The issue of crony capitalism should be front and center in this campaign. President Obama defends his cronies instead of the so called 99 percent. That’s his contradiction. Big Labor, Big Business and Big Green Energy are collections of cronies with big jobs, big salaries and big privileges. Nothing to do with the 99 percent.
But Romney can go even further to slam crony capitalism. This is where tax reform and deep spending cuts come in. A flattening of tax rates should be accompanied by the elimination of cronied tax deductions, exemptions and carve-outs. Even more, we should get rid of crony corporate welfare wherever it exists, including crony government subsidies to energy, exports and agriculture. Wherever it exists.
Let’s say you went to two tax brackets at 10 and 25 percent, as per Paul Ryan’s plan, or even the next step of a single-rate flat tax. Here, all the crony tax advantages should be wiped out. They won’t be necessary at lower rates, and their removal would end crony favoritism.
Finally, Romney can punctuate his crony-capitalism attack by telling folks he will overturn and upend the prevailing Washington, D.C., establishment.
Sadly, with the exception Rick Santorum making the case for lower tax rates, Thursday night’s debate had virtually no discussion of tax reform. Newt Gingrich never even once mentioned his 15 percent flat-tax plan. Unfortunately, Newt still leaves most deductions and carve-outs in place, and that needs to be fixed.
That aside, Romney capped his strong performance with a Reaganesque summation. As he has in the past, he criticized Obama for trying to “transform” America from a merit society — an opportunity society where people are free to choose — to a European-style entitlement society. Romney said, “We need to restore the values that made America the hope of the Earth. … (President Obama) has made it almost impossible for our private sector to reboot. … I will defeat Barack Obama and keep America as it’s always been, the shining (city) on a hill.”
Hopes that Greece can be saved are dwindling. Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut, but banks have now made it clear that efforts to reach an agreement could fail. Should the country go bankrupt, the European Central Bank stands to lose the most.
It’s official: The European Financial Stability Facility (EFSF) plan announced at the EU summit on October 27th is essentially dead prior to arrival.
As a consequence, Angela Merkel and Nicolas Sarkozy appear to be betraying signs of throwing in the towel on the Euro project as it exists today. They appear to be actively contemplating ways to engineer an orderly breakup of the Euro.
As financial market participants gets wind of their intentions – albeit tentative – expect financial markets to accelerate the unfolding of events. The entire Euro edifice could collapse before the New Year.
EFSF Chief: The Insurance Plan Is Dead Prior To Arrival
When the Chief of the EFSF is pessimistic about the capacity of the EFSF to be leveraged to an extent that is adequate to the task at hand, then you might as well kiss the whole thing goodbye.
In a little noted article in Thursday’s FT, Klaus Regling, head of the EFSF essentially admitted that the plan agreed upon at the EU summit on October summit to use the EFSF as collateral for a first-loss insurance scheme is essentially dead.
As I predicted would occur in an article of mine several weeks ago entitled “Europe’s Inane Idea: Fake Brady Bonds,” the EFSF chief has acknowledged that there is no interest on the part of investors to purchase PIIGS bonds with a first-loss guarantee of only 20%.
Regling believes that a first-loss guarantee of 30% may be required to garner any interest.
Personally, I have serious doubts that there would be sufficient interest. Any issuance that actually requires a 30% loss guarantee in order to be viable simply has an implicit default risk profile that will be unable to garner sponsorship of sufficient size.
Since there are only about 250 billion euros available for the EFSF first-loss insurance scheme, that means that, even assuming 30% were sufficient, the mechanism would only be adequate to cover about 800 billion euros worth of debt issuance by Italy and Spain — and any other euro area country that needed funding.
It has been estimated that roughly two trillion euros of funding are needed to simply merely meet projected roll-over and fresh financing needs through mid 2013. Therefore, the 800 billion projection is totally insufficient to the task at hand.
If $800 billion in guarantees are all that Europe can come up with, Europe would probably better off wasting precious resources on this scheme at all.
That is why the EFSF first-loss guarantee proposal seems to be dead on arrival. The plan is totally insufficient, and therefore is unlikely to be implemented at all.
I believe that this realization is thoroughly discouraging the Eurocrats that are charged with structuring the EFSF insurance facility and selling it to investors. These Eurocrats are relaying their pessimism back to Merkel and Sarkozy in real time. This in turn, is prompting Merkel and Sarkozy to begin to contemplate “exit strategies.”
Imminent Fiasco
Because Merkel and Sarkozy are unwilling or are unable to support the only viable option available to them that is to fund bond purchases via the ECB, they appear to be engaging in preliminary speculations regarding a possible exit plan. The problem is that there is no viable exit plan that would not entail a total economic and financial disaster.
