"End of Wall Street Boom" - Must-read history

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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Wed Nov 24, 2010 9:25 pm

QE2: Krugman vs. Hudson Smackdown

All articles archived here with original links given for strictly non-commercial fair use in education and debate.

http://www.nytimes.com/2010/11/19/opini ... nted=print

November 18, 2010
Axis of Depression
By PAUL KRUGMAN

What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs. And the motives of all three are highly suspect.

It’s not as if the Fed is doing anything radical. It’s true that the Fed normally conducts monetary policy by buying short-term U.S. government debt, whereas now, under the unhelpful name of “quantitative easing,” it’s buying longer-term debt. (Buying more short-term debt is pointless because the interest rate on that debt is near zero.) But Ben Bernanke, the Fed chairman, had it right when he protested that this is “just monetary policy.” The Fed is trying to reduce interest rates, as it always does when unemployment is high and inflation is low.

And inflation is indeed low. Core inflation — a measure that excludes volatile food and energy prices, and is widely considered a better gauge of underlying trends than the headline number — is running at just 0.6 percent, the lowest level ever recorded. Meanwhile, unemployment is almost 10 percent, and long-term unemployment is worse than it has been since the Great Depression.

So the case for Fed action is overwhelming. In fact, the main concern reasonable people have about the Fed’s plans — a concern that I share — is that they are likely to prove too weak, too ineffective.

But there are reasonable people — and then there’s the China-Germany-G.O.P. axis of depression.

It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen.

For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing.

But why are Republicans joining in this attack?

Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing.

Republicans, however, will have none of it, raising objections that range from the odd to the incoherent.

The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation.” These concerns were echoed in a letter the top four Republicans in Congress sent Mr. Bernanke on Wednesday. Neither letter explained why we should fear inflation when the reality is that inflation keeps hitting record lows.

And about dollar debasement: leaving aside the fact that a weaker dollar actually helps U.S. manufacturing, where were these people during the previous administration? The dollar slid steadily through most of the Bush years, a decline that dwarfs the recent downtick. Why weren’t there similar letters demanding that Alan Greenspan, the Fed chairman at the time, tighten policy?

Meanwhile, the incoherent: Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either.

So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.

And if Mr. Bernanke gives in to their bullying, they may all get their wish.


Among the comments to Krugman...

Elwood Anderson
Las Vegas NV
November 19th, 2010
1:49 am
The Fed isn't trying to create jobs. It's trying to stimulate the market to make the wealthy and the bankers whole, while destroying the economies of developing countries and the value of the dollar. The criminals are running the country. It's time for debtors to walk away from their debts and start spending their income. That will create demand and punish the creditors that are strangling governments and taxpayers around the world. What are they going to do, put everyone in jail? Who would clean their pools and wash their limos? If ordinary people take this lying down they are fools. Stop advocating for the wealthy and their bankers and start advocating for average people that are bearing the brunt of this mess. The Fed is doing absolutely nothing for the average Joe and Jane and their children and grandchildren.


AJD
New York
November 19th, 2010
1:49 am
I find Krugman's touting the weak dollar ironic, considering that only a couple days ago, the Times printed an article showing that the weak dollar was unlikely to help our economy and also unlikely to put much of a dent in the trade deficit.

He conveniently leaves out the fact that we have a huge trade deficit with Germany despite the euro being stronger than the dollar for years already, while according to The Washington Post, German manufacturers have lately been exporting a wide variety of goods to China.

The bottom line is that we make fewer and fewer products that the rest of the world wants to buy. This isn't because of our currency, but because of our policy over the last 30 years of basically encouraging companies to move manufacturing abroad. That's why we have such huge trade deficits, and it's not until we address the evisceration of our manufacturing base that we'll be able to close the gap.

Plus, weakening the dollar will ultimately be bad for the country. People on fixed incomes have the most to lose from inflation. While energy and food are left out of the CPI, the prices of both will go up. Because we hardly make any consumer goods in this country anymore -- not just unnecessary "toys" but things like clothing, kitchen supplies, you name it -- the prices of those will all go up as well. The same goes for higher education, public transportation and so forth.

Blaming our problems on China will do about as much to help us as blaming our problems on Japan did in the 1980s. In other words, it'll drum up some emotions and xenophobic sentiment, but it won't replace any of the manufacturing jobs we've lost, and we'll continue to see China develop as a superpower while its manufacturers move up the value chain and crank out better and better goods.

We're in very real danger of becoming a second-rate country. But if there's anyone to blame for that, it's us.


Crush:

http://counterpunch.org/hudson11222010.html

November 22, 2010
The Case of the China-Bashing Professor
Why Paul Krugman Waves the Flag for Uncle Sam

By MICHAEL HUDSON

Here’s the quandary that the U.S. economy is in: The Fed’s quantitative easing policy– creating more liquidity so that banks can lend more – aims at helping the economy “borrow its way out of debt.” But banks are not lending more, for the simple reason that a third of U.S. real estate already is in negative equity, while small and medium-sized businesses (which have created most of the new jobs in America for the past few decades) have seen their preferred collateral (real estate and sales orders) shrink. How can banks be expected to lend more to re-inflate the economy’s asset prices while wages and consumer prices continue to drift down? The “real” economy as a whole therefore must shrink.

What has made the argument over Fed policy so important over the past week is a series of exchanges between Republicans and Democrats. The deteriorating situation prompted a group of Republican economists and political strategists to publish an open letter to Federal Reserve Chairman Ben Bernanke criticizing the Fed’s policy of Quantitative Easing (QE2), flooding the economy with liquidity spilling over into foreign exchange markets to push the dollar’s exchange rate down. True enough, as far as this criticism goes. But it only scratches the surface.

Enter Paul Krugman, one of the most progressive defenders of Democratic Party policy. His New York Times op-eds usually rebut Republican advocacy for Wall Street and corporate interests. But he also indulges in China bashing. To “blame the foreigner” rather than the system is normally a right-wing response, yet Krugman blames China simply for trying to save itself from being victimized by the Wall Street policies he normally criticizes when labor is the prey. By blaming China, he not only lets the Federal Reserve Board and its Wall Street constituency off the hook, he blames virtually the entire world that confronted Obama’s financial nationalism with a united front in Seoul two weeks ago when he and his entourage received an almost unanimous slap in the face at the Group of 20 meetings.

Sadly, Krugman’s “Axis of Depression” column on Friday, November 19, showed the extent to which his preferred solutions do not to beyond merely marginalist tinkering. His op-ed endorsed the Fed’s attempt at quantitative easing to re-inflate the real estate bubble by flooding the markets with enough credit to lower interest rates. He credits the Fed with seeking to “create jobs,” not mainly to bail out banks that hold mortgages on properties in negative equity.

The reality is that re-inflating real estate prices will not make it easier for wage earners and homebuyers to make ends meet. Lowering interest rates will re-inflate real estate prices (“wealth creation” Alan-Greenspan style), raising the degree to which new homebuyers must go into debt to obtain housing. And the more debt service that is paid, the less is available to spend on goods and services (the “real” economy). Employment will shrink in a financial spiral of economic austerity.

Unfortunately, most economists are brainwashed with the trivializing formula MV=PT. The idea is that more money (M) increases “prices” (P) – presumably consumer prices and wages. (One can ignore velocity, “V,” which is merely a tautological residual.) “T” is “transactions,” for GDP, sometimes called “O” for Output.

Some 99.9 per cent of money and credit is not spent on consumer goods (the “T” in MV = PT). Every day more than an entire year’s GDP passes through the New York Clearing House and the Chicago Mercantile Exchange for bank loans, stocks and bonds, packaged mortgages, derivatives and other financial assets and bets. So the effect of the Fed’s Quantitative Easing (monetary inflation) is to inflate asset prices, not consumer prices and other commodity prices.

This is the key dynamic of today’s finance capitalism. It loads down economies with debt – and when debt service exceeds the surplus out of which to pay it, the central bank tries to “inflate its way out of debt” by creating enough new credit (“money”) to make real estate, stocks and bonds worth more –enough more for debtors to borrow the interest due. This is the deus ex machina, the external influx of credit enabling financialized economies to operate as Ponzi schemes. The dynamic is encouraged by taxing speculative (“capital”) gains at a lower rate than wages and profits. So why should investors finance tangible capital investment when they can ride the wave of asset-price inflation. The Bubble Economy turns into speculative “wealth creation.”

Can it work? How long will gullible investors bet on a pyramid scheme growing at an impossibly exponential rate, enjoying fictitious “wealth creation” as bankers load the economy down with debt? How long will people think that the economy is really growing when banks lend to an economy overseen by regulatory agencies staffed by ideological deregulators?

The bankers’ ideal is for the entire surplus over and above bare subsistence to be paid in the form of interest and fees – all disposable personal income, corporate cash flow and real estate rent. So when the Fed’s QE lowers mortgage interest rates, will this enable homeowners to pay less – or will it simply increase the capitalization rate of existing rental value?


The Fed’s cover story is that QE benefits homebuyers by reducing the debt they must take on. But if this were true, their gain would be the banks’ loss – and the bankers are the Fed’s main constituency. To the Federal Reserve, the economic “problem” is that falling (that is, more affordable) housing prices are killing the balance sheets of banks. So the Fed’s real goal is to re-inflate the real estate bubble (while spurring a stock market bubble as well, if it can).

A Wall Street Journal op-ed by Andy Kessler (also published on Friday, Nov. 19, the date of Krugman’s op-ed in The New York Times) pointed this out – but also recognized that the Fed would create a public relations disaster if it came right out and explained that its motivation in QE2 was to reverse the fall in property prices. “ Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff,” and admitted that bank balance sheets still suffer from “toxic real estate loans and derivatives.” But the degree to which reported bank solvency is largely fictitious is reflected in the fact that the stock market value for the Bank of America (which brought Countrywide Finance) is only half its reported book value, while that of Citibank is off by 20 per cent.

Foreclosure is of course bad for homeowners, but it is even worse for banks, because of the financial pyramid of credit erected on the past decade’s worth of junk mortgages. The problem with Krugman’s analysis is his assumption that QE – intended to re-inflate the real estate bubble – is good for employment and indeed even for a renewal of U.S. competitiveness, not its antithesis. By focusing on trade and labor, he implies that the dollar is weakening only because of the trade deficit, not because of military spending and capital flight. And he assumes that re-inflating the real estate bubble – the Fed’s explicit aim – will make U.S. exports more competitive rather than less so! Most seriously, he asserts in his November 19 column, “the core reason for the attack on the Fed is self-interest, pure and simple. China and German want America to stay uncompetitive.”

This is not what I have been told in China and Germany. They simply want to avoid having instability disrupt their trade and domestic production, and to avoid having to take a loss on their international reserves held (mainly from inertia stemming from World Wars I and II when the United States increased its share of the world’s gold to 80 per cent by 1950). The U.S. Treasury would like U.S. banks and speculators to make an easy $500 billion at the expense of China’s central bank on slick speculative currency trading. The Fed would like to see the U.S. economy revive by looting other economies.

It’s not going to happen. The plunging-dollar standard of international finance is being wound down as fast as other countries are able to replace the dollar with currency swaps among themselves, led by the BRIC countries (Brazil, Russia, India and China). South Africa has just joined these countries as a fifth member, and oil exporters from Nigeria to Venezuela and Iran are associating themselves in the attempt to make the international monetary system less unfair and less exploitative. Krugman’s fellow Nobel Prize winner, Joseph Stiglitz has provided (seemingly ironically, also in a Wall Street Journal op-ed): “That money is supposed to reignite the American economy but instead goes around the world looking for economies that actually seem to be functioning well and wreaking havoc there.”

The Fed and Congress have told China to revalue its currency, the renminbi, upward by 20 per cent. This would oblige the Chinese government and its central bank to absorb a loss of half a trillion dollars – over $500 billion – on the $2.6 trillion of foreign reserves it has built up. These reserves are not merely from exports, much less exports to the United States. They are capital flight by U.S. money managers, Wall Street arbitragers, international speculators and others seeking to buy up Chinese assets. And they are the result of U.S. military spending in its bases in Asia and elsewhere – dollars that recipient countries turn around and spend in China.

Chinese authorities have tried to make it clear that what they object to is the U.S. policy of creating “electronic keyboard credit” at one quarter of a percent (0.25 per cent) to buy up higher yielding assets abroad (and nearly every foreign asset is higher yielding). The Group of 20 in Seoul Korea last week accused the United States of competitive currency depreciation and financial aggression, and countries stepped up attempts to shun the dollar and indeed, to avoid running trade and payments surpluses as such.

The bottom line is that there is no way that the United States can defend depreciation of the dollar on terms that oblige other countries to take a loss on their holdings. Investors throughout the world have lost faith in the dollar and other paper currencies, and are moving into gold or simply closing off their economies. Over the past year – ever since the BRIC meetings in Yekaterinburg, Russia, in summer 2009 – their response has been to avoid using the dollar, to protect themselves from aggressive U.S. capital flight seeking to raid their central banks, buy out their companies, raw materials and assets with “paper credit” and indeed to step up military spending.

Instead of supporting this attempt – a drive that has the positive consequence for world peace that it will limit U.S. military adventurism (much as the Vietnam War finally forced the dollar off gold in 1971), Krugman is using the crisis to attack China – as if its success is what is harming U.S. labor, not U.S. post-industrial pro-financial policies that have inflated the real estate bubble, privatized health care without a public option – and without even a bulk discount for U.S. Government drug purchases – and the failure to write down mortgages and other bank debts to the ability to pay.

Today’s China-bashing is much like the earlier attacks on Japan and other Asian countries in the late 1980s, demonizing successful economies for avoiding the predatory practices that have corroded American industry, “financializing” and post-industrializing the economy. The U.S. debt pyramiding that has occurred since 1980 has turned into a class war that has little economic justification. So blaming foreigners – for getting rich in the very same way that the United States has done ever since the North won the Civil War in 1965 – simply offers political cover for a status quo that is not working.

