea to live in a world ruled by zombies? They eat brains you know.
crittermom, November 16, 2015 at 6:01 am
Excellent article. I watched the debate. I found it very telling that when Wall St was mentioned, the only thing she could seem to equate to it was 9/11.
I found it disgusting that she even brought up 9/11 in an obvious attempt to steer the debate away from the corruption by 'her friends' on Wall St while trying to encourage the voters to give her a pat on the back for 'all she did' after 9/11. Pathetic, cheap, transparent tactic IMO.
I found it sad, however, as mentioned in the article "Only when mentioned by a Twitter user later in the debate did the full recognition of the strangeness of that comment shine through." Far too many "trained seals" outside the convention center, as well?
IMO she "put the last nail in her coffin", so to speak, when she brought up AIG & Lehman, showing her ignorance to what really happened. (Or was she just "playing dumb" in an attempt to distance herself from her big contributors on Wall St?)
fresno dan, November 16, 2015 at 8:42 am
I agree. The tendentious quibbling about the definition of "banks" when everyone uses that as shorthand for "excessively large under regulated, corrupt, and stupid financial institutions who have completed co-opted the regulators and politicians who are suppose to oversee them and enforce the rules, regulations and laws" is just deflection from the real issue.
As Bernie said in response: NOT GOOD ENOUGH
dk, November 16, 2015 at 9:05 am
I think you underestimate "most" voters. Don't mistake them for the political media echo chamber that pretends to articulate their subconscious (via absurd polling). Except for the extremes, voters tend to be a taciturn bunch, it's true. One ends up having to pick from an imperfect selection, that's representative democracy; a fact of the circumstance, and voters know it. They play along, don't kid yourself that they actually like it that much.
Comforting stories play well for the comfortable, and when no other stories are being told. The wage disparity issue was almost non-existent in 2008 and got small play in 2012. The BLM narrative is in part a counter-shock to the (granted, naive) assumption that having a black president would have (or indicated) a significant impact on day-to-day racism. The street-level economy has kept sputtering for too many years for that to be passed off as "normal". Too many cats got out of the bag this time around.
Take a look here:
In the last quarter, Hillary collected 5.19 mil from under-$200 donors, Bernie collected 20.19 mil. That's just shy of four times as much money, and arguably on the order of four times as many people. Whether Hillary is changing these people's minds at any appreciable rate remains to be seen, but this many people backing a Dem candidate in this way is a new thing (not so new for the Tea Party brand).
Not saying Bernie is a slam dunk by any means, but numerically, in dollars and voters, he can't be dismissed as an impossibility (see also, Corbyn). Political media hacks hate voters, they still can't predict them (and they know it too). Sometimes elections occur in a near vacuum of clear indicators and issues (2012), sometimes the indicators and issues are bigger than even a "big" candidate (2008, Obama would not have won without the financial collapse, which suppressed and fractured Rep voting).
Voters aren't smarter than anybody else, but they're not dumber either. What they are is shy (especially the Dems). But think of Bernie's small donor base as a bunch of wallflowers reacting to something they haven't seen before. That wasn't in anybody's narrative.
Ulysses, November 16, 2015 at 9:09 am
You provide a very astute description, of how the MSM Wurlitzer works to concoct narratives that disempower people. Yet I think that Chris Hedges is also on to something when he observes:
"The frustration, mounting across the country, is bringing with it a new radicalism."
We teeter on a knife's edge, close to societal collapse. My hope is that we will shake off our chains and begin to replace systematic oppression and exploitation with a more humane society. My fear is that the people, who currently benefit from the status quo, will go full-bore totalitarian/repressive in a desperate attempt to cling to their ill-gotten wealth and power.
RUKidding, November 16, 2015 at 12:00 pm
I'm afraid that the impetus is more towards the latter than the former. The PTB haven't spent decades/centuries brainwashing the masses to be good little authoritarians wanting Big Daddy/Momma to "take care" of them for nothing.
Dino Reno, November 16, 2015 at 8:18 am
Yeah, that 9/11 rift was bad, but the "60% of my contributors are women" was worse. I'd love to see this claim fact checked. What a tidy number. Not too big to make her campaign a women's movement, but big enough to throw the guys off their game and make her nomination a foregone conclusion. Meanwhile, corporations make up probably 90% of her actual contributions.
JaaaaayCeeeee, November 16, 2015 at 11:52 am
WaPo fact checked Hillary Clinton's claim that most of her donors are small donors. Only 17% donated less than $200 (she did donation drives asking for a dollar even to get to 17% and most of her donations from women were big donations, too):
Code Name D, November 16, 2015 at 12:41 pm
So corporations have genders now?
nigelk, November 16, 2015 at 1:49 pm
We had one neoliberal Trojan horse get elected twice and if you questioned his policies you were at best a "bad Democrat" and at worst some version of racist…why not try it again? Anyone who questions her bought-and-paid for corruption will be painted as a card-carrying member of the he-man woman-haters club.
Some of us, however, just dislike her since she's an enemy of the working class: http://mattbruenig.com/2015/11/06/my-beef-with-hillary-is-mainly-that-she-is-an-enemy-of-the-poor/
Pat, November 16, 2015 at 9:47 amVatch November 16, 2015 at 10:10 am
I agree that the remark was cynical and false and typical of Clinton's disdain for both facts and the intelligence of the voters. (And knowledgable in that she knew she would not get fact checked on this in any manner that would make her look like Ben Carson talking about pyramids.) I truly do not think it is as important as you do, as she had already lost that battle.
The people know the great never ending bank bailout of 2008 did not translate to bailing out the economy. There are still foreclosed homes in neighborhoods across America rotting. If they didn't lose a job and are still looking for a decent one they have a parent, a kid, another family member, or multiple friends who are still un or underemployed. They know their bills are going up but their paychecks aren't. And they get to hear about Jamie Dimon becoming a billionaire. They may not know which bank he heads, but they know a whole lot of those billions came from their taxes while they are still struggling. None of this may get into the details of what happened or what went wrong, but they know they got taken. And her response tells them she would take them again. The only people who don't hear that, are the ones who think 60% of my donations are from women makes Clinton a feminist and tribal loyalists. You know the Democratic equivalent of the Bush supporters who never wavered.
Trying to understand the ins and outs of the financial industry shenanigans is deep, dense, and takes way too much time for most folk. I happened to be out on workmen's comp when it went down. This is not my area, I read and read and read and got deeply angry. I still don't understand it all, and I have more facts at my fingertips then probably at least 75% of the population. My point on this, is that sometimes you don't need to know the details to smell the bullshit. And it reeked of manure.
Today is November 16, which is a deadline for the Clinton Foundation to refile some documents, according to this article to which Water Cooler linked on Oct. 28:
Here's an article published today about this, although nothing has been resolved yet:
Still, the Clintons have not defined how they decide to designate their speaking fees as income versus charity work. Earlier this year, the Bill, Hillary, and Chelsea Clinton Foundation admitted collecting $26.4 million in previously unreported speaking fees from foreign governments and foreign and U.S. corporations. For tax purposes, who should be treated as the recipient of that money? It is not a silly question.
Jerry Denim, November 16, 2015 at 11:46 am
I couldn't believe my eyes and ears during the debate when Sanders impugned Clinton's integrity for taking Wall Street super PAC money and she seemed to successfully deflect the accusation by going full-bore star-spangled sparkle eagle. She played the vagina card then quickly blurted out "9/11 New York" for applause while attempting conflate aiding and abetting Wall Street with the 9/11 attacks and patriotism. I couldn't believe people were clapping and I couldn't believe Clinton had the audacity to pull such a illogical and juvenile stunt on live television, but yet CBS reported her highest approval scores of the debate were registered during her confusing but emotionally rousing (for some people apparently) "vagina, 9/11" defense.
I loved that Bernie Sanders was willing to drop the "F-bomb" (fraud) on Wall Street but he needs to swing much harder at Clinton. Clinton was quick to zing O'Malley as a hypocrite by noting he appointed a former hedge-fund manager to some state regulatory position when given the chance, but yet neither Sanders or O'Malley hit back with the fact that her only child and Clinton Foundation board member, Chelsea Clinton, worked for the hedge fund of a Clinton family pal and mega-donor in 2006. Neither candidate mentioned that her son-in-law and the father of her grandchild who she is so fond of mentioning, just so happens to be an extremely rich hedge fund manager who benefits handsomely from the Clinton's political connections and prestige. This isn't mud, this is extremely germane, factual material already on the public record. It gets to the core of who Hillary is and where her loyalties lie. Hillary herself chose to identify unregulated derivatives and the repeal of Glass-Steagall as the primary causes of the financial crisis. She either claimed directly or insinuated that she would address these issues as President, but surprisingly no one pointed out that it was her husband's administration that blocked Brooksley Born from regulating derivatives in the 1990's and it was her husband's administration that effectively repealed Glass-Steagal with the signing of Gramm-Leach-Billey act in 1999. It's not a stretch to say the Clinton's deregulation of Wall Street paved the way for the crisis of 2008 and the extreme income inequality of today. Wall Street is deeply unpopular and Bernie Sanders has built a candidacy on two main issues: attacking Wall Street and addressing income inequality. These are punches he can't afford not to throw at his rival when she holds a commanding lead in the polls plus the support of the DNC and media establishment. Clinton is deeply corrupt and beholden to Wall Street. She needs to be beaten with this stick hard and often. Attempting to deflect this very accurate, very damaging criticism by wrapping herself in the flag and invoking feminism is a cheap stunt that will only work so many times before people notice what she is doing. Bernie needs to swing harder and keep at it, he already has the right message and Clinton is highly vulnerable on his pet topics.
I thought O'Malley had one of the best lines of the night when he said "I think it may be time for us to quit taking advice from economists" but it seemed to go mostly unnoticed and unappreciated. I would have loved a frontal assault on the validity and integrity of economists when the bespectacled lady in blue attempted to nail down Sanders with a 'gotcha' question implying raising the minimum wage would be catastrophic for the economy because "such-and-such economist" said so. There is so much disdain for science and academic credentials in the heartland right now, it seems crazy not to harness this anti-academic populist energy and redirect it to a deserving target like neo-liberal economists instead of climate scientists. " How's that Laffer curve working out for ya Iowa? Are you feeling the prosperity 'trickle down' yet?" Sanders did a relatively good job of deflecting and not getting zinged by the 'gotcha' question but a full-frontal assault would have been much better. Stronger, more Presidential and with the added bonus of giving neo-liberal economists under the pay of plutocrats a black eye. Another missed opportunity. The questioner set it up perfectly for him. I would have loved to see the expression on her corn-fed face when Bernie turned her 'gotcha' question that she had spent so much time and thought crafting into the home-run answer of the evening. Perhaps it could happen in a debate in the near future.
RUKidding, November 16, 2015 at 11:58 am
I think what happened there is that Bernie is showing his true colors, unfortunately. While I'm more than OK with Bernie's attitude towards Benghazi & the emails, he really does not confront HRC on her egregious attitudes towards unfettered War, Inc, and most esp not on Wall St and the Banks.
I have no serious expectations of Sanders, however, and never did.
Jerry Denim, November 16, 2015 at 12:15 pm
Perhaps you are correct but Sanders did say Wall Street's business model is greed and fraud. Strong language for a Presidential candidate and unmistakably clear terms. When it comes to attacking Clinton I feel like something is holding Sanders back. Maybe it's his campaign advisors because he's been told his anger scares voters and people don't like negative attacks. Maybe the DNC and Clinton are holding some threat over his head regarding ballot access, debate cancellation or some other punishment if he doesn't play by certain rules. Perhaps he's been warned certain topics are off limits during debates. Seems fishy to me, but maybe it's just as simple as you say.
RUKidding, November 16, 2015 at 1:27 pm
Yes, Sanders has been outspoken about Wall St, greed, fraud and tightening up regulations, etc. That's why it's disappointing and beyond annoying when he clams up vis Clinton and her relationship with and money from Wall St.
The GOP engages in phony baloney food fights much to the tingling excitement of their base. I'd like to see some REAL debate from the Dems. Not just make nice phony baloney bullshit.
Again, I've never expected Sanders to be anything more than someone who'll sound populist and then tell his followers to vote for Clinton… as he's already SAID anyway.
We're told allegedly that "poll after poll" shows Clinton in a double digit lead. I really question that, as well, but clearly no one's showing me the factual data. It is what is. HRC is the anointed one, so get used to it.
To me, Sanders is just window dressing & a distraction, even though, clearly, he's the pick of "both" (or the combined, if you will) litters. Whatever…
JerryDenim, November 16, 2015 at 2:51 pm
"Again, I've never expected Sanders to be anything more than someone who'll sound populist and then tell his followers to vote for Clinton… as he's already SAID anyway"
Yeah maybe, but I believe that was the price of admission to the Clinton / Wasserman-Shultz ball for a life-long socialist who sometimes caucuses with Democrats. The more damage Sanders inflicts on Clinton in the primaries the less sincere and effective any possible Sanders endorsement of Clinton will be later. I too share your distrust of polls and given that distrust it's hard for me to write off a guy who has had every disadvantage in his Presidential bid but is still polling pretty darn well against a extremely well-known political juggernaut early in the primary season.
Sanders has the right message, the right record and popular support on his side in a year when people are fed-up with the entire Washington establishment and sick of pedigreed, legacy politicians like Clinton. Look at how poorly Bush has fared so far against outsider, blow-hard Donald Trump and unknown-nobody Ben Carson. Even conservatives are sick of dynasties.
If there's ever been a moment when Bernie Sanders could win the nomination this is it. If you really think Sanders is the "pick of liter" as you say perhaps you could stop calling him things like "window dressing" and "a distraction". While it may protect your feelings from future disappointment to speak confidently of Clinton as the inevitable nominee it clearly helps her campaign objectives, so…. maybe just try tempering your cynicism just a wee bit unless you are out to help Hillary win the nomination. If you are out to help Hillary then carry on, you're doing a fine job of tarring and feathering Sanders as a loser on behalf of her campaign.
3.14e-9, November 16, 2015 at 2:53 pm
Bernie's campaign never in a million years thought he would get this far. In the beginning, it was calculated to draw attention to income inequality, big money in politics, and other issues that likely would get ignored if the coronation went ahead unopposed. Within that context, it would have been very easy for him to promise the few votes he thought he would get to Clinton.
I have a feeling that his campaign is regretting he ever said that as much as we are. He has a huge number of supporters who, like jgordon above, would write in "Dog Turd" before voting for Hillary (although I don't know why we couldn't write in Bernie). These people are going to be extremely angry if he throws his support behind her, and they have demonstrated well already that they are very vocal. I've commented on NC before that I think there will be hell to pay if and when that happens.
I also suspect that the DNC didn't make a big fuss about his running as a Democrat because no one there thought he'd get this far, either, and they probably thought he would be useful. For all we know, he agreed to that. And then, suddenly, all the unexpected crowds.
Sanders is the ranking minority member on the Senate Budget Committee, which means he definitely could challenge Clinton on economic issues, and competently. So I agree that something has to be holding him back. Yet another consideration is that he might be keeping the most damaging counts against her until later in the campaign. If he showed his hand now, the Clinton machine would kick into gear overtime, get her off the hook, and drag him down into the mud.
Cassandra, November 16, 2015 at 4:10 pm
No need to think of conspiracies, etc. As you point out, Sanders is a senator. He never expected to get this far. He won't win the nomination. He has to think of his post-2016 career. If he goes after Clinton hammer and tongs, he will be (more of) a pariah in the Senate, effectively ruining any chance for him to accomplish anything. As he said in the debate, the VA bill wasn't all he wanted, but it was something. Many think incrementalism is a fool's game, but I believe Sanders is willing to fight for crumbs.
Lambert Strether, November 16, 2015 at 4:14 pm
I think Sanders did pretty well, especially considering the primaries haven't started. He pushed Clinton into two horrible responses, at least: (1) 9/11 and Wall Street and (2) Sanders single payer vs. ObamaCare. Both will be gifts that keep on giving. My thought would is that the opportunity cost of spending a lot of time reverse engineering whatever number of dimensions of chess Sanders is playing failing to use the very powerful ammo he gave - both of which are about policy.
RUKidding, November 16, 2015 at 4:17 pm
I'm willing to be wrong about Sanders, and in fact, hope I am. Time will tell. I agree that he's done better than the odds called for. Willing to listen to him but wish he'd speak up more about HRC's bs. But he is a politician after all and is playing a long game.
3.14e-9, November 16, 2015 at 6:14 pm
Well, he has to be very careful about that. Clinton's people immediately jump on the least bit of truth from Sanders as "negative campaigning" and then call up their friends in the MSM to back them up:
Anyway, thanks for being open.
Jim Haygood, November 16, 2015 at 12:10 pm
'AIG's largest counter-party was Goldman Sachs.'
Thus, the Federal Reserve's "Sunday night special" waiver of the 30-day application period for Goldman Sachs and Morgan Stanley to become bank holding companies, and to get their sticky mitts (or tentacles, as the case may be) into "free money" at the discount window. News story from 22 Sep 2008:
Having essentially zero consumer deposit-taking business, then or now, these two investment banks resemble ordinary commercial banks like mangy wolves dressed in ill-fitting sheep costumes.
Investment banking is a high-risk, high-reward business with some of the most highly compensated employees in the country. Subsidizing GS and MS with Federal Reserve free money is a rank disgrace. It vexeth me greatly, comrades. But changing it is not even on the menu.
TimmyB, November 16, 2015 at 12:35 pm
What really hasn't been discussed is Sander's motivation for breaking up too big to fail financial institutions. Sanders on his website states he wants to break them up because they have too much economic and political power. Sanders says that breaking them up, in and by itself, will provide a benefit.
So when Clinton starts discussing how her plan will be more effective in preventing another financial collapse, she has changed the subject from how breaking up our banks will benefit our democratcy to whether or not breaking them up will prevent another 2008 crisis.
What Sanders needs to do is bring the discussion on breaking up TBTF banks back around to their having too much economic and political power. For example, he could say he wants to break them up because they have too much power and that Clinton want them to continue to hold that power. Clinton has no real response to that claim.
Michael, November 17, 2015 at 11:44 am
Bernie is not running to win. I'm not sure why he is running. If he does not start to hit Hillary then I think it is primarily to keep the left wing of the Democratic Party inside the party instead of seeking a new home elsewhere. The Justice Party is interesting but a third party has no chance unless the Democrats implode.
Honestly I can see the Democrats collapsing before the Republicans. The South and Midwest are just batshit crazy and they'll stick with the Republicans as long as the evangelicals dominate their culture. Does anyone here know anything about previous "great awakenings" in American culture?
MojaveWolf , November 16, 2015 at 1:01 pm
For all her vomit-inducing disingenuousness about how she would be the toughest on the financial industry as a whole (really, how does she say that with a straight face?), and her basically sounding like a smarter, saner business as usual neocon on the middle east, I thought her worst moment by far was when she tried to describe single payer as "dismantling" Medicare, Medicaid, etc and letting Republican administrations decide who gets health care, and playing up that the ACA as better and more comprehensive. She is not stupid. She is one of the smartest people in politics from a pure short term IQ standpoint. And she has studied and once advocated for single payer so she KNOWS what it does. Think about this for a minute.
Hillary KNOWS single payer EXPANDS on what Medicaid and Medicare provide.
Hillary KNOWS Bernie's single payer plan would not allow states to opt out, unlike the ACA she is touting, while she was claiming the exact opposite. She knowingly bald-faced lied on national TV & radio (I was driving and listening, not watching) in a way to equal anything Dick Cheney or Mitch McConnell or Newt Gingrich ever did, and she lied about a matter she KNOWS will result in millions of people NOT getting adequate medical care with ripple effects ranging from constant illness and misery to job performance to not seeking treatment until emergency to actual death. People can't pay 3k or 5k deductibles. We already have news reports of people not going for this reason. We paid the penalty on our taxes last year because the only affordable plans that were actually usable required us to make a 2 hr one way drive (over 90% hwy, this is a long way) to the closest hospital/doctor that was included in it. One of my acquaintances who is covered took a taxi to what was supposedly the only local doctor who took her plan (after calling everyone in town), waited over an hr, and was told that whoever she spoke to on the phone made a mistake and she is not covered, and they have no idea where she should go, plus she's out the time and a r/t taxi ride. You think Hillary hasn't studied this and doesn't know things like this happen? You think she doesn't know Bernie's single payer plan (and probably all single payer plans) wouldn't prevent these sorts of situations?
She KNOWS we could cut out the insurance companies, have free single payer, pay for it by taxing the most well off, and people on the whole would get much better service, with much better outcomes, and without having to freak out if the ambulance took them to a hospital outside of their plan or a visiting specialist at the hospital their plan said go to was outside the plan and billed them five or six figures or what have.
But she clearly doesn't care. She just cares about people donating money to her campaign and getting elected as a resume stuffer. She doesn't want to change how things are done more than minor tinkering, even when she KNOWS the changes will make everything better off. She will be the same on climate change, even tho she isn't stupid and knows both what we are doing now and what she is recommending are leading us to a planet of the jellyfish in the long run and a state of neverending crises and mass extinction in the short and medium run.
(I am not saying she knows the misery her foreign policy position has and will cause because I actually fear she might believe in what she's saying there; tho whether she believes it or not she clearly intends to continue the same policies that have led us to destabilize the middle east and are starting to destabilize the entire world; the only reason I'm not thinking this is her worst moment is because she was more hinting at than saying things, and I'm less sure of her actual positions)
She is willing to sacrifice millions of lives to get herself elected and continue enriching her already rich family who doesn't need any more money. She is, basically, a Republican on everything but social issues (yes, these matter, and good for her, tho past cowardly statements on abortion and votes on marriage equality should not be disregarded when compared with her opponents).
i guess people think nothing of this, just as they think nothing of her lies on regulating the financial industry, because they think that sort of flat out lie and distortion is just politics as usual, and more important to be good at lying than good on substance?