It will be impossible for Merkel, Sarkozy and other European leaders to prepare an exit strategy without their intentions being leaked to the press. Financial markets will therefore unravel any and all plans that they contemplate before they can even commit them to paper.
As soon as markets realize that the original EFSF scheme is being abandoned and that the entire Euro project will be restructured, the Euro will be crushed, the European banking system will become insolvent and global financial markets will freeze up.
Merkozy Musings
Sarkozy is already openly musing about a “two-speed” Europe. He envisions a group of countries that will quickly move towards tight fiscal and economic integration and another group of countries that will remain fiscally and monetarily independent.
Sarkozy has stated that he believes that a tight federation is impossible for a large group of economically, politically and culturally disparate countries. The implication is that the group of 16 nations that currently comprise the Euro is probably too large to be manageable.
At the same time, Merkel is already dreaming about a “New Europe.” Exactly what Germany’s Chancellor means by this is ambiguous. However, it is clear that Merkel has in mind much tighter fiscal and economic integration. In this regard Merkel must know that several current Euro members may be unable or unwilling to join in such a tight federation.
The problem with Sarkozy’s and Merkel’s musings is that they are completely irrelevant and even counterproductive to the current task at hand. The issues that they are touching on were issues that needed to have been resolved at the inception of the Euro. At this point, the question is how the damage can best be undone, not to debate what should have been.
Conclusion
Merkel and Sarkozy will soon learn that an orderly break-up of the Euro is not possible. Even the slightest hint that a breakup is being contemplated will cause a global financial disturbance that is so great that any perceived benefits of a break-up will be completely overwhelmed by the costs that will be imposed by the market.
One of the things that I suspect has brought many of you to Naked Capitalism is the hard lesson that conventional wisdom in finance and economics has been very costly to ordinary citizens around the world. If you had believed the prevailing world view of early 2007, that markets were efficient and bad actors would of course be found out and shunned, that were were in the midst of a Great Moderation and could expect to enjoy continued prosperity, punctuated by shallow recessions, and that financial innovation was a boon and therefore to be encouraged, you had an ugly awakening. The global financial crisis imposed tremendous costs on investors and society at large, via unemployment, a housing bust, plunging tax revenues, cuts in government services and increasing political discord.
Yet no one in power before the crisis has been punished or even suffered much. In fact, 2009 and 2010 Wall Street bonuses exceeded the record levels of 2007. As former IMF chief economist Simon Johnson described in a May 2009 Atlantic article, the US instead suffered a quiet coup, with the top end of the financial services industry becoming more concentrated, more powerful, even more concentrated and more firmly in charge of the political apparatus.
Most of you understand this. It’s awfully hard not to notice that we have a two-tier system of justice, in which the major financial firms get to flout the law and violate their own contracts, yet are able to get their agreements enforced against seemingly everyone, from credit card, mortgage, and student debt borrowers to municipalities who entered into risk-laden swaps they didn’t understand to nations like Greece, where a clearly insolvent borrower cannot get a deep enough restructuring out of fear of triggering payouts on credit default swaps. But complexity, leverage, and opacity have been the big banks’ best friends in executing this program of looting. You’ve come here to get educated so you won’t be so easily taken next time.
So the lies that the elite financiers have peddled appeared to be free, when in fact, many of them were sold via clever messaging and lobbying. Read the Rest…
The American financial system seems ultramodern in its complexity, but it is actually ancient in the brutal ways wealth asserts power over others. The earliest societies were torn by conflicts between lenders and borrowers, the rich versus the poor. They were compelled to fashion hard rules and put restraints on lending to curb the cruelties and promote a moral minimum for social justice. Nearly every country and culture embedded these values in religious tenets that governments enforced. Anthropologist David Graeber asserts provocatively in his book Debt: The First 5,000 Years that the power struggles over debt were probably the starting point for developing civilization’s moral codes. The arguments typically began when kings or landowners lent some of their surplus wealth to peasant farmers, then took away the debtors’ property if they failed to repay the loans. In olden days, the creditor would seize the debtor’s livestock and vineyard, perhaps even his children to be enslaved as household servants, until the debts were repaid. If the failure of borrowers persisted, the wealthy lenders would wind up owning all the property, with the peasants reduced to tenant farmers on the land they had once owned. The negative cycle stopped when the peasants could no longer borrow because they had nothing left for lenders to claim in default. Economic life at that point was frozen or depressed, no longer functioning. In a rough sense, this resembles what happened to our economy in the financial crisis. Debtors were tapped out, up to their eyes in debt, and creditors recognized that they could not lend to them anymore without losing their money. In modern economies, no one takes away their children, but they do seize homes and cars and other assets. The ancient Hebrew society worked out a solution for recurring debt crises—you can find it in the Bible. Every seven years (in some interpretations, every fifty) the cycle of debt accumulation was erased by a declaration of general forgiveness. This was called the year of jubilee, and Christianity embraced the same moral principles (“forgive us our debts, as we forgive our debtors”). Property was returned to the original owners, and children and slaves were freed. Everyone was redeemed. The economy was freed to start over again. Graeber thinks Judaism’s reform laws were probably influenced by the Babylonians, who issued “clean slate” edicts when excessive debt accumulation threatened social crisis. Graeber notes that nearly every society, ancient and modern, shares moral confusion about debt, with contradictory attitudes. On the one hand, “Paying back money one has borrowed is a simple matter of morality.” On the other hand, “Anyone in the habit of lending money is evil.” Americans share this ambivalence. Here is what Americans can learn from the ancients: severe inequality of wealth and income is not just a question of morality. Inequality is the fundamental source of the disorder that leads to financial crisis and chokes off the economy. Ancient religious principles like the limits on interest rates were a practical way of maintaining balance in economic life. Taking away those rules—as US politicians did when they repealed prudent regulations of banking and finance—in effect authorized the growing inequality that eventually leads to chaos. Modern economists and their supposed “science” generally ignore the ancient wisdom. Most would probably dismiss the connection as folklore. Some economists study inequality and what drives it. Others study financial fragility and macroeconomic volatility. But the two subjects are seldom addressed as underlying cause and effect. Gross concentrations of money at the top help explain why the system eventually stalls out. This is a basic insight that ought to inform the agenda for recovery. Inequality matters.