The two U.S. parties and their spokesmen find it easier to demonize policies that go beyond the merely marginal than to set about solving structural problems. So political discussion ends up by highlighting fairly insignificant policy differences. One would hardly realize that the problem facing U.S. industrial employment is that wage earners must earn enough to pay for the most expensive housing in the world (the FDIC is trying to limit mortgages to absorb just 32 per cent of the borrower’s budget), the most expensive medical care and Social Security in the world (12.4 per cent FICA withholding), high personal debt levels owed to banks and rapacious credit-card companies (about 15 per cent) and a tax shift off property and the higher wealth brackets onto labor income and consumer goods (another 15 per cent or so). The aim of bankers is to calculate just how much their customers can pay, defined as everything they make over and above basic subsistence costs and “non-discretionary” spending to the FIRE sector.

This is post-industrial suicide – and it is the road to debt peonage for American wage earners and consumers. China has created an economy that has managed – so far – to avoid financializing its firms. The government owns over half the equity in its commercial banks. According to its Ministry of Finance, assets of all state enterprises in 2008 totaled about $6 trillion (equal to 133 per cent of annual economic output.) The effect is that when loans are made to domestic enterprises – especially to partially or wholly owned by the government – the interest and financial returns accrues to the public sector, making it unnecessary to tax labor.

China understandably is trying to defend this system. Yet the Obama administration (echoed by Republican free marketers) has criticized it, especially for its public subsidy of solar energy investment to slow domestic pollution and global warming. Wednesday’s Wall Street Journal provided an almost comically hypocritical attack earlier last week, (Jason Dean, Andrew Browne and Shai Oster, “China’s ‘State Capitalism’ Sparks a Global Backlash,”) decrying China’s accelerated investment in solar power to free its economy (and its air quality) from oil imports and carbon emissions. “It leverages state control of the financial system to channel low-cost capital to domestic industries—and to resource-rich foreign nations whose oil and minerals China needs to maintain rapid growth.”

This policy prompted Charlene Barshefsky, U.S. trade representative under President Bill Clinton (who helped negotiate China's 2001 entry into the World Trade Organization) to complain that “powerful state-led economies like China and Russia … decide that ‘entire new industries should be created by the government,’ … it tilts the playing field against the private sector.” This is just what Japan did to promote its industrialization – by providing government credit intended to promote tangible capital investment, not extract financial rake-offs. “Vast swaths of industry still controlled by state companies and tightly restricted for foreigners,” complain the Wall Street Journal authors. “The government owns almost all major banks in China, its three major oil companies, its three telecom carriers and its major media firms.”

We are dealing with two quite different ideas of what the proper role of a financial system should be. Commercial banks in the West have created most credit for speculation and asset-price inflation over the last thirty years, not to fund capital formation and industry. The guiding idea of a public-sector bank is to promote long-term investment to raise productivity, output and employment. This is what has enabled China to succeed so rapidly while Western economies have let themselves be financialized. The Baltics, Iceland and now Ireland are examples of the disaster that financial neoliberals cause when given a free hand.

The moral is that China’s bank success – and its attempt to avert U.S. currency raiding and arbitrage speculation seeking to loot its foreign reserves – should be emulated, not accused of being economic warfare. This emulation is what the BRIC+ countries have announced as their goal. The Obama administration and European politicians certainly are making an obvious point in urging China to focus more on its own domestic market and accelerate the rise in its living standards. It is clear that markets in the United States and Europe are shrinking as debt deflation sets in.

China is not as economically self-sufficient in natural resources and water as the United States. This means that a sustained rise in its living standards will require spending much of the international savings it has built up. But at least it is on the right path. Can the same be said of America? Does it help to denounce China, or should we rather ask why its productivity, capital investment and living standards are rising while ours are declining?

Asking this question suggests the answer: China’s financial system is designed to promote a growing surplus, not siphon it off. A byproduct is to increase real estate and stock market prices – but this is a reflection of capital investment and progress, not a diversion of investment to fuel financial asset stripping as has occurred in the United States with increasingly arrogant greed over the past 30 years.

What Krugman and other economists advocating for wage earners and the economy at large should be concerned with is the danger of the Fed undertaking yet another back-door bailout its Wall Street constituency. Kessler suggests that the Fed should do just this – to “move the toxic debt onto the balance sheets of the FDIC and the Fed, and re-float the banks with fresh capital to open on Monday morning.”

You can’t blame China for this!


Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com



And here's Bernanke selling QE2 as medicine for the jobless:


Nov 19, 12:25 PM EST


Bernanke defends bond-purchase plan, warns China

By JEANNINE AVERSA
AP Economics Writer

AP Photo/Manuel Balce Ceneta



WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke hit back at critics, both at home and abroad, who have challenged the central bank's $600 billion bond-purchase program.

In a speech in Germany, he argued that Congress must help support the Fed's program with further stimulus aid. And he issued a stern warning to China, saying it and other emerging nations are putting the global economy at risk by keeping their currencies artificially low.

Bernanke made the remarks Friday at a banking conference in Frankfurt.

Without more stimulus, high unemployment could persist for years, he said. But in making that argument, Bernanke risks heightening complaints that he's plunging the Fed into partisan politics.

The Fed's Treasury bond-buying program is intended to invigorate the economy in part by lowering interest rates, lifting stock prices and encouraging more spending. Lower interest rates on loans would prompt companies to borrow and expand.

And higher stock prices would boost the wealth and confidence of individuals and businesses, Bernanke has suggested. The additional spending would lift incomes, profits and growth.

But the Fed's program has triggered a barrage of criticism both within the United States and abroad.

Republican leaders in Congress and some Fed officials are among those who say they doubt the program will help the economy. They also worry it could unleash inflation and lead to speculative buying on Wall Street.

And at a summit of world leaders in South Korea last week, China, Germany, Brazil and other countries complained that the Fed's plan would give U.S. exporters a competitive price edge by flooding world markets with dollars. A weaker dollar makes U.S. goods more attractive to foreign buyers.

Emerging economies like Thailand and Indonesia also fear that falling Treasury yields will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.

Still, European Central Bank President Jean-Claude Trichet insisted during a panel discussion after Bernanke's speech that he and the Fed chairman "strongly share the view that a solid strong dollar ... is very important."

The International Monetary Fund's head, Dominique Strauss-Kahn, said he believes that "wherever it's possible ... the support to growth is still something which is absolutely necessary."

He cited the U.S. as an example, saying the economy could pick up to 4 percent growth or slow to less than 2 percent growth, "and the consequences for the rest of the world would be huge." Still, he also said that in general there's a need to "restore confidence" by tackling debt problems.

Because countries are recovering from the severe global recession at different speeds, tensions among nations have risen, making it harder to find global solutions to global problems, Bernanke said. So-called emerging countries like China, Brazil and India are growing at much faster rates than "advanced" economies like the United States, Japan and Britain.

"Insufficiently supportive policies" in the United States and other advanced economies could "undermine the recovery not only in those economies but for the world as a whole," Bernanke warned.

By contrast, China and other emerging economies face the challenge of keeping growth robust, without igniting inflation, he said. By keeping their currencies artificially weak, China and other emerging economies are causing problems for themselves and for the stability of the world economy, Bernanke said.

His comments come days after a U.S. congressional report called on Washington to do more to force China to increase the value of its currency. On Friday, the Chinese Foreign Ministry countered that that constitutes interference in Beijing's internal affairs and accused the U.S.-China Economic and Security Review Commission of having a "Cold War mentality" and of harboring a grudge against China.

Bernanke argued that the Fed's Treasury bond purchases are needed to promote faster job creation and reduce the risk that very low inflation could turn into deflation. Deflation is a prolonged and destabilizing drop in prices of goods and services, wages and the values of assets like stocks or homes.

Even so, the Fed's program by itself can't fix all the economy's problems, Bernanke said.

"We don't want to overpromise, the effects are ... meaningful but moderate," Bernanke said of the Fed's bond-buying program during a panel discussion after his speech. "To the extent that we can get help from the private sector, from other policies, I think that's all very constructive, so I hope that we can."

He also called on Congress to step up.

"A fiscal program that combines near-term measures to enhance growth with strong confidence-inducing steps to reduce longer-term structural (budget) deficits would be an important complement to the policies of the Federal Reserve," he said.

Bernanke has previously warned that the economy is too fragile for the Congress to slash spending or boost taxes, even as he has made the case that lawmakers and the White House must craft a credible plan to reduce trillion-dollar plus budget deficits over the long term.

But the Fed chief amplified that warning. He is doing so as Republicans in Congress - coming off big wins in the midterm elections - are using their clout to push for less government spending and more fiscal discipline.

Republicans are upset with Bernanke because they think the Fed is overstepping its bounds with the bond-buying program. They argue that the Fed is printing money to pay for the government's massive debt.

Senate Minority Leader Mitch McConnell of Kentucky and incoming House Speaker John Boehner of Ohio had no immediate reaction to Bernanke's request for Congress to step up stimulus aid. Both GOP leaders blasted the Fed's bond-buying program earlier this week.

Senate Majority Leader Harry Reid of Nevada also didn't have an immediate response.

Republicans Rep. Mike Pence and Sen. Bob Corker, want the Fed's mission to be revamped.

They want the Fed to focus solely on keeping inflation in check. It now has a "dual mandate" from Congress: to keep both inflation and unemployment low.

Put on the defensive, Bernanke felt compelled this week to meet privately with lawmakers on the Senate Banking Committee to defend the Fed's program. A stream of Bernanke's colleagues have also been out making public appearances to back the Fed's action in recent days. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, and Sandra Pianalto, president of the Cleveland Fed, were on the circuit Thursday.

Bernanke warned the economic risks are high if Congress doesn't work alongside the Fed to stimulate the economy.

"On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," Bernanke said. "As a society, we should find that outcome unacceptable."

----

Geir Moulson in Berlin contributed to this report.

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A Tale of Two Commissions

Postby JackRiddler » Wed Nov 24, 2010 9:57 pm

.

So anyone remember that in addition to the Catfood Commission, which got all the attention for manufacturing crisis, there was another one actually investigating banking fraud and the crash? I followed it a couple of times, and knew that it wouldn't have the same media favor...

http://www.huffingtonpost.com/2010/11/1 ... view=print

The Huffington Post
November 24, 2010

Shahien Nasiripour
shahien@huffingtonpost.com | HuffPost Reporting
FCIC Delays Report Despite Republican Opposition, Citing 'Very Powerful Interests' Seeking To Undermine Investigations

First Posted: 11-17-10 11:01 PM | Updated: 11-17-10 11:01 PM


The bipartisan panel created to investigate the roots of the financial crisis voted Wednesday to delay the Dec. 15 publication of their report despite Republican opposition, foreshadowing disagreements that are sure to arise when the commission attempts to reach a consensus on the causes of the worst financial crisis since the Great Depression.

The Financial Crisis Inquiry Commission's 6-to-3 vote came after the panel's four Republicans argued privately against the decision to ignore the statutory deadline set by Congress. One of the Republicans, former Congressional Budget Office Director Douglas Holtz-Eakin, was unable to participate in the vote, though he made his dissent known. The report will now be released in January.

The move comes on the heels of revelations that the nation's biggest mortgage companies employed possibly-fraudulent tactics in trying to foreclose on distressed homeowners. The recent disclosures by the likes of Bank of America, JPMorgan Chase and Ally Financial that they used flawed documentation practices sparked inquiries by all 50 state attorneys general, as well as federal prosecutors and federal regulators, among others. Those investigations are ongoing.

The crisis commission is also looking into the matter, said Phil Angelides, the panel's Democratic chairman. The Republicans on the panel are resisting further inquiries, according to people familiar with the matter. Angelides said in an interview that "there are very powerful interests" seeking to undermine the panel's investigation.

"People who have trillions of dollars at stake who have been watching our efforts closely," Angelides said. "There have been efforts throughout the year to undermine me and my fellow commissioners."

Among other things, Angelides' panel is probing the documentation practices that federal watchdogs say may be emblematic of the entire mortgage securitization chain, in which lenders may have used bogus documents when originating mortgages and passed them through to other entities before they were sold to investors, ignoring basic due diligence along the way. The discovery of the use of "robo-signers" -- employees whose sole job was to rubber-stamp documents without actually reading them or verifying their contents -- "may have concealed much deeper problems in the mortgage market," the Congressional Oversight Panel reported Tuesday.

Large lenders and Wall Street banks may be on the hook for hundreds of billions of dollars in unexpected losses, threatening to undermine "the very financial stability that the Troubled Asset Relief Program was designed to protect," the COP report noted.

The information the crisis commission has gathered from its numerous public hearings has added fuel to that fire.

During an April hearing, the panel heard from Richard Bowen, former chief underwriter for Citigroup's consumer-lending unit, who said he discovered in mid-2006 that more than 60 percent of mortgages the bank bought from other firms and sold to investors were "defective." Investors were not informed, however.

In September, the former president of the nation's leading home-loan due-diligence firm testified that as many as 28 percent of mortgages given to borrowers with poor credit that the firm examined for Wall Street banks failed to meet basic underwriting standards, and that nearly half of them were likely sold to investors anyway. Keith Johnson, formerly of Clayton Holdings, said he was unaware of any disclosure to unwitting investors by the banks.

Together, the testimony and accompanying data could bolster pension funds and other investors in their pursuit to force Wall Street banks to buy back the bogus mortgages they peddled. Investors are trying to use the rights prescribed in the agreements from their initial purchases of the mortgage-linked securities.

Analysts from Compass Point Research and Trading LLC pegged potential losses for 11 global banks to reach $179.2 billion, the Washington-based firm said in an Aug. 17 report.