And that is why really do need a political revolution. Almost all of the current political class, including the political media, really need to go.
RUKidding, November 16, 2015 at 1:37 pm
AKA, there's very little difference bet HRC and whomever barking lunatic the GOP coughs up… other than HRC isn't such a barking lunatic. She's just mired in pure unfettered greed and imperialistic hubris.
Actually the GOP should be kissing the ground that HRC walks on bc she's probably the biggest War Hawk in the whole amalgamated group, and she's way more for BigIns getting their hugely giant sucking cut out of "health" insurance scams than almost any other candidate.
The GOP puts on a dog 'n pony show constantly wasting time and all taxpayer money on voting against ACA. They do that bc they know their phony baloney bills will never ever pass. The GOP doesn't want ACA to ever go away bc the politicians are getting rich rich rich off of it as much as the Dems are. They just have to play a Kabuki show to appease their utterly stupid base.
Such a waste of time all of this is. Such a monumental waste of money. ugh.
nothing will change. authoritarian USians like Big Daddy/Mommy too much to let ever let go of this system.
Vatch, November 16, 2015 at 3:33 pm
There are at least two advantages to breaking up the giant banks:
1. If one of the fragments gets into financial trouble, we won't have to fear a complete economic collapse.
2. Sure, the owners of the banks will continue to own as much as before (and some of their stock might even rise in value). But the CEOs of the big banks will lose influence, because they will suddenly be the bosses of much smaller corporations. Currently, people like Jamie Dimon have far too much power.
Bob Stapp, November 16, 2015 at 2:17 pm
I'm at a complete loss to understand why Dems, the media, and in fact anyone with two brain cells to rub together, can fail to see or acknowledge that HRC is a liar, a crook, and a generally mean-spirited individual who's only in it for herself and will do and say anything and accept money from anyone as long as it helps her to win.
Sadly, the only difference between Hillary and Obama, is that Barack is a better shape-shifter and, when he lies, he can do so with greater eloquence and charm. Hillary can never manage to completely hide her forked tongue and her poisonous lizard personality.
Our country and, in fact, the entire world is at a crossroads and yet there has never been such a lack of selfless, skilled leadership stepping up to help us get to some version of the common good. Meanwhile, Bernie Saunders and Jeremy Corbyn get pilloried daily for even suggesting that we are all in this together and had better get to fixing things right quick. I guess it's the fate of truth-tellers.
I plan to attend my state's caucus and when I say that if we insist on pursuing the political process as we have always done, we are condemning ourselves to disaster. Going out and working for a person, a personality, or a hoped-for savior, is merely repeating the same kind of insanity that has produced the rotten system we have today. Bernie's right. It's going to take all of us standing up together, not to get Bernie or anybody else elected, but for what we know is right. And we'd better do it soon. Then, when I'm shut down by the party operatives, I'll go home and continue to watch the slow-motion train-wreck.
Lambert Strether, November 16, 2015 at 3:21 pm
"It depends upon what the meaning of the word 'bank' is."
cassandra, November 16, 2015 at 7:11 pm
After Obama's behavior, and the documentation of Gilens & Page, can anyone believe that campaign speeches have anything to do with post-electoral policies? The nomination process is beyond dysfunctional: everyone knows Hillarity's positions are synthetic, yet she successfully campaigns with the grossest political impunity and she is taken seriously enough for analysis. I don't understand why. The only political power remaining to democracy is resistance, either by voting for a third party, or else by total abstinence. I personally prefer the former, as it's a bit harder to sweep under the media carpet. This keeps me outside the grasp of helplessness.
Telee, November 16, 2015 at 7:38 pm
The refusal of HRC to be for reinstating Glass-Steagall to separate investment banks and commercial banks is a sure sign that she will be a lap dog for the fraudsters on Wall Street. More of the same or worse.
Another point. My readings has lead me to believe that she played a large role in the destabilization o Libya. In her 11 hours before the Benghazi committee she was never asked why she was so hell-bent for a military solution when there were negotiations which would have led to a more peaceful solution.
1 kings, November 16, 2015 at 9:39 pm
"We came, we saw, he died". HRC
aliteralmind, November 16, 2015 at 10:21 pm
Family Guy *exactly* predicted Hillary's 9/11 tragedy-distraction strategy way back in 2008: Life imitating art: http://youtu.be/Rm3d43HLyTI
Sep 16, 2015 | Zero Hedge
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
Jesus College, Cambridge hosted, once more, the world's leading Symposium on Economic Crime, and over 500 distinguished speakers and panelists drawn from the widest possible international fora, gathered to make presentations to the many hundreds of delegates and attendees.
What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry.
I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.
Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.
– From the excellent article: The Banking Criminals Exposed
My prediction is that bankers will be jailed in the next economic/financial crisis. Lots and lots of bankers.
It may seem to many that those working within this profession will remain above the law indefinitely in light of the lack of any accountability whatsoever since the collapse of 2008. It may seem that way, but extrapolating this trend into the future is to ignore a monumentally changed political environment around the world. From the ascendancy of Donald Trump and Bernie Sanders here in the U.S., to Jeremy Corbyn becoming Labour leader in the UK, big changes are certainly afoot.
I have become convinced of this change for a little while now, but we won't really see evidence of it until the next collapse. However, something I read earlier today really brought the point home for me. Rowan Bosworth-Davies recently attended the 33rd Cambridge International Symposium on Economic Crime and provided us with some notes in an excellent piece titled, The Banking Criminals Exposed. Here are a few excerpts:
Jesus College, Cambridge hosted, once more, the world's leading Symposium on Economic Crime, and over 500 distinguished speakers and panelists drawn from the widest possible international fora, gathered to make presentations to the many hundreds of delegates and attendees.
This Symposium has indeed become an icon among other international gatherings of its knd and over the years, it has proved to be highly influential in the driving and development of international policy aimed at combating international financial and economic crime.
What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry.
I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.
Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.
Speaker after speaker addressed the implications of the scandalous level of PPI fraud, whose repayment and compensation schedules now run into billions of pounds.
Some speakers struggled with the definition of such activity as 'Mis-selling' and needed to be advised that what they were describing was an institutionalized level of organised financial crimes involving fraud, false accounting, forgery and other offenses involving acts of misrepresentation and deceit.
One of the side issues which came out of this and other debates, was the general and genuine sense of bewilderment that management in these institutions concerned, (and very few banks and financial houses have escaped censure for this dishonest practice) have walked away from this orgy of criminal antics, completely unscathed. The protestations from management that these dishonest acts were carried out by a few rogue elements, holds no water and cannot be justified.
In the end, I sat there, open-mouthed while evidence against the same old usual scum-bag financial institutions, was unrolled, and a lengthy list of agencies, all apparently dedicated to dealing with fraud and financial crime, lamely sought to explain why they were powerless to help these victims.
This was followed by a lengthy list of names of major law firms, and Big 5 accounting firms who were willing to join with these pariah banks to bring complex and expensive legal actions against these victims, bankrupting them, forcing them from their homes, repossessing properties they had worked for years to create, while all the time, the regulators and the other agencies, including to my shame and regret, certain spineless police forces, stood by and sought to justify their inaction.
At one stage, we were shown how banks ritually and deliberately take transcripts of telephone calls made between complainants and the bank, and deliberately and systematically go through these conversations, re-editing them and reproducing them in a format which is much more favourable to the bank.
For the first time, I found routine agreement among delegates that the banking industry had become synonymous with organised crime. Many otherwise more conservative attendees expressed their grave concern and their repugnance at the way in which so many of our most famous banking names were now behaving. It is becoming very much harder to believe that the banks will be able to rely on the routine support they have traditionally enjoyed from most ordinary members of the public.
The election of Jeremy Corbyn to the leadership of the labour Party means that banking crime and financial fraud will now become an electoral issue.
But now, the new Labour leadership will focus the attention of the electorate on the relationship between the Tory party and their very crooked friends in the City, and the degree of protection that the Square Mile gangsters and their Consiglieri, their Capos, and their Godfathers will become much more identifiable. Bank crime will now become much more identifiable as a City practice and their friends in the Tories will be seen as being primary beneficiaries.Things are moving in the direction of justice. At a glacial place for sure, but moving they are.
When they're swinging from lamp posts lining Broadway and Water St,
*then * I'd call it progress.
Til then, same old same old...
There were over 1,000 felony prosecutions that came out of the Savings & Loan fiasco in the 80's, with a 90% conviction rate.
But, to your point, these were not the big Wall Street Bankers. Mostly just your local common banker thief and his cronies, with a few politicians thrown in for good measure. No big fish were prosecuted during the Depression era, either.
A reminder of how JPM saved its own ass in 2008. Worth bookmarking....
The Secret Bailout of JP Morgan
Dream on, Mike. Just who will jail the banksters? They own the governments of USA, Canada, and Western Europe. Not a chance in my lifetime.
Politicians and the judicial branch are in the banks pockets. I will believe it when I see it to be honest. I have yet to see real bankers or for that matter politicians go to jail. As long as the big fines are paid nothing will change. Must be nice to create money from nothing to pay these fines and fucking your customers over at the same time.
Wishful thinking. If any justice is to be meted out then the "little people" will have to take it upon themselves.
And by little people I mean the plebes, not dwarves; but the dwarves are welcome to help, unless of course
some of them are little bankers, then they're not welcome, but the rest are. Glad we got that cleared up.
May 14, 2013
The Federal Reserve is serious-about something.
On May 2, The Wall Street Journal reported that regulators were pushing to require "very large banks to hold higher levels of capital," including minimum levels of unsecured long-term debt, as part of an effort "to force banks to shrink voluntarily by making it expensive and onerous to be big and complex." The article quoted Fed Governor Jeremy Stein, who said, "If after some time it has not delivered much of a change in the size and complexity of the largest of banks, one might conclude that the implicit tax was too small, and should be ratcheted up" (emphasis added).
A few days later, Fed Governor Daniel Tarullo said roughly the same thing (emphasis added):
"'The important question is not whether capital requirements for large banking firms need to be stronger than those included in Basel III and the agreement on capital surcharges, but how to make them so,' said Mr. Tarullo, adding later that even with those measures in place it 'would leave more too-big-to-fail risk than I think is prudent.'"
Tarullo recommended higher capital requirements and long-term debt requirements for systemically risky financial institutions.
Last week, Governor of Governors Ben Bernanke quoted from the same talking points (emphasis added):
"Mr. Bernanke said the Fed could push banks to maintain a higher leverage ratio, hold certain types of debt favored by regulators, or other steps to give the largest firms a 'strong incentive to reduce their size, complexity, interconnectedness.'
"The Fed chairman acknowledged growing concerns that some financial companies remain so big and complex the government would have to step in to prevent their collapse and said more needs to be done to eliminate that risk."
It's important to note exactly what Stein, Tarullo, and Bernanke are all saying.
- Here's what they're not saying: Too-big-to-fail banks enjoy implicit subsidies and impose externalities on the rest of us; therefore those subsidies and externalities should be priced; and then those banks can decide whether they want to absorb those costs or make themselves smaller.
- Here's what they are saying: Too-big-to-fail banks are too big and complex and pose a systemic risk to all of us; therefore they need to become smaller and less complex; and the Fed will tweak the regulations until they become smaller and less complex.
What's remarkable about this? These three men-probably the three most important on the Board of Governors when it comes to systemic risk regulation (as opposed to monetary policy, for example)-all say that they know that the megabanks are too big and complex. They all say that accurate pricing of subsidies and externalities is not an end in itself.* They all say that the goal is smaller, less complex banks.
But here's what baffles me: If the goal is smaller, less complex banks, why not just mandate smaller, less complex banks? Why beat around the bush with capital requirements and minimum long-term debt levels? Those tools might be appropriate if you think huge, complex banks should exist but you want to make them safer. But if you've already concluded that banks need to be smaller and less complex, then they're just a waste of time.
They also betray a frightening naivete regarding corporate governance. The theory is that higher capital requirements, for example, will lower banks' profits, which will upset shareholders, who will eventually force the board of directors to eventually convince the CEO to break up his empire. This scenario, unfortunately, depends on the premise that American corporations are run for the benefit of their shareholders, which is only roughly true, and even that often requires long, expensive, and messy shareholder activist campaigns.
Instead, there's an obvious solution: rules that limit the size and scope of financial institutions. But Bernanke has ruled out "arbitrary" size caps in favor of his cute regulatory dial-tweaking.
Again, Bernanke's position might be defensible if he wasn't already sure that today's banks are too big and complex. Then it might make sense to tweak the incentives and see how the market reacts. But if he knows they are too big and complex, he should eliminate that risk in the simplest, most direct way possible. If he's not sure how much smaller and simpler banks need to be, he can do it in steps: set one set of size and scope limits, see what he thinks about the outcome, and then set another set of limits if he's still unhappy.
To use a crude analogy, let's say we're concerned about guns on airplanes. Ben Bernanke thinks, like I do, that guns on planes present an unacceptable risk to the safety of air travel. But his approach is to charge a $100 fee for anyone who wants to bring a gun onto a plane. If people keep bringing guns on board, he'll raise the fee to $200, then $300, and so on until people stop. The sensible, obvious solution is to just ban guns on planes. But that would be "arbitrary."
* It is theoretically plausible that one should simply price the subsidies and externalities and then let the market determine whether big banks provide enough societal benefit to offset the costs they impose on the rest of us. But that is not what Stein, Tarullo, and Bernanke are saying.
- George Peaocck | May 14, 2013 at 2:03 pm |
One can only surmise regulatory capture.
- Bolt | May 14, 2013 at 3:35 pm |
Does Dodd-Frank actually allow for the direct approach James advocates?
It could be that these Stein, Tarullo, and Bernanke have an implicit "political reality" filter and they are pursuing the only course of action available to them ("cute regulatory dial-tweaking") even though it may not be the most effective course.
Kind of like how Bernanke won't come right out and say "we need stimulus now" but instead says things like "the Fed is working against a fiscal headwind".
- Ralph Musgrave | May 14, 2013 at 4:01 pm |
"The theory is that higher capital requirements, for example, will lower banks' profits…". Modigliani and Miller demolished that idea, didn't they?
Another solution to TBTF is full reserve banking. Under the latter system, any depositor who wants their bank to lend on or invest their money has to bear the risk involved in such investment or lending. In effect, all depositors become shareholders.
That system already operates with British mutual building societies, and the latter compete very effectively with banks. As Mervyn King said recently in respect of depositors at those building societies, "in a mutual organisation they are, in effect, the shareholders."
- tonyforesta | May 14, 2013 at 8:45 pm |
Because the socalled Fed is in fact the Alison of the predatorclass banks to the socalled government. The Fed, the TBTF banks, and their purchased and owned spaniels in the socalled government are tentacles in the giant "squid" that is the predatorclass. These monsters operate and manage criminal enterprises that rob and pillage poor and middleclass Americans, to feed the superrich, the predatorclass! They conduct their nefarious and systemic criminal activities untouched by theruleoflaw, or any semblance of ethics or moral consideration in broad daylight knowing full well that they will never be held to the same laws and rules and regulations that are ruthlessly imposed on the people. They are immune from prosecution for a festering litany of wanton crimes and abuses. They are ToBigToProsecute, so their manifold crimes, and systemic criminal enterprises continue unadulterated and untouched by the hand of justice!!!
The predatorclass operates above and beyond the law, while the people are subjected to ruthless prosecution and punishments for minor infractions.
Effectively there exist in Amerika two distinctly different sets of law. One that is harsh and brutal where the people are involved -,and another that is soft, lenient, and unprosecutable where the predatorclass is involved. So in practical reality – there are no laws! And in a world where there are no laws – there are no laws for anyone predatorclass biiiiiaaaatches!!!
- crawlars | May 14, 2013 at 9:08 pm |
The Fed is run by the Banks…not the other way around.
- Bruce E. Woych | May 14, 2013 at 9:47 pm |
THE UNIVERSITY OF IOWA CENTER FOR INTERNATIONAL FINANCE AND DEVELOPMENT
"….unregulated development will foster international competition among emerging markets in developing nations. In order to come out on top, developing nations will deregulate as much as possible so as to demonstrate their willingness to accommodate new business and investment. This causes a "race to the bottom" - a race that environmentalists state we are in danger of winning with the prize being a complete exhaustion of the earth's resources and an alteration of the earth's climate."
"A Race to the Bottom: Creating Risk, Generating Debt and Guaranteeing Environmental Destruction, March 1999, A Report by Berne Declaration, Switzerland; Bioforum, Indonesia; Center for International Environmental Law, U.S.; Environmental Defense, U.S.; Eurodad, Belgium; Friends of the Earth, U.S.; Pacific Environment and Resources Center, U.S.; Urgewald, Germany available at http://www.environmentaldefense.org/pdf.cfm?contentid=480&filename=ecareport%2Epdf
The report focuses on publicly owned bilateral export credit agencies (ECAs) and investment insurance agencies , and their growing role in privately owned project ventures abroad.
In a series of case studies, the report provides insight into the impact these ECA ventures have on the surrounding environment and society. Written by a conglomeration of prominent environmental activist organizations, the report argues that OECD country-supported bilateral aid agencies and multilateral development banks, such as the World Bank, circumvent environmental standards through the ECAs, which have no detailed social or environmental procedures for their lending."
- Moses Herzog | May 14, 2013 at 9:47 pm |
This is a good post and agree with the intentions and idea to limit the size of banks. However, it's not going to happen. And I would go so far as to say it will NEVER happen in my lifetime (I'm in the middle age range).
The Fed is largely composed of bank CEOs (example Jamie Dimon). The Fed has in essence become a "self-regulatory" body (a contradiction in terms if there was ever one that existed). It really has become a branch or extension of the ABA (American Bankers Association) but unfortunately most people are too dumb to see it. The OCC (Office of The Comptroller of the Currency) is by far the most captured of any of the regulatory institutions with John Dugan and then John Walsh having had their olfactory organ jammed up TBTF bankers' A$$.
Here is the man who enjoys taking golden showers from the TBTF bankers' himself (notice Dugan's trademark sh*t-eating grin:
If you see Dugan in public or your local eating establishment, be sure to spit a large lugee in his face and tell him "That was from the American taxpayer". And as you leave the scene be sure to tell his wife "Mam, I'm very sorry you married a d*ckhead. My deepest sympathies to your children's genes."
- Bruce E. Woych | May 14, 2013 at 10:19 pm |
(some interesting dynamics):
1. THREE DYNAMICS OF REGULATORY COMPETITION
2. INTERNATIONAL COOPERATION IN CAPITAL MARKET REGULATION
2.1 A Case of Success: Standardising Capital Adequacy Requirements in International Banking
part 6. A TYPOLOGY OF REGULATORY COMPETITION
MPIfG Working Paper 97/4, April 1997
Regulatory Competition and International Cooperation
by Philipp Genschel and Thomas Plümper
- Bruce E. Woych | May 14, 2013 at 10:27 pm |
Revealed – the capitalist network that runs the world
Updated 13:15 24 October 2011 by Andy Coghlan and Debora MacKenzie
"AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters' worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.
The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.
The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere (see photo: @LINK). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world's transnational corporations (TNCs).
- Bruce E. Woych | May 14, 2013 at 10:40 pm |
[PICTURE]: HSBC bankers testifying before U.S. Senate on laundering billions in drug money (photo courtesy of The Economist, 21 July 2012)…
The Global Banking 'Super-Entity' Drug Cartel: The "Free Market" of Finance Capital
By: Andrew Gavin Marshall
"I would like to introduce you, the reader, to some realities of our global banking system, resting on the rhetoric of free markets, but functioning, in actuality, as a global cartel, a "super-entity" in which the world's major banks all own each other and own the controlling shares in the world's largest multinational corporations, influence governments and policy with politicians in their back pockets, routinely engaging in fraud and bribery, and launder hundreds of billions of dollars in drug money, not to mention arms dealing and terrorist financing.
These are the "too big to fail" and "too big to jail" banks, the centre of our global economy, what we call a "free market," implying that the global banks – and corporations – have "free reign" to do anything they please, engage in blatantly criminal activities, steal trillions in wealth which is hidden offshore, and never get more than a slap on the wrist.
This is the real "free market," a highly profitable global banking cartel, functioning as a worldwide financial Mafia."
- Bruce E. Woych | May 14, 2013 at 10:50 pm |
Sen. Warren Continues Campaign Against 'Too Big To Jail' Banks
BY- Jon Queally, staff writer
Published on Tuesday, May 14, 2013 by Common Dreams
Sen. Warren Continues Campaign Against 'Too Big To Jail' Banks
Letter to heads of SEC, Federal Reserve, and Justice Dept. demands to know if and when "public interest" trumps protecting big banks
BY- Jon Queally, staff writer
As a laudatory article by TruthDig columnist Robert Scheer this week acknowledges:
"How astonishing to have a public servant who actually cares to inform the public about the inner workings of the system of crony capitalism that has wedded big government with big business. This comes at the expense of the free market that corporate lobbyists delight in invoking as an ideal while they subvert it as a reality." http://www.commondreams.org/headline/2013/05/14-5
- London Banker | May 15, 2013 at 3:50 am |
The Bank Holding Company Act used to be used by the Fed to control bank expansion and complexity. All acquisitions and reorganisations had to be approved by the Fed. The Fed could condition approval with restrictions. This sort of unfashionable "activism" controlled risk and scale in TBTF banks for 50 years until abandoned under Greenspan in favour of unrestrained expansion and scale in all business lines. We just need to go back to what works. The law is already on the books.