Economists Michael Kumhof and Romain Rancière wrote a breakthrough paper for the IMF that made the connection between inequality and financial crisis. “The crisis,” they wrote, “is the ultimate result, after a period of decades, of a shock to…two groups of households, investors who account for 5% of the population, and whose bargaining power increases, and workers who account for 95% of the population.” The 5 percent, broadly speaking, lend to the 95 percent, and in so doing gain still greater wealth and power. The shock comes when the creditor class suddenly realizes that the borrowers are drowning in debt and cannot possibly absorb any more. At that point, financial assets connected to consumer debt are dumped and prices crash, much as they did in 2007. The authors add, “To our knowledge, our framework is the first to provide an internally consistent mechanism linking the empirically observed rise in income inequality…and the risk of a financial crisis.” It took three decades of lopsided borrowing to produce the breakdown, Kumhof and Rancière explain, but the ominous trend was evident for years. In the early 1980s the 95 percent had debts equal to about 65 percent of their income. By 2006 that figure had risen to 140 percent. They were devoting so much of their paychecks to making payments on old debt—credit cards, equity lines and mortgages—there was nothing left to make the payments on new debt. Defaults and bankruptcies were already swelling. The collapse came when creditors grasped the danger and started selling off their mortgage bonds and loans to consumers. It seems odd that the financial interests, with their brilliant analysts and high-speed computers, didn’t see the nature of the crisis until it was breaking over their heads. They may have been blinded by the fabulous wealth they were harvesting. Kumhof and Rancière point out that the same ominous combination—a run-up of debt accompanied by gaping inequality—preceded the crash of 1929. Greed may inspire optimism. But why did ordinary debtors fall into this trap? The standard line is that they, too, were blinded by greed, eager for consumer pleasures they couldn’t afford. This is true for some, but the explanation libels most working people. Wage stagnation started in the 1970s and spread widely in the Reagan era. Typically, as incomes faltered, families faced two bad choices—either go deeper into debt or surrender their middle-class standard of living. Naturally, most people tried to hang on to what they had. The responses to this crisis are well-known. People worked more—women and teenagers entered the workforce, family members took two or three jobs. And they borrowed more, paying the bills with credit cards. In these terms, average families were making heroic efforts to maintain their standard of living. They were doomed to fail unless dramatic economic reforms improved their lot. University of California economist Clair Brown predicted nearly two decades ago in her landmark study of American consumption that sooner or later working people would have to retreat to lower levels of consuming. Working harder and borrowing more had sustained them for twenty years, but neither of these remedies was repeatable. At some point the merry-go-round would have to stop. The retreat is now in full flight. Homeownership has declined by 1.1 percent over the past decade. Wages are stagnant or falling. Foreclosures are tearing through communities, and falling home prices are destroying family equity. Americans, as Whalen says, are experiencing the reverse New Deal.
One would have thought the last few years of mine disasters, exploding oil rigs, nuclear meltdowns, malfeasance on Wall Street, wildly-escalating costs of health insurance, rip-roaring CEO pay, and mass layoffs would have offered a singular opportunity to explain why the nation’s collective well-being requires a strong and effective government representing the interests of average people.