The crisis panel, though, was expected to be wrapping up its report on the crisis. The law that created the commission says: "On December 15, 2010, the commission shall submit to the President and to the Congress a report containing the findings and conclusions of the commission on the causes of the current financial and economic crisis in the United States."

In a statement, the four Republicans on the panel -- Holtz-Eakin, Vice Chairman Bill Thomas, Keith Hennessey and Peter Wallison -- said that the commission is "statutorily required to deliver the report on December 15." They added that the panel "has had over a year to complete the report" and that the delay was due to a need to "accommodate the publication of a book-length document."

The FCIC hopes to publish a book on its findings, similar to the national best-seller that came from the work of the 9/11 Commission. The crisis panel recently switched publishers.

The law allows the panel an additional 60 days "for the purpose of concluding the activities of the commission ... and disseminating the final report." It's under that additional 60-day authority that Angelides and his fellow Democrats are using to justify their delay by up to six weeks. The panel's authority formally ends Feb. 13.

To date, the commission has interviewed more than 700 people, examined hundreds of thousands of documents and held 19 days of public hearings, Angelides wrote in a Wednesday letter to President Barack Obama.

In an interview, Angelides said his team of investigators continue to pursue leads in their "ongoing investigation." He added that they're also interviewing new witnesses, in addition to circling back to old ones, indicating that the panel continues to push its investigation further.

Congress tasked the panel to deliver its findings on 22 distinct areas, ranging from monetary policy to accounting rules and international capital flows. They also include the role of "fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector"; "lending practices and securitization"; and "the quality of due diligence undertaken by financial institutions."

All three of those areas would seem to include the current mortgage and foreclosure documentation issues roiling big banks and the financial sector.

However, there may be complications in trying to advance its investigation. Because the law says that the commission's findings must be sent to the President by Dec. 15, there are open questions regarding the validity of further investigative actions beyond that date, including issuing subpoenas, people familiar with the crisis panel's efforts said. For example, a firm may have grounds to resist the subpoena, these people said.

Hennessey wrote that a vote to delay the report "would violate the law, or at a minimum would be inconsistent with the law," according to a post on his blog. "The FCIC is a creation of a law, and we must be governed by that law whether we commissioners like it or not," he wrote.

The crisis panel isn't the first to unilaterally delay the release of its congressionally-mandated report. The Commission on the Prevention of Weapons of Mass Destruction Proliferation and Terrorism blew past its deadline, as did the National Bipartisan Commission on the Future of Medicare and the Commission on Affordable Housing and Health Care Facility Needs in the 21st Century.

Those panels, however, didn't have subpoena authority. And their reports were largely advisory. The FCIC can make criminal referrals to the Department of Justice.

Like the FCIC, the 9/11 Commission also had substantial powers, and it, too, extended its own deadline. However, the 9/11 panel got its extension from an act of Congress.

Angelides said the extra time will be critical for the panel's investigation and subsequent report.

In a statement, the spokesman for Senate Banking Committee Chairman Christopher Dodd said the Connecticut Democrat supports the panel's investigation, and was not opposed to the report's delay.

Dodd indicated that a "brief delay to allow the commission to finalize and prepare a more thorough report was not unreasonable," spokesman Sean Oblack wrote in an email.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
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Re: "End of Wall Street Boom" - Must-read history

Postby seemslikeadream » Wed Nov 24, 2010 10:38 pm

1st arrest made in growing insider trading probe
Prosecutors charge and arrest expert network employee


Louis Lanzano / AP
Don Ching Trang Chu, left, exits Manhattan federal court, Wednesday with his lawyer James DeVita.
By Grant McCool and Matthew Goldstein

An executive of a hedge-fund networking firm was arrested Wednesday on charges related to insider trading, part of a broad investigation of hedge funds by U.S. prosecutors.
A criminal complaint unsealed in U.S. District Court in New York said Don Ching Trang Chu promoted the services of his California-based firm, Primary Global Research, by arranging for inside information to be leaked to hedge funds.
Chu's arrest stems from wiretaps and the cooperation of Richard Choo-Beng Lee, a hedge-fund manager who pleaded guilty last year as part of the insider-trading prosecution of Galleon Group hedge-fund founder Raj Rajaratnam and 22 other traders, lawyers and executives.
The government won a big victory in the Galleon case on Wednesday when a judge ruled that secretly-recorded telephone conversations of Rajaratnam were admissible as evidence at his trial. Rajaratnam has pleaded not guilty to charges of conspiracy and securities fraud and is scheduled to go on trial on Jan. 17.
Story: Hedge funds may overhaul business in wake of investigation
Prosecutors have described the Galleon case as the biggest probe of insider trading at hedge funds in the U.S. The investigation has widened to include subpoenas of several funds with billions of dollars under management.
In subpoenas served on SAC Capital Advisors and other hedge funds and mutual funds, authorities have asked for information about so-called "soft dollar" deals — an arrangement in which a hedge-fund client executes trades through a designated brokerage that has some relationship with an expert networking firm such as Primary Global.
Expert networking firms are businesses that take fees to match up hedge funds with experts in particular industries such as medicine, engineering and technology.
The widening investigation heated up on Monday when FBI agents used court-approved search warrants to raid three hedge funds in Connecticut and Massachusetts.
Lee once worked for SAC Capital. There is nothing in Wednesday's complaint that alleges any wrongdoing at SAC Capital. Authorities are looking at funds established by former associates of SAC founder Steven Cohen, according to lawyers and people familiar with the investigation.
A spokesman for Primary Global Research said in a statement that "based upon recent events, PGR has severed its relationship with Mr. Chu."
The statement said Chu served as the firm's liaison in Taiwan and that he had been with PGR for seven years.
Chu, of Somerset, N.J., made a brief appearance before a magistrate judge in New York Wednesday and was released on a bond of $1 million. Chu was not asked to enter a plea to the charges and both of his lawyers declined to comment.
The office of Manhattan federal prosecutor Preet Bharara said Chu was scheduled to leave the U.S. for Taiwan this Sunday. His lawyers said Chu had planned the trip to visit family. The court was told that Chu had surrendered his U.S. passport and agreed to surrender an expired passport issued by Taiwan.
Mazars and Deutsche Bank could have ended this nightmare before it started.
They could still get him out of office.
But instead, they want mass death.
Don’t forget that.
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Re: "End of Wall Street Boom" - Must-read history

Postby vanlose kid » Thu Nov 25, 2010 6:55 am

thought i'd post these.

-- visualize a trillion dollars.



-- basic run-down of the subprime MIHOP in two parts.





*
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Re: "End of Wall Street Boom" - Must-read history

Postby 2012 Countdown » Thu Nov 25, 2010 10:31 am

Real:

UKIP Nigel Farage MEP on the Irish Crisis - November 2010
UK Independence Party MEP Nigel Farage tells the European parliament a few home truths about the Irish bailout and the Euro being largely to blame



----------

Imagined:

The Day the Dollar Died
The first 12 hours of a U.S. dollar collapse!
George Carlin ~ "Its called 'The American Dream', because you have to be asleep to believe it."
http://www.youtube.com/watch?v=acLW1vFO-2Q
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Perspectives on QE2

Postby JackRiddler » Thu Nov 25, 2010 12:17 pm

Assimilating some stuff from the QE 2 thread, started by Montag.

Dean Baker defends QE2:

Quantitative Easing Round II: The Fed’s Second Shot
by Dean Baker

November 8, 2010
http://www.cepr.net/index.php/op-eds-&- ... -round-two

SNIP

The recent economic data leave little doubt that the economic recovery in the United States is anemic at best. There was much celebration over the November jobs report. This showed a gain of 151,000 jobs. This was better than the near-zero number anticipated by most economists, but should hardly provoke cries of joy. The economy must create 100,000 jobs a month just to keep even with the growth of the labor force, which means that it will take more than a decade at this pace to get back the 7.5 million jobs lost to date.

The picture painted by the data on third-quarter GDP, which was released the prior week, was even bleaker. Most reports focused on the 2.0 percent growth number, which was slightly higher than had been expected.

However these reports missed the fact that most of this growth was due to the extraordinary pace of inventory accumulation in the quarter. The rate of accumulation in the third quarter was the second-highest ever, adding 1.4 percentage points to growth for the quarter. Excluding this jump in inventories, the economy grew at just a 0.6 percent annual rate in the third quarter. If inventory growth returns to a more normal level, fourth quarter growth will likely be negative.

The Fed’s decision to try another round of quantitative easing must be understood in this context. The U.S. economy is operating far below its potential and is not likely to return to potential output any time soon without some outside boost. The Fed’s decision to buy $600 billion in government bonds over the next eight months is a step in this direction.

This is a follow up to an earlier round of quantitative easing announced at the beginning of 2009 in which the Fed bought $1.25 trillion of mortgage-backed securities and another $300 billion of government bonds. That move helped to bring down long-term interest rates and stabilize the economy at a time when it was sliding rapidly.

The new move should also help to lower interest rates; although the effect is likely to be limited. With long-term interest rates already at extremely low levels, it is unlikely that the Fed’s new bond purchases will lower them much further. A decline of 30-40 basis points would probably be the best that can be expected. This would lead to a somewhat smaller decline in private sector rates, like mortgage interest rates and corporate bond rates.

This will help to promote growth, but it is not likely to qualitatively change the basic economic picture. A modest drop in mortgage interest rates will not revive the housing market nor will lower interest rates lead to an investment boom. The positive stock market response may lead to some additional consumption through the wealth effect, but here too the impact is likely to be modest.

The largest effect will likely be on the value of the dollar. With the Fed quite explicitly determined to keep interest rates low, investors are likely to seek alternatives to dollar assets. This will cause the dollar to drop, which will in turn improve the U.S. trade balance. The downward drift of the dollar is something that must happen and a second round of quantitative easing may bring the drop about sooner.

Still, the Fed’s move is a disappointment. Given the severity and the duration of the downturn, $600 billion in bond purchases is a very modest measure. The more effective policy that the Fed opted not to pursue is inflation targeting. If the Fed targeted a moderate rate of inflation (e.g. 3-4 percent), it could change expectations and therefore behavior.

If businesses expected that prices for most goods and service would be 12-16 percent higher in four years, then they would be far more willing to undertake investment even in the current economic climate. A moderate rate of inflation would also help households escape from indebtedness. While their debt is fixed in nominal terms, if inflation raised wages by 15 percent then it would reduce the burden of the debt by 15 percent. This should also boost consumption and growth.

House prices should also rise roughly in step with inflation. A 15 percent rise in prices over the next four years would pull many people out from being underwater. It would add trillions of dollars to homeowners’ wealth.

The Fed’s holding of debt also has another benefit that has received far too little attention. Insofar as the Fed holds the government’s debt, the interest payments on this debt pose no burden for the government since the interest received by the Fed is refunded right back to the Treasury. Last year, the Fed refunded $77 billion in interest to the Treasury, an amount equal to nearly 40 percent of the government’s net interest payments. The Fed’s decision to buy and hold debt prevents the interest on this debt from posing a burden to the Treasury.

In short, QE II, as this second round of quantitative easing has been dubbed, is a positive step in the current economic situation. Unfortunately, it is not nearly enough to fully counteract the severity of the downturn.



stefano takes a turn on QE2:


stefano wrote:Thanks Montag, especially for the AlterNet piece. I just wrote a thing about it, so if you'll excuse me I'll toot my own horn for a bit below, ha. What I couldn't figure out was the exact mechanism by which the Treasury recirculates the money. Can anyone fill me in a bit on that?
__________

QE2: What impact on emerging markets?

Money creation in developed economies, now called 'quantitative easing' (QE), has seen massive increases in money supply. This fresh money chases high returns in emerging markets, driving up currencies and resulting in calls for a new international system.

The latest round of QE in the US will involve creation by the Federal Reserve of $600bn between now and the end of Q2 2011 ($75bn a month) to push down US interest rates and devalue the dollar to favour US exports. All the liquidity will go into longer-term Treasury securities. The US Treasury circulates the money back into the economy cheaply, in theory to allow US firms to expand production, increase employment, and stimulate aggregate domestic demand to act on disastrous unemployment rates, the highest since the Depression of the 1930s.

However, what has happened in previous rounds of QE, and what will happen again, is that firms would rather invest the money in high-yield assets in emerging markets than try to make money in depressed developed ones. Billions in capital has flowed to emerging markets, and while economists usually praise the virtues of foreign investment in stimulating production, currencies of the most attractive markets have risen sharply, making exports from these countries less competitive and reducing local-currency earnings from exports.

In the 22 months since January 2009, Brazil's currency has appreciated by 56% against the dollar, South Africa's by 38%, and Thailand's by 18%. The issue will doubtlessly be discussed at the current G20 meeting in Seoul, and we can have a good stab at drawing the debate lines in advance: delegates from emerging countries will ask measures be taken to curb hot money flows, and the US will say that the floating exchange rate system will sort things out, and blame imbalances on trade surpluses in the world's main manufacturing economies.

US Treasury Secretary Timothy Geithner is particularly worried about surpluses, and, until a turnaround this week, was calling for international financial institutions to set surplus and deficit targets as percentages of GDP. This prompted scoffs from the world's two largest exporters, China and Germany. German Finance Minister Wolfgang Schäuble told Der Spiegel magazine that "the United States lived on borrowed money for too long," and that America's problems "don't include German export surpluses," while Chinese Commerce Minister Chen Deming told the BBC that the US deficit is the consequence of American companies outsourcing production to China. Basically, 'it's their own fault'.

Geithner also denies, contrary to the opinions of many analysts, that an objective of QE is the devaluation of the dollar and has been jetting all over the globe to reassure his government's creditors. Last week he told a group of Asian finance ministers in Kyoto that "a strong dollar is in our interest as a country," and pledged that the US would "never use our currency as a tool." In a pre-G20 meeting in Abu Dhabi on Tuesday he re-affirmed this message to reassure his audience: the UAE dirham is pegged to the dollar, and a dollar devaluation would reduce purchasing power in this region where almost all consumer goods are imported. He also needs to reassure China that its tremendous dollar and Treasury reserves will retain their value.