- Hartzman | May 15, 2013 at 9:09 am |
Conclusion; Wells Fargo Advisors LLC / Hartzman / 4-3750-13-010
- Pavlos | May 15, 2013 at 12:14 pm |
Is the pressing issue that some banks are individually too big, or is it some other form of systemic exposure or asymmetry? Was Lehman Brothers too big at ~$650 Bn? What if it was under $500 Bn, or even $100 Bn? Would it then not have sparked the collapse of an overexposed and insolvent financial system, and wouldn't/shouldn't the bubble have burst anyway?
I'm soundly unconvinced by the TBTF argument. Banks are "too big" if individual bank management appears to have too much bargaining power, or if the random non-systemic failure of banks appears to bring higher expected losses the larger the banks get (i.e. doesn't get rarer with size, or becomes uninsurable). I don't know if these are true concerns, and if they are I doubt they're a most pressing issue.
If, as many suspect, the core issue is systemic exposure and risk asymmetry in the banking/state system then TBTF is a red herring. It doesn't matter for systemic fragility if the banks are large or small. Systemic insolvency would travel through either a fine-grained or a coarse-grained system, albeit differently. You can't say simply that a fine-grained system would be systemically more robust.
In light of this I think TBTF is a convenient way to avoid talking about radical reforms, such as full-reserve banking, radically lower insured deposit limits, converting bank balance sheets to trust funds, changing the M0/M1 mix, and other big changes that might really be needed to bring the monetary and financial system to health.
- James Taylor | May 15, 2013 at 4:07 pm |
There is an old say among bankers, e.g., "The best way to rob a bank is to own one!"
- gluon1 | May 15, 2013 at 5:06 pm |
What Bolt said. (http://baselinescenario.com/2013/05/14/if-the-fed-knows-banks-are-too-big-why-doesnt-it-make-them-smaller/#comment-142733)
- Jessica Weinkle | May 15, 2013 at 6:22 pm |
This is an interesting post. Without knowing a great deal about the history of this specific debate, it seems that outlined here is an example of negotiating an understanding of socially acceptable risk. Capital is a proxy for risk. Hmm systemic risk perhaps? I imagine the reason that the Fed does not just make things smaller and less complex is because size and complexity exist on a continuum so what appears to be a good risk for the Fed (ie. the public) is not so good for someone else. After all, risk is a marketable product. Perhaps sudden changes in size/complexity would also have sudden impacts on public interest (eg. retirements or whatever).
Much like the frustration shown here about reframing the debate as one over capital, I believe a danger lurks in turning the debate into a nonsensical battle over capital. Of course, a good capital amount is arbitrary, as is a good size and a good level of complexity. Though I am nearly certain that the real underlying issue is not capital, I'm not quite sure what it is. For argument sake, I'll go out on a limb and guess it is some sort of moral dilemma about how the US would like to foster its economic future. While the nation has long been a leader in banking and turning risk into a socially profitable endeavor, in recent years the tradition has demonstrated some undesirable consequences.
Thanks for the discussion here. Good stuff!
- Bayard Waterbury | May 15, 2013 at 8:18 pm |
James, needless to say, you are beating a drum which is now severely scarred from about four years of steady rhythm. We must call into question the wisdom and determination of both Ben and the FED Board when the QE programs have pumped many trillions into these behemoths over the last couple of years, and yet, all that has done is gone to their asset pool and enabled them to dramatically increase their levels of derivative issuance, program trading, etc., while having virtually no positive impact on the general economy and, in fact, very possibly suppressing really useful activity and leading to some unwanted negatives. Employment has not been the FED's focus, although it is supposed to be. It hasn't exercised other powers which could be far more useful and the QE crap programs. And now he's just not fighting very hard to bring pressure on the absurd austerians trying hard to make us resemble the PIIGS in Europe, by suppressing economic activity, while Ben twiddles his thumbs and occasionally appears on Capitol Hill to object in some hearing or other, while Congress totally ignores his advice and complains about what he does that they can't control.
The criminal Bankster TBTF's are strangling us and will bring it all down soon, if they aren't stopped. No prosecutions, no control over derivatives or high speed trading. No special taxation of absurd bonuses. Nothing is being done.
They own Washington, and the FED is just paying lip service, because its biggest members are those travesties on Wall Street.
- tonyforesta | May 15, 2013 at 10:59 pm |
Always enjoy your commentary Bayard Waterbury. We all know the core problems, perverse incentives, systemic criminality, select immunities, and predatorclass psychopathology that defines the current global financial system. We all know the socalled government and regulatory agencies are purchased spaniels advancing and shielding the untoward bidding and unfathomable profits of the predatorclass. We all know these fiends are driving the nation and the citizenry to the precipice of another financial collapse that will make 2008 look like a Disney movie. We all know the predatorclass den of vipers and thieves are above and beyond the law and unaccountable for wanton and systemic crimes and abuses. We all know there are no Andrew Jackson's to stand up to them.
What we sadly do NOT know are the solutions or remedies to this horrorshow. No one provides any real suggestions or pathways to right these horrible wrongs. So the horror continues unabated and the predatorclass obdurate and insular in their opulent palaces pillages even more wealth and resources, while the people are ruthlessly oppressed, and exponentially deprived of wealth resources, freedoms, rights, and protections.
This nation was born of revolution.
I'm of the burn it all down – and reset crowd!
It's our only hope!
- reddit.com | May 17, 2013 at 9:17 am |
"Austerity means the rich never having to say they're sorry for not paying their taxes. See S Anderson IPS report http://www.ips-dc.org/reports/ceo-tax-subsidized-pay …"
- crawlars | May 17, 2013 at 2:37 pm |
Ah, the only heartening aspect of the galactic-scale, on auto-pilot theft of value from value-creators, the dying geese, is reading comments in various articles and finding that the host is waking up and many are a lot smarter than I. Reset, yes, it is coming. I was hoping otherwise but I am reminded daily that the problem is sociopathic parasites…
- interguru | May 21, 2013 at 11:13 am |
Breaking up the banks is a red herring. Canada is dominated by a few large banks and had no meltdown. In 1998 the Wall Street was almost brought down by a small hedge fund failure. The real issue is regulation, or to be more precise, the lack of it. This points to our corrupt campaign finance system that lets Wall Street own Washington. As Gore Vidal said, there is only one party, the Money Party, with a Republican and Democratic branch.
- Tyrone | May 21, 2013 at 1:58 pm |
While it will never happen, it seems the right thing is to have a periodic and complete government overseen audit of banks to determine their real size, in a manner where they can't appear smaller by temporary moving assets overseas. Then, once a bank's valuation rises, even if temporarily, above a trip point related to the nations GDP, the bank should be given 12 months to split up into multiple parts, with the minimum split allowed be a bifurcation. We all know that 12 months is plenty of time for such things, given how quickly deals are done when the banks want them done. If the bank does not split up within that twelve months, then the government should be required to bifurcate the bank within one quarter regardless to the claims of damage such a bifurcation might entail. In the case of a bifurcation, voluntary or government created, the split has to be roughly equal but no worse than 40%-60%.
- DEC | May 23, 2013 at 7:14 am |
I'm old enough to recall the Savings and Loan Crisis in the 1990′s when small banks were the culprit. Regulators and politicians told us that larger, more responsible, and better diversified banks were the key to avoiding systemic financial crisis. Policy decisions rewarded ever larger banks and over decades, we accomplished this objective of larger, easier to regulate banks.
When will we learn to leave all lending decisions in the hands of wise government officials? Wait. We have. (Fannie, Freddie, FHA, Farm Loan, Frank Dodge)
Problem Solved! Nothing but safe prosperity on the horizon now.
Cross posted from Washington's Blo
U.S. Attorney General Eric Holder said today:
I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy
As we've repeatedly noted, this is wholly untrue.
If the big banks were important to the economy, would so many prominent economists, financial experts and bankers be calling for them to be broken up?
If the big banks generated prosperity for the economy, would they have to be virtually 100% subsidized to keep them afloat?
If the big banks were helpful for an economic recovery, would they be prolonging our economic instability?
In fact, failing to prosecute criminal fraud has been destabilizing the economy since at least 2007 … and will cause huge crashes in the future.
After all, the main driver of economic growth is a strong rule of law.
Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won't recover:
The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that's really the problem that's going on.
I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That's the point. There were victims all over the world.
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future.
Indeed, professor of law and economics (and chief S&L prosecutor) William Black notes that we've known of this dynamic for "hundreds of years". And see this, this, this and this.
(Review of the data on accounting fraud confirms that fraud goes up as criminal prosecutions go down.)
The Director of the Securities and Exchange Commission's enforcement division told Congress:
Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public's fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.
Paul Zak (Professor of Economics and Department Chair, as well as the founding Director of the Center for Neuroeconomics Studies at Claremont Graduate University, Professor of Neurology at Loma Linda University Medical Center, and a senior researcher at UCLA) and Stephen Knack (a Lead Economist in the World Bank's Research Department and Public Sector Governance Department) wrote a paper called Trust and Growth, showing that enforcing the rule of law – i.e. prosecuting white collar fraud – is necessary for a healthy economy.
One of the leading business schools in America – the Wharton School of Business – published an essay by a psychologist on the causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:
According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. "Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG." The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. "Normal expectations of what is safe and dependable were abruptly shattered," Sachs noted. "As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred."
People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.
He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. "She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.
"By no means a sophisticated economist, she knew … that some people had become fantastically wealthy by misusing other people's money - hers included," Sachs said. "In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished."
Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.
Note that Sachs urges "hold[ing] the perpetrators of the economic disaster responsible." In other words, just "looking forward" and promising to do things differently isn't enough.
Robert Shiller – one of the top housing experts in the United States – says that the mortgage fraud is a lot like the fraud which occurred during the Great Depression. As Fortune notes:
Shiller said the danger of foreclosuregate - the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt - is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.
Indeed, it is beyond dispute that bank fraud was one of the main causes of the Great Depression.
Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith's, definitive study of the Great Depression, The Great Crash, 1929:
The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy.
In 2004, the FBI warned publicly of "an epidemic of mortgage fraud." But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….
This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.
The government that permits this to happen is complicit in a vast crime.
Galbraith also says:
There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that's a process which needs to get underway.
Galbraith recently said that "at the root of the crisis we find the largest financial swindle in world history", where "counterfeit" mortgages were "laundered" by the banks.
As he has repeatedly noted, the economy will not recover until the perpetrators of the frauds which caused our current economic crisis are held accountable, so that trust can be restored. See this, this and this.
No wonder Galbraith has said economists should move into the background, and "criminologists to the forefront."
The bottom line is that the government has it exactly backwards. By failing to prosecute criminal fraud, the government is destabilizing the economy … and ensuring future crashes.
Postscript: Unfortunately, the government made it official policy not to prosecute fraud, even though criminal fraud is the main business model adopted by the giant banks.
Indeed, the government has done everything it can to cover up fraud, and has been actively encouraging criminal fraud and attacking those trying to blow the whistle.
Topics: Banking industry, Legal
Email This Post Email This Post Posted by George Washington at 7:06 pm
48 Comments " Links to this post
Zachary Smith says:
March 6, 2013 at 8:07 pm
I'll admit I've resisted the idea that BHO is anything besides a lawless and corrupt liar. As evidence accumulates of his administration screwing up virtually everything it touches, I'm forced to consider adding "incompetent" to the mix.
Even after reading this piece though, I think I can cling to the lawless/corrupt bits for a while longer. But I'm beginning to waver…
Not that it really matters, for so far the Powers That Be have managed to arrange that our alternatives are always worse.
different clue says:
March 7, 2013 at 2:07 am
I still favor pro-lawless and pro-corrupt myself. "Incompetent" does not explain it. Real incompetence would be randomly incompetent in all directions. The Obama Administration has very competently overseen even greater wealth-poverty divergence than what the Bush Administration was able to arrange for. The Obama Admin. has been very competent so far at shielding its social class comrade FIRE sector players from serious investigation or prosecution or even any inconvenient loss of bussiness or money. The O.A. has been very patiently manipulating the budget terrorization process in line with Shock Doctrine precepts in order to approach its goal of Catfood Cuts to SS/Mcare/Mcaide. (And it looks as if Obamacare was stealth-engineered to facilitate the entire privatisation into the Obama Exchanges of Medicaide in its entirety in those states which have understood the stealthy channel carefully dug in advance for them to flow down.)
And the O. A. mass-mind managers continue to understand their liberal and progressive marks very well, offering them all the right shuck-and-jive stringalong-things such that the liberals and progressives stay desperately strung along.
I see no incompetence here.
Doug Terpstra says:
March 7, 2013 at 4:05 pm
We should not attribute to incompetence, cowardice, or even naked greed what can only be explained by malice, mental disease (megalomania/messiah complex?), or vast conspiracy. The consistent cumulative evidence of broken promises and escalating violence proves, beyond any reasonable doubt, a calculated intent to deceive - especially when weighed against Obama's manifest intelligence, the entirety of the "hope and change" campaign, MSM oligopoly censorship, distracting tea party noise, and the sophistication of propaganda in the continual reframing of BHO as a man of the people and of peace. In aggregate, the evidence of premeditation with malice aforethought is simply overwhelming, IMO. BHO is no common con. I've often said in separating word and deed, he makes his idol, Reagan, look like a ham-amateur.
It is still difficult to comprehend the ultimate end game. It shouldn't surprise us to find Israel in the thick of it, but Obama seems to be a key chess piece in a concerted, systemic campaign that follows Klein's Shock Doctrine playbook to destroy the New Deal and reestablish plantation economics or an even greater agenda worthy of Alex Jones - global currency and totalitarian world government.
Jim in MN says:
March 6, 2013 at 8:12 pm
It's not just failure to prosecute, but also the No Bond Haircuts/sabotage of accounting principles. Overall, the policy call can be summarized as Japanification. We are losing about 1%/yr of GDP growth due to the drag and random 'whocoodaknew' bailout requirements that are built in like trap doors.
The other thing failure to prosecute causes is massive failure of legitimacy. This infects social discourse, confidence in markets and the rule of law, and politics per se.
Good contribution GW.
March 7, 2013 at 1:23 am
Agree, Wall Street has become impervious to regulation and prosecution – it's a Corporatocracy (Transparency International, the body who publish a standardized 'Corruption Index,' shows that for 2012, the US ranked 19th among nations) that has utterly arrogated the legal process, the DOJ and the Attorney General.
Wall Street has recently discovered that, even when any member of its cadre of TBTF banks breaks the law, launders drug money or trades with the enemy, it's now easier and cheaper to avoid prosecution vis-à-vis the executive branch's DOJ, than to lobby Congress and nullify or negate pending legislation that might result in a prosecution in the first instance – if you are above and beyond the law, who cares about the law makers?
So if regulation, legislation and prosecution don't work we're left only with "death and taxes". Putting death to one side (for a moment), the only option remaining is tax: a 'Too Big to Fail Tax (TBTFT); a progressive tax (say, 0.1%, that's $30 million on $30 billion in assets, up to 1% on a trillion dollars in deposits) from which, by definition small banks (under $30 billion in deposits) would be exempt; a tax that could deliquesce the TBTF problem and generate revenue to offset the deficit. A bi-partisan tax if ever there was one – difficult to vote against (only the state representatives of Delaware might have an issue). Implement it, incrementally, over three years – give the banks the time to downsize in an orderly fashion. They'll split their business along the lines of a Glass-Stegall fault-line by default (then look at a Tobin Tax for the risky, leveraged, but enfeebled investment banks).
And, what is out there to stop these taxes from being passed on directly to the people who use these banks? Nothing, as far as I see it the smaller banks become more competitive - they attract more accounts (up to their limiting factors) vs. the mega-banks – don't like the higher fees at Mega Corp? Move your account to LittleBankOnThe Prairie & Co.
If taxation doesn't work, we're left only with death.
March 7, 2013 at 11:29 pm
I agree, superb work, GW. Thank you.
March 6, 2013 at 8:16 pm
OH DEAR GOD YES! …… YESS
You had me at the title
"It's not a crime if the President has lots of contracts with lots of people"
The Infamous Oregon Lawhobbit says:
March 7, 2013 at 3:18 pm
Somebody already took the best -- Darn!
But I will second it, wholeheartedly. :D
March 6, 2013 at 8:21 pm
You mean like how a failure to prosecute war crimes inevitably leads to more war crimes?!
Seriously, although I completely agree with the sentiment of GW and others about the prosecution of criminal fraud, I sometimes kind of find it hard to believe that we're starting(stopping?) the discussion there.
9/11 aside – and that's a big aside – the leaders/elite of our country nearly a decade ago blatantly waged illegal aggressive war, murdered millions of innocent people, tortured/imprisoned thousands of others and engaged in sundry other war crimes and everyone walked away scot free.
But somehow we are surprised that they haven't been brought to justice over their involvement in the ongoing financial fraud?!
Oh, murder's one thing but STEALING!!!
The criminality of the elite shouldn't be pigeonholed especially as they relied upon the same members of our Vichy government to assist in the the commission of ALL of these crimes – i.e., war and financial.
The ability to steal trillions of dollars from unsuspecting people the world over?
Well-placed bribes worth billions into the pockets of political minions here and there.
The ability to wage war, murder, assassinate, torture and imprison people with impunity?
March 7, 2013 at 2:46 pm
Well on target!
If, and that is a BIG IF…..the average American subscribed to your view their "intellectual" world would probably collapse.
As I was reading your post what came to mind was someone digging a pit…..scratching the surface reveals "something smelly"; digging deeper (into US "foreign policies") and deeper reveals a greater stink.
Until the average US citizen gets their heads out of where the sun doesn't shine; walks away from the major media which controls the intellectual trends (and of behavior) and opts out in a major way from the insensate consumer economy we will get nowhere…..
Most educational institutions don't teach "real" history; it is not in the interests of those schools who receive so much funding from their own taxpayers to disallusion those same as to the real history of the US in the world.
You are also so correct about not prosecuting our own officials for war crimes…etc…..etc…..
No one is supposed to be above the law….but we don't even really recognize international laws…..
If we do not prosecute (don't hold your breath!) those war crimes, if we don't throw some of these CEO's of the financial institutions into solitary, then both segments of our society will continue and will escalate their crimes on the American citizens and those around the world.
We are slackers when it comes to prosecuting crimes we commit in our own names; we are now showing very explicitly that we will not even prosecute financial crimes against those saem peoples.
Trust has been crushed in this last financial explosion; trust will not be restored until we "level the playing field"!
March 6, 2013 at 8:53 pm
Eric Holder and his boss are nothing more than prostitutes.
George Washington says:
March 6, 2013 at 8:57 pm
Chairman of the Department of Economics at George Mason University: Politicians Are NOT Prostitutes … They Are Pimps
March 6, 2013 at 10:12 pm
Right-wing troll alert.
March 7, 2013 at 12:43 am
Hunh? He's the author.
Lambert Strether says:
March 7, 2013 at 3:09 am
Please. Comparing Holder to a prostitute is insulting to prostitutes.
El Guapo says:
March 6, 2013 at 9:10 pm
Holder is such a gutless and despicable piece of trash. And the problem is he is unremarkable – 98% of the "elites" are just like him.
Stephen Nightingale says:
March 6, 2013 at 11:34 pm
Or to put it succinctly, he's a Nebbish.
March 6, 2013 at 9:18 pm
Between this story and the piece the Times had about the revolving door between the SEC and Wall Street, I am starting to wonder whether the middle class will ever be relevant during policy discussions in D.C. Clearly it's not now, and won't be anytime in the future.
And as far as the impact on the economy . . . um, who forgot to tell Eric how we got here in the first place? Basically his logic is this–we cannot go after banks because they will destroy the economy, so we have to let them continue on their way, even if that means they will destroy the economy. Can I play AG for a few years???
March 6, 2013 at 11:21 pm
After Alberto Gonzales, I figured the trajectory for future Attorney General appointees would be sharply upward.
Unfortunately, it appears that I was greatly mistaken and naively optimistic.
March 6, 2013 at 9:31 pm
"Catch-22 says they can do anything we can't stop them from doing."
different clue says:
March 7, 2013 at 2:12 am
"22-Catch says they can't do anything we can stop them from doing".
So is there anything we can stop them from doing? And how would we actually stop them from doing it? And re-arranging something or something's form or context to make that something un-doable will stop them from doing it just as surely as stopping them by brute force from doing a do-able thing. Are there some things we can turn from "do-able" into "un-do-able"?
March 6, 2013 at 9:35 pm
Soooo, in the eighties, AT&T, which posed no existential threat to anyone, much less the entire United States of America, was summarily broken up. Quaere, then. What is the difference between then, and now?
March 6, 2013 at 9:46 pm
Maybe it's not just TBTF. Maybe it's just purely TFBP. (Too F***ing Big Period)
Wake Up America! says:
March 6, 2013 at 9:36 pm
The economy will not recover until the perpetrators are behind bars and the people who've had their homes, savings and lives stolen from them are made whole again.
TARP, foreclosure fraud, ZIRP, QE to infinity – where and when does it end? When I try to explain to people who think they haven't been impacted by the outright fraud and theft that they indeed have, I'm met with blank stares. How many seniors have had to adjust their lifestyle because their savings now draw nothing? Somehow they can't seem to make the connection.
It amazes me that while the banks and the federal government continue to loot the masses, the masses believe the propaganda that it was "those subprime people the banks were forced to lend to" who brought the global economy to its knees.
March 7, 2013 at 2:58 pm
Had to giggle when reading your post!
Been there, done that!
Receive nothing but a "thousand yard stare"!