Republicans aren’t content with blocking anyone and everyone from leading the Consumer Financial Protection Bureau. Next week, they’re planning to attach a series of anti-Dodd-Frank amendments to a noncontroversial economic development bill. One amendment would neuter the CFPB, of course. Gotta keep trying, I guess. Another would repeal the whole law. A third would stop the government identifying too-big-to-fail firms and regulating them more tightly. And that doesn’t even get into the ongoing efforts to defund the agencies that need to implement the various regulations, or the language in the GOP budget repealing the government’s authority to dismantle firms that are about to detonate the financial system.
One possibility here is that I Rip Van Winkled it for a bit and banks got really popular while I was snoring under a tree. So I asked Gallup. The answer? Nope. Wall Street’s got the sort of poll numbers usually reserved for the guy who ran over your dog when you were a kid, or the boss who fired you from your first job. Almost 70 percent of Americans think they’ve got to much power in Washington. That’s four points below the much-beloved lobbyist class and tied with “major corporations.” Allying with the banks is not how you get ahead in American politics.
Perhaps this just shows that so long as your issue isn’t atop the polls, you can take whatever position you want. Perhaps it shows that substantive positions are meaningless — Republicans often pretend that their agenda is anti-bank, even though it echoes the banks’ agenda almost precisely, and even though they’ve not proposed an alternative package of financial regulations to take its place. Perhaps it just shows what the aforementioned Gallup poll shows: Banks are very powerful in Washington.
But those are all political explanations. What about among Republicans themselves? The tea party doesn’t much like the banks. The Republican legislators who had to vote for TARP and listen to Ben Bernanke talk up the chances of armageddon can’t want to go through that again, right? My only hypothesis here is that the Fannie Man/Freddie Mac/CRA explanation, though discredited, has become such conventional wisdom on the Republican side of the aisle that they think, though can’t clearly say, that regulation of Wall Street isn’t really needed. The problem was Washington, and you can’t solve that with more Washington.
Nevertheless, it’s depressing. If anything, Dodd-Frank didn’t go nearly far enough. The Consumer Financial Protection Bureau isn’t strong enough. But it barely took three years for the pendulum in Washington to swing from “it’s time to get a handle on Wall Street” to “leave Wall Street alone!” Even if Dodd-Frank survives this round of attacks, it’s pretty obvious that any approach that relies on regulators is an approach that, sooner than later, Congress will undermine.
A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.
The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended.
The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed’s money and flipped easy profits simply by lending it back to another arm of the government.
The report was requested by Sen. Bernie Sanders (I-Vt.), who likened the crisis-era emergency loans to “direct corporate welfare to big banks,” in a statement. The cash likely was lent back to Uncle Sam in the form of Treasuries and other debt “instead of using the Fed loans to reinvest in the economy,” Sanders added.
In all, more than $3 trillion was lent to financial institutions from the Fed, and terms were generous. Junk-rated securities were pledged as collateral for taxpayer-backed loans. The Fed did not provide conditions for how the money was to be used.
As part of one Fed program, on 33 separate occasions, nine firms were able to borrow between $5.2 billion and $6.2 billion in U.S. government securities for four-week intervals, paying one-time fees that amounted to the minuscule rate of 0.0078 percent.
The end of the second round of quantitative easing (QE2) is going to be a complete disaster for the paper markets — specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE3, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the “Muni Asset Trust Term Liquidity Facility” or the “American Prime Purchase Program,” but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.
A Premature Victory Lap
Ben Bernanke recently stood at a lectern and announced to the assembled audience that the Fed’s recent policies could be credited with elevated stock prices and an improved employment statistic while somehow keeping inflation low.
It was his own version of a “mission accomplished” speech, just like the one G. W. Bush gave. Similarly, it does not mark the end of significant difficulties, but the probable beginning of a very long period of treacherous economic and financial disruption.
Here’s one recent version of how the Fed’s actions are being interpreted, courtesy of Bloomberg:
Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.
The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.
“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”
A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What’s not to like?
My comrade Jonah Goldberg compares America’s present situation to that of a plane with one engine out belching smoke. But, if anything, he understates the crisis. Air America doesn’t need a busted engine because it’s pre-programmed to crash.
Our biggest problem is Medicare and other “entitlements.” They’re the automatic pilot of Big Government. Whoever’s in the captain’s seat makes no difference. The flight is pre-programmed to hit the iceberg, if you’ll forgive me switching mass-transit metaphors in midstream.
For some reason, Obama, Reid, Pelosi, Harkin & Co. don’t seem to mind this. If you recall the smile on the face of the “automatic pilot” in “Airplane!” as he’s being inflated, that’s pretty much the Democrats’ attitude to binge-spending as a permanent fact of life.
ONE OF THE MOST IMPORTANT POSTS TO READ IN ORDER TO FULLY UNDERSTAND THE DIRE STRAITS THIS COUNTRY IS IN!