China has over $2.6trn in reserves, giving it plenty of ammunition to keep the renminbi low and resulting in the trade deficit that so concerns US officials. In the year to end September the US had a $200bn trade deficit with China, 25% higher than over the same period in 2009. A big part of the G20 meeting will surely be plaintive calls from US authorities for China's reserve bank to let the renminbi appreciate.

Concerns about the viability of the dollar, once unthinkable, are becoming more mainstream. A Chinese rating agency, Dagong Global Credit Rating, has cut its credit rating for the US from AA to A+ on account of the latest QE operation, and on Tuesday gold hit a record high of $1 424 an ounce as markets bet on a further drop in the dollar.

For emerging economies without the ammunition to sell down their currencies, the biggest issue at the G20 meeting will be asset bubbles resulting from QE money flows. In Pretoria on Tuesday 9 November, before leaving for Seoul, South Africa's Finance Minister Pravin Gordhan called the flows "a global problem", and called for "actions taken at the source." He said that developing countries defending their currencies could not be the only solution.

The solution chosen by developed countries - protectionism - will probably end up being the one that emerging markets will be forced to resort to as well. Simon Evenett of the University of St. Gallen estimates that since the last G20 summit, in Toronto in June, "G20 governments have implemented 111 measures that harm foreign commercial interests", while non-G20 countries have, overall, enacted policies that favour free trade.

This situation cannot last. If the worst-off countries realise that the rich will never practise what they preach, they will tighten tariffs and currency controls, resulting in global beggar-thy-neighbour policies that will leave everyone worse off. But that is still to be preferred to a system where emerging countries are forced to accept a regime that goes against their interests.



The danger of increasing capital flows (like, do you really think the QE2 injection will stay in the US?).

Currency chaos will hit global recovery
By Martin Khor

November 12, 2010
http://www.deccanherald.com/content/112 ... overy.html

Developing countries have learnt that sudden and large capital inflows can lead to serious problems.

The past few weeks have seen the emergence of global currency chaos, which is a new threat to prospects for economic recovery. The situation is being depicted by the media and even by some political leaders as a ‘currency war’ between countries.

Some major countries are taking measures to lower the value of their currency in order to gain a trade advantage. If the value of a country’s currency is lower, then the prices of its exports are cheaper when purchased by other countries, and the demand for the exports therefore goes up. On the other hand, the prices of imports will become higher in the country, boosting local production and improving the balance of trade.

The problem is that other countries which suffer from this action may ‘retaliate’ by also lowering the value of their currencies, or by blocking the cheaper imports through higher tariffs or outright bans. Thus, a situation of ‘competitive devaluation’ may arise, which can contribute to a contraction of world trade and a recession.

The present situation is quite complex and involves at least three inter-related issues.

Double edged sword

First, the US is accusing China of keeping the yuan at an artificially low level, which it claims is causing its huge trade deficit with China. A US Congress bill is asking for extra tariffs to be placed on Chinese products. China claims such a measure would be against the World Trade Organisation rules, and that a sudden sharp appreciation of the yuan would be disastrous for its export industries, nor would it solve the problem of the US deficit.

Japan, whose yen has appreciated sharply against the dollar, intervened on the currency market on Sept 15 by selling 2 trillion yen in order to drive its value down. Japan has criticised South Korea for taking the same intervention measure to curb the appreciation of the won.

Second, the US is trying to lower the value of its dollar, through a new round of ‘quantitative easing,’ in which the Federal Reserve will spend $600 billion to buy up government bonds and other debts.

This will increase liquidity in the market, which would reduce long-term interest rates and thus, it is hoped, contribute to a recovery. But it would weaken the US dollar further.
And the new liquidity would also add to a surge in capital flowing out from the US to developing countries. In fact critics of the Fed’s initiative predict that a large part of the $600 billion would not remain in the US but would leak abroad.

In the past, such surges of ‘hot money’ would have been welcomed by the recipient countries. But many developing countries have now learnt, the hard way, that sudden and large capital inflows can lead to serious problems, such as:

*The capital inflow leads to excess money in the country receiving it, thus increasing pressure on consumer prices, while fuelling ‘asset bubbles’ or sharp rises in prices of houses, other property and the stock market. These bubbles will soon burst, causing a lot of damage.

*The large inflow of foreign funds will build up pressures for the recipient country’s currency to rise significantly. Either the financial authorities would have to intervene in the market by buying up the excess foreign funds (known as ‘sterilisation’) and thus build up foreign reserves, or allow the currency to appreciate and this would have an adverse effect on the country’s exports.

*The sudden capital inflows can also turn into equally sudden capital outflows when global conditions change, as the Asian crisis in the late 1990s showed. This can cause economic disorder, including sharp currency depreciation, loan servicing problems, balance of payments difficulties and economic recession.

Some developing countries have introduced capital controls to slow down the huge inflows of foreign capital. The Institute of International Finance estimates that a massive $825 billion will flow to developing countries this year, an increase of 42 per cent over last year.

Brazil has tripled the tax on foreigners buying local bonds, while Thailand recently imposed a 15 per cent withholding tax on interest and capital gains earned by foreign investors on Thai bonds and South Korea has warned of new limits on forwards, while banks are asked not to lend in foreign currency.

Finally, there are fears that if the currency chaos or currency war is not solved soon, the world faces a threat of trade protectionism, whether it takes the old form of an extra tariff, or a new form of competitive currency depreciation.

Moreover the US quantitative easing may exacerbate the speculative flows of funds in search of profits, and this can be destabilising to the recipient countries and the global economy overall.



Official German Reaction

Next, QE2 is attacked by Germany's Schaeuble, which FT headlines as "Germany attacks..." Keep in mind that this is the CDU-FDP government, not "Germany," and that they've emerged as austerity champions, but less for themselves than for their wards within the EU. Schaeuble was just moved from Interior to Finance, for more than 20 years he has been the German mainstream authoritarian right personified (and an icon since he was crippled in a missile attack back in '91 or so). (Article thanks to Montag.)

FT wrote:Germany attacks US economic policy
by Ralph Atkins

November 7, 2010
http://www.ft.com/cms/s/0/c0dca084-ea6c ... z15EKGNe9n

SNIP

Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.

Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a “deep crisis,” he also warned over the weekend.

His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week’s US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through “quantitative easing”.

On Friday, Mr Schäuble described US policy as “clueless”. In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed “increase the insecurity in the world economy”.

“They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking.”

Mr Schäuble added: “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank’s] printing press.”

Germany’s export success, he argued, was not based on “exchange rate tricks” but on increased competitiveness. “In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems – German export surpluses are not part of them.”

There was also “considerable doubt” as to whether pumping endless money into markets made sense, Mr Schäuble argued. “The US economy is not lacking liquidity.”


Mr. Morgan, pithy as ever:

Stephen Morgan wrote:Why are you all so worried about inflation? Got big cash holdings you don't want eroding? Worried your debts might be too easy to pay off?



stefano on European hypocrisy:

stefano wrote:If the European Central Bank ends up bailing out both Greece and Ireland it could end up injecting more than the $600bn the US Treasury is planning to create. Excerpts, my bold:

How big is Europe's crisis?

Here are the relevant numbers: non-domestic bank exposure (that's the exposure of overseas banks to public, private and banking sectors) is around $300bn for Greece, a little bit more for Portugal, and $840bn for Ireland. That's around $1.5 trillion (£930bn) in total, twice the value of the aggregated economies of Greece, Portugal and Ireland, or three-quarters of Britain's GDP.

Let's assume, which is reasonable, that a meaningful portion of that $1.5 trillion can never be repaid, because some part of the collateral backing those loans has been lost forever (property prices, for example, simply won't recover fast enough) and the earning capacity of the Greek, Portuguese and Irish economies isn't enough to meet the difference.

Even so, the potential loss on that $1.5 trillion exposure for banks would be manageable (if painful) so long as there is an orderly process of establishing what can be repaid - and then reconstructing the quantum and payment schedule of the debts on that basis.

What would be a disaster - and this is reflected in the emotional comments of Mr van Rompuy and of Portugal's finance minister, Fernando Teixeira dos Santos - would be a disorderly, piecemeal process of public and private sector defaults, especially since that would be bound to undermine the financial credibility of other much bigger eurozone economies, such as Spain and Italy.

To simplify where we stand, the global financial system has recapitalised sufficiently over the past couple of years to absorb the losses of a controlled workout of the excessive debts in the eurozone's weaker economies - but there would be a serious risk of a new credit crunch, and global recession, if the providers of that $1.5 trillion of credit to Ireland, Portugal and Greece were to lose confidence that there will be a controlled workout and were to ask for their money back now.
_____________

Of course paperholders often demand immediate payment for reasons other than just making sure of getting their money back - to depress prices drastically and buy entire sectors at the bottom. It's a long game.



Alan Grayson:

vanlose kid wrote:





*



Exchange: What's QE2 really about?

vanlose kid wrote:
vanlose kid wrote:
Nordic wrote:Doesn't anyone want to suggest that the fed is doing this because nobody wants to buy the debt anymore, at least not in the quantities constantly needed by the US? I'm no expert but I pay attention and I remember the fed has been forced to do this repeatedly the past year or so. Why are we assuming this is a conscious choice by the fed? This whole thing "we're doing this to help the economy could just be PR.


it's been suggested a few times by quite a number of people in other threads: cf. "buyer of last resort".

*


QE2 amount:

$600 Billion For QE2
4 November 2010 - News - Editor

While there was little doubt that the Federal Reserve would launch 'QE2' – a second round of quantitative easing – in an effort to boost economic recovery, there has been plenty of speculation as to what the amount would be, with guesstimates ranging from $500 billion into the trillions of US dollars. The guessing game came to an end when, following its two day meeting, the Fed announced that over the next eight months it would spend $600 billion on long-term treasuries, as well as reinvesting between $250 and $300 billion of the proceeds of previous investments... [link]


what are they buying?

Guest Post: Currency Wars And The Fed’s Demise
Submitted by Tyler Durden on 11/20/2010 10:19 -0500

Submitted by Maurizio D'Orlando of AsiaNews.it

Currency Wars And The Fed’s Demise

The Federal Reserve has decided to buy US Treasury bills for about US$ 600 billion in all, in monthly installments of about US$ 75 billion over eight months, until June 2011. However, this action will not achieve the desired goal of economic growth, nor will it change the US labour market, this according to most analysts and security traders surveyed by Bloomberg in its quarterly “Global Poll”. In fact, more than half of 1,030 experts who took part in the survey, expressed doubts about the Federal Reserve’s move. For more than 70 per cent of them, the Fed’s second round of quantitative easing (QE2[1]) is largely an attempt to adjust the exchange rate of the US dollar against other currencies. Thus, according to such set of views, the Federal Reserve (de facto but not de jure the US central bank) wants to redress the trading disadvantage US manufacturers have accumulated over the last few decades and cut the US trade deficit.

For many, the QE2 is seen aimed at contrasting by design those economies which have set their manufacturing structure upon an export-driven growth model. It is no accident that the sharpest critics of the Fed’s QE2 have come from China and Germany, both of which reiterated their positions at the recent G20 summit in Seoul, South Korea. The huge injection of liquidity in the US system conceals, in reality the desire to manipulate the US dollar exchange rates, said Donald Tsang, president of the Executive Council of Hong Kong. For him the risks are much higher. "International investors should tighten their seat belts and get prepared for unprecedented turbulence in currency markets, bond markets, stock markets and the property market," said Tsang.

The end result could be something similar to the Asian crisis of 1997 and 1998.

However, such criticism is too often self-serving in nature.

Currency wars and trade deficits: China’s QE

The US trade balance has been in negative territory since 1980 (picking up speed in 1985) against countries like Canada, Japan and Germany who have seen their trade surplus against Uncle Sam grow. The negative balance (for US goods) accelerated further in 1997, two years after China’s yuan was devalued, and customs duties began to be progressively removed, easing the way of Chinese products into the US market. The US trade balance, then, fell down the cliff when in December 2001 China joined the World Trade Organisation (WTO), the international body imposing regulations to world trade with the general aim to remove (or at least reduce) tariff barriers within a framework of binding agreements and treaties .

When it joined the WTO, China was allowed to keep a highly undervalued currency, as well as tight controls on capital movement and the exchange rate[2], as we had pointed out back in 2003. AsiaNews was one of the first media to estimate the yuan’s undervaluation (about 40-45 per cent) by using a specific reference point, i.e. its purchasing power parity exchange rate with the US dollar. In practice, we observed, the exemptions have “enabled China to maintain the devaluation at a [more or less] constant level as it was established by the Chinese monetary authorities on 1 January 1994”.[3] We said it years ago, and little has changed since then.

China has been doing it for all these years what the Federal Reserve did on 3 November. It has artificially kept its currency below its (theoretical) market value, printed yuan and bought dollars (from Chinese exporters) in order to buy (so far) US Treasury securities. It is quantitative easing, Chinese- style, as Prof Morici shrewdly noted[4]. This has given Beijing the means to accumulate surpluses uninterruptedly and maintain an average 10 per cent growth even in this phase of the current depression. Today, China’s QE is reflected in the country’s distorted domestic demand. Instead of profiting hundreds of millions of underpaid workers, such huge liquidity has been hoarded, placed in shelter investment assets by Communist Party apparatchiks, which explains the mainland’s current real estate bubble and the many empty buildings dotting the country’s urban landscape.