The average American consumer is suffering from mass financial and intellectual schizophrenia………..a kind that does lead to a Cach 22….
If they believe what "we" try to tell them it would turn their world completely topsy turvy….if they don't they can continue to feel frustrated, maybe even screwed,…but they can continue to "live the American Dream" albeit with some restricitons…..
They still get to play the "game".
March 6, 2013 at 9:44 pm
Obviously, the "top" eschelons of every facet of regulatory artifice is corrupt.Obviously the executive power is corrupt.Everyday, their crimes are articulated on sites like these.They are so brash,they don't even seem to feel like they have to hide anymore.They know just saying"I didn't mean to steal your money,waste your decade";is enough to escape any legal entanglement.
just for starters, who are "they"?
When each card in our economic house of cards can rightly claim it is not "they alone",who is holding up the facade.
We can't just take the executive officers and board members of the fortune 100, and the entire upper eschelons of every executive branch of gov't(which are currently failing to "enforce" the laws).every op-ed apologist,every shill,every think tank prostitute.Every supreme court justice.Every circut court or state supreme court judges who enable the ongoing crimes…."out back and shoot them",or out front, and tar and feather them before they are hanged.These things are too many….who will hear the call?Who gets to make the decision?.And really, how long would it take for others to fill their roles.1 minute?two?
It seems to me we need to modify the trough these pigs eat at.We need to seriously debate, and change our monetary system.Get rid of the fed,(the dark dank opaqueness where this odor and filth eminate from),And return the money creation powers to the Treasury.
112th congress, HR2990 "The NEED Act"
Make these people work for a living again.
The real problems we have stem from the top.The biggest players.When they are rotten,everything smells.
March 6, 2013 at 9:52 pm
TFBP would explain why we now have Sequestration. The maw of our government has grown so insatiable that no thoughtful, targeted, intelligent effort to satisfy it's appetites will suffice. Instead, we make indiscriminate sacrifices…virgins, sheep, whatever, in hopes of pacifying the beast.
Paul Repstock says:
March 6, 2013 at 11:00 pm
They can and will do anything they 'want to' because nobody has the guts to stand up and stop them.
President O does not have the authority, moral or legal, to assasinate people, yet he will continue to do so, because nobody stops him. Infact, he is a hero and a posterboy for the hardliners. The supposed delays and weighty considerations are merely lipstick on the pig. A sop to his once liberal constituency.
March 6, 2013 at 11:07 pm
Banks have to be regulated in order to curtail excessive financial power and their ability to rig the system. Regulate banks so they have to source their funds first before they lend instead of simply creating money. Anyone that can create money may run amok with the system.
R Foreman says:
March 6, 2013 at 11:28 pm
Screw prosecuting.. just break them up, shut them down, or whatever else needs to be done.. as Yves said before, the regulators, the government, has all the power. If the g-men say jump then the bankers jump or they get shut down tomorrow, as in 50 suits and 75 badges walk into your office and escort you away.
Holder is such a little weasel it's disgusting.
Susan the other says:
March 7, 2013 at 1:07 pm
Amen and then some. What we need is triple damages – paid to every citizen who suffered because of these crooks. It won't help much of anything to send a small army of banksters to jail. That just frees up their positions for the next slimey perps. We need to change the system. Take over the Federal Reserve and do a population-wide bailout. We also need to acknowledge that this mess is far more complex than a mortgage crisis. It goes back at least 150 years. That's how long we've been patching this stupid tire. All the way back to great-great granddad.
So it follows emotionally that in order for trust to "be restored" we'd have to turn back the clock and prosecute the crooks so everyone could go forward with trust and confidence, from say 1880. A timely response to crime is the essence of trust. That cannot happen.
So we need, really really need, to change the institution of finance from privateers (a model that originated under Elizabeth the First in the 1500s) to public finance, utility finance, and MMT. As Yves advocates, turn the banks into utilities.
Our system for the entire duration of the 20th c. was based on the seductive idea of perpetual growth and all of the ignored contradictions that idea contained. So, really, how does a remiss government destabilize an economy that was never an economy and was always unstable? Riddle me that.
And just for my own sense of revenge, I'd like Obama and Holder to be strung up like Mussolini – for the historical record.
Steve The Great says:
March 6, 2013 at 11:41 pm
The Obama Presidency is nothing other than the getaway car of the fraudsters. he was promoted by the fraudsters the exact same way Clinton was. First he is given the key note address at the Democratic national convention in the Presidential campaign preceding the campaign cycle in we he himself has been selected to run. Then the presstitutes spend the next four years fawning over the so-called bright new refreshing political face, and he will have the entire press corps campaigning for him from then on right through the next election. Mr. Clinton is reported to have received over 80 million dollars in "speaking fees" since his retirement. This is the reward that Obama believes will be in store for him as well.
…by the way, how much do you think it would cost to bribe the Nobel committee to nominate the Nobel Prize for Peace recipient of your choice? What do you think the message was that Obama got from that?
…Clinton and Obama both should be awarded Nobel Prizes for Financial Crimes Against Humanity and for the Betrayal of Human Progress. Don't even get me started on Bush.
March 7, 2013 at 2:04 am
THE KEATING FIVE
Holder: I am concerned that the size of some of these institutions [banks] becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy
It is simple. He was told not to prosecute when he took office – the fraud was already blatant. Obama needed Wall Street money to get reelected.
He is now "justifying" (or trying to do so) the fact that he did not prosecute when the iron was hot.
Many banks have paid fines. But fines will not stop the fraud. Only jail sentences will help in that regard.
And yet, there is a precedent. Remember the Keating Five scandal in 1989? The "Five" were all Senators, including John McClain and John Glenn. Keating went to jail, but the Senators all served out their terms. The two Johns were reelected …
No, the only measure that will mitigate the fraud is by diminishing the incentive to undertake it. That is, a wholesale reform of the Tax Code. For as long as banksters can take home 80% of the loot (legally) why should they not fraud the system?
Who will refuse to take that risk, when the payoff is soooooo juicy?
The only measure that will prevent fraud is a jail-sentence, provided that the fraud is not too massive and too difficult to prosecute.
So, let's snip the incentive to fraud in the bud in the first place, and have the Justice Department hounds go after the jerks who try it anyway.
Conscience of a Conservative says:
March 7, 2013 at 5:29 am
There's lots to agree with here. A dishonest finanical system turns the banking function into a giant tax/drain on the rest of the economy. Banks are no longer an intermediary(a useful role) but serve to extract profits from the financial eco-system akin to a parasite attached to a salmon.
March 7, 2013 at 7:35 am
But then the powers that be will reign: drones, ndaa, Homeland Security, pepper spraying/shackling of Occupiers ( THIS government would have a field day with MLK marchers) by the likes of Obama/Bloomberg/Kwan.)
Why does this president think the room GASped at his recent line "I am not a dictator?" Blatant arrogance.
Sequester steps on the throats of the little guy. Take their homes, nick them @ the gas pump: presuming they are still lucky enough to have a job to go to, and God forbid if they have to buy a loaf of bread for their family…!
F. Beard says:
March 7, 2013 at 1:35 pm
Banks are no longer an intermediary(a useful role) … CoC
Banks don't lend savings; they create temporary money ("credit") as they lend it. The "loanable funds" theory has been disproved.
March 7, 2013 at 7:36 am
Didn't James Jr., that scion of the regulatory state, just defend Jack Lew?
I'm sorry, but you can't (apparently hypocritically) talk about prosecuting criminal bankers at, say, Citibank and then turn around and defend their paid enablers and seek to put them into the government.
I know the self named "progressive" economists think the public is stooopid, but just how stooopid are we supposed to pretend to be for them?
March 7, 2013 at 8:38 am
Look, Holder isn't going to prosecute people who are going to be signing his checks later. The Mob really needs to get in on this, offering sweet consigliare jobs to former prosecutors. (Although given that for all practical purposes HSBC is the Mob, so I guess we are already there.)
March 7, 2013 at 9:29 am
BEST. ARTICLE. EVER. Will be forwarding to as many folsk as I dare…thank you!
March 7, 2013 at 9:42 am
The financial services industry – they knew or should have known what they were doing – legally….'I did not know' or 'no one could have foreseen' - is no defense. Nor should justice abdicate it's duty to prosecute by claiming to protect the economy… laws were broken systematically and knowingly.
Proof howls from the past
Tax Facts – published in the 1920′s below:
He isn't really a big time crook unless you must let him alone to prevent the loss of public confidence.
Speaking of plastic surgery, isn't there some way of transferring bone from a politician's head to his back.
A good president is one who happens to be on the job when you are having a run of good luck.
There is a bright side, after watching great minds combat the recession you should be rid of your inferiority complex.
"Laborers knowing that science and invention have increased enormously the power of labor, cannot understand why they do not receive more of the increased product, and accuse capital of withholding it. The employer, finding it increasingly difficult to make both ends meet, accuses labor of shirking. Thus suspicion is aroused, distrust follows, and soon both are angry and struggling for mastery.
It is not the man who gives employment to labor that does harm. The mischief comes from the man who does not give employment. Every factory, every store, every building, every bit of wealth in any shape requires labor in its creation. The more wealth created the more labor employed, the higher wages and lower prices.
But while some men employ labor and produce wealth, others speculate in lands and resources required for production, and without employing labor or producing wealth they secure a large part of the wealth others produce. What they get without producing, labor and capital produce without getting. That is why labor and capital quarrel. But the quarrel should not be between labor and capital, but between the non-producing speculator on the one hand and labor and capital on the other.
Co-operation between employer and employee will lead to more friendly relations and a better understanding, and will hasten the day when they will see that their interests are mutual. As long as they stand apart and permit the non-producing, non-employing exploiter to make each think the other is his enemy, the speculator will prey upon both.
Co-operating friends, when they fully realize the source of their troubles will find at hand a simple and effective cure: The removal of taxes from industry, and the taxing of privilege and monopoly. Remove the heavy burdens of government from those who employ labor and produce wealth, and lay them upon those who enrich themselves without employing labor or producing wealth."
"In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
If, however, a man's income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
If part of the speculator's income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer's income be taxed it will tend to limit employment and stop the production of wealth.
Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn."
Written around 1925
Then some other stuff:
"We, the People, are the rightful masters of both the Congress and the Courts. Not to overthrow the Constitution, but to overthrow the men who have perverted it." – Abraham Lincoln
We had to struggle with the old enemies of peace–business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me–and I welcome their hatred."
Election eve speech at Madison Square Garden (October 31, 1936)
Franklin Delano Roosevelt
It goes on and on.
March 7, 2013 at 12:02 pm
….this is so upsetting. We were certain the missing dollars were being skimmed by school teachers and family workers that were given elaborate benefits like say, health-care.
now hush…it's all about the market…didn't you get the memo?
Of course, with it brings the wealth creation and trickle down, all code for a greed-based, narcissistic hyperindividualism that radiates with a new sociopathic lack of interest in others.
The president and his DOJ has the power to break the law at will whenever he deems that doing so promotes the interests of his monied backers. That America's most celebrated journalist not only supports this, but demands that all presidents follow this model of lawlessness, is a sad state of where we're at.
March 7, 2013 at 11:25 pm
Who is America's most celebrated journalist? I missed the memo.
March 7, 2013 at 2:44 pm
The big lie of the financial crises was that banks only had liquidity problems – not insolvency issues. Prime them with cheap money and everything would work out fine. A big Pay Day loan so to speak.
Holder is just one of many pawns continuing to proprogate this lie through his complete failure to acknowledge and prosecute bank fraud. We can safely assume he is getting his marching orders from the White House and Wall Street. Where is Christian-Judeo guilt when we need it? Justice truly is blind.
March 7, 2013 at 3:02 pm
Every time I visit this site (daily) and read the comments it enables the descriptions of the commenters of being, "(economic) militants", "subversive thinkers"…etc…..
I can hear the drones already!!!!!!
March 7, 2013 at 3:10 pm
If U.S. Attorney General Eric Holder is not prepared to do his job and uphold the law where it applies to the largest banks then he ought be relieved of his position as an AG.
Is he not complicit in the crimes by way of overlooking prosectution, not effecting a deterrent and by not removing criminal elements in order to prevent further offending ? Does anyone know how the written (USA) law stands on this ?
Does Mr.Holden really believe that the guilty will not re-offend and that having set the preceedent ( of exemption for prosectution) others will not be encouraged to take greater risk and transgress the regulations and rule of law, both local and international ?
If any bank is too "big to prosecute" then it is too big to be allowed to break the system with impunity ( not that even small banks should be allowed), if the effect of the prosecution on the world bank system is proportional to the size of the bank, then the effect of the transgression will equally proportional to the effect on whole world banking system.
If Mr.Holden believes that the banks are too big to prosecute why did he not prosecute individuals within the bank who are guilty ?
Kurt Sperry says:
March 7, 2013 at 7:39 pm
The scary part for me is that there are only political solutions to all this, and pretty obviously those solutions cannot be done within the existing duopoly. Both brands of the duopoly are of a piece with the organized criminals. And the entry barriers to the league they play in are prohibitive.
If you adhere to the same playbook.
Look at M5S in Italy however and you see an alternative playbook where a significant political entity can be more or less conjured up in a few years on a shoestring budget on the internet. When the disconnects between what government does and what the electorate want reach some point in a democracy, the system becomes less stable and disruptive change to the status quo becomes easier to trigger. And the internet makes one hell of a potential trigger– cheap, fast, powerful, dangerous and beyond effective control.
That said I don't feel the time is right here in the US–not yet at any rate. But that could change in six months!
different clue says:
March 8, 2013 at 1:29 am
If you see the Internet go dark in 6 months, you'll know the governators agree with you.
If the Internet were taken down by the ruling Corporate BizNazi Goverplex, millions of people would still have millions of stand-alone computers. How might people create a whole "network-of-people" . . . amateur couriers carrying
discs or hard-drives or memory sticks or whatever those data-storage techno-thingies are called . . . between and among those millions of owners of millions of computers? Something like how Solidarity activists moved notes and memos around during the Jaruszelski Martial Law Period in Poland?
Are people preparing to catapult the samizdata?
March 9, 2013 at 4:34 pm
It's basically impossible to take the Internet down. It's much more decentralized than you realize. If people concluded that it was being taken down, they'd start taking over the junction rooms, and/or reconnecting the wires at different junction rooms.
What happened to the global economy and what we can do about it
(1) The government created the mega-giants, and they are not the product of free market competition;
(2) The White House needs to "regulate and oversee them", even though it is clear that the government has no real plans to regulate or oversee the banking behemoths;
(3) Giant banks are good for the economy
In response to the latest claims by the government, let me recap the real reason the government doesn't want to break up the too big to fails.
We Need Them To Help the Economy Recover?
Do we need the Too Big to Fails to help the economy recover?
The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:
Nobel prize-winning economist, Joseph Stiglitz
Nobel prize-winning economist, Ed Prescott
Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
Simon Johnson (and see this)
President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
Deputy Treasury Secretary, Neal S. Wolin
The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
The Congressional panel overseeing the bailout
The head of the FDIC, Sheila Bair
The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
Economics professor and senior regulator during the S & L crisis, William K. Black
Economics professor, Nouriel Roubini
Economist, Marc Faber
Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
Economics professor, Thomas F. Cooley
Former investment banker, Philip Augar
Chairman of the Commons Treasury, John McFall
Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.
In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke's thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.
Even the Bank of International Settlements – the "Central Banks' Central Bank" – has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments' attempts to clean up their banks. "The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery," it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.
This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.
If We Break 'Em Up, No One Will Lend?
Do we need to keep the TBTFs to make sure that loans are made?
Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…
At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks…
Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."
And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…
For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.
Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks' own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.
Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don't really need credit in the first place. See this and this.
So we don't really need these giant gamblers. We don't really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.
The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:
The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.
"They actually experience diseconomies of scale," Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."
And Governor Tarullo points out some of the benefits of small community banks over the giant banks:
Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries–to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.
A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.
It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the "too big to fails" are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.
The Giant Banks Have Recovered, And Are No Longer Insolvent?
Have the TBTFs recovered, so that they are no longer insolvent?
The giant banks have still not put the toxic assets hidden in their SIVs back on their books.
The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.
The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).
Indeed, Nobel prize winning economist Joseph Stiglitz said recently:
The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."
Stiglitz's views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."
While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.
Some very smart people say that the big banks – even after many billions in bailouts and other government help – have still not repaired their balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.
But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can't prove they are solvent, they should be broken up.
The Government Lacks the Power to Break Them Up?
Does the government lack the power to break up the TBTFs?
One of the world's leading economic historians – Niall Ferguson – argues in a current article in Newsweek:
[Geithner is proposing that] there should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
Indeed, even the FDIC mentions Continental Illinois in the same breadth as "too big to fail" banks.
And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and Law) – says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.
Whether or not the banks' holding companies can be broken up using the PCA, the banks themselves could be. See this.
And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.
FDR seized gold during the Great Depression under the Trading With The Enemies Act.
Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).
And the government could use 100-year old antitrust laws to break them up.
So don't give me any of this "our hands are tied" malarkey. The Obama administration could break the "too bigs" up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.
Is Temporarily Nationalizing the Giant Banks Socialism?
Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.
That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.
In contrast, the Bush and Obama administrations' actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is – truly – socialism.
Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.
The Real Reason the Giant Banks Aren't Being Broken Up
So what is the real reason that the TBTFs aren't being broken up?
Certainly, there is regulatory capture, cowardice and corruption:
Joseph Stiglitz (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action
Economic historian Niall Ferguson asks:
Guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs [too big to fails].
Manhattan Institute senior fellow Nicole Gelinas agrees:
The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span
Investment analyst and financial writer Yves Smith says:
Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.
William K. Black says:
There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .
Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well. There have been no prosecutions of the chief executives of the large nonprime lenders that would expose the "epidemic" of fraudulent mortgage lending that drove the crisis. There has been no accountability…
The Obama administration and Fed Chairman Ben Bernanke have refused to investigate the nature and causes of the crisis. And the administration selected Timothy Geithner, who with then Treasury Secretary Paulson bungled the bailout of A.I.G. and other favored "too big to fail" institutions, to head up Treasury.
Now Lawrence Summers, head of the White House National Economic Council, and Mr. Geithner argue that no fundamental change in finance is needed. They want to recreate a secondary market in the subprime mortgages that caused trillions of dollars of losses.
Traditional neo-classical economic theory, particularly "modern finance theory," has been proven false but economists have failed to replace it. No fundamental reform can be passed when the proponents are pretending that there really is no crisis or need for change.
Harvard professor of government Jeffry A. Frieden says:
Regulatory agencies are often sympathetic to the industries they regulate. This pattern is so well known among scholars that it has a name: "regulatory capture." This effect can be due to the political influence of the industry on its regulators; or to the fact that the regulators spend so much time with their charges that they come to accept their world view; or to the prospect of lucrative private-sector jobs when regulators retire or resign.
Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.
But there is an even more interesting reason . . .
The number one reason the TBTF's aren't being broken up is [drumroll] . . . the 'ole 80's playbook is being used.
As the New York Times wrote in February:
In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.
In other words, the nine biggest banks were all insolvent in the 1980s.
Indeed, Richard C. Koo – former economist at the Federal Reserve Bank of New York and doctoral fellow with the Fed's Board of Governors, and now chief economist for Nomura – confirmed this fact last year in a speech to the Center for Strategic & International Studies. Specifically, Koo said that -after the Latin American crisis hit in 1982 – the New York Fed concluded that 7 out of 8 money center banks were actually "underwater" and "bankrupt", but that the Fed hid that fact from the American people.
So the government's failure to break up the insolvent giants – even though virtually all independent experts say that is the only way to save the economy, and even though there is no good reason not to break them up – is nothing new.
William K. Black's statement that the government's entire strategy now – as in the S&L crisis – is to cover up how bad things are ("the entire strategy is to keep people from getting the facts") makes a lot more sense.
Debunking the "Too Big To Fail" Myth
Facebook 4 Responses to "Debunking the "Too Big To Fail" Myth"
October 14th, 2009 at 6:34 am
the whole game plan at the Fed is to bring these corpses back to life by lending to them no matter what their state of solvency is. The Fed is not supposed to do that obviously.
The authorities have outlawed risk and that is tremendously hyperinflationary. I don't know what the outcome here will be, but I'm betting it isn't benign.
October 14th, 2009 at 7:57 am
Awesome point BR. I like the list of supporters at the top. I hope this discussion becomes more and more of a topic. Socializing the largest institutions because the bankerment's friends are giving them handouts should upset all Americans. Talk about taxation without representation. Not to mention the waste of money and time on keeping them afloat that could actually go to good use in the economy.
Is europe any different than this? I was under the impression that Europeans didn't like the big box chains stores, etc. I wonder if they feel this way about banks too?
October 14th, 2009 at 9:30 am
Me thinks this is a message of futility, because the ENORMOUS MONEY, who by definition are the banks, will not let them fail. No matter if it means years and years of below par growth for the rest of us. Unless we could get another Teddy Roosevelt elected i.e. someone with some balls. (And they don't have to be male.) http://www.independentnation.org/theodore_roosevelt.htm
with 36 commentsBy Simon Johnson
In case you were wondering, Paul Volcker is still pressing hard for the Senate (and Congress, at the end of the day) to adopt some version of both "Volcker Rules". It's an uphill struggle – the proposed ban on proprietary trading (i.e., excessive risk-taking by government-backed banks) is holding on by its fingernails in the Dodd bill and the prospective cap on bank size is completely missing. But Mr. Volcker does not give up so easily – expect a firm yet polite diplomatic offensive from his side (although the extent of White House support remains unclear), including some hallmark tough public statements. It's all or nothing now for both Volcker and the rest of us.