AT JESSE’S:
I think most readers with an economics background would be familiar with a liquidity trap, which is a situation where monetary policy is unable to stimulate an economy suffering a non-cyclical credit contraction, either through lowering interest rates or increasing the money supply because expectations of adverse events (e.g., exogenous deflationary factors, insufficient aggregate demand, or civil or international war) make persons with liquid assets unwilling to invest.
America is caught in a confidence or credibility trap, in which the changes, investigations, and reforms necessary to restore trust to an economy or market are rendered unlikely because doing so would expose a pervasive corruption that the principals fear would destroy any remaining trust. It could also endanger the careers of politicians and business people who may have permitted and even appeared to facilitate the control fraud that caused the financial crisis in the first place. Personal risk trumps public stewardship.
The fraudulent activity is covered up and therefore continues or at the very least appears to continue, crowding out most productive business investment and activity which cannot possibly hope to compete with the highly profitable fraudulent activity ad asset bubbles under such opaque and uncertain circumstances. Informed market participants are unwilling to invest their liquid assets in a system which they suspect is riddled with accounting fraud, insider trading, and regulatory weaknesses, except of course in a few situations and somewhat ironically in some existing frauds, such as a bubble in equity valuations for example, which they think they understand.
The American government is indeed acting as if it is involved in a massive coverup of a control fraud and corruption that could perhaps be the worst in its history. I think many people who are looking at this know in their hearts that all is not well, that there is something not quite right in the current situation. How else can we explain such massive and widespread financial fraud, with so few meaningful indictments, or even ongoing investigations with credible disclosures? And the worst perpetrators appear to be dictating the remedies and reforms to the system for this government sponsored recovery.
Hank, Tim, and Ben alluded to the consequences of the discovery and uncontrolled disclosure of this fraud, and it frightened the Congress so badly that they immediately gave up and signed over 700 billion dollars, and many billions more, to facilitate the coverup of this under the guise of recovery and stabilization. I would like to imagine that those in charge are attempting to prevent a panic while they put out the fires, but I see little serious remedies designed to save the public, much less than to perpetuate the firetrap. And so the corruption continues to smolder and fester, and thereby debilitate the nation.
More than an American scandal, this fraud reaches deep into the halls of power in Europe, some of whose national governments are already failing. What had been the Keating Five is now the Global Finance 500.
People say they understand this, but they really do not understand the implications of it. They intellectualize and theorize around it, try to deal with it by smashing it down into something they can get their mind around and accept. They may even try to turn it to their short term personal financial advantage. But they are not dealing with it and certainly not facing up to it.
The US banking system controls the issue of the reserve currency of the world, which impacts the price of virtually everything that is bought and sold.
And as you might expect there are many whose vested interest is to distract and to change the subject away from it. There is a great deal of money to be made by serving the desire to turn people’s attention away from the problem to find someone else to blame, some other problem to focus upon, and some new victim class to absorb the public anger. It is an old story, often repeated in tragedy.
But unfortunately, confronting the truth and fixing the situation is key to any sort of sustainable recovery. And this is the trap of crony capitalism and control fraud, when it has nearly exhausted its victims, and is having difficulty finding new ones to maintain its growth and facade.
Until that time there will be a procession of scapegoats, defaults, bailouts, and property seizures, both implicit and explicit, and a growing toll of innocent victims and systemic destruction, ending finally in the collapse of the US national currency and international trade.
If it had not been that the US is so large, and for the time being controls the bulk of the world’s reserve currency, it is likely this would have already come to some conclusion before spreading so widely and pervasively. But the situation remains highly unstable and threatening, despite assurances to the contrary.
William K. Black is telling us something very important, as Harry Markopolos had been trying to tell some simple but important things to the investors in Bernie Madoff’s investment scheme. The Madoff investors preferred to vilify and ignore him. It appears that the same thing is happening to William Black. And the final outcomes may be similar.
What can one person do besides to spread the word, and demand the truth in their own place and their own way? Support those who stand and tell the truth, sometimes at great cost. Insulate and remove yourself from the fraud as best you can to preserve your wealth and your integrity.
Above all resist the disinformation, propaganda, and distractions, and all the insidious rationalization and convenient skepticism to complicit apathy, making it clear that you will be neither a willing victim nor a silent bystander to the intoxicant of blame and hatred, and the victimization of others designed to turn the people on one another, be they Gypsy, Muslim, Jew or Christian, black, white, Asian, Hispanic, disabled, old, poor, ill or weak, or any other variety of outsider and convenient target.
For once the madness starts, it can never be controlled, and will eventually come for all, and consume all.
The Great American Bank Robbery
Video – Lecture
By William K. Black
1. Why do we have repeated, intensifying economic crises?
2. What can white collar criminology add to our understanding of what’s going wrong?
Note: The William K. Black video was first served at this Cafe in August of 2009 in a post titled The Great American Bank Robbery.