Chinese responsibilities

Those, who in the past sang the praise of “globalisation” (based on such rigged exchange rates formula) and said that it would have cushioned against difficult economic times, today should be rather quiet, hold their peace and meditate about today’s crisis, which is for all intents and purposes the first Global Depression. However, we cannot blame only the Americans; the fault is global and there is enough to go around. For at least ten years, the rest of the world accepted Chinese goods, sold at a 40 per cent discount, in order to subvention a soft transition for the Asian giant as it tried to replace a Stalinist command economy with today’s ‘Communist-Capitalist’ system. Under the circumstance, China is not in a position to lecture others.

The Fed’s responsibilities

Having said this, there is nothing that justifies the Federal Reserve’s decision to start a currency war by launching its QE2 as a way to redress America’s trade imbalance. In fact, Donald Tsang’s argument is not very plausible. Even if this were QE2’s final outcome, the Fed’s move was not started off or triggered by the need to redress trade imbalances, but rather from a domestic imperative, namely the survival of the US banks and financial system. All one needs to do is read Bernanke’s speech[5] to find out.

The table below, which is a modest examination by this author of the Federal Reserve’s balance sheet[6], makes this clear right away. Undoubtedly, this table does not pretend to be an exhaustive analysis and reclassification of the original balance; for that to be the case, it would have to be more comprehensive.

Image

Figures are in millions of dollars. The chosen date, 4 March 2009, is the last one referable directly the previous Bush administration after President Obama and his administration took office in early February 2009. The date of 3 November looks at the situation before this month’s QE2.

For the sake of understanding, when we speak above about federal notes were are not talking about ordinary bank notes, but securities in large figures that, unlike bonds cashable on due date, are cashable at any time. As for the federal agencies that issued debt securities, we mean organisations like Fannie Mae and Freddie Mac that issued subprime loans (but not AIG, whose debt titles are registered separately).

A frightening US public debt

Looking at these numbers, certain things come to mind right away. With a portfolio of US$ 773 billion, the Federal Reserve is on its way of becoming the main holder of US Treasury securities. Within about one month from the start out of QE2, it will overtake China, which currently holds US$ 868 billion.

This is a patent economic inconsistency. What it means is that the Fed is unable to sell a good chunk of its securities (failing to attract both US and foreign investors) to meet, if nothing else, the federal government’s current spending commitments. This is not surprising though since the US government debt is not “60 per cent of current gross domestic product, “but rather “840 per cent,” according to Laurence Kotlikoff (a little less according to this author, but of the same magnitude).

Secondly, one does not have to be a graduate in economics to realise that the increases in ‘federal securities, notes and bonds’ (+ 87.20 per cent) and federal agency debt securities (+ 291.30 per cent) are huge for such a short period of time (12 months). As for mortgage-backed securities (+ 1,426.29 per cent), the jump is frightening and deserves a closer look, which we shall do below.

In the meantime, if we take these three items together, we see that they have represent the largest part of the total Federal Reserve Balances, going from 26.76 to 84.33 per cent in the period under consideration. The Fed’ balance sheet has thus been completely turned around. What this means is that what Ben Bernanke had said would not happen when he appeared before the US Congress has actually happened, namely the monetisation (conversion) of government debt into currency.

The scandal of mortgage notes

As for, mortgage-backed securities (MBSs), they saw a 14-fold rise. As of November of this year they constitute 44.91 per cent of the total Federal Reserve assets side of the balance sheet (albeit this not exactly so). However, don’t be fooled by the name. We are not talking about securities that are backed by mortgages on real property. We are talking about what journalists call “cash for trash”.

First, most MBSs are not directly issued by big financial institutions, but by ad hoc companies (SPV, special purpose vehicles), empty boxes that contain hundreds of thousands of mortgage notes of various kinds. A huge scandal is brewing right now, one that the main US media have chosen to ignore so far. At the core of it are thousands of mortgage notes signed by officials who were not entitled to sign them and who practically had no control over the documents. In one case[7], at a court hearing, one official said under oath that after she left high school she went to college for a year but never graduated. Yet, despite her lack of training in either economics or law, she was appointed “notary” after a couple of years. And all she did was sign papers she did not read and that were full of material and factual errors. Notes such as these are worthless, and it would not take long for lawyers to prove it. Up to now, no one knows what proportion of the Fed’s portfolio is constituted by such MBS, how many worthless mortgage notes it has, or how big its percentage of risk of insolvency is. Any private company, whether financial, commercial or industrial would have to make financial provisions in its balance sheet for such a situation. However, on the Federal Reserve’s balance sheet, these mortgages are recorded at their full nominal value. Putting aside the doubts that Kotlikoff (and more modestly by AsiaNews[8]) raised about the sustainability of the US federal debt and the solvability of the United States, mortgage-backed securities represent almost half of the Federal Reserve’s balance sheet, and that is scary.

Sacrificing the Fed

It is very likely that “turbulences” will hit currency markets once the QE2 is implemented. Contrary to what China, Germany and Hong Kong’s Donald Tsang claim, namely that QE2 is part of a deliberate and planned currency war, we at AsiaNews think otherwise. Our criticism is no less damning however when it comes to the health of the US financial system or forgiving towards what the Federal Reserve has done.

For us, the Fed’s decision to initiate a second round of quantitative easing was not really motivated by a desire to lead the United States and the world out of the current economic crisis, but rather from the need to save US banks and their top officials from the consequences of an unimaginable mess (or deceitful system), which was built up over at least the past decade. The only deliberate thing here is the decision to sacrifice precisely the very same Fed itself. This was decided not only to save big financial corporations and their leaders, but also to lay the ground for either a world Federal Reserve, a sort of SuperFed, or (if the former fails) at least one for a North American Fed that would rise out of the ashes left by the existing Federal Reserve, now destined to explode as a result of hyperinflation.

Who controls the priests of money?

Last but not least, let us not forget the Fed’s gold stock , all 261,635,072 ounces of them. In the Fed’s balance sheet, their relative value is given as US$ 11.04 billion, based on US$ 42.3 per ounce. Altogether, they represented 0.57 per cent of the Fed’s assets on 4 March 2009, and 0.47 per cent on 3 November 2010. If however, we look at gold’s actual market value (US$ 911 per ounce in March 2009 and US$ 1,350 per ounce in November 2010), the value of Federal Reserve’s gold stock changes. Thus, they were worth US$ 238.5 billion on 4 March 2009 (12.26 per cent of balance sheet assets), and US$ 353.3 billion on 3 November 2010 (15.09 per cent).

A balance sheet should correctly reflect economic reality. By contrast, the Federal Reserve’s Statistical Releases are pure fantasy. The same can be said for almost all other central banks with the power to print money with legal tender. Many of them do not even release a balance statement. Of course, all this is perfectly legal, but is it right and legitimate? Is it right that an obscure esoteric sanhedrin of private bankers, under no one’s control but their own, can issue money, a public good like few others?


[1] Quantitative Easing or QE. See Maurizio d’Orlando, “Squandering more public resources,” in AsiaNews, 3 November 2010.

[2] We have held this view since 2003, see Maurizio d’Orlando, “I successi economici apparenti; la schiavitù, i fallimenti,” in AsiaNews, 11 November 2003.

[3] See ibid., “Economic crisis: US, China and the coming monetary storm,” in AsiaNews, 9 December 2008.

[4] See Peter Morici, “QE2 and G20 Hypocrisy,” in FOXBusiness, 8 November 2010.

[5] See Maurizio d’Orlando, “A global financial disaster is imminent, says Bernanke,” in AsiaNews, 13 October 2010.

[6] See Federal Reserve, “Factors affecting reserve balances,” in Federal Reserve Statistical Releases 5 March 2009, and “Factors affecting reserves balances,” in Federal Reserve Statistical Release, 4 November 2010.

[7] See Tyler Durden, “The Nine Most "Inconvenient" RoboSigning Admissions BofA Would Love To Disappear,” in Zero Hedge, 13 November 2010. All the officials who spoke said that they signed piles of paper, thousands in fact, without checking what was on them. They only made sure that they were putting their signature where their name was.

[8] “Real numbers show that the (real) ratio between total public debt and GDP, depending on how public debt is defined, stands at between 450 and 900 per cent of GDP,” in Maurizio d’Orlando, The world’s economic crisis, the real global warming,” in AsiaNews, 10 June 2010. See also; ibid. “This year, US public debt could reach end game,” in AsiaNews, 3 March 2010; ibid., “As the world waits for hyperinflation and a world government, Bernanke becomes “Person of the Year,” in AsiaNews, 29 December 2009. See also by the same author, “Clashes between US, China and Iran may account for record gold prices,” in AsiaNews, 12 May 2006; “War scenarios: Iran, oil embargo and the collapse of the world's financial system,” in AsiaNews, 7 August 2006; “Chinese stocks and the risk of economic crisis,” in AsiaNews, 22 May 2007. See many other articles published on AsiaNews dealing with subprime, toxic securities, bank rescue, etc. See again Maurizio d’Orlando, “Subprime lending to trigger world’s worst financial crisis since 1929,” in AsiaNews, 19 September 2007; ibid., “Depth of the abyss of economic, social, political chaos,” in AsiaNews, 30 September 2008; ibid., “Paulson plan: useless and harmful to democracy,” in AsiaNews, 6 October 2008; ibid., “The way out of the crisis is neither Left nor Right,” in AsiaNews, 25 November 2008; and ibid., “Economic crisis: US, China and the coming monetary storm,” in AsiaNews, 9 December 2008


[ http://www.zerohedge.com/article/guest- ... 99s-demise ]


*






JackRiddler wrote:I was with Tyler Durden, not above, but back on page 1 when he was quoted as saying this:

vanlose kid wrote:Is QE2 A Stealthy $90 Billion Gifting Scheme To The Primary Dealers?
Submitted by Tyler Durden on 11/12/2010 20:40 -0500

POMO


We have previously discussed how due to the inability to know at what price (par or market) the Fed is buying back bonds from the Primary Dealers, there is a distinct possibility that due to the par-market difference, especially with many CUSIPs trading near record prices over par, the Fed may be implicitly letting PDs pocket the market-to-notional difference. The total, as shown below, could amount to over $40 billion. Furthermore, by avoiding the tight spread of on the run bonds, the Fed is effectively allowing PDs to pocket a huge bid/offer spread, which assuming a total size of ~$800 billion (low estimate) of all USTs bought over the (initial) life of QE2, aka QE2.5 and higher pre-extensions, amounts to $50 billion over the next 8 months. Since the money paid out is certainly not that of Brian Sack, but of the US taxpayers, to which the FRBNY has repeatedly demonstrated it has no fiduciary obligation, one can see why it is prudent to ask just how much leakage is occurring as the Fed is monetizing. Surely the Chairman can see why at a time when Wall Street is about to pocket $150 billion in bonuses, America can be a little concerned with the possibility that QE2 in addition to being a blatant debt monetization scheme, is also a direct taxpayer funding mechanism to the Primary Dealers. We hope Congressman Paul will demand an answer to the these questions at first opportunity.

John Lohman explains in detail.

When the Fed is finished playing 68 with the primary dealers (where the Fed blows the PDs and the PDs “owe ‘em one”), perhaps they can answer two quick questions.

According to the FRBNY’s website, prices for the securities purchased in today’s POMO will be released at 2:00 PM on December 10th. In the meantime, an approximation of what was actually spent can be found by taking an average (using one minute intervals) of prices from 10:42 until 11:30. As shown in the table below, almost a half billion dollars more was pumped into the market than was revealed in the par amount. So, query number one: does the “$600 billion” refer to par or market value? Since it’s not clear on their website, one is left to assume that they consider $40 billion to be chump change.

Query number two: why was the on-the-run 5 year (1 ¼ Oct 15) only 2% of the total operation? It trades with a 1/64th bid/ask versus every other security purchased which is quoted with a 2/32nd bid/ask (per Bloomberg). The result, when applied to the total operation of $800 billion, amounts to a transfer of roughly $50 billion dollars in commissions directly to the primary dealers (final table). So, perhaps question two should be rephrased: Why not just drop the pretense and absorb every Treasury auction directly for the next 8 months?

Image

[ http://www.zerohedge.com/article/qe2-st ... ry-dealers ]

*


In other words, QE2 is the latest means to funnel cash directly to the banksters, the latest bailout, with the Fed once again showing that it functions as their cartel. The claimed good effect of QE2 on the economy is not the reason for it, or secondary. Claims of whether it actually is good or bad or indifferent are all debatable, but let's be clear about the purpose. (Only thing I'm sure about is that it's not an intentional destruction of the US economy on behalf of a New World Order plan. As though bankster profits and keeping the Zombies afloat would ever be a means to a higher end, however nefarious. Bankster profits are the be-all and end-all, that is their religion.)

.





And finally: a voice of reason? Mahathir says to just stop the damn money-go-round:


Bloomberg News wrote:Mahathir Calls Currency Trading `Silly,' Advocates Return to Bretton Woods
by Barry Porter and Haslinda Amin

Nov 16, 2010
http://www.bloomberg.com/news/2010-11-1 ... -pegs.html

Former Malaysian Prime Minister Mahathir Mohamad, who fought off an attack on the ringgit with capital controls during the Asian financial crisis, said currency trading is “silly” and the world should return to the Bretton Woods System of fixed exchange rates.

Currency wars are futile and the U.S. Federal Reserve’s latest quantitative easing plan will result in hot money pushing up prices in small countries, the 85-year-old said in an interview in Kuala Lumpur today. The Fed on Nov. 3 said it intends to buy an additional $600 billion of Treasuries to foster growth.

“When you lose money, you must accept that you have lost money,” he said. “When you lose money and then you go back to your house and print more money for yourself, that makes things quite ridiculous. This is money that is not real, yet this money can destabilize by, for example, going into small countries to invest in stock exchanges.”