But at the same time as the legislative prospects look bleak (although not impossible), we should recognize that Paul Volcker has already won important adherents to his general philosophy on big banks, including – most amazingly of late – Ben Bernanke, at least in part. In a speech Saturday, Bernanke was blunt,
"It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation [like fall 2008]."
You may dismiss this as empty rhetoric, but there is a definite shift in emphasis here for Bernanke – months of pressure from the outside, the clear drop in prestige of the Fed on Capitol Hill, and the pressure from Paul Volcker is definitely having an impact.
Bernanke finally understands the "doom loop" – in fact, he provides a nice succinct summary:
"The costs to all of us of having firms deemed too big to fail were stunningly evident during the days in which the financial system teetered near collapse. But the existence of too-big-to-fail firms also imposes heavy costs on our financial system even in more placid times. Perhaps most important, if a firm is publicly perceived as too big, or interconnected, or systemically critical for the authorities to permit its failure, its creditors and counterparties have less incentive to evaluate the quality of the firm's business model, its management, and its risk-taking behavior. As a result, such firms face limited market discipline, allowing them to obtain funding on better terms than the quality or riskiness of their business would merit and giving them incentives to take on excessive risks."
He also expands on an important, related point – that the presence of "too big to fail" is simply unfair and really should be opposed by all clear thinking businesspeople who don't run massive banks (aside: someone kindly point this out to the Chamber of Commerce – they are undermining their people),
"Having institutions that are too big to fail also creates competitive inequities that may prevent our most productive and innovative firms from prospering. In an environment of fair competition, smaller firms should have a chance to outperform larger companies. By the same token, firms that do not make the grade should exit, freeing up resources for other uses…. In short, to have a competitive, vital, and innovative financial system in which market discipline encourages efficiency and controls risk, including risks to the system as a whole, we have to end the too-big-to-fail problem once and for all."
Bernanke now endorses the first Volcker Rule, "Some proposals have been made to limit the scope and activities of financial institutions, and I think a number of those ideas are worth careful consideration. Certainly, supervisors should be empowered to limit the involvement of firms in inappropriately risky activities."
But he is still hampered by the illusion that there is any evidence we need megabanks in their current form – let alone in their likely, much larger, future form. Let me be blunt here, as the legislative agenda presses itself upon us.
I've discussed this issue – in public where possible and in private when there was no other option – with top finance experts, leading lawyers, preeminent bankers (including from TBTF institutions), and our country's most prominent policymakers. And I have testified on this question before Congress, including to the Joint Economic Committee, the House Financial Services Committee, and – most recently – the Senate Banking Committee, where leading spokesmen for big banks were also present.
Mr. Bernanke, with all due respect: there is simply no evidence to support the assertion that, "our technologically sophisticated and globalized economy will still need large, complex, and internationally active financial firms to meet the needs of multinational firms, to facilitate international flows of goods and capital, and to take advantage of economies of scale and scope," at least if this implies – as it appeared to on Saturday – we need banks at or close to their current size.
We can settle this in a simple and professional manner. Ask your staff to contact me with the evidence – or, if you prefer, simply have a Fed governor provide the compelling facts in a speech and/or have a staff member put out the technical details in a working paper.
There is no compelling case for today's massive banks, yet the downside to having institutions with their current incentives and beliefs is clear and awful. Think hard: what has so far changed for the better in the system that brought us to the brink of global collapse in September 2008? In this context, Mr. Bernanke's three part proposal for dealing with these huge banks should leave us all quite queasy:
Mr. Bernanke needs to face some unpleasant realities. Because of the various actions – some unavoidable and some not – it took in saving Too Big To Fail financial institutions during 2008-09, the Federal Reserve is now looked up with grave suspicion by a growing number of people on Capitol Hill.
The cherished independence of the Fed is now called into question – and losing this could end up being a huge consequence of the irresponsible behavior and effective blackmail exercised by megabanks – who still say, implicitly, "bail us all out, personally and generously, or the world economy will suffer".
Mr. Volcker sees all this and wants to move preemptively to cap the size of our largest banks. Mr. Bernanke has one last window in which to follow suit (e.g., lobbying Barney Frank could still be effective). In a month it could be too late – the legislative cards are now being dealt.
Mr. Bernanke is a brilliant academic and, at this stage, a most experienced policymaker. What is holding him back?
Written by Simon Johnson
March 22, 2010 at 6:03 am
Posted in Commentary
Tagged with Ben Bernanke, Paul Volcker
" Metternich With A BlackberryBloomberg Reviews "13 Bankers" "
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Funny how Chris Dodd seems to be a new man now.He sounds like the life lock guy now a days:
March 22, 2010 at 6:36 am
It's not just that government backed banks are taking too much risks. And can take too much risks because they are government backed.
Those banks actually create the money everybody uses. Such is the fractional reserve system with a high multiplier we have now. But, of course the big bankers create that money first for themselves, their friends, their servants, and their own dark purposes.
Once they have created most of the world's capital, the big bankers divert it towards the derivative universe, 800 trillion dollars strong, or so. Nothing much is left for the real universe, and the real economy. This allows them to claim big (imaginary) profits, and thus all too real bonuses (a gigantic 145 billion dollars in 2009 alone, in the USA alone; basically all this money was stolen from the taxpayers, because the banks would have stopped existing without the taxpayers.)
Thus what are these big bankers, except the biggest, most corrupt "civil servants" who ever were? It would not be the first time that civil "servants" would have become the masters, because people were looking somewhere else.
A partial solution: put a 95% tax on the property of all big bankers, their families and associates. It goes without saying that most derivatives ought to be outlawed, to force capital back in the real universe.
March 22, 2010 at 8:32 am
"Chris Dodd's wife and derivatives trading
March 19, 2010 | 2:14 pm
In the middle of a blog item about credit default swaps, Felix Salmon of Reuters drops the following nugget about Sen. Chris Dodd and the CME Group, which owns the Chicago Mercantile Exchange and the New York Mercantile Exchange.
"Dodd's wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000. (The CME makes no mention of her husband on its website or in its SEC filings, despite the fact that he's surely a big part of the reason why she has the position.)"
March 22, 2010 at 9:20 am
All that means is that he feels enough pressure that he feels the need to talk a better game.
Weeks before Obama called the banksters "savvy businessmen" he called them "fat cats". His actions prove which one really reflects his loyalties.
Aren't we finally, irrevocably past the point where we would ever believe anything anyone says?
Where we would ever believe in anything but actions?
March 22, 2010 at 9:27 am
All that means is that he feels enough pressure that he feels the need to talk a better game.
But his re-appointment already got confirmed, so he is all set for the next four years.
That he waited until after his confirmation might mean he is speaking his mind. Not that I really expect anything to come of it.
March 22, 2010 at 10:46 am
This is off topic, but I recently started reading the "bond crash course," section of Nemo and Bond Girl's website, and I just want to say it is really a spectacular resource. I highly recommend it to anyone looking to learn about bonds. You can find it here:
March 22, 2010 at 11:30 am
True. But he still wants more stuff, like control of the CFPA, and any kind of scam "resolution authority". So he's not an island yet.Russ
March 22, 2010 at 3:39 pm
Here's one: (The Man Who Sold the World:Ronald Reagan and the Betrayal of Main Street America-William Kleinknecht)
The McFadden Act of 1927, 'a law aimed at preserving community banking by restricting the ability of financial institutions to operate in more than one state. The law was all that stood in the way of national companies' swallowing up independently owned banks across the country. Reagan was even more disdainful of the Banking Act of 1933, better known as Glass Steagall Act. …enacted to break up the unethical collusion between banks and brokerage houses in the years preceding the Depression. Many depositers lost their life savings because commercial banks had invested money in stocks during the speculative frenzy leading up to the Great Crash. Some banks had engaged in a practice known as self-dealing-the loaning of money to hollow companies to make their books look attractive to investors. The bank was then repaid from the company's artifically inlfated stock market capitlization."
Great book, highly recommend. Reagan got rid of the McFadden act, then began the weakening of Glass-Steagall. By the time Clinton repealled it, it had become nearly useless. Obviously with deriviatives these criminals have up the ante to 'nth degree.
The only solution might be State Banks, and all that implies for that struggle…
March 22, 2010 at 9:31 am
Actually, it started under Carter.
Reagan's contribution was to elevate it to Religion.
March 22, 2010 at 11:42 am
And it was Religion with a knife.
March 22, 2010 at 12:28 pm
State banks are a great idea and should be pushed by state officials and legislators. They could be capitalized by the state, initially, and loan to state enterprises and get our local economies going. Forget Wall Street!m. curran
March 22, 2010 at 1:17 pm
Wall Street is all about rogue corrupt self obsessed civil servants who believe they make the universe go around, because government backing allows them to create more than 4/5 of the money.
Money creation ought to be seen for what it is: a REGALIAN function. By facing that fact, and re-incorporating money
creation as an official regalian function, one will be cutting off qualificatives such as "rogue", "corrupt", "self obsessed".
Plus one will stop the instauration of a new so called aristocracy (I say "so called" because they are not "aris", namely
the best fitting).
March 22, 2010 at 4:14 pm
This "relatively small number of giant financial firms" is not only too big to fail. It is also too big to regulate, too big to investigate, too big to prosecute. It has become a virtual sovereignty unto itself. Further, its global scope and reach isn't well known. It will be interesting to see if any significant regulation is legislated and, if legislated, how long it stands.jim
March 22, 2010 at 9:42 am
But I do not think the argument is still about whether the banking system is too big to fail but rather what is the best approach going forward.
Even though at times we're prone to believe in what we read and hear, to Mr. Bernanke and Treasury Secretary Geithner, we're not all dummies!)
March 22, 2010 at 9:47 am
"[If] a firm is publicly perceived as too big, or interconnected, or systemically critical for the authorities to permit
its failure [it receives even more] incentives to take on excessive risks."
Setting aside Bernanke blaming the markets as the prime mover for a distortion amplified beyond comprehension by himself, the corollary here is that the most "important" institutions are also bound to be the most dysfunctional. That should have anti-trust and Too Big implications all by itself, especially as the cause-effect relationship here is dramatically nonlinear – there are thresholds (defined by presence or absence of peer competitors and market share).
Market efficiency is fundamentally incompatible with market dominance, even as it produces it.
March 22, 2010 at 10:37 am
Or maybe the "succint" summary is more sublte than I give Bernanke credit for: He might just see the Fed as another "creditor" or "counterparty" who had decreased "incentive" to "evaluate [...] management and risk-taking behavior" – and provided the "funding" to fuel even more "excessive risks".
Bernanke himself certainly demonstrated he suffered no "incentive" whatsoever to evaluate during his decade-long bubble bath.
I do not think he understands the doom loop. He is busy rewriting the past, that is no foundation for anybody attempting to write the future.
March 22, 2010 at 10:43 am
I just posted a rather long comment that I think got eaten because it was too long. I'm going to break it down into two parts and see if it comes up. I apologize if this ends of being double posted.
While I agree with the thrust of your argument that the size of the nation's largest banks constitute an implicit tax on the American people that can/should be recouped by moving toward a more progressive tax system, I think your characterization of fractional reserve banking as the source of the financial industry's power to extract economic rent is flawed. The necessity for banks to maintain some fraction of the amount of money they lend out is an artifact of the days when the U.S. was still on the Gold Standard. This requirement is no longer necessary in the fiat currency world we live in today. Several countries, including Canada and Australia, that have fared quite well in the current financial crisis actually have no reserve requirements at all. Here in the U.S. Chairman Bernake has recently proposed doing away with minimum reserve requirements, stating:
"The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."
While many individuals of the libertarian persuasion view this proposition as akin to the end of civilization as we know it, I would submit that it is merely a recognition of the way our modern fiat currency system operates. The standard textbook interpretation of money multiplier theory is highly misleading. For those interested in learning about money multiplier theory I recommend looking through the Federal Reserve Board of New York's educational material posted on their "about," web-page. You can find relevant information here:
I want to quote a paragraph from the above web-page here because it does an excellent job of showing how money multiplier theory is presented to credulous undergraduate students (like I was not too long ago) who go on to uncritically accept what they are taught even though the theory is deeply flawed:
"If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100 + $90 + $81 + $72.90 +… = $1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+ $80 + $64 + $51.20 + … = $500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity."
However, later on in the educational material it is acknowledged that:
"…the Federal Reserve operates in a way that permits banks to acquire the reserves they need to meet their requirements from the money market, so long as they are willing to pay the prevailing price (the federal funds rate) for borrowed reserves. Consequently, reserve requirements currently play a relatively limited role in money creation in the United States."
March 22, 2010 at 11:00 am
Thanks for the thoughtful contribution, which I just noticed. Unfortunately I am presently, at this very moment, travelling with my 5 months old daughter, on business, so I will need some time before I can think about this as thoroughly as it deserves.
On a quick note, it seems to me, though, that one has to distinguish between "reserve requirement" and "multiplier". As long as the central bank provides the reserve, the fact remains that the privates create and control most of the money, with the reserve provided by the government. So, if anything, it's worse.
Short of commanding an army, money creation is the most important function of an empire. Or so it was, for 5,000 years of civilization. The system we have now is different, and is a devolution to NEOLITHIC times, with the great chiefs, the great sorcerers and shamans, the bankers, creating the universe as we know it. They do that thanks to their democratically unsupervised use of the multiplier.
March 22, 2010 at 4:30 pm
*Continued from above:
A "relatively limited role," should probably read "almost no role." In our modern banking system banks will offer a loan to any credit-worthy customer that walks in the door. The constraints on bank lending are the number of credit-worthy customers on the demand side and the amount of liquid capital available on the supply side. FDIC insured deposits do not count as assets that can be used to meet capital requirements. Demand deposits count as bank LIABILITIES and, contrary to money multiplier theory taught in most undergraduate economics classes, are not "loaned out."
If you were to talk to an individual who works as a loan officer at a commercial bank (as I have asked my cousin who works at the small-business desk of a medium sized bank in Boston) you will find that a bank's decision to originate a loan is made quite independent of the bank's reserve position. If a commercial bank is short required reserves it can borrow from another bank in the interbank market, but if the system overall is short of reserves these "horizontal" transactions will not add the required reserves. Banks that are short of funds can either sell bonds back to the Federal Reserve or borrow outright through a device called the "discount window." There is typically a penalty for using this source of funds as noted in the qualification above by the FRNY. In reality, the Federal Reserve will ALWAYS provide the necessary reserves; if it did not it would lose control over its target rate. Therefore, at the individual bank level the price of reserves (the interest rate) will play some role in a bank's decision to loan funds, but the reserve position per se will not matter. So as long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, the bank will lend.
So in conclusion, the idea that reserve balances are required initially to finance bank balance sheet expansion via rising excess reserves is inapplicable. A bank's ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. Banks expand their balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank.
Sorry for the length of this comment, but I feel this is an important point that is rarely discussed. I myself was quite resistant to the ideas I have expressed here when I first read about them, but after talking to my cousin about it I came to the conclusion that what I had been taught in my economics classes as an undergraduate about banking was incorrect. For a more detailed discussion of these points you may want to see this blog post by one Professor Bill Mitchell called "money multipliers and other myths:"
Also of interest may be the blogs "Building bank reserves will not expand credit," and "Building bank reserves is not inflationary," which can be found here and here:
March 22, 2010 at 11:01 am
Thanks, N Klein. The money multiplier has been declining for many years as shown by the below link to the St Louis Fed.
I studied this same graph with data from the decades from fifties backwards.
The multiplier is dogma we live with. The decline shown in the graph is stunning. The secular decline shown is obviously somewhat traceable to funds diverted from banking institutions to shadow banking. What would the plot on this graph look like if all shadow deposits were forced into formal banks?
March 22, 2010 at 12:51 pm
The multiplier is going into a derivative universe, that is the explanation, indeed, and that is why the world economy is getting starved of capital. This was my most crucial point entirely. Shadow banking and off balance sheet sh.. ought to be, well, incorporated (figuratively and literally). That is where the regalian capital royally leaks.
Then, of course, the banks do not feel like lending to simple mortals, when they can manipulate as one all these juicy derivatives.
Keeping banks small will not alleviate that problem, because they could still act as one big conspiracy. Only stiff regulations about where money creation ought to go can prevent the conspiracy, and return banks to the real world.
March 22, 2010 at 5:14 pm
@Patrice Ayme and JerryJ
In its most simple form the money multiplier is just the inverse of the required reserve ratio. So if the central bank told private banks that they had to keep 10 per cent of total deposits as reserves then the required reserve ratio would be 0.10 and the money multiplier would equal (1 / 0.10) = 10. More complex expressions of the money multiplier can be derived by adding in liquidity preferences, but this adds little and would needlessly complicates our discussion here. The standard formula out of any econ 101 textbook for calculating the money supply using money multiplier theory is:
Money Supply = money multiplier x monetary base
If all the money in the shadow banking system were to brought onto the balance sheets of commercial banks we see
would see an increase in the monetary base and hence the money supply, but the money multiplier theory would still be
The problem with this theory presented in most intro economic textbooks is that it does not acknowledge that the money supply is essentially endogenously determined. That is neither private financial institutions nor the government have control over how much money is in circulation. This has been clear since at least the mid to late 1970's (and early 80's in some countries outside the U.S.) when central banks in several countries tried monetary targeting in an attempt to stem the tide of inflation by controlling the supply of money, but failed miserably (those Whip Inflation NOW buttons Ford liked to wear were probably more effective policy tools). While I share Patrice's concern over derivatives, trying to curtail speculation in the derivatives market by fiddling around with interest rates or required reserve ratios is bound to fail. Better to just outlaw trading of the most offensive products.
Finally, I completely agree with Patrice Ayme that regulating the money supply is a Regalian function which should belong solely to the Federal Government. However, it is important to distinguish between credit money banks can create and high powered money that only the consolidated government sector (Treasury plus the Federal Reserve) can create. In general, using the term "money," is not terribly helpful because it obscures the differences between these two types of money. Better to be more specific and talk about whose liability and whose asset. As a general rule, only the consolidated government sector can safely create new financial assets (bonds or currency). All credit money created by private actors must eventually net to zero because one person's asset is necessarily another person's liability. In essence, when we rely on private institutions to fund our investments we are renting the money supplied to us for a set time. The price is the interest rate (usually rather high) and the duration is the amount of time allotted to pay back the loan (usually not very long, which is why the private sector has been unable to make the kind of long-term capital intensive investments needed to provide the human capital and infrastructure development necessary to be competitive in the 21st century). The consolidated government sector, on the other hand, has the wherewithal to create new financial assets out of nothing without any corresponding liabilities (the bonds and money issued by the Federal Reserve are not redeemable in anything but additional dollars that the Federal Reserve can create virtually cost-free). This is an incredibly powerful tool that must be carefully controlled lest inflation create distortions in the real economy.
March 22, 2010 at 7:04 pm
Jerry, the link to the St. Lewis Fed research report is broken.NKlrin1553
March 22, 2010 at 9:13 pm
It should come up searching the title. " St. Louis Fed:Series:MULT,M1 Money Multiplier" I brought it up just searching US Money Multiplier.
I printed it off this morning. The multiplier was about 3.2 in 1986 just before the US became a net international debtor. By 2009 it was steadily down to 1.6. In the last year it has plunged to about 0.70.
The chart is " The M1 multiplier is the ratio of M1 to the St. louis Adjusted Money Base" according to the St. Louis Fed.
March 22, 2010 at 9:32 pm
Transparancy is more reliable than regulation. Every contract over $10M should be publicly visible.Jon Claerbout
March 22, 2010 at 11:26 am
Transparency ought to be a regulation, the law, a basic requirement, whatever the amount, even one percent of one
March 22, 2010 at 5:36 pm
As appalling as the situation with too big to fail banks is, at least the problem has been diagnosed – the discussion is about remedies. Who is talking about the moral hazard that the Fed has become. Apart from Mr. Hoenig who has correct identified the source of moral hazard (in the "we will keep rates low for ever"), the rest of the FOMC is still deflecting blame and hiding behind dubious statistical evidence. Fire Bernanke and his band of Greenspan style radical rate cutters. We have paid enough for their stupidity and erroneous theories.ReturnFreeRisk
March 22, 2010 at 12:18 pm
I've said it before………..
Until we get rid of the Fed everything else is mumbo jumbo, meaningless esoteric crap. Abolish the Fed. Period. Done. Gone. Forgotten forever.
Replace it with a senate confirmed, independent body of total economy focused economists & business persons to set monetary policy & as the lender of last resort. And 49 more state banks like the Bank of ND.
Until we do we're just pissing in the wind.
March 22, 2010 at 2:10 pm
"…And 49 more state banks like the Bank of ND."
An excellent idea that has an extremely long pedigree in American history going all the way back to at least the early 18th century Pennsylvania Land Bank conceived of by Francis Rawle and endorsed by Benjamin Franklin:
March 22, 2010 at 2:21 pm
Jon Claerbout wrote:
"Transparancy is more reliable than regulation."
New York Fed Warehousing Junk Loans On Its Books: Examiner's Report
03-22-10 01:12 PM – Huff Post – excerpts
"As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn't sell in the market, according to a report from court-appointed examiner Anton R. Valukas.
The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds… Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities.
Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books…"The net result of this is we know the Fed knowingly bought assets for more than they were worth - substantially more than they were worth - and actually created a market for garbage that Lehman was more than happy to push on the Fed because they regarded the public as the suckers of last resort," said Grayson."
March 22, 2010 at 3:03 pm
The FRBNY was audited with a full clean opinion for 2008 by Deloitte & Touche. Of course, assets at the end of 2008 changed quickly in 2009 when assets based on central bank liquidity swaps were liquidated and mortgage backed securities were purchased.