1. A recent article of yours, “Schemes of the Rich and Greedy,” cites the bailouts in Europe among such schemes. What are the main faults with bailouts, and for whom are they designed?
The financial sector is trying to get politicians to siphon off money from labor and industry to pay bankers. This will impede capital formation and living standards.
The banks misrepresented the real value of balance sheet and hence what they really were owed under actual market conditions. Now that they have taken the money and run, the «real» economy is being told to pay the off their bad loans. The arrogance of this demand prompted Angela Merkel to ask why governments – meaning «taxpayers» – should pay for bad bank loans and corrupt financial dealing.
Nice try if bankers can get away with it! But I’m glad to see Germany opposing the EU proposal to double its bailout fund.
The European Council uses its leadership role to sort out disputes between member states and the institutions, and to resolve political crises and disagreements over controversial issues and policies. It acts externally as a “collective Head of State” and ratifies important documents (e.g. international agreements and treaties).[59]
On 19 November 2009, Herman Van Rompuy was chosen as the first permanent President of the European Council. On 1 December 2009, the Treaty of Lisbon entered into force and he assumed office. Ensuring the external representation of the EU,[60] driving consensus and settling divergences among members are tasks for the President both during the convocations of the European Council and in the time periods between them.
The EU became illegitimate when it refused to accept the rejection of theEuropean Constitution by French and Dutch voters in 2005. There can be no justification for reviving the text as the Lisbon Treaty and ramming it through by parliamentary procedure without referenda, in what amounted to an authoritarian Putsch. (Yes, the national parliaments were themselves elected – so don’t write indignant comments pointing this out – but what was their motive for denying their own peoples a vote in this specific instance? Elected leaders can violate democracy as well. There was a corporal from Austria … but let’s not get into that).
Ireland was the one country forced to hold a vote by its constitutional court. When this lonely electorate also voted no, the EU again disregarded the result and intimidated Ireland into voting a second time to get it “right”.
This is the behaviour of a proto-Fascist organization, so if Ireland now – by historic irony, and in condign retribution – sets off the chain-reaction that destroys the eurozone and the European Union, it will be hard to resist the temptation of opening a bottle of Connemara whisky and enjoying the moment. But resist one must. The cataclysm will not be pretty.
“His daily presence in the Capitol will ensure the American people finally get a seat at the table,” the statement continued. “And it will allow him to advance our message that everyone, including Americans, deserves to be represented in Washington.”
Weldon says he hopes to spin the American public, above, as a group worth Congress’ time.
The 310-million-member group said it will rely on Weldon’s considerable clout to ensure its concerns are taken into account when Congress addresses issues such as education, immigration, national security, health care, transportation, the economy, affordable college tuition, infrastructure, jobs, equal rights, taxes, Social Security, the environment, housing, the national debt, agriculture, energy, alternative energy, nutrition, imports, exports, foreign relations, the arts, and crime.
Sources confirmed that Weldon is already scheduled to have drinks Monday with several members of the Senate Appropriations Committee to discuss saving the middle class.
Interview by Paul Smalera, senior editorApril 30, 2010: 3:21 PM ET
(Fortune) — At Tuesday’s epic Goldman Sachs hearing, Senator Carl Levin of Michigan led a public grilling of Wall Street not seen by a government panel since the Depression-investigating Pecora Commission. Fortune wanted to know what Levin thought of the answers he got from executives, including CEO Lloyd Blankfein, whether Goldman can save its reputation, and what his committee has learned from its hearings on the financial crisis.
It was surprising how much the Goldman Sachs (GS, Fortune 500) executives talked. How did you get them to reveal what they did?
By confronting them with their own documents. A lot of time and work goes into getting huge amounts, literally millions, of documents … I think when people are confronted by their own documents by someone who’s really studied those documents; it’s easier to force them to respond.
They obviously were trying to delay and evade answering. We had a willingness to take them on and not let them talk forever, telling them, “Hey we’ll stay here all night if we have to, but we’re going to get the information we want.”
And when they did answer?
When they did answer, some people have asked me, “Were they telling you the truth?” The answer is yeah, and that’s what’s even more troubling than the evasions — they are defending what most people would say are indefensible actions. They shouldn’t be betting against what they’re selling at the same time they’re telling you: “Here, these are our securities, our names are on the prospectus.”
I think people think that someone selling something believes their product needs to succeed in some general way; that they want it to succeed. But [Goldman Sachs] are betting against [their product] and basically say they are going to profit from its failure. At that point, in most people’s minds, clearly in mine, there’s a conflict of interest. You’re betting against a product that you’re holding out to the public, by fair assumption, as a good product.
They were trying to turn this into, “We can’t guarantee that people are making money,” but that’s not the point. The point is that at the same time you’re holding this thing out as something that presumably you’d like to see provide something good for your customer, you’re betting against it and making a heck of a lot of money by its failure. And you’re not disclosing that.