Mahathir, who stepped down in October 2003 after 22 years in power, drew international criticism when he imposed currency curbs in 1998. He called George Soros a “moron” and accused the billionaire investor of attacking the country, while Soros responded by describing the Southeast Asian leader as a “menace to his own country.”


[They leave out the subsequent reconciliation with Soros and the fact that Soros himself supports capital controls in his writing, if not his actions.]

Capital Controls

More than a decade later, the World Bank has said countries in the region may need capital controls to protect against destabilizing inflows caused by U.S. monetary policy. Asian economies may need to respond to the Fed’s easing with short- term, targeted controls to address asset bubbles in their stock, currency and property markets, World Bank Managing Director Sri Mulyani Indrawati said on Nov. 9.

“We’re seeing big swings in Asian currencies because people are concerned over a slew of capital control measures,” Enrico Tanuwidjaja, a Singapore-based economist at DMG & Partners Securities Pte said in a telephone interview today.

South Korea and Indonesia have already adopted measures to manage capital flows, while China, India and Australia have raised interest rates to limit inflation pressure.

“Currency trading doesn’t create any jobs or spin off any business,” Mahathir said. “What we should do is stop this silly thing called currency trading,” which would remove one source of “instability,” he said.

Instead, nations should return to the Bretton Woods System first established after World War II, under which countries were obliged to adopt monetary policies to maintain their exchange rates within a fixed range linked to gold.

Gold Standard

“This idea that the market should fix the exchange rate is a new thing,” Mahathir said. “A currency war is not something that is going to overcome the present crisis. The result is a very unstable exchange rate system in the world.”

World Bank President Robert Zoellick said in a Financial Times column last week that Group of 20 nations should once again consider using gold as an international reference point of market expectations about inflation, deflation and future currency values as they reform the global monetary system.

Mahathir also said Malaysia’s ringgit should be repegged and criticized current Prime Minister Najib Razak’s September proposal to allow off-shore ringgit trading, which would remove the nation’s remaining control from the Asian financial crisis.

“I think the government came up with this idea at the wrong time,” he said. “I think that the government may have second thoughts now, because if everyone else is controlling their currencies and you allow your currency to be manipulated by the market you will suffer.”

Joint Measures

Asian nations may undertake joint measures to prevent excessive speculation in their currencies, Thai Finance Minister Korn Chatikavanij told reporters in Bangkok on Nov. 4. Malaysia’s central bank Governor Zeti Akhtar Aziz said last week there may be a joint effort by governments in the region to manage capital flows.

The region’s currencies have climbed against the dollar this year as the region’s growth outpaces the rest of the world. The Malaysian ringgit gained 9.3 percent this year, the best performer after the Thai baht among the 10-most active currencies in Asia outside of Japan. Malaysia’s benchmark stock index climbed to a record on Nov. 8.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 2:08 pm

More Europe...


Published on Monday, November 22, 2010 by The Guardian/UK
Ireland Should 'Do an Argentina'
The Irish people expected to pay in austerity cuts for their banks' sins have another option. Reject the ECB and IMF, ditch the euro

by Dean Baker

When a firefighter or medical team make a rescue, the person is usually better-off as a result. This is less clear when the rescuer is the European Central Bank (ECB) or the IMF.

Ireland is currently experiencing a 14.1% unemployment rate . As a result of bailout conditions that will require more cuts in government spending and tax increases, the unemployment rate is almost certain to go higher . The Irish people are likely to wonder what their economy would look like if they had not been rescued.

The pain being inflicted on Ireland by the ECB/IMF is completely unnecessary. If the ECB committed itself to make loans available to Ireland at low interest rates, a mechanism entirely within its power, then Ireland would have no serious budget problem. Its huge projected deficits stem primarily from the combination of high interest costs on its debt, and the result of operating at levels of economic output that are well below full employment – both outcomes that can be pinned largely on the ECB.

It is worth remembering that Ireland's government was a model of fiscal probity prior to the economic meltdown. It had run large budget surpluses for the 5 years prior to the onset of the crisis . Ireland's problem was certainly not out of control government spending; it was a reckless banking system that fueled an enormous housing bubble. The economic wizards at the ECB and the IMF either couldn't see the bubble or didn't think it was worth mentioning.

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now. The plan is to impose stiff austerity, requiring much of Ireland's workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this. The decision to make Ireland's workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country's bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

This should be a huge warning flag for progressives and, in fact, anyone who believes in democracy. If the ECB puts conditions on a rescue package, it will be very difficult for an elected government in Ireland to reverse these conditions. In other words, the issues that Ireland's voters will be able to decide are likely to be trivial in importance relative to the conditions that will be imposed by the ECB.

There is no serious argument for an unaccountable central bank. While no one expects or wants parliaments to micromanage monetary policy, the ECB and other central banks should be clearly accountable to elected bodies. It would be interesting to see how they can justify their plans for subjecting Ireland and other countries to double-digit unemployment for years to come.

The other point that should be kept in mind is that even a relatively small country like Ireland has options. Specifically, they could drop out of the euro and default on their debt. This is hardly a first best option, but if the alternative is an indefinite stint of double-digit unemployment, then leaving the euro and default look much more attractive.

The ECB and the IMF will insist that this is the road to disaster, but their credibility on this point is near zero. There is an obvious precedent. Back in the 2001, the IMF was pushing Argentina to pursue ever more stringent austerity measures. Like Ireland, Argentina had also been a poster child of the neoliberal crew before it ran into difficulties.

But the IMF can turn quickly. Its austerity programme lowered GDP by almost 10% and pushed the unemployment rate well into the double digits. By the end of the 2001, it was politically impossible for the Argentine government to agree to more austerity. As a result, it broke the supposedly unbreakable link between its currency and the dollar and defaulted on its debt .

The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth, until the world economic crisis eventually took its toll in 2009.

The IMF, meanwhile, did everything it could to sabotage Argentina, which became known as the "A word". It even used bogus projections that consistently under-predicted Argentina's growth in the hope of undermining confidence .

Ireland should study the lessons of Argentina. Breaking from the euro would have consequences, but it is becoming increasingly likely that the pain from the break is less than the pain of staying in. Furthermore, simply raising the issue is likely to make the ECB and IMF take a more moderate position.

What the people of Ireland and every country must realise is that if they agree to play by the bankers' rules, they will lose.
© 2010 Guardian News and Media Limited

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org ) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy . He also has a blog, "Beat the Press ," where he discusses the media's coverage of economic issues.

Article printed from www.CommonDreams.org
URL to article: http://www.commondreams.org/view/2010/11/22-2


Did I post this about Portugal yet?

Note the usual headline spin: cripples. Hell no. The cripples are trying to rise up and strangle the cripplers.

http://www.google.com/hostednews/afp/ar ... 8d0117.121

General strike cripples debt-hit Portugal
By Thomas Cabral (AFP) – 17 hours ago

LISBON — Portugal ground to a halt Wednesday as unions staged the country's first general strike in more than two decades to protest spending cuts that the government says are vital to avoid financial disaster.

Both public and private sector workers joined the one-day strike, which follows similar stoppages in other troubled euro economies such as Greece and France, as governments are forced into unpopular cost-cutting programmes.

The transport sector was crippled by the stoppage with no flights taking off or landing at any airport. More than three-quarters of train services were cancelled and 60 percent of bus services were also scrapped, operators said.

Lisbon's metro system was also closed for the day while the capital's ferries stayed in their docking berths.

The strike, the first time since 1988 that private and public sector workers have come together, also hit banks, media and petrol deliveries.

Union leaders said the strike had had a "massive impact" on the private sector, in particular on the auto sector with less than 10 percent of the workforce turning up at Volkswagen's Autoeuropa plant near the northern city of Porto.

"The mobilisation of workers is enormous," said Manuel Carvalho da Silva, the head of the major CGTP syndicate.

The strike began on the stroke of midnight with union members setting up picket lines across the country, including outside Lisbon's international airport.

Scuffles broke out between police and union activists during a picket outside a sorting office in Lisbon, although no charges were filed.

The unions' anger has been stoked by government plans for a drastic round of spending cuts and tax rises, worth some five billion euros (6.85 billion dollars) which are currently being pushed through parlaiment.

The package of cuts is intended to reduce the deficit from 7.3 percent of GDP to 4.6 percent next year in a bid to quell growing international unease over the state of its finances.

Portugal's main opposition party said on Tuesday it would not block the government's 2011 budget, paving the way for its adoption on Friday.

But the unions say the cuts are intolerable, particularly from a Socialist government led by Prime Minister Jose Socrates.

"It is unacceptable that workers are making all the sacrifices," said unionist Joao Proenca.

"We cannot accept that the first, second and third priority of Portugal is the deficit," said Proenca, referring to the country's 10.9 percent unemployment rate, an all-time high.

Portuguese bond yields rose to 6.636 percent from 6.523 percent on Tuesday amid growing concerns over the country's deficit-reduction efforts.

The government on Monday announced that spending had actually increased by 2.8 percent through October on a yearly comparison, raising the deficit to 11.9 billion euros.

Socrates has rejected suggestions that his country is next in line after Ireland to receive an European Union bailout, saying that Portugal did not need financial aid.

The situation is even affecting the country's priesthood.

The archbishop of Braga has called on priests in his northern diocese to donate a month's wages to people suffering in the crisis.

"We live in extremely serious times. We cannot ignore this and must show a concrete love for the people," Archbishop Jorge Ortega said in a letter to priests.

Copyright © 2010 AFP. All rights reserved.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

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I am by virtue of its might divine,
The highest Wisdom and the first Love.

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Bank of America, King of Zombies

Postby JackRiddler » Thu Nov 25, 2010 2:58 pm

.

Several "BoA Faces Doom" articles in the last couple of weeks - first spot goes to Mr. Black, who in a just world would be head of SEC (with Markopolos as his hitman) or Attorney General.

Fair use archive of like articles for education & debate, with original links, no commercial purpose.

http://www.huffingtonpost.com/william-k ... view=print

Black and Wray wrote:The Huffington Post
November 25, 2010

William K. Black and L. Randall Wray
Posted: November 4, 2010 06:06 PM

Let's Set the Record Straight on Bank of America: Open the Books!


While we welcome Bank of America's response to our two-part essay, "Foreclose on the Foreclosure Fraudsters," it does not actually respond to any of the facts or analytical points we made. Indeed, it does not engage the issues we raised. Bank of America's response contains some useful data on foreclosures that supports points we have made in prior articles, but overwhelmingly it is a plea for sympathy; Bank of America says it is beset by deadbeat borrowers and it is distressed that it is criticized when it forecloses on their homes. Bank of America portrays itself as the victim of an ungrateful public.

Bank of America Should be Placed in Receivership NOW

We argued that the FDIC should place Bank of America in receivership and the federal banking agencies should impose a moratorium on foreclosures until the mortgage servicers correct their systems, which currently often rely on massive fraud and perjury. There can be no assurance that foreclosures are lawful until the banks actually find the mortgage "wet ink" notes signed by debtors to prove they are the true beneficial owner of the mortgage debts, which is required to seize property. We also called on the banks to identify and compensate homeowners who were fraudulently induced to borrow by the lenders and their agents through a number of fraudulent practices variously marketed by lenders as "no doc", liar, and NINJA loans (all subspecies of what the industry aptly called "liar's" loans).

We showed that outside studies by a wide range of parties showed massive fraud by the bank.

The demands by investors that Bank of America repurchase loans and securities sold under false "reps and warranties" may cause exceptional losses if those making the demands document the broader fraud by the lenders. The article "Bank of America Resists Rebuying Bad Loans" shows that Bank of America's potential loss exposure to Fannie and Freddie is staggering: "[Bank of America] said it sold $1.2 trillion in loans to the government-controlled housing giants from 2004 to 2008 and has thus far received $18 billion in repurchase claims on those loans."

The company is fighting the groups that are demanding that it repurchase the toxic mortgages. Its CEO, Brian Moynihan counters their claims with the following analogy:
Such investors are like "people who come back and say, 'I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cylinder [engine],'" Mr. Moynihan said in October. "We're not putting up with that."

One-third of its subprime business is in default and Mr. Moynihan thinks Countrywide was selling Vegas? If one third of Vegas crashed and burned within three years of being purchased the metaphor might be apt and completely incriminating. We argued that putting Bank of America into receivership is the proper remedy for its substantial violations of the law and for its continuing reliance on unsafe and unsound practices. Outside reviews have documented the most extensive and financially harmful violations of law and unsafe banking practices and conditions in history.

As argued in a recent article by Jonathon Weil, the bank is nearing a "tipping point" as markets recognize it is "cooking the books," vastly overstating the value of its assets as it refuses to recognize the true scale of losses on its purchase of Countrywide. Ironically, it still carries on its books $4.4 billion of fictional "goodwill" value created by overpaying for Countrywide (a notorious control fraud), as well as $142 billion of home equity loans that are worth far less. A more honest accounting of "good will" and of the value of home equity loans would take a big bite out of Bank of America's market capitalization ($116 billion), which has lost 41 percent of its value since April 15. The markets are moving ever closer to shutting down the institution, but Moynihan is not "putting up with" the demand by investors for Bank of America to come clean on its fraudulent practices.

Ms. Mairone's Response Verifies Our Claims

Rebecca Mairone replied on behalf of Bank of America to our two-part post. Step back for a moment and consider the context of Bank of America's response. We cite evidence that the bank has committed massive fraud, explain that this provides a legal basis for placing it in receivership, and call on the FDIC to do so. Bank of America chooses to respond publicly, but its response never contests its massive fraud or our demonstration that there is a legal basis for placing it in receivership.

Instead, Bank of America complains that we "do nothing to illuminate the challenges [BofA's home mortgagees] face." This is not our task; nevertheless, the claim is incorrect. We illuminate the problems posed by the fact that nonprime borrowers were frequently victims of mortgage fraud perpetrated by lenders as well as many other operatives in the unprecedented criminal lending and securities fraud of the past decade. This problem is typically ignored -- at least by the financial sector and the mainstream media -- so we did "illuminate" the problem and the cause of action borrowers could bring for "fraud in the inducement."