The 2008 audit letter was dated April 2, 2009 so the 2009 certified annual report should become public very soon.
Skipping forward to the FRBNY numbers included in the weekly consolidation released by the FED . As of 3/17/2010, the FRBNY
total holdings of Mortgage Backed Securities was $416,845 mn. Note 4 to these securities for all FRB's issued by the Fed is
" Guaranteed by Fannie Mae, Freddie Mac,and Ginnie Mae. Current face value of the securities,which is the remaining principal balance of the underlying mortgages."
It should be noted that FRBNY is a quasi public body and does not follow GAAP applicable to private entities. This is explained in the notes to the audit every year.
FRBNY is not required to mark to market. Besides, the loans that fail are purchased by Fannie, Freddie and Ginnie. The loans were not purchased for merchandising but for holding to term. That was their assumption.
If you look at the year end numbers of FRBNY included in the Fed consolidation, you will see that the entire balance of mortgages purchased are covered by outstanding deposits owed Depository Institutions. That is, and in the spirit of looseness championed in the press today, the same as you selling your house for a cashiers check for the total and never cashing the check. I can only wonder if these mortgages will liquidate back to the sellers to the FRBNY by taking back the paper in exchange for the cashiers check in my desk drawer.
Now why would the sellers to FRBNY sit on their proceeds credit to their account at FRBNY? The answer is they have only one choice for almost the entire balance. That is, they take currency which is probably greater in physical volume than their vaults can accomodate. Why did they surrender market rate interest for a mere 16 basis points. Cash in the vault earns zero basis points.
But, the FRBNY has been audited with clean opinions and will again in a few days.
March 22, 2010 at 4:44 pm
"Although the Fed told The New York Times earlier this month that a third party verified the market value of the bonds Lehman used as collateral for loans from the Fed, they did not specify who the third party was. Of course, Lehman's auditors at Ernst & Young are already implicated in helping Lehman cook their books and fake the value of their derivatives, so the Fed may well have allowed a third party to determine the valuation but, as with the Goldman-AIG valuation debacle, not done a particularly good job at making sure that third party was at all independent."
March 22, 2010 at 6:41 pm
Collateralization is another matter. As a party making a loan for say $1 bn, I may require a pledge of $2 bn of collateral. The loan booked is $1 bn.
Anyway, Lehman collapsed on September 15, 2008. The FRBNY audited financial statements show no adverse effect from the collapse. Under the circumstances, the FRBNY paperwork would have allowed immediate seizure of the collateral and it's subsequent liquidation. The FRBNY netted $11,860 mn for 2008 and distributed $10,571mn to the Treasury as interest on Federal Reserve Notes.
Whatever the effects of Lehman were on FRBNY, they were resolved by the end of the calendar year in so far as financial
measurement is concerned. FRBNY did record a loss of $5,237 mn for " Investments held by consolidated variable interest
entities ( losses) , net ". This is a new category and obviously would include the Bear Stearns and AIG transactions
in their various Maiden Lane entities.
All other categories were at a profit.
Whatever FRBNY did with Lehman came out OK or making money for FRBNY.
The total 2008 FRBNY Annual Report for 2008 is 103 pages. I did not find anything specific to Lehman doing a quick scan just for Lehman.
March 22, 2010 at 8:13 pm
I should have added above that there was one other new category and it showed a profit of $1,357 mn titled " U.S. government, federal agency,and government-sponsored-enterprise securities gains, net."
Here may be where the Lehman collateral enters the P&L for 2008. If so, overall FRBNY came out making money . Net , of course.
March 22, 2010 at 8:37 pm
Is it possible that Obama is saving this issue for the campaign, and that he really does get it?
Maybe the plan is to do immigration reform now, and use banking reform for the late summer and fall. It's much easier to score political points by beating up Wall St.
March 22, 2010 at 4:19 pm
simon what about huge multinational corporations? is it fair to tell the banks u r too big. yet GE is allowed to grow without limit & have significant exposure in all sectors of the economy. my recommendation is for anti-trust regulation on all companiesep3
March 22, 2010 at 5:04 pm
with 208 commentsAs the Lehman anniversary approaches, defenders of the financial sector struggle into position – partly in response to your comments (also here). They offer three main points:
Point #1 is correct, but this does not necessarily mean we need finance as currently organized. The financial sector worked fine in the past, with regard to supporting innovation and sustaining growth. Show me the evidence that changes in our financial structure over the past 30 years have helped anyone outside the financial sector.
On #2: Financial innovation has obviously benefited the people who run and operate large financial companies. Has it helped anyone else, including their own sharedholders? And if you can show broader social benefits (e.g., lower cost of capital, better ability to take nonfinancial risks that make sense, or anything else), do these outweigh the massive social/fiscal costs that are now apparent?
Which leads to point #3: what kind of egg did the finance goose lay? Obviously we now need to go back and recalculate economic growth – if much of what was done by finance was issue loans that were not likely to be repaid (while not recognizing the probable losses).
But the unfortunate side effects of finance lie much more in the future than in the past. It's not lowering recent growth by some fraction of a percentage point that should bother us, it's the likely behavior of large-scale finance, now more powerful and with greater concentration of power.
Private sector capture of the state is bad enough, wherever it happens in the world. But when the capturers have an unparalleled ability and willingness to "tax" the rest of us, we should really be afraid.
The business model of big finance is not to consolidate their position and live on comfortable annuities. It's to take as much as they can ("otherwise the competition will hire our best people") while stuffing the risk ("which ordinary people don't understand") onto the taxpayer. The technical details of this arrangement are loosely refered to as "financial innovation".
Modern finance is more than quack medicine. This is state capture, an old tradition for bankers – and in the modern American version their hands are in the deepest set of pockets ever. Why would they ever let go?
By Simon JohnsonWritten by Simon Johnson
September 5, 2009 at 4:42 amPosted in Commentary
Tagged with finance debate" Krugman on Economics
The Myth of Consumer Choice "
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"The Lone Ranger and Tonto
Were riding down the Navajo Trail
When a band of Indians found em
Proceeded to surround em and
The Lone Ranger turned kinda pale
Tonto, our lives are in danger
We got to get away if we can
Tonto just looked at Lone Ranger
What you mean, we, white man?"
"Point #1 is correct, but this does not necessarily mean we need finance as currently organized."
Point #1 is correct if you choose to maintain capitalism. Probably the only people clinging to this antiquated system are those that are half or more psychotic and those that think we'll be pulling out of this in a few months.
What's the endgame, damnit? I know you know. Send me an email, beam it straight to my screen. Enough's enough - I've been on the edge of my seat for the past 3 years. Have we been taken out by "economic hit men"? If so, they'll be sucking us dry for years to come, right? What's the alternative? What is your policy recommendation?Uncle Billy Cunctator
September 5, 2009 at 5:54 am
I was wondering why do we let investment banks hold positions in the markets anymore? If financial innovation means that everything can be securitized then why do we let the investment banks hold on to or back securities? If people are going to make a CDO vehicle (and in the process make all the feees) why cant we force them to also securitize the super-senior debt (or any other garantees) instead of hide it on their accounts virtually insured by the U.S. taxpayer? Why don't we outlaw any originator from holding a position, they make fees. The second group would be hedge funds, institutional investors, and other market participants. Finally if you want a normal business loan we have plain vanilla banks who have to see through the terms of a loan that they grant. Any collusion between the actors can be investigated through insider trading rules. It may seem uneasy that whole security vehicles would be held up by the market, but isn't this what innovation should be able to overcome anyway? This will not touch problems with executive incentives, but it seems like it would force people to be more upfront with information than the current institutional arrangement allows.dfowl
September 5, 2009 at 6:22 am
You could argue that the system did deliver lower costs of capital. Who can argue the low mortgage interest rates. Those were borne by those assuming the actual risk of the loans – not the organized system.winstongator
September 5, 2009 at 7:03 am
As interest rates were held low, prices went up so the result was that the debt acquired was substantially larger than if a person paid less for a property. A person usually buys based on what he can afford in monthly payment. Higher interest rates would have kept the housing balloon from forming, but since construction was pumping money into the economy, nobody wanted it to stop.. Now there is a glut that has to be absorbed and the unqualified buyers that should never have been in the market are worse off than before and the toxic loans are still on the books.
We need to know who is holding the bad MBS that are hidden or the potential counterfeit ones and the CDS that were bets against them.. in multiples. If the ratings agencies never saw the tape for rating these MBS, it would be easy to sell counterfeit MBS with absolutely no assets behind them.
I came across this. Strong stomach required. http://www.senseoncents.com/2009/05/us-attorney-and-sec-investigating-lehmans-auction-rate-securities-sales-they-should-also-investigate-finras/mhelburn
September 5, 2009 at 1:48 pm
The Case for a Level Playing Field and the Golden Rule as Economic Axioms
If we are to believe the postulates of basic string theory, we are all potentially connected to everything and each other (at least as my minimal understanding goes).
Intuitively, maximum potential output for an economy should be all resources human and otherwise being utilized over time to the extent of their full latent possibilities. So reality would be some function of combined individual and collective implementation and utilization, that is, our own individual efficiency in relation to implementation of latent potential and collectively, our group´s, town´s, state´s, region´s, country´s, and ultimately, global implementation as an interactive system.
Notwithstanding, we are always going to be pushing against limiting factors, as well as individual and collective attitudes and
actions–both conscious and unintended–that may be contrary to maximizing this potential economic output, because at the very simplest
level, we just do not have all of the answers.
Thus if maximization of collective output depends on the degree of implementation and utilization of individual and collective latent possibilities, one can arrive at the fairly obvious conclusion that because we cannot know the best possible array or outcome top down, society should work from the bottom up, that is, to assure that the potential value of each individual and element can be maximized and implemented through efforts directed at supplying a level playing field for all. Conversely, a level playing field depends on responsibility for following or playing by fair rules being assumed at the individual level, that is, do unto other as you would have them do unto you, rather than do as I say, not as I do.
Adam Smith, I am sure took this for granted when he spoke of the invisible hand and the nation´s founding fathers sought this when they referred to life, liberty, and the pursuit of happiness.andrew
September 5, 2009 at 7:47 am
>This is state capture, an old tradition for bankers – and in the modern American version their hands are in the deepest set of pockets ever. Why would they ever let go?
First, I am on board with all of the above.
What I would like to know, after watching the last year of craziness in politics and the "private sector", is who is going to wrest the reigns of finance from these "deepest of pockets" when we have a apathetic and well divided American public. Our elected officials? That remains very much to be seen.David Goldstein
September 5, 2009 at 9:20 am
The biggest problem with financial regulatory reform is that there is no political will for it.
The second biggest problem with financial regulatory reform is that there are very few people in this world who understand innovative products well enough to be specific about where things have gone wrong. It is difficult enough to explain the market for one specific product; to explain the financial system as a whole right now, you'd have to be Poincare.
I think when people talk about financial innovation, they are really talking about the abuse of innovative products, not the products themselves. There are some financial products that are completely nonsensical. But many products are great products that would add tremendous value to the system if their use were limited to where it made sense.
For example, I work a great deal with interest rate swaps. For people who understand them, swaps are an essential part of managing a fixed income portfolio. But the banks, realizing the potential for swaps to become fee machines, have also marketed swaps to unsophisticated investors. So, you ask, does the benefit the instrument provides outweigh the costs? This question assumes it is inevitable that innovative products will be abused.
Abuse does not necessarily follow innovation. We can produce a regulatory system that directs the actual use of these products into their proper channels. Whether we will is another story.
I think blaming innovation generally is the wrong way to go. Most innovations can be either good or bad. It is the behavior that is the problem and the culture that perpetuates the behavior.
None of this bodes well for financial reform. To allow innovation to exist and combat its abuse, we are going to need highly sophisticated, independent regulators. Apart from the fact that the financial industry has tremendous resources at their disposal to devote to creating inefficient regulators, this task is complicated by the fact that the same players who engage in abusive transactions are also responsible for most of the productive financial activity in our country.Bond Girl
September 5, 2009 at 9:41 am
There may not be a will for reform, but I don't think there is a budget for this kind of bailout any more. So we can continue to push the boundaries of failure and go even more broke, or we can reform the system.anne
September 5, 2009 at 11:13 am
When a business gets so complicated and obscure that it can be understood only by 'Poincare's' it has gone too
far. It no longer is a business, it is rent seeking based upon intellectual obscurantism. I have no problem with them gambling
with their own money. I want them to pay, personally, for their mistakes. That's capitalism at work. Right now they're simply
gaming the system. And they should be stopped.
If people like you and I cannot understand what they are doing I don't want them playing with my money.
September 5, 2009 at 12:22 pm
I do not think that complexity is a good reason to discard innovation. Swaps are complicated, but so is chemotherapy. We find a way to supervise complicated developments in other industries, and the same should be true for finance.
The problem here is that we've let the industry develop for decades without any form of supervision, and the result has been chaos. We would need a Poincare to sort out the good and bad activities that have persisted so far. What net value these products have provided absent supervision is a purely academic question that does not reflect the value they could provide going forward if the system for providing oversight can be brought into the 21st century. For that to happen within the current framework requires tremendous political will.Bond Girl
September 5, 2009 at 12:59 pm
The medical analogy again? Isn't that what Elizabeth Warren did last week? It's wrong, just wrong. We can safely say that doctors who administer chemotherapy want to help people. Correct? The finance industry is meant to separate you from the fruits of your labors.
Pardon me while I go bash my head into a wall.
Get out of that world, Bond Girl. Go get a real job. Become a doctor, do something useful.Uncle Billy Cunctator
September 5, 2009 at 6:20 pm
Yeah, I've never met a doctor who cared about making money… Give me a break.Bond Girl
September 5, 2009 at 9:20 pm
Not arguing there aren't mercenary doctors who put money above care. Of course there are. I'm even related to a few of them and know a few others, and they turn my stomach. But I think that even now most of them value providing care a little higher. In any case it's an industry that's built around helping people, not screwing people. We can say with confidence (excluding the ugly world of big pharma) that innovation in medicine is almost invariably good. We can hardly say this about financial innovation.Uncle Billy Cunctator
September 6, 2009 at 12:21 am
"We can say with confidence (excluding the ugly world of big pharma) that innovation in medicine is almost invariably good."
Yeah. I love how much attention they lavish on innovating a better erection. I'm sure that's the highest and best you of the scientists' time.
There is nothing wrong with the profit motive. I think it is a great thing, in fact. But the focus on constant growth for public companies really has perverted everything. You can have a wonderfully profitable business, but unless you have a growth story, you won't get credit for it in today's equity markets, where shareholder value is measured solely by share price. We need to bypass the casino mentality.Scot Griffin
September 6, 2009 at 12:30 am
Your analogy is wrong because chemo is fairly well understood process. Why can't the banks just focus on depositing money and lending it? Why should the banks be able to operate in the stock markets?Eurocitizen
September 6, 2009 at 12:32 pm
"Right now they're simply gaming the system. And they should be stopped."
There you go, pacr, that'll stop 'em, shoulding all over yourself and shaking your finger. And how would you propose bringing an end to this practice, son, through elections and a subsequently appointed instrumentality like the utterly terrifying Elizabeth Warren? Enlighten us, kindly.Lavrenti Beria
September 5, 2009 at 2:22 pm
I'd like to apologize if I seemed harsh sometimes in discussing regulation. But the Canadian experience, during this financial crisis, has been very different from the American.
I'm asking myself how did Canada get it so right? Unlike other countries Canada was not consumed by practices that lead to the 2008 financial crisis. One answer is the Liberal government in power from 1993-2006. It banned foreign ownership of banks. Although in the late 90s there was a huge lobbying effort to allow Canadian banks to merge with American banks. The pro-merger argument, ironically, was Canadian banks needed to be bigger to be competitive and profitable. It was not until 2006, when the Conservatives formed a minority government, that Canada began to adopt American mortgage practices. Thankfully, this was too late in the game to cause too much damage.
I read somewhere that the Canadian financial system is actually - less regulated - than its American counterpart. But our government is also less captured by corporate interests. So this must definitely be a factor. Richard Hoogesteger has also stated Canada has a functioning civil service.
So it is not just regulation that speaks to the strength of a country's financial system. But also, as others have pointed out here, the kind of government and ideology that leads a country.tippygolden
September 5, 2009 at 1:14 pm
I can't wait for global warming so I can move to Canada. ;)Min
September 7, 2009 at 11:54 pm
Tippy, just heresay, but I heard it from people who work in Canadian banks, but many of those quiet conservative canadian banks are said to be facilitating financial crime all over the globe. Maybe they can afford to not rip off their own. Plus it's a much more homogenous society, so they enrich themselves no end, but make sure they don't piss off the proles.Uncle Billy Cunctator
September 8, 2009 at 4:44 pm
are your "sources" implying that Canada has noiselessly become the Switzerland of the Americas? (which incidentally we get told all the time has the best health care and old age pension schemes imaginable)
September 8, 2009 at 5:09 pm
"But many products are great products that would add tremendous value to the system if their use were limited to where it made sense."
At the risk of digressing too far, and also of being a one-note Johnny, I'd like to point out that this is one of the fundamental problems with the health care system as well. I have often on this blog emphasized that about 1/3 of all health care services rendered in the US are useless. It is also true that most of that consists of services that, _applied to the right patients in the right situations_ are very useful and beneficial indeed! But the health care system seems to just proliferate treatments way beyond the confines within which they actually work.
And as with finance, it will require people with extensive expertise to distinguish what is beneficial from what is not. And, also in health care those who deliver the useless care are, in general, also the purveyors of some of the best care.
I'm not entirely sure what we can learn from the analogy in policy terms. But it suggests that part of the solution requires a major shift in the culture at large, away from unbridled expansionism and unending growth towards focusing on the creation of valuable output as the goal of human endeavors.CBS from the West
September 5, 2009 at 1:17 pm
I have this question – which is an honest question, without an underlying ax to grind:
It's certainly true that financial innovation have _some value_. But you yourself have argued elsewhere that financial innovators are simply smarter/faster/better than any regulators we could possibly hope to hire.
The question then becomes whether we are capable of building a system that can not only sort the good from the bad, but continue to do so as new innovations are developed. Even a semi-privatized system ( http://baselinescenario.com/2009/08/08/filling-the-financial-regulatory-void/ ) would require a general structure that could conceivably be evaded by "bad" innovations, or even innovations that are good but being overused due to principal/agent problems.
Even if a modern day Poincare materializes, and manages to acquire authority, can we institute a system that keeps the balance after that mythical figure loses power?
If your answer to this is no, then SJ's next challenge becomes material:
On balance, do the innovations "outweigh the massive social/fiscal costs that are now apparent"?
If we can't tell the difference, and if on balance the innovations have been more harmful than beneficial, then the best thing to do is throw them all out – baby and bathwater together.
But if we can tell the difference – how, exactly, do we build a system that can do so?
I suspect, btw, that Team Obama's response will be to try to preserve the baby and throw out the bathwater, so this is a very relevant question.StatsGuy
September 6, 2009 at 8:11 am
The problem was never innovations, but outright fraud and departure from prudent standards (for example, Per has made the case many times that reserve ratios need to be lower and based on classic underwriting, not AAA ratings). The solution is therefore to stop fraud however it occurs, and write standards that enforce prudence. Simon's suggestions about consumer protection would take care of the remaining cases of misuse.
If you really wanted to stop the abuses, give everyone who broke the law 6 months in jail instead of carte blanche to keep doing it.Yakkis
September 6, 2009 at 9:02 am
WHAT IS INNOVATIVE ABOUT GIVING PEOPLE LOANS THEY HAVE NO HOPE OF EVER PAYING BACK?
That's a fraudulent business practice. If it's not illegal, it needs to be – with severe penalties for developing "innovative" loan docs that allow for such fraud – penalties that include jail sentences and heavy fines.anne
September 6, 2009 at 9:45 am
Suppose health care had not been regulated at all for a long time – decades which included major worldview-changing developments – and it got to the point where even educated people had a difficult time distinguishing between legitimate, fraudulent, and somewhat unethical practices. Would you just say, forget about bypass surgeries, let's go back to the leeches, it costs too much to sort this out? You can't convince me that this is even a live option for finance right now. It is a strange situation, but the rent-seekers in the system are really just exploiting a Kuhnian crisis point; our main obstacle right now is description.
Financial innovators are better, faster, etc. than government regulators, and I think for the most part, most people do not have a clue what government regulators' learning curves on these instruments are. They are going to have to transition to a completely new regulatory responsiblity, and so far they can't even get past their philosophies of regulation. (Should we try to get into the details of transactions, or just give market participants a broad set of principles to follow? … What does that even mean?)
I think people wildly underestimate what this task requires, and yes, the cost. We need regulators that can do trade analysis, that can quanitify what a reasonable transaction is and what it is not. Trying to bring regulatory organizations up-to-date within their existing frameworks would undoubtedly be expensive. But there are people out there with this sophistication already, not just within the banks, but in consulting firms, etc. Finding a way to get them to participate in regulation would reduce the learning curve and the cost associated with it, and reduce the chances that our regulatory organizations just become an inexpensive vehicle for educating future bankers. It is also our best bet for creating a proactive regulator that can keep pace with new developments.
I firmly believe that no progress will be made in holding the financial industry to real standards until market participants themselves start standing up and lending their credibility to the fight. Short of some sort of paradigm shift in regulation that allows them to participate, I'm not sure why they would risk it otherwise. Most Americans are not capable of viewing market participants' contribution to this discussion intelligently, but cling to their generalizations and cariacatures like they might offer some sort of salvation from what this mess will become in the future.