To add insult to injury, in those emails that call it “junk” that they’re selling, “crap,” and I won’t get into the “shitty” word but anyway, that adds insult to injury. When you’re putting together a product, hold that out and then are betting against that same product, I think it’s a conflict and at minimum you have to tell people, not some boilerplate that you might be on the other side, but in clear language that you’re betting against [the security].
Regulators have taken a lot of blame for the crisis but doesn’t part of this come from the laws — or lack of laws — surrounding these activities? Goldman seemed to testify that its actions were unseemly but not illegal.
The reaction of one guy when I asked about his reaction to his emails was, “That shouldn’t have been in an email.” There are two different worlds here. My reaction was, “You shouldn’t believe that, you shouldn’t feel that.”
I could have understood the reaction [by Goldman] that they should not be selling stuff that they’re betting against and think is junk, but they don’t say that because they don’t believe it. They think they can do anything they want, that it’s a dog-eat-dog market and all these sophisticated buyers know they disagree. The sophisticated buyers see an AAA rating on something: they’re not then going to go into the 500 mortgages referred to in a synthetic CDO. There’s no way they can. They’re not the underwriter, they haven’t put it together Of course with Abacus, when you have the fact that [John Paulson]., who was betting against it, helped put the referenced mortgages together, that’s just a second insult.
It’s not just Wall Street, it’s upstream: We spent a long time getting into the Washington Mutual issue as an example of lenders putting together shoddy mortgages, securitizing them and getting them off their books. These are mortgages, which never should’ve been issued where the regulator failed to enforce the laws in this case.
The regulators pointed out things in emails and visits to the bank … but they never enforced it. There’s a failure to stop the abuses. Then you have credit rating agencies susceptible to pressure, acknowledge it in emails, and are involved in an inherent conflict of interest. They’re being pressured to put higher ratings on financial documents by the people who will benefit from those ratings and they’re being paid by those people. You have the problem of the person who pays the fiddler calling the tune.
Then you get down to Wall Street with their vacuuming up these securities and getting the risk off their books without disclosing it. It’s not limited to Wall Street’s unbridled greed, it comes all the way from upstream.
Even when we disagree with Larry Summers, we’ve long thought of him as a better economist than politician. But after reading his nearby letter to the editor, we may have to reverse our judgment. The senior White House aide is abandoning his former economic views to serve the Democratic Party’s current political purposes.
Earlier this week, we quoted an essay by Mr. Summers published in 1999 in which he explained that unemployment insurance creates an incentive for workers to delay going back to work. The share of America’s jobless out of work for 27 weeks or more reached a new record of 44.1% in March, and Mr. Summers’s past writing offers one likely reason.
The paragraph we quoted followed a subhead, “What Causes Long-Term Unemployment?” Here is how the passage reads in more complete form:
“To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.
“First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work. . . .
“The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.”
In his letter, Mr. Summers says we took his words out of context, but readers will note that he doesn’t deny that he linked jobless insurance with longer periods of joblessness. Mr. Summers skips over that point and instead resorts to that all-purpose economic explanation known as “aggregate demand.” In 2010 as opposed to 1999, the harmful incentive effects of extending jobless payments to an unprecedented 99 weeks don’t matter. He says the point now is to stimulate the economy by increasing consumer “demand.”
This is worth parsing because it gets to the heart of what’s wrong with Obamanomics. The Summers argument is that increasing unemployment insurance increases aggregate demand and thus reduces unemployment. This is because he and the neo-Keynesians believe that the impact on macroeconomic demand of this jobless spending outweighs the microeconomic harm on individual incentives.
In other words, if government pays people for not working, then more people will work. Subsidize unemployment and you will somehow get less of it. But if this were true, we could lower unemployment even more if we increased jobless benefits to $100,000 a year per person to cause an even greater surge in demand.
As Wall Street bombshells go, the lawsuit that the Securities and Exchange Commission filed against Goldman Sachs Group Inc. is about as big as it gets.
Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble — that it simply was serving clients’ needs — could come so unglued so quickly?
To recap, the SEC’s complaint accuses Goldman and one of its vice presidents of selling subprime mortgage-backed securities to institutional investors, without disclosing that one of its clients, the giant hedge fund Paulson & Co., had paid Goldman to structure these securities so that they would be the world’s perfect short — at least from Paulson’s point of view.
The securities, called Abacus 2007-AC1, became worthless within months, showing that Paulson had done its homework. The SEC said Paulson paid Goldman a $15 million fee.
The SEC said Goldman’s main infraction was telling investors who bought the securities that an independent company called ACA Management had chosen the assets that were backing them, when it was Paulson that played a major role in the process. The SEC said Goldman duped ACA into believing that Paulson was looking to take a bullish position, though the SEC’s complaint doesn’t try to explain why this somehow would excuse ACA’s decision to bow to Paulson’s influence.