We showed that the fraudulent senior officers that controlled home mortgage lenders created "liars," and NINJA loan programs designed to induce millions of Americans to take out loans they could not afford to repay. The endemic underlying fraud in the origination and sale of nonprime loans is critical to understanding why loan defaults are massive, why borrowers were typically the victims of the fraud and lost their meager savings due to the frauds, why loan modifications typically fail, and why foreclosure fraud has been so common. The endemic fraud also hyper-inflated the bubble and helped cause the economic crisis and severe loss of employment. Over a million Bank of America borrowers face these "challenges" that we "illuminated."

Bank of America's response is guilty of what it criticizes; it ignores the fraud by nonprime lenders and sellers, particularly Bank of America's frauds in both capacities. It does not seek to "illuminate" the frauds or the problems that arise from endemic mortgage fraud. We did not invent the "epidemic" of mortgage fraud. The FBI began testifying about that in 2004. The FBI predicted that it would cause a "crisis" if it were not stopped -- and no one claims it was stopped. The mortgage industry's own fraud experts opined publicly in 2006 that the type of loans that Countrywide decided to elevate to its favored product was an "open invitation to fraudsters" and fully deserved the phrase that the lenders used to describe the product: "liars' loans". (Bank of America chose to purchase Countrywide at a time when it was notorious for the awful quality of its mortgage loans.) It is the lenders and their agents, the loan brokers, that directed the lies in these liar's loans and appraisals and it was the lenders that made fraudulent "reps and warranties" in order to sell the fraudulent loans on to others in the form of securities. Economists and white-collar criminologists share a belief in "revealed preferences." The senior officers that control lenders provide an "open invitation to fraudsters" in the midst of an "epidemic" of fraud because they intend to profit from those frauds.

Instead of contesting its issuance and sale of massive numbers of fraudulent loans, Bank of America writes to provide data on delinquencies and foreclosures in support of its claim that it is the victim of Countrywide's deadbeat borrowers who it tries in vain to help. Bank of America's data, however, add support for the evidence of widespread mortgage fraud, particularly by Countrywide. Accounting control frauds maximize their (fictional) reported income by lending routinely to those who cannot afford to repay their loans. It is this aspect of the fraud scheme that is most counter-intuitive to those that do not study fraud, but to criminologists it provides the most distinctive markers of fraud. The senior officers that control fraudulent lenders maximize the bank's reported short-term income, in order to maximize their compensation, by growing extremely rapidly through making loans at a premium yield. This strategy creates a "sure thing" (Akerlof & Romer 1993). The lender is sure to report record (fictional) profits in the short term and suffer enormous (real) losses in the longer term.

The Evidence Supports Our Claims of Fraud

If we are correct that Countrywide operated as a fraud we would expect to find the following:
disproportionately large rates of loan delinquencies and defaults
huge losses upon default, and fraudulent representations and appraisals.

We would also predict widespread fraud in the "reps and warranties" that Countrywide and Bank of America provided to purchasers of nonprime loans originated by Countrywide. As we emphasized in our initial posts, a wide range of financial entities have confirmed the widespread fraud in the reps and warranties. This is why Bank of America is being sued. The data they provided in its response to our blogs supports the first three predictions.

First, Bank of America admits to a 14 percent delinquency rate on its mortgages. That percentage is roughly seven times greater than the normal delinquency rate for prime loans. It is roughly three times the traditional rule of thumb for a fatal delinquency rate (5 percent) for a home lender. Losses upon default during this crisis are dramatically greater than the historic percentages, and loss reserves were at historic lows, so the traditional rule of thumb for fatal losses is unduly optimistic in this crisis.

Second, Bank of America's response states that Countrywide-originated loans have caused 85 percent of total delinquencies. Bank of America was a massive mortgage lender before it acquired Countrywide, so taken together these data suggest that the delinquency/foreclosure rate for Countrywide-originated mortgages must have been well over 20 percent -- over ten times the normal delinquency rate and four times the traditional rule of thumb for fatal losses. These exceptionally large rates of horrible loans, defaulting so quickly after origination, are a powerful indicator that Countrywide was engaged in accounting control fraud. Unfortunately, lenders that specialized in making nonprime loans were typically fraudulent. The result was a massive bubble and economic crisis.

Our conclusions are well-supported by many other analyses, many of which were conducted long ago. For example, Reuters reported in January 2008 that one-third of Countrywide's subprime mortgages were already delinquent:
(Reuters) - Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, on Tuesday said more than one in three subprime mortgages were delinquent at year-end in the $1.48 billion portfolio of home loans it services.

Countrywide said borrowers were delinquent on 33.64 percent of subprime loans it serviced as of December 31, up from 29.08 percent in September.


Foreclosures are now vastly more common and the losses lenders suffer upon foreclosure, particularly for nonprime loans, are catastrophic. For example, Bloomberg reported at the end of 2009 that foreclosures result in losses amounting to nearly three-fourths of the value of the loan:
For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale, Amherst [Securities Group LP] reported.

Third, Bank of America's data indicate another form of deceit that is a typical consequence of accounting control fraud. Bank of America has delayed foreclosing, sometimes for years, on large numbers of loans that have no realistic chance of being brought current, even with the loan modifications it offered. This behavior would be irrational for an honest lender, for it would increase ultimate losses, but is a typical strategy for a lender controlled by fraudulent senior officers because it greatly delays loss recognition and allows them to extend their looting of the bank for years through bonuses paid on the basis of fictional reported "profits" after the bank has (in economic substance) failed. Bank of America's response to us admit that, of their 1.3 million customers who are more than 60-days delinquent, 195,000 have not made a payment in two years. Of those loans which have not received a payment in two years, 56,000 are already vacant.

For the foreclosure sales in the period from Jul-Sep, 2010:
80 percent of borrowers had not made a mortgage payment for more than one year

Average of 560 days in delinquent status (approximately 18 months)

33 percent of properties were vacant

The traditional rule of thumb is that a home loses 1.5 percent of its value each month it is delinquent but not foreclosed and sold. Those losses are far greater when the property is vacant. The loss of value is not limited to the particular home; all homes in the neighborhood are harmed when homes are left vacant for long periods. Bank of America does not address this issue, but the time from foreclosure to sale has also grown dramatically, which means that the length of time that foreclosed homes remain vacant prior to sale has grown substantially. The industry calls this huge number of homes, which are not producing income to the lenders because of the extraordinary growth in delinquencies and the delay in sales even after foreclosure, the "shadow inventory." Note that none of the government foreclosure relief programs mandated that Bank of America sit on these delinquent assets for an average of 18 months and allow them to be wasting assets.

The bank's response primarily criticizes its borrowers as deadbeats, yet the data it provides support points we have made in our prior posts, including Bill Black's posts about the banks working with the Chamber of Commerce and Chairman Bernanke to extort the Financial Accounting Standards Board (FASB) in order to destroy the integrity of the accounting rules requiring banks to recognize losses on their bad loans. We have explained why the fraudulent officers controlling many lenders followed a strategy of making bad loans at premium yields in order to maximize (fictional) accounting income and their bonuses. This dynamic drove the current crisis. These frauds hyper-inflated the housing bubble and caused trillions of dollars of losses.

The extortion of FASB was successful; Bank of America was one of the leaders of that extortion. It changed the accounting rules so that banks could often avoid recognizing losses on these fraudulent loans, until they actually sold the home taken back through foreclosure. This dishonorable accounting fiction creates perverse incentives for banks to do exactly what Bank of America has done -- let bad assets waste away and make already severe losses catastrophic.

Let's Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud

This is the second installment of a two-part series. Read the first here.

We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first two-part post called on the U.S. to begin "foreclosing on the foreclosure fraudsters." We concentrated on how the underlying epidemic of mortgage fraud by lenders inevitably produced endemic foreclosure fraud. We wrote to urge government policymakers to get Bank of America and other lenders and servicers to clean up the massive fraud. We obviously cannot rely solely on Bank of America assessing its own culpability.

Note also that while we have supported a moratorium on foreclosures, this is only to stop the foreclosure frauds -- the illegal seizure of homes by fraudulent means. We do not suppose that financial institutions can afford to maintain toxic assets on their books. The experience of the thrift crisis of the 1980s demonstrates the inherent problems created by forbearance in the case of institutions that are run as control frauds. All of the incentives of a control fraud bank are worsened with forbearance. Our posts on the Prompt Corrective Action (PCA) law (which mandates that the regulators place insolvent banks in receivership) have focused on the banks' failure to foreclose as a deliberate strategy to avoid recognizing their massive losses in order to escape receivership and to allow their managers to further loot the banks through huge bonuses based on fictional income (which ignores real losses). We have previously noted the massive rise in the "shadow inventory" of loans that have received no payments for years, yet have not led to foreclosure:
As of September, banks owned nearly a million homes, up 21 percent from a year earlier. That alone would take 17 months to unload at the most recent pace of sales, and doesn't include the 5.2 million homes still in the foreclosure process or those whose owners have already missed at least two payments.

Bank of America's response admits how massive its contribution to the shadow inventory has been. Mairone implies that the bank delays its foreclosures for years out of a desire to help homeowners, but common sense, and their own data show that the explanation that makes most sense is that the bank is hiding losses and maximizing the senior officers' bonuses by postponing the day that the bank is finally put into receivership.

We did not call for a long-term foreclosure moratorium. Our proposal created an incentive for honest lenders to clean up their act quickly by eliminating foreclosure fraud. We will devote a future post to our proposals for dealing with the millions of homes that the fraudulent lenders induced borrowers to purchase even though they could not afford to repay the loans.

Bank of America's data add to our argument that hundreds of thousands of its customers were induced by their lenders to purchase homes they could not afford. The overwhelming bulk of the lender fraud at Bank of America probably did come from Countrywide, which was already infamous for its toxic loans at the time that Bank of America chose to acquire it (and also most of Countrywide's managers who had perpetrated the frauds). The data also support our position that fraudulent lenders are delaying foreclosures and the sales of foreclosed homes primarily in order to delay enormous loss recognition.

The fraud scheme inherently strips homeowners of their life savings and finally their homes. It is inevitable that the homeowners would become delinquent; that was the inherent consequence of inducing those who could not repay their loans to borrow large sums and purchase homes at grossly inflated prices supported by fraudulent inflated appraisals. This was not an accident, but rather the product of those who designed the "exploding rate" mortgages. Those mortgages' initial "teaser rates" induce unsophisticated borrowers to purchase homes whose values were inflated by appraisal fraud (which is generated by the lenders and their agents) and those initial teaser rates delay the inevitable defaults (allowing the banks' senior managers to obtain massive bonuses for many years based on the fictional income). Soon after the bubble stalls, however, the interest rate the purchasers must pay explodes and the inevitable wave of defaults strikes. Delinquency, default, foreclosure, and the destruction of entire neighborhoods are the four horsemen that always ride together to wreak havoc in the wake of epidemics of mortgage fraud by lenders.

Out of these millions of fraudulent mortgages, Bank of America claims to have modified 700,000; of these, 85,000 are under HAMP. Still, the Treasury says that the bank has another 375,000 mortgages that already meet HAMP terms. In other words, Bank of America has been shockingly negligent in its efforts to modify mortgages. The Treasury reports that the bank's performance is far worse than that of the other large banks. Alternatively, Treasury could be wrong about the mortgages; Bank of America may be refusing to modify mortgages for homeowners who appear to qualify for the HAMP terms because it knows the data Treasury relied upon is false. Their unusually low rate of HAMP modifications could be the result of the extraordinarily high rate of mortgage fraud at Countrywide.

Bank of America has admitted that HAMP's "implicit" purpose is to help the banks that made the fraudulent loans -- not the borrowers. That goal was the same goal underlying the decision to extort FASB to gimmick the accounting rules -- delaying loss recognition. For example, as reported by Jon Prior
BofA Merrill Lynch analysts said critics of the program aren't yet vindicated on their calls that HAMP is a failure. "While the increased re-default rates will provide more 'fodder to those in the camp' that regards HAMP as a failure, we do not think the story is so simple," according to the report. The analysts said the revised re-default rates are in line with what they expected. While the "explicit goal" of HAMP to help 3m to 4m homeowners "appears unattainable at this point," its "implicit goal" to stall the foreclosure process and provide some order to the flow of properties into REO status has been achieved, according to the report. "In our view, the implicit goal has been one of the key reasons for the stabilization in home prices," according to the BofA Merrill Lynch report.

HAMP's parallel goal is funneling more money to the banks that induced the fraudulent loans. Data indicate that neither the HAMP modifications nor those undertaken independently by the banks actually benefit homeowners. Most debtors eventually default even on the modified mortgage and end up in foreclosure. Further, many reports indicate that banks encourage homeowners to miss payments so that they can qualify for HAMP, then use the delinquencies as an excuse to evict homeowners. Most importantly, as we reported, half of all homeowners are already underwater in their mortgages, or nearly so. Bank of America representative Rebecca Mairone does not report how many of these mortgages undergoing mods are underwater, but given the massive lender fraud that included overvaluation during the property appraisal process (in other words, even before property values fell these mortgages were probably underwater), it is likely that most are. Since the modification merely lowers the monthly payment but leaves the balance unchanged, the homeowners remain underwater. What this means is that homeowners are left with a terrible investment, paying a mortgage that is far larger than the value of the home. Because most modifications will lead to eventual default, all they do is to allow the bank to squeeze more life savings out of the homeowner before taking the home. Bank of America wants to be congratulated for such activity.