All of this is moot, however, until wrongdoing can actually be punished in some meaningful way. And that is a political problem.Bond Girl
September 6, 2009 at 10:59 am
And if regulators actually did punish wrongdoing in a meaningful way, that would likely reduce the cost of regulation going forward.Bond Girl
September 6, 2009 at 11:42 am
This did not happen over the course of decades. Let's review some history:
1990s: Greenspan advocates for derivatives. Summers repeals Glass-Stegal.
2000: Criminals enter the Whitehouse from election fraud in Florida. Massive business scandals emerge.
2001: WTC7 mysteriously collapses, along with all ongoing SEC invesigations. Criminals take over Wall Street.
2001-2008: Era of fraudulent lending, securities fraud and insider trading. No one major goes to jail.
2008: Collapse of economy. Government props it up temporarily by printing money.
2009: Only major/minor player prosecuted so far is Madoff.
September 6, 2009 at 12:33 pm
I can tell you that swaps have been used in the muni market since the 80s at least. Securitization has also been around for quite a while.
It is just that the use of these products increased substantially in the 1990s and thereafter.Bond Girl
September 6, 2009 at 2:02 pm
Oh I agree completely.
September 6, 2009 at 4:20 pm
Sure, that was leading up to the enactment of the Commodity Futures Modernization Act, but that does not mean that the derivatives markets were a novel concept then. (And Greenspan's reference, I'm sure, was with respect to London.)
Usually something has been around for a while by the time legislation is drafted about it. Congress is hardly on top of innovation :)
But you could add this to your timeline – May 2009: Obama taps Gary Gensler, one of the architects of the Commodity Futures Modernization Act and the left-wing version of Christopher Cox, as chairman of the Commodity Futures Trading Commission, which he wants to be the main regulatory player for derivatives oversight going forward. Adds a nice symmetry to events, you know?Bond Girl
September 6, 2009 at 4:53 pm
Sorry, was afk for a few days…
I think your points are fair, but leave a very pessimistic view. I'm still struggling with the overall themes:
1) Can we actually do "good regulation"? Can a government agency ever have that capacity, on an enduring time scale?
2) If not, are financial innovations worth the costs?
Regarding health care, there are a lot of people that argue that if we can't discern whether a procedure is justified or not based on a test, then sometimes it's better not to conduct the test. Thus, the American Cancer Society (aka, oncologists) currently does not recommend the PSA prostate cancer screen, while the Urologists do recommend it. So, medicine _is_ having these sorts of discussions. In finance, the issue is simply much larger in scale.
3) In terms of a self-reinforcing system… what about the following (much of which borrows from your ideas):
a) Increase capital ratios to make sure that derivatives creators have more of their own skin in the game.
b) Write the laws to permit going after personal assets in a broader range of cases.
c) Require X% of bonuses/commissions to go into escrow for 2 years prior to distribution.
d) Open up financial regulation to class-action lawsuits. This gives incentives to a large range of private actors to engage in post-hoc regulation and recovery of assets, including personal assets.StatsGuy
September 8, 2009 at 9:27 am
When I listen to claims about the benefits of financial innovation, I ask myself where's the gain? Institutinally, you have legitimate pools of 'managed' money: mutual funds, pension funds, insurance companies. Then you have operating companies, non-profits, private fortunes, and penny ante individuals tuning in to Jim Cramer. Sure, all these 'investors' hope to manage risk, but every bet has two sides and all 'innovation' does is make the aggregate bets increase exponentially, while the money jumps from one asset class to another, and the ever increasing bets are supported by bank credit accommodated by the Fed money machine. There isn't anything else that CAN happen, systemically, which makes it ridiculous that anybody didn't understand that as the asset prices advanced the risk of collapse became bigger and bigger, and indeed collapse became inevitable, because sooner or later even lenders would realize their collateral was mispriced. Finance isn't really a Ponzi scheme; its a game of musical chairs. The fact that it may have made increased credit available to consumers is only good so long as the consumers remain able to service the debt. Instead, they got the opportunity to pay $400k for a $100k house. Of course, since wage gains are a thing of the past, consumers certainly need credit. I would rather see the government providing household credit on reasonable terms, rather than building superfast trains from Disneyland to Las Vegas, but maybe that is just me.jake chase
September 5, 2009 at 10:15 am
Is this suggested curative action untouchable?
"The likely future is: more of the same, at least until we find a Jackson or a Roosevelt."
FOUND: Simon Johnson can do it - UNFOOL the people by getting these histories in their faces, ONGOINGLY:
"Real Homes, Real Dow" at
And, the foregoing two mispricings abetted the two 'misbehavings' here (second chart):
"Real Dow & Real Homes & Personal Saving & Debt Burden" at
September 5, 2009 at 10:17 am
>I think blaming innovation generally is the wrong way to go. Most innovations can be either good or bad. It is the behavior that is the problem and the culture that perpetuates the behavior.
I guess I am not clear why you think innovation is good in finance, except for people who can act independent of the system, (aka, the truly rich folk of our world).
My feeling is that all the financial "innovation" since the 401k is destined to fail us when we most need it.
For instance. Wait till the financial "innovation" of 401k's go crashing through the floor with a bunch of heavily indebted, geriatric old farts living on an insufficiently funded social security system.
When will that crash occur? Well, it has started already – I have friends in their mid 60's, trying to figure out what happened to their mutual fund "investements" that they had been so reassured would only grow for so many years. Many have delayed retiring, under the false assumption that the market will recover. In fact, it will only get worse as the biggest contributors to mutual funds stop contributing, (they have to at some point), and just want to coast on their "investements". Ha. A house of cards.
There will be no where near enough money being pumped into the hyper inflated stock market to sustain it, certainly not by baby booomer's children where the ratio is something like one of them for two BB's.
As far as regulation goes, as soon as we institute it, (and I agree, there seem little political will, so make that a big "if"), there will a decades long war to dismantle it, (as took place up to and through the Reagan, Bush, Clinton, Bush years and even today), and with the short term nature of human memory, we will be back in this same boat again.
BTW, I don't want to sound too provincial, but my references are to the system as I understand it in the U.S. today.David Goldstein
September 5, 2009 at 10:17 am
And I can spell "investment" even if my fingers do not cooperate!
Once again, please let us edit our posts. :-)David Goldstein
September 5, 2009 at 10:40 am
As an outsider to economics and all the theories that support that science, I remain astonished that highly educated, exceptionally well compensated people devised innovative tools and math models they used brilliantly to bring the global economy down.
There was a great deal of intellectual endeavor that went into creating such a crash. Mortgage brokers decided to create an environment where loaning to people who could not afford the loan was an acceptable business practice. (Simply cannot wrap my head around this factor in the crash! "So you have no income to support this loan; we've created the NINJA loan for you!")
Investment bankers utilized innovative CDOs and CDSs to "minimize risk" and never asked themselves how packaging up so many bad loans would ever be a good deal when the loans came due. Apparently this was done because the homes themselves were to be acceptable collateral – never mind that housing prices were seeing a completely unsustainable rise in value – and a bubble was about to pop.
Ratings agencies failed utterly to issue ratings based in the reality of what was being sold.
And the regulatory environment, battered by 30 years of anti-regulatory propaganda, laid down and died in the last decade.
What is even more astonishing is an investment banking community that seems to think that this way of doing business is acceptable. They are not outraged at all by the events that led to the crash (except perhaps those who worked at Lehman). Hard to be outraged when you've profited so nicely by questionable business practices.
We have a financial system in which risk is rewarded, caution is penalized and the government is there with a no-strings bailout when the bankers fail.
It is unacceptable to ask the American public to accept that a reliance on a math model or economic theory caused the crash. Grossly irresponsible human behavior is at the root of the crash.
And as of today, the taxpayers are the ones held accountable. Not those whose irresponsible behavior led up to the crash. They're actually making quite a tidy profit in today's market – and setting aside "record" bonuses for themselves.anne
September 5, 2009 at 11:09 am
"Mortgage brokers decided to create an environment where loaning to people who could not afford the loan was an acceptable business practice. (Simply cannot wrap my head around this factor in the crash! "So you have no income to support this loan; we've created the NINJA loan for you!")"
The people making these loans were not fools, they were predators, and predators have different business practices. What mattered was getting the bad loans booked so they could then be used to spawn one or more rounds of derivatives, with fees being collected when the loan was originated and each time it was sold off. Since the bad loans were sold off immediately, the lender was never exposed to any risk by making a loan, and lending standards went out the window. They simply did not care if their marks could pay back the loans or not, there was a huge demand for subprime and Alt-A loans to be packaged into CDOs, and they were able to make a lot of money by feeding the beast.Scot Griffin
September 5, 2009 at 1:32 pm
Yes – and who won this game? Predators.
Innovation's not the problem. Just like you cannot blame the existence of knives for murder, you cannot blame financial innovation for the utterly corrupt use of tools. But unlike the pharma biz, where pushing the boundaries will get you a large fine (as Pfizer saw this just last week), financial shenanigans instead get you the biggest bonus. There is no one holding any of those corrupt peddlers of junk accountable for practices that should be against the law.anne
September 5, 2009 at 3:42 pm
Agreed. But the pharma biz has to go through clinical trials that are closely monitored by the FDA before they can peddle their innovation. It would be nice to have similar regulatory oversight of the introduction and use of innovation, just so the regulations and accounting rules can keep up.Scot Griffin
September 5, 2009 at 8:29 pm
" I remain astonished that highly educated, exceptionally well compensated people devised innovative tools and math models they used brilliantly to bring the global economy down."
It's not astonishing at all if you assume that this is what they intended to do, or at least those they work for intended to do.Uncle Billy Cunctator
September 5, 2009 at 6:24 pm
Who intended what? There are many versions of the story… here is one
September 6, 2009 at 12:30 pm
A while back I remember being troubled by seeing that Berkshire Hathaway was one of the largest shareholders of Moody's. This prompted me to look into who controls the big three, Moody's, Fitch, and S&P. The ratings were key, but exactly who are these people? At Moody's currently, Berkshire is still number one of course. Fitch is owned by the French Fimilac. Who are these people? Fitch Group also owns Algorithmics, vendor of risk management software. Apparently this is quite the magical software. Is it used commonly in the industry? Only by people who work with Fitch? For some weird reason, their CEO, Steve Joynt, looks like William Janeway's twin brother.
(Maybe it's just the moustache and glasses)
S&P. This is more than just a little curious: "It is also worth mentioning that Standard & Poor's apparently failed
to predict the bankruptcy of all the largest Icelandic banks and a weaker position of the Icelandic Government in 2008,
a country that had a very high rating until its economy suddenly collapsed.
In April 2009 Standard & Poor's called for "new faces" in the Irish Government, which was seen as interfering in the democratic process.In a subsequent statement they said they were "misunderstood""
Here's their CEO -
Defense industry, George W. Bush's Transition Advisory Committee on Trade…
Was there any collusion between Wareen Buffett, Fimilac, and McGraw, or did they each have their own separate sphere of influence?Uncle Billy Cunctator
September 6, 2009 at 7:51 pm
They just sold 20% of themselves to Hearst Communications.
That's an interesting connection. Fitch is a company that is involved in managing our perceptions of the quality of certain things. The Hearst corporation has always been about managing perceptions.
The Looting of America How Wall Street Fleeced Millions from Wisconsin Schools Corporate Accountability and WorkPlace AlterNet
The Looting of America: How Wall Street Fleeced Millions from Wisconsin Schools
By Les Leopold, Chelsea Green Publishing. Posted June 3, 2009.Wall Street investment houses went after the $100 billion saved in school-district trust funds like Whitefish Bay's, and made a killing.
Also in Corporate Accountability and WorkPlace
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7 Most Heinous Concoctions
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House 'Under Water'?
Do Like the Banks Do and Just Walk Away
Revolt on Goose Island: The Chicago Factory Takeover, and What it Says About the Economic Crisis
Of Ponzi Schemes, Bubbles and Banks
More stories by Les Leopold
The following is an excerpt from Les Leopold's new book, "The Looting of America" (Chelsea Green, 2009).
The Hooking of Whitefish Bay
The great economic crash of 2008 tore right through Whitefish Bay, Wisconsin, population 13,500-though you'd never guess it from looking around town.
Located just a few miles north of Milwaukee, this golden village exudes the hopeful self-confidence of the early 1960s. Whitefish Bay's stately mansions offer breathtaking views of Lake Michigan from cliffs that rise a hundred feet above the shoreline. As you head inland on its tree-lined streets, the houses slowly shrink back into sturdy, middle-class neighborhoods. The stores on Silver Spring Drive, its main shopping strip, have survived despite fierce competition from the nearby Bayshore Mall (a self-contained ultramodern shopping village with faux streets, a faux town square, and real condos). Whitefish Bay also supports an art deco movie theater that serves meals while you watch the show, and a top-notch supermarket, fish market, and bakery. Nothing is out of place-except you, if you happen to be brown or black. Whitefish Bay is 94 percent white and only 1 percent black. There's a reason the town's unfortunate moniker is White Folks Bay.
Yet this white-collar town voted for Obama-and has always voted for its schools, which are considered among the best in the state. Its residents' deep pockets supply the school system with all the extras: In 2007, $700,000 in donations provided "opportunities, services and facilities for students." The investment has paid off. An average of 94 percent of Whitefish Bay's high school graduates go on to college immediately. And the school dropout rate is less than half of 1 percent.
The school district takes its fiscal responsibilities seriously. It has set up a trust fund to pay benefits, primarily health insurance, for retired school employees. When these benefits (called "Other Post-Employment Benefits" or OPEB) were originally negotiated, the expense was modest. But then health care costs exploded. What's more, accounting rules now require that school districts amortize these costs and post them on their books as a liability each year. Whitefish Bay, like many other school districts, became worried about how to meet these liabilities.
Whitefish Bay is a town full of financially sophisticated residents, including its school managers. They sought to pump up the OPEB trust fund quickly so they could keep their promises to retirees. As responsible guardians of the town's resources, they looked for the highest rate of return at a minimal risk to the fund's principal. As Shaun Yde, the school district's director of business services, put it, the goal was to "guarantee a secure future for our employees without increasing the burden on our taxpayers or decreasing the funds available to our students to fund their education."
Meanwhile, Wall Street investment houses had set their sights on school-district trust funds like Whitefish Bay's. They hoped to persuade districts to stop stashing this money-valued at well above $100 billion nationwide in 2006-in treasury bonds and federally insured certificates of deposit (CDs). Wall Street's "innovative" securities could provide higher returns-not to mention more lucrative fees for the investment firms.
So an old-fashioned financial romance began: Supply (Wall Street's hottest financial products) met Demand (school districts seeking to build up their OPEB trust funds). It looked like a perfect match.
In the Milwaukee area, Supply was represented by Stifel Nicolaus & Company, a venerable, 108-year-old financial firm, which promised to put "the welfare of clients and community first" as it pursued "excellence and a desire to exceed clients' expectations . . ."
As a national firm based in St. Louis, Stifel Nicolaus was fortunate to be represented in Milwaukee by David W. Noack. According to the New York Times, "He had been advising Wisconsin school boards for two decades, helping them borrow for new gymnasiums and classrooms. His father had taught at an area high school for 47 years. All six of his children attended Milwaukee schools." School boards repeatedly referred to him as their "financial advisor"-a label he never refuted.
In 2006, Mr. Noack, an avuncular, low-key salesman (he preferred to be called a banker), urged the Whitefish school board and others in Wisconsin to buy securities that offered higher returns than treasury notes but were just about as safe. He had recently attended a two-hour training session on these new financial products, so he was confident when he assured the officials that they were "safe double-A, triple-A-type investments." None of the investments included subprime debt, he said. And the deal conformed to state statutes, so the district would be erring on the conservative side. In fact, Noack said, the risk was so low that there would have to be "15 Enrons" before the district would be affected. For the schools to lose their investment, "out of the top eight hundred companies in the world, one hundred would have to go under."
As in many romances, one party seduces and the other is seduced. Noack certainly came across as a caring, considerate suitor. He started his sales drive by inviting area school administrators and board members to tea, "with food and beverage provided by Stifel Nicolaus," making the gathering seem more like a PTA fund-raiser than a high-powered investment pitch. He merely wanted to introduce the local officials to these new "AA-AAA" investments, as the invitation pointed out.
In a series of video- and audiotapes recorded by the Kenosha school board-which later joined forces with Whitefish Bay and three other nearby school districts to invest with Noack-you could discern a pattern to his pitch. First he would stress the enormity of the financial problems the school districts faced in meeting their long-term retiree liabilities. For example, during a seventeen-minute spiel recorded on July 24, 2006, he reminded school board members that, based on Stifel's actuarial computations, the district had an $80-million post-retiree liability. (In an "updated" Stifel study presented a year later, the estimate rose to $240 million.) In fact, Noack spent much more time describing the extent of the liability and how the district would have to account for it than he did explaining his proposed multimillion dollar investments and loans. Not to worry. He said that he had "spent the past four years" developing investment solutions for such liability problems.
Next Noack stressed that he was not about to take unacceptable risks with the schools' money. His recommended investments were extremely conservative, his approach cautious. As he put it in the July meeting, "our program ... is using the trust to a certain degree [and] a small portion of the district's contribution, investing the money, making the spread in double-A, triple-A investments and funding a little bit at a time over a long period of time ... and what we make is as risk-free as we can get. . . ."
He also nudged the school district along with a bit of peer-group pressure, describing how other Wisconsin districts were working with him on similar investments. There was power in numbers, he told them. By working together with other districts, they would "increase their purchasing power," a phrase he repeated many times.
Noack made it seem as if the districts' collective "purchasing power" had banks and investment houses lining up to compete for their business, offering them the lowest-cost loans and highest rates of return. He was soon going to be "bidding out" the districts' packages and he was sure he was going to get them the best rates.
To take the edge off the enormity of the investment Noack was pushing, he ended his pitch by asking the school board to pass resolutions to "authorize but not obligate" its financial committee or officials to make the investment if and when the rates seemed favorable. He never asked the boards to make a final commitment then and there. Instead, he conveyed the sense that even after the vote, they weren't committed to anything.
But the seduced are rarely passive. In this affair, several key board members helped the process along. On the Kenosha videotapes, for example, one board member, Mark Hujik, a hulking, ex–Wall Street player who now owns a Wisconsin financial advisory service, repeatedly sealed the deals. The self-confident Hujik never asked a question he didn't already know the answer to. He made sure everyone knew that he knew the ins and outs of finance. At a key meeting before Kenosha signed on to its first deal, he stressed that the tens of millions in loans the board would be taking out were "moral" but not "contractual" obligations on behalf of the town. He implied that if things went wrong, the town really wasn't on the hook for $28.5 million in loans. (Unfortunately, he didn't mention that the town could still be successfully sued and see its debt ratings plummet if it defaulted on its "moral" financial obligations. And when a town's debt rating falls, it faces higher interest rates for all its other borrowing needs, assuming anyone will ever lend to it again.)
Together, Hujik and Noack wooed the parties with intimate bankerspeak that conveyed confidence and expertise. They whispered financial sweet nothings: LIBOR rates, basis points, spreads, mark to market, cost of issuance, static and managed investments, arbitrage, tranches, letters of credit, collateralization ratios, and standby-note purchase agreements. After a while the board members started using the same language. Words like "million" and "dollars" disappeared from their vocabulary; instead they referred familiarly to "twenty" and "thirty" (as in thirty million dollars). Perhaps the slang and technical lingo distracted the officials from the risky nature of their financial decisions. They whispered financial sweet nothings: LIBOR rates, basis points, spreads, mark to market, cost of issuance, static and managed investments, arbitrage, tranches, letters of credit, collateralization ratios, and standby-note purchase agreements. After a while the board members started using the same language. Words like "million" and "dollars" disappeared from their vocabulary; instead they referred familiarly to "twenty" and "thirty" (as in thirty million dollars).
Like any romance, at first everything seemed simple. There was so much trust. As one Kenosha board member said to more experienced members before a key authorization vote: "I'm not a financial person. So if you say it should be done, I will follow your lead."
Listening to seven taped meetings, it's hard not to notice the school officials' consistent deference to Noack and their inability to ask him basic or troubling questions. No one wanted to seem dumb, though nearly all decidedly were not "financial persons." The district officials never asked questions such as: "How will the rate of return compare to government-guaranteed securities?" Or, "If Wall Street goes into a slump, how much could we lose?" Unless you're Woody Allen, you don't talk about the prospect of breaking up at the beginning of a romance. When the votes were taken, no one dissented. Demand and Supply consummated their relationship.
To the Wisconsin school districts, the deal seemed safe. They would pool their money to increase their "purchasing power." They would borrow more money ("leverage," as the big boys call it) and invest it in something called a "synthetic CDO" for seven years. In a handout he gave to the boards on July 24, 2006, Noack illustrated how their trust fund for retirees' benefits could accumulate almost $9 million in seven years by borrowing and investing $80 million. These CDOs would pay them over 1 percent more than what it would cost to borrow the money. The more the schools borrowed, the more they would make. It was practically free money. What was not to like?
The complexity of the deal alone should have given the investors pause. Their newly purchased "Floating Rate Credit Linked Secured Notes" were a lot more complicated than federally insured CDs or treasury notes. In fact they were more convoluted than anything any of them had ever bought or sold, individually or collectively. But Noack had done his job well by making the purchases seem straightforward and prudent.
According to court documents, by the time Noack was through, the five school districts had put up $37.3 million of their own funds (most of it raised through their towns' general-obligation bonds) and borrowed $165 million more from Depfa, an aggressive Irish bank owned by a much larger German bank. The net investment after fees was $200 million. With that money, the school officials bought three different bondlike CDO financial instruments from the Royal Bank of Canada-Tribune Series 30, Sentinel Series 1, and Sentinel Series 2. With a little Wall Street magic, a big payoff seemed like a sure thing.