Neither the fund, founded by John Paulson, nor its employees were named as defendants, because the SEC said it was Goldman that made the misstatements to investors.
Allowed the giant banks to grow into mega-banks. For example, Citigroup’s former chief executive says that when Citigroup was formed in 1998 out of the merger of banking and insurance giants, Greenspan told him, “I have nothing against size. It doesn’t bother me at all”
Preached that a new bubble be blown every time the last one bursts
Kept interest rates too low
And did alot of other hinky things
More importantly, as Nassim Taleb repeatedly points out, financial experts who don’t plan for rare events are like pilots who don’t know about storms.
There are storms out there, Taleb says, and any pilot who doesn’t know how to deal with storms shouldn’t be flying. Similarly, no one should be in a position of financial leadership if they don’t know about – and plan for – the infrequent event:
From the terrible Algerian slaughter, and its terrible silence, comes this small tale, told by an officer of the special forces who broke with “Le Pouvoir” of his own country and sought asylum in France. It is the autumn of 1994, deep into the season of killing. An old and simple Algerian woman, accompanied by two of her children, comes to the army barracks, to the very building where the torturers did their grim work, in search of her husband and her son. The two men were there; they had already endured three days of torture. The woman was quite certain where the men were being held. It was the same place, she told the astonished young Algerian officer, where the French held and tortured their prisoners during the “war of liberation” decades earlier. Her husband had been an old mujahid, a soldier in the holy war, and had known imprisonment under the French–and now again, during this most recent time of horror and sorrow. The old woman was never to see her husband and her son again. They perished in the ordeal of the new Algeria.
As German philosopher Arthur Schopenhauer once said, truth is ridiculed, then denied, and then “accepted as having been obvious to everyone from the beginning.” So let’s start with the obvious: There isn’t the slightest possibility that the course laid out by Barack Obama in his Dec. 1 speech will halt or even slow the downward spiral toward defeat in Afghanistan. None. The U.S. president and his advisors labored for three months and brought forth old wine in bigger bottles. The speech contained not one single new idea or approach, nor offered any hint of new thinking about a conflict that everyone now agrees the United States is losing. Instead, the administration deliberated for 94 days to deliver essentially “more men, more money, try harder.” It sounded ominously similar to Mikhail Gorbachev’s “bloody wound” speech that led to a similar-sized, temporary Soviet troop surge in Afghanistan in 1986.
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.
That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.” Secret Banking Cabal Emerges From AIG Shadows – Reilly – Bloomberg
Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.
Then he got elected.
What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.
How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?
Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.
How did we get here? It started just moments after the election — and almost nobody noticed.
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times
The rights of Irish sovereignty
Sovereignty is the quality of having supreme, independent authority over a geographic area, such as a territory.
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European Council
The European Council gives direction to the EU, and convenes at least four times a year. It comprises the President of the European Council, the President of the European Commission and one representative per member state; either its head of state or head of government. The European Council has been described by some as the Union’s “supreme political authority”.[58] It is actively involved in the negotiation of the treaty changes and defines the EU’s policy agenda and strategies.
The European Council uses its leadership role to sort out disputes between member states and the institutions, and to resolve political crises and disagreements over controversial issues and policies. It acts externally as a “collective Head of State” and ratifies important documents (e.g. international agreements and treaties).[59]
On 19 November 2009, Herman Van Rompuy was chosen as the first permanent President of the European Council. On 1 December 2009, the Treaty of Lisbon entered into force and he assumed office. Ensuring the external representation of the EU,[60] driving consensus and settling divergences among members are tasks for the President both during the convocations of the European Council and in the time periods between them.
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The EU became illegitimate when it refused to accept the rejection of theEuropean Constitution by French and Dutch voters in 2005. There can be no justification for reviving the text as the Lisbon Treaty and ramming it through by parliamentary procedure without referenda, in what amounted to an authoritarian Putsch. (Yes, the national parliaments were themselves elected – so don’t write indignant comments pointing this out – but what was their motive for denying their own peoples a vote in this specific instance? Elected leaders can violate democracy as well. There was a corporal from Austria … but let’s not get into that).
Ireland was the one country forced to hold a vote by its constitutional court. When this lonely electorate also voted no, the EU again disregarded the result and intimidated Ireland into voting a second time to get it “right”.
This is the behaviour of a proto-Fascist organization, so if Ireland now – by historic irony, and in condign retribution – sets off the chain-reaction that destroys the eurozone and the European Union, it will be hard to resist the temptation of opening a bottle of Connemara whisky and enjoying the moment. But resist one must. The cataclysm will not be pretty.
The horrible truth starts to dawn on Europe’s leaders Ambrose Evans-Pritchard, Telegraph