But what if Wall Street took a tumble and the value of the school boards' investments fell below the value of their loans? The school officials didn't even ask the question, but Noack already had the answer: "If we stick to all investment-grade companies, you still got to have ten percent . . . go under. You're talking, I would assume, and I'm not an economist, but that's a depression."
The districts seemed oblivious to risk, even after securing disappointing returns on their first investments. There was a huge gap between the rates Noack had expected to lock in and what they finally got. The entire point of investing in CDOs was to get a rate of return that was substantially higher than what it would cost to borrow the money. The difference is called "the spread." Every quarter of a year you were supposed to collect what you'd earned through the spread and reinvest it. Noack had predicted that the CDOs would yield the school districts about 1.5 percent above what it would cost to borrow the money. In the first purchase, Tribune Series 30 for $25 million, the spread was 1.02 percent. However, on the next CDO purchase, Sentinel 1 for $60 million, the spread was only 0.67 percent. In their final deal, Sentinel 2 for $115 million, the spread was 0.82 percent. The idea was that after the seven years the districts could redeem their CDOs, like bonds, and have enough money to pay off the Depfa loan as well as the general-obligation bonds taken out by the town. Of course, this assumed that the CDOs would be safe and sound for seven years.
Unfortunately the CDOs were not the secure investment Noack had thought they would be. According to the New York Times' analysis:
If just 6 percent of the bonds ... went bad, the Wisconsin educators could lose all their money. If none of the bonds defaulted, the schools would receive about $1.8 million a year after paying off their own debt. By comparison, the CDO's offered only a modestly better return than a $35 million investment in ultra-safe Treasury bonds, which would have paid about $1.5 million a year, with virtually no risk.
But this comparison missed the true alchemy of the deal, and its great attraction to the local school officials. Buying a safe treasury bond would have required the schools to put up $35 million from their general-obligation borrowing-money they would have to pay back and on which they would have to pay interest to the bondholders. In fact, if the districts had made such an investment, they would have had to pay more in interest than the treasury bonds would have yielded. That investment would make little sense.
The CDO deal was complex but it seemed to have enormous advantages: Not only would it supposedly produce $1.8 million a year in revenues, it would also pay for all the interest on the general-obligation bonds, as well as the debt itself, at the end of the seven years. That is, returns from the CDOs would cover the $165 million in loans from Depfa and the $35 million of collateral the schools put up through the general-obligation bonds. All in all, the deal was supposed to generate $1.8 million a year, free and clear. Now that's fantasy finance.
Hujik certainly had bought into the dream. "Everyone knew New York guys were making tons of money on these kinds of deals," he said. "It wasn't implausible that we could make money, too."
The Wisconsin officials didn't see that their quest for this pot of gold had created two insidious problems. First, town elders were now ensnarled in a series of complicated financial transactions that yielded considerable fees for bankers and brokers. The districts paid fees to issue their general-obligation bonds; they paid fees to service those payments; they paid fees to borrow the funds to buy their CDOs; they paid fees to buy their CDOs, and they paid fees to collect the loan payments and to distribute the CDO payments. Someone would be getting rich off all this, but it wasn't the five Wisconsin school districts.
Second, when little fish try to swim with big fish, they better be prepared for risk-lots of it. No one on either side of the deal, at least on the local level, had read the fine print. They couldn't have, since the detailed documents-the "drawdown prospectuses"-were delivered weeks after the securities were purchased. They wouldn't have understood them anyway. In this romance between Supply and Demand, everyone was in over their heads. The "experts" in the room (on both sides) sounded cautious, confident, and knowledgeable. But in truth, Noack had no idea what he really was selling, and school district officials like Hujik and Yde had no idea what they really were buying. It is likely that both parties truly believed they were handling the equivalent of a mutual fund made up of highly rated corporate bonds. They weren't.
It's hard to blame the Wisconsinites for not understanding the transaction: They were dealing with one of the most complex derivatives ever designed-a synthetic collateralized debt obligation, which is a combination of two other derivatives: a collateralized debt obligation (CDO) and a credit default swap (CDS). This is the kind of security that Federal Reserve chairman Ben Bernanke called "exotic and opaque." Investment guru Warren Buffet called it a "financial weapon of mass destruction." In other words, one of the most dazzling-and dangerous-illusions in all of fantasy finance.
As we'll see, these investments were truly mysterious in their design and in their execution. One of the most "exotic" features was that these securities didn't give the buyer ownership of anything tangible at all. The buyer received no stake in a corporation, as they would have with a stock or bond. Instead, the school districts, without realizing it, had become part of the trillion-dollar financial insurance industry. (It was not called insurance, however, since insurance is, by law, heavily regulated.) In fact, they had put up their millions, and had borrowed millions more, to insure $20 billion worth of debt held (or bet upon) by the Royal Bank of Canada. And that debt included some very nasty stuff: home equity loans, leases, residential mortgage loans, commercial mortgage loans, auto finance receivables, credit card receivables, and other debt obligations. Technically, Mr. Noack may have been correct when he said that the schools didn't own any subprime debt. They didn't own anything. Instead, they had agreed to insure junk debt. The revenue they hoped to receive each quarter was like receiving insurance premiums from the Royal Bank of Canada, which was covering its bets on the junk debt.
What's more, although the synthetic CDOs had been rated AA, as Noack had touted, those ratings were bogus. The CDOs were drawn from a vast pool of junk debt that had been chopped up into slices based on risk. The top slices had the least risk and the bottom slices had the most risk. Unbeknownst to both Noack and the school districts, the districts' $200 million of borrowed money was used to insure a slice near the bottom of the barrel! They would be on the hook for paying out claims if the default rate hit about 6 percent, a number it is fast approaching. Neither savvy Dave Noack, nor confident Mark Hujik, nor concerned Shawn Yde appeared to have any understanding of this frightening reality.
But the big fish-the CDO creators and peddlers at the top levels-knew what they were doing. The Canadian bank received $11.2 million in up-front fees. (That's right, the bank was, in effect, buying insurance, yet the school districts were paying the bank up-front fees for the honor of insuring the bank's junk debt.) The investment sales company took $1.2 million in commissions. We don't know precisely how much Depfa got for the loans, but it was substantial.
Whitefish Bay and the other school districts got something substantial too: nearly all of the risk. The school districts are about to lose all of their initial $37.3 million. They will also lose another $165 million of the money they'd borrowed from Depfa. As soon as the default rate is reached, $200 million will go to pay insurance claims to the Royal Bank of Canada. And the schools still will owe the full $165-million Depfa loan, and they will still owe on the bonds they had issued to raise much of their $37.3 million in collateral. The risk of reaching total default currently is so high that Kenosha's entire piece of the CDO investment ($35.6 million) was valued at only $925,000, as of January 29, 2009-a decline in value of $36,575,000. Now the school districts are paying hefty fees not just to bankers but also to lawyers, as they sue to unwind the deal and recover damages.
"This is something I'll regret until the day I die," said Shawn Yde of the Whitefish Bay schools.
He's not alone. As National Public Radio and the New York Times reported in a joint article, "Wisconsin schools were not the only ones to jump into such complicated financial products. More than $1.2 trillion of CDOs have been sold to buyers of all kinds since 2005-including many cities and government agencies. . . ."
Did these public agencies deserve any protections? A prudent rule might be to forbid investment houses to peddle such risky securities within a thousand yards of a school district. But there are no rules, since these "exotic and opaque" financial securities are still entirely unregulated. (When the Kenosha Teachers Association discovered that the securities peddled to the school districts were identical to those that sunk AIG, it requested that the Federal Reserve remove them from the school districts just as they have done for AIG-an eminently fair and reasonable request in my opinion. See chapter 8 for more on AIG.)
Whitefish Bay, Kenosha, and the other three districts made missteps and miscalculations. They were naive. As Mark Hujik candidly said, they saw a pot of gold on Wall Street and wanted their piece. But they were had. We all were. We know that something has gone terribly wrong not just in Whitefish Bay but with our entire economy. There's a connection between the junk that was peddled to the "Wisconsin Five" and the crash of the global financial system. In fact, if we can understand exactly what David Noack sold to Whitefish Bay and why, we will also understand how the economy collapsed, and what needs to change to prevent this from happening again.
Our trail will lead to an examination of financial booms and busts, including the Great Depression. And those of us with strong stomachs will also learn more than we ever wanted to know about CDOs, CDOs-squared, synthetic CDOs, and credit default swaps-those exotic instruments that swamped Whitefish Bay.
Along the way, we will see how bankers, traders, and salespeople pocketed hundreds of millions of dollars by selling risk all over the world as if it were a collection of predictable Swiss watches. And we'll puzzle over why Alan Greenspan, Robert Rubin, and Ben Bernanke fought so hard to keep these dangerous financial instruments unregulated.
We'll tackle the "logic" of free marketeers who claim that the meltdown is the fault of low-income homebuyers who got in over their heads. We'll also marvel at how, in response to the financial meltdown, former treasury secretary Paulson and friends blew open the U.S. Treasury vault so that Wall Street could walk off with a trillion dollars . . . and counting.
And once we've put all the puzzle pieces together, we'll use our new understanding to formulate reforms that might protect us from the fantasy-finance fiasco that is harming not just Wisconsin and the rest of America, but the whole world.
Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America (Chelsea Green Publishing, 2009).
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The Prophet of the Great Depression By Frank Shostak Posted on 10/4/2006 Subscribe at email services, tell others, or Digg this story. The Causes of the Economic Crisis is a collection of articles on the business cycle, money, and exchange rates by Ludwig von Mises that appeared between 1919 and 1946. Here we have the evidence that the master economist foresaw and warned against the breakdown of the German mark, as well as the market crash of 1929 and the depression that followed. Mises presents his business cycle theory in its most elaborate form, applies it to the prevailing conditions, and discusses the policies that governments undertake that make recessions worse (even before Keynes's General Theory appeared!). He recommends a path for monetary reform that would eliminate business cycles as we have known them and provide the basis for a sustainable prosperity. In foreseeing the interwar economic breakdown, Mises was nearly alone among his contemporaries - which is particularly interesting because Mises made no claim to possessing clairvoyant powers. To him, economics is a qualitative discipline. But among those who say that economics must be quantitative with the goal of accurate prediction, neither the pre-monetarists of the Fisher school nor the Keynesians foresaw the economic damage that would result from central bank policies that manipulate the supply of money and credit. Why is this? Most economists were looking at the price level and growth rates as indicators of economic health. Mises's theoretical insights led him to look more deeply, and to elucidate the impact of credit expansion on the entire structure of the capitalistic production process. The essays were well known to contemporary German-speaking audiences. They had not come to the attention of English audiences until 1978, four years after F.A. Hayek was awarded the Nobel Prize for, in particular, "his theory of business cycles and his conception of the effects of monetary and credit policies." In tribute to Hayek's excellent contributions, the Austrian theory of the business cycle has long been called a Hayekian theory. But it might be more justly called the Misesian theory, for it was Mises who first presented it in his 1912 book and elaborated it so fully in the essays presented in this new book from the Mises Institute. Although the articles address issues that were debated many years ago, the analysis presented by Mises are as relevant today as they were in his time. Mises reached his conclusions regarding events of the day by means of a coherent theory, as applied to current events, rather than attempting to derive a theory from data alone, as many of his contemporaries did. This is what gave his writings their predictive power then, and it is what makes his writings fresh and relevant today. A proper economic theory such as Mises presents here applies in all times and places. As in the past, most economists today believe that sophisticated mathematical and statistical methods can torture the data enough to reveal some causal link between events and yield a theory of inflation and the business cycle. But this is a senseless exercise. It is no more fruitful than a purely descriptive account and it has no more predictive value than a simple data extrapolation. These essays have been buried in obscurity for far too long. How fortunate we are to have them in a form that can reach a mass audience. Reading the writings of this great master economist might convince some economists and policy makers that there is no substitute for sound thinking. Economics is far too important a subject to be left in the hands of the trend extrapolators, data torturers, and monetary central planners who rely on them. Do we need ever more money? In his articles from 1919 to 1923. Mises addressed the factors that were responsible for German hyperinflation. For Mises, inflation is defined as money creation, the act of which tends to manifest itself through the fall in the purchasing power of money (PPM). Thus for a given demand for money, an increase in its supply lowers the PPM. Whenever monetary authorities allow the rate of monetary pumping to proceed at an accelerating pace, the purchasing power of money tends to fall by a much larger percentage than the rate of increase in money supply. Mises attributed this to increases in inflationary expectations. Peoples' expectation that the future PPM is likely to fall causes them to lower the present demand for money. This sets in motion a mechanism that, if allowed to continue unabated, can ultimately break the monetary system. Inflationary expectations lead the suppliers of goods to ask for prices that are above what the holders of money can pay. Potential buyers don't have the money to purchase the goods. The emerging shortage of money, according to Mises, is an indication that the inflationary process has gained pace and cannot be "fixed" by raising the supply of money. On the contrary, policies that accommodate this shortage can only make things much worse. Ultimately, the sellers demand astronomical prices, transactions with inflated money become impossible, and the monetary system falls apart. Mises argued that without an impenetrable link to gold, it is not possible to eradicate inflation. Gold cannot be printed, and it thereby evades the politicians' desires and wishes and keeps the economy healthy. For Mises, the real purpose of paper money is to give politicians control over the supply of money. In response to the view that there is not enough gold to support growing trade, Mises argued that any given amount of gold can fulfill all that money is required to do: provide the services of a medium of exchange. Additional quantities of gold cannot improve on the economic function of money. It was also Mises's view that the international exchange rate of the domestic money tends to follow inflationary trends, all other things being equal. For Mises, a currency rate of exchange is determined by the relative purchasing power of respective monies. Any rate of exchange that deviates from the relative purchasing power of money makes it profitable to sell commodities for overvalued money and buy commodities with undervalued money. This brings the rate of exchange of a currency in line with the relative purchasing power of respective monies. This opinion clashes with popular thinking both then and today that the currency rate of exchange is set by the state of the balance of payments. Do we need policies aimed at stabilizing prices? Having established that the purchasing power of money is set by the relative supply and demand for money, Mises ridiculed the view that the PPM can or should be "stable." The notion of stability is compatible only with the imaginary conditions of economic equilibrium - a state of no change. Money is of little use in the state of equilibrium; it is only of use in the state of change. What's more, once we accept stability as a policy goal, it would appear that having a money paper standard is a policy solution. Only a central bank should manipulate the money supply to bring about price stability and economic equilibrium. In this view, the existence of the gold standard is the major obstacle for attaining the goal of price stability, since the supply of gold is not under the control of the stabilizers, i.e., the central bankers. There is a problem here, however. Even if we were to agree that the stable purchasing power of money leads to better economic conditions, we need to be able to quantify the PPM to provide a benchmark. But there are no means to determine scientifically the total purchasing power of money (PPM). The various price indexes that were suggested by the American economist Irving Fisher to calculate the PPM were just exercises in wishful thinking. For instance, there is no way to determine what type of average one should select in establishing the average price, and there are no objective criteria to prefer a geometrical average over an arithmetical average. Mises raises the issue of weighing the importance of various goods in the index. In the world of change such weighting - i.e., the importance people attach to various goods and services - is constantly in flux. So even if one ignores various mathematical problems associated with the construction of price indexes, they can at best only describe frozen human beings, or automatons. Mises concludes that policies of stabilizing the price level must only lead to more instability. Why? Because policies of stabilizing the PPM are in fact tampering with the prices of goods, which by implication must be a destabilizing act. Also, these policies generate a redistribution of wealth from the late receivers of the newly injected money to the early receivers of money. Some individuals derive benefit at the expense of other individuals. Economic Business Cycles And Their Causes In the slump of a cycle, businesses that were thriving come to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs. Businessmen themselves are confused as to why. They cannot make sense of why certain business practices that were profitable yesterday are losing money today. Bad business conditions emerge when least expected - just when all businesses are holding the view that a new age of steady and rapid progress has emerged. In his writings, Mises argued against the prevailing explanation of the business cycle by overproduction and under-consumption theories, and he critically addressed various theories that depended on vague notions of mass psychology and irregular shocks. In the psychological explanation, an increase in people's confidence regarding future business conditions gives rise to an economic boom. Conversely, a sudden fall in confidence sets in motion business stagnation. Now, there can be no doubt that during a recession people are less confident about the future than during good times. But to observe this is not to explain it. Likewise theories that view various shocks and disruptions as the central cause behind boom-bust cycles do not advance our knowledge regarding the boom-bust cycle phenomenon. Neither explains how the boom and bust come about, nor why they are of a recurrent nature. To arrive at a correct explanation, we need to trace the change in business conditions back to a previously established and identified phenomena, and that is precisely what these theories do not do. Hence Mises concluded that all these theories do not provide an explanation but rather describe the phenomenon in a different way. That is to say, it does not help us to understand rain to define it as something that makes the ground wet. Mises also held that various statistical and mathematical methods are others ways of describing but not explaining events. Statistical methods make it possible to generate charts of data fluctuations but they do not improve on our knowledge of what causes the fluctuations. The Circulation Credit Theory of Business Cycles Mises made a distinction between credit that is backed by savings, and credit that does not have any backing. The first type of credit he labeled commodity credit. The second he labeled circulation credit. It is circulation credit that plays the key role in setting the boom-bust cycle process. Consider a producer of consumer goods who consumes part of his produce while saving the rest. In the market economy, our producer could exchange the saved goods for money. The money that he receives can be seen as a receipt as it were for the goods produced and saved. The receipt is his claim on the goods. He can then make a decision to lend the money to another producer through the mediation of a bank. By lending the money of the original saver, the lender transfers his claims on real savings to the borrower. The borrower can now use the money - i.e., the claims - and secure consumer goods that will support him while he is engaged in the production of other goods (say, tools and machinery). The credit in this case is fully backed by savings and permits the expansion of tools and machinery. With better infrastructure, it is now possible to produce not only more goods but goods of a better quality. The expansion of real wealth is now possible. Once a lender lends his money, he relinquishes his claims on real goods for the duration of the loan. In an unhampered market economy, borrowers are users of savings who make sure that savings are employed in the most efficient way: generating profits. This means that real savings are employed in accordance with consumers' most important priorities. We can thus see here that as long as banks facilitate commodity credit, they should be seen as agents of wealth generation. In contrast, whenever banks embark on the lending of circulation credit they in fact become agents of real wealth destruction. As opposed to commodity credit, circulation credit is not supported by any real saving. This type of credit is just an empty claim created by banks. In the case of commodity credit, the borrower secures goods that were produced and saved for him. This is, however, not the case with respect to the circulation credit. No goods were produced and saved here. Once the borrower uses the unbacked claims, it is at the expense of the holders of fully backed claims. In this way, circulation credit undermines the true wealth generators. Now, as a result of an increase in the supply of circulation credit money, market interest rates fall below the natural rate, that is, the rate that would be established by supply and demand if real goods were loaned directly in barter without the use of money. (In his later articles, Mises referred to the natural rate as the rate that would be established in a free market.) As a result of the artificial lowering of interest rates, businesses undertake various new capital projects to expand and lengthen the production structure. Prior to the lowering of interest rates, these capital projects didn't appear to be profitable. Now, however, as money market rates are kept below the natural rate, economic activity zooms ahead and an economic boom emerges. Such a situation cannot last. Mises here explains the important role played by the subsistence fund. The expansion of the production structure is always constrained by the availability of the means of sustenance (saved consumer goods) to maintain workers during the period of the expansion and the enhancement of the production structure. The forced lowering of interest rates bring into being production processes that would not otherwise be undertaken. A production structure is now created that produces goods and services that consumers in fact cannot afford. Instead of using the limited pool of the means of sustenance to make tools and machinery that will generate consumer goods on the highest individual priority list, the means of sustenance are wasted on capital goods that are geared towards the production of low-priority consumer goods. At some point, the producers of such goods will discover that they cannot make a profit or even complete their plans. What we have here is not over-investment but misdirected investment or malinvestment. The expansion of the production structure takes time and the limited subsistence fund may not be sufficient to support the expansion of the capital structure. If the new flow of the production of consumer goods does not emerge quickly enough to replace the currently consumed consumer goods, the subsistence fund comes under pressure. At some point in time, banks discover that they don't have the savings to back their loans and that marginal businesses are starting to under-perform. All this causes them to curtail the expansion of circulation credit, which in turn raises interest rates. This undermines business funding, and can often be the precipitating event that leads to an economic bust. Mises wrote that the bust phase of the business cycle process could be precipitated by other events. The expansion in the money supply enriches the early receivers of money. Those individuals who have now become wealthier as a result of receiving the money may alter their pattern of consumption. This may force businesses to adjust to this new setup. Once the rate of expansion in money slows down or comes to a halt, the new pattern of consumption cannot be supported and the new capital structure that was erected becomes unprofitable and must be abandoned. $18 It is not surprising that Mises was strongly opposed to the idea that central banks should impose "low" interest rates during a recession in order to keep the economy going. Instead, he believed that the policy makers should not engage in the artificial lowering of interest rates but rather refrain from any attempts to manage the economy via monetary policy. By curtailing its interference with businesses, the central bank provides breathing space to wealth generators and thereby lays the foundation for a durable economic recovery. In the shelves of books on the business cycle, this one stands out for its theoretical clarity and also its historical prescience. May its appearance earn for Mises his rightful place in history as an economist who dared to break with the pack, think for himself, and provide a clear explanation while everyone else was in panic. -------------------------------------------------------------------------------- Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of Man Financial, Australia. Send him mail and see his outstanding Mises.org Daily Articles Archive. Comment on the blog.
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