Meanwhile, Bank of America expects to receive billions of dollars for its participation in HAMP. The top three banks (JPMorgan Chase and Wells Fargo being the others) will share $17 billion because HAMP pays servicers, investors and lenders for restructuring. These top 3 banks service $5.4 trillion in mortgages, or half of all outstanding home mortgage loans. Yet, as Phyllis Caldwell, Treasury's housing rescue chief has testified, there is no proof that these banks have any legal title to the loans they are modifying and foreclosing. In Bank of America representative Rebecca Mairone's response to us, she does not respond to, let alone contest, the fact that her bank, as well as other banks, has been illegally foreclosing on properties -- illegally removing people from their homes. Instead, she lists characteristics of those homeowners on which Bank of America might be illegally foreclosing: they are unemployed, they have not made payments in many months, a third no longer occupy their homes, and so on. It is interesting that she completely ignores all the important issues at hand with respect to the "deadbeat" homeowners. How many of these homeowners were illegally removed from their homes so that they became vacant?

Does Bank of America hold the "wet ink" notes on any of these homes, as required by 45 states? How many of these homeowners were unemployed or otherwise financially distressed when the loans were originally made? How many of the mortgages were fraudulent from the very beginning: low docs, no docs, liar loans, NINJA's (all specialties of Countrywide)? Without addressing these questions, Bank of America cannot claim to have demonstrated that the foreclosures were appropriate, no matter how many years borrowers might have been delinquent.

Unfortunately, the non-response to the crises caused by Bank of America's frauds exemplifies their response to our reporting. It does not engage the points we made. It is a pure PR exercise. Bank of America also wants praise for having "stepped up" to purchase Countrywide, and asserts that if it had not done so, the "failure of [Countrywide] would have been devastating to the economy, the markets, and millions of homeowners." We have explained why this was not true of Countrywide or Bank of America. Receiverships of fraudulent banks preserve, not destroy, assets. Countrywide and its fellow fraudulent lenders and sellers of toxic mortgages "devastat[ed] the economy, the markets, and millions of homeowners," as Citicorp's response put it. A receiver would have fired Countrywide's fraudulent senior leaders. Bank of America, by contrast, put them in leadership roles in major operations, including foreclosures, where they could commit continuing frauds.

Bank of America did not purchase Countrywide for the good of the public. It purchased a notorious lender to feed the ego of their CEO, who wanted to run the biggest bank in America rather than the best bank in America. They certainly knew at the time of the purchase that is was buying an institution whose business model was based on fraud, and it had to have known that a substantial portion of Countrywide's assets were toxic and fraudulent (since Bank of America's own balance sheet contained similar assets and it could reasonably expect that Countrywide's own standards were even worse). The response does not contest the depth of the bank's insolvency problems should it be required to recognize its liability for losses caused by its frauds.

Here is how current CEO explained the decision to acquire Countrywide:
The Countrywide acquisition has positioned the bank in the mortgage business on a scale it had not previously achieved. There have been losses, and lawsuits, from the legacy Countrywide operation, but we are looking forward. We acquired the best mortgage servicing platform in the country, and a terrific sales force.

Bank of America's response to our articles ignores its foreclosure fraud, which we detailed in our articles. News reports claim that the bank sent a 60 person "due diligence" team into Countrywide for at least four weeks. The Countrywide sales staff were notorious, having prompted multiple fraud investigations by the SEC and various State attorneys general. The SEC fraud complaint against Countrywide emphasized the games it played with the computer system. Countrywide had a terrible reputation for its nonprime lending. Nonprime loans were already collapsing at the time of the due diligence, the FBI had warned about the epidemic of mortgage fraud, and the lending profession's anti-fraud firm had warned that liar's loans were endemically fraudulent. Is it really possible that Bank of America's due diligence team missed all of this and that the CEO thought even months later that the Countrywide lending personnel and Countrywide's computer systems were exceptionally desirable assets?

The obvious questions we have for Bank of America about the due diligence are:

How did you determine the losses in Countrywide's assets?
How large were the market value losses at that time?

How large are the market value losses now?

Which members of the due diligence team were assigned to determine the incidence of fraud in various loan categories? What did they find?

What actions did BofA take in response to finding the incidence of mortgage and accounting/securities fraud?

Even Bank of America now acknowledges that Countrywide's computer system and personnel were defective:
After buying Countrywide, Bank of America decided to adopt the Calabasas, Calif., company's homegrown mortgage-servicing technology. For more than a year, though, the combined company used two core systems that didn't communicate with each other. The company's resources were strained by the integration, the need to roll out new loan-modification programs and rising delinquencies. "We knew it would be challenging," says one executive involved in the integration. Bank of America soon discovered that information was missing from many Countrywide loan files, making it more difficult to communicate effectively with borrowers. "You would shake your head and say: How can that be?" this executive says.

It didn't help that many Countrywide executives were let go during the integration, with Bank of America installing its own employees in key posts. Such moves are routine in corporate acquisitions. Former Countrywide executives ran the servicing operation until recently, says Dan Frahm, a company spokesman.

Bank of America says no home-loan servicer could have anticipated the crushing workload caused by economic turmoil, falling home prices and the foreclosure epidemic. The bank did its "best" in "difficult and an unforeseen set of circumstances," says Mr. Mahoney, the head of public policy.

We explained in our initial posts why accounting control frauds typically have very poor record keeping. They are wrong to claim that no "servicer" could anticipate that making fraudulent loans would cause severe losses. Countrywide was perfectly poised to know how extensive fraud was in nonprime lending and the sale of nonprime paper. Indeed, its CEO predicted disaster.

Bank of America's computer problems aligned with its senior officers' interest in hiding its losses, as reported by Michael Powell:

The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank's system repeatedly asked for and lost the same information and generated inaccurate responses. In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices. But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance. Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.


Any competent due diligence team would have seen obvious warning signs within hours of entering Countrywide's offices. Countrywide openly violated the law on record keeping with impunity. Gretchen Morgenson reported on such practices on August 26, 2007:

Independent brokers who have worked with Countrywide also say the company does not provide records of their compensation to the Internal Revenue Service on a Form 1099, as the law requires. These brokers say that all other home lenders they have worked with submitted 1099s disclosing income earned from their associations. One broker who worked with Countrywide for seven years said she never got a 1099. "When I got ready to do my first year's taxes I had received 1099s from everybody but Countrywide," she said. "I called my rep and he said, 'We're too big. There's too many. We don't do it.' " A different broker supplied an e-mail message from a Countrywide official stating that it was not company practice to submit 1099s. It is unclear why Countrywide apparently chooses not to provide the documents. More than 85% of the bank's 1.3 million mortgage customers now at least 60 days behind on their payments got their loans through Countrywide. The $4 billion deal also saddled Bank of America with technology problems, paperwork glitches and cultural tension. The servicing unit now has its fourth leader in roughly two years.


Is it too much to expect of Bank of America's due diligence team that it might have looked at publicly available reports?

As we explained, fraud begets fraud. Bank of America created over $4 billion in "goodwill" and placed it on its books as an asset when it paid money to acquire Countrywide at a time when it was deeply insolvent on a market value basis. Instead of acquiring an asset, they got thousands of fraudulent employees and officers, a failed computer system and catastrophic losses. So, we have a question for Bank of America, its auditors, and the SEC: why haven't you written off that entire goodwill account?

Given the fact that we have obtained B of A's attention (and that of the some administration officials), we ask the following questions that the public needs to make intelligent policy decisions.
Has Bank of America conducted a review of the bank's assets that AMBAC reviewed and found a 97 percent rate of false reps and warranties?

If so, who conducted the review, and what rate of false reps and warranties did they find? Does Bank of America agree that liar's loans have extremely high fraud rates?

Does Bank of America agree that an honest secured lender would never seek to inflate an appraisal?

Does Bank of America agree that a competent, honest secured lender would prevent others from frequently inflating appraised values?

Does Bank of America agree that appropriate home mortgage underwriting can minimize adverse selection and produce a positive expected value to home lending?

How many fraudulent mortgage loans made by Countrywide has Bank of America identified?

What is Bank of America's procedure when it finds suspicious evidence of a fraudulent loan?

How many fraudulent mortgage loans, by year, since 2000, have Countrywide and Bank of America identified.

How many suspicious activity reports (SARs) did Bank of America file concerning mortgage fraud, by year, for the period 2000-to date? What are the position titles of the three most senior Bank of America managers that were a subject of the SARs filed by the bank?

How many SARs did Countrywide file, by year, for the period 2000 on?

How many mortgage loans or securities did Countrywide and Bank of America sell under false reps and warranties?

What was the allowance for loan and lease losses (ALLL) (aggregate amount and relevant ratios) provided by Countrywide and by Bank of America, each year from 2000 on for mortgages and mortgage securities? If it varied by type of mortgage provide the ALLL for each type.

Which years does Bank of America consider Countrywide's ALLL to be adequate?

Has Bank of America reviewed Countrywide's nonprime loans for fraud incidence, fraud losses, and the incidence of lender fraud and fraud by the lender's agents? Please provide the results.

What has Bank of America done to remedy the injuries that borrowers suffered through loan or foreclosure fraud by them or Countrywide?

Does Bank of America agree that Countrywide's nonprime lending was often conducted in a manner that was unsafe and unsound?


Does Bank of America agree that Countrywide's record keeping was not adequate and required substantial improvement?

At current market value of its assets, just how insolvent is Bank of America

How much can the bank sell its toxic assets for in today's market?

What is the value of mortgages and mortgage backed securities held by Bank of America for which it has no clear title?

How many MBSs has the bank sold to investors for which it does not hold the notes that are required?

What is the bank's current estimate of losses it will suffer in court due to lawsuits by investors?

The top four banks are holding434 billion in second liens (good only if the first lien -- the mortgage -- is paid), and carrying these on their books at 90% of face value. What are Bank of America's reasonably expected losses on second liens against properties that are delinquent, in foreclosure, or likely to go into foreclosure?

How large a sample of subprime and liar's loans did BofA's due diligence team review?

What likely mortgage fraud incidence did BofA's due diligence team discover? What did they report to BofA with regard to fraud incidence? What changes in lending and personnel did BofA implement in response to these findings?

Bank of America has not responded to Bill Black's prior requests that it terminate the services of its openly racist chief advisor in Germany: Hans-Olaf Henkel. We request a response.



Bloomberg is willing to publish one, too:

http://www.bloomberg.com/news/2010-11-0 ... -weil.html

Bank of America Edges Closer to Tipping Point: Jonathan Weil
By Jonathan Weil - Nov 3, 2010 9:00 PM GMT-0400
Bloomberg Opinion

It was only last April that Bank of America Corp. was making fools out of the doomsayers who had called for its nationalization a year earlier. Taxpayers had gotten their bailout cash back. Investors who bought its shares at the bottom were making a killing. Government leaders lauded the company’s rescues, both of them, as a great success.

Now the bank may be on the verge of trouble again. Its stock has fallen 41 percent since April 15. Mortgage-bond investors are demanding untold billions of dollars in refunds. The foreclosure fiasco is metastasizing. A member of the Troubled Asset Relief Program’s oversight panel, AFL-CIO attorney Damon Silvers, openly worried at a hearing last week about the risk that Bank of America might need another bailout.

A few more months like the last one, and we may be wishing Bank of America had never returned its $45 billion of TARP money.

You wouldn’t know there’s anything wrong with Bank of America by an initial look at its balance sheet. The company showed common shareholder equity, or book value, of $212.4 billion as of Sept. 30. And its regulatory capital ratios have risen steadily throughout the year.

Tipping Point

Judging by its shrinking stock price, though, investors are acting as if Bank of America is near a tipping point. Its market capitalization stands at $115.6 billion, or 54 percent of book value. That’s the second-lowest price-to-book ratio among the 24 companies in the KBW Bank Index, and well below the 76 percent ratio the company was at in October 2008 when it landed its first round of TARP dough. Put another way, the market is saying there’s a $96.8 billion hole in Bank of America’s balance sheet.

When I asked Jerry Dubrowski, a Bank of America spokesman, about the disparity, he said: “I’m not going to comment on the book value and the stock price.”

It may be the shares are a bargain at $11.52, if the company’s books are right. Another plausible scenario is that Bank of America’s management, led by Chief Executive Officer Brian Moynihan, has lost so much credibility with investors that the stock’s decline might start feeding on itself.

The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet is that it’s largely impenetrable. Some portions, though, are so delusional that they invite laughter. Consider, for instance, the way the company continues to account for its acquisition of Countrywide Financial, the disastrous subprime lender at the center of the housing bust, which it bought for $4.2 billion in July 2008.

Goodwill Purchase

Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.

Dubrowski, the company spokesman, declined to comment when I asked him why not. In its latest quarterly report with the SEC, Bank of America said it had determined the asset wasn’t impaired. It might as well be telling the public not to believe any of the numbers on its financial statements.

No Surprise

Combine that with Bank of America’s reaction to the robo- signer scandal. (Working on it! Wait, halt foreclosure sales! No, restart them! Whoops, still checking records!) Add in the $141.6 billion of home-equity loans on Bank of America’s books, the real value of which is unknown. And it should be no surprise that the company’s stock price has been plunging.

So, does Bank of America need to issue new common stock to raise capital? Its executives say no. They point to the usual regulatory benchmarks, as well as their own calculations of tangible common equity. This is a bare-bones capital gauge, showing a company’s ability to absorb future losses, which excludes preferred stock and most intangible assets.

Using Bank of America’s $129.5 billion figure for tangible common equity, though, that’s still about $14 billion more than the company’s market cap. So the market isn’t just discounting the intangibles, most of which don’t count in regulatory capital. Investors are wary of the company’s other numbers, too.

Artifice of Strength

The tough part for Bank of America executives is that the company’s future may be out of their hands. Writing off more worthless assets or boosting reserves for future losses might help their credibility. (The bank wrote off $10.4 billion of goodwill unrelated to Countrywide last quarter.) Or, the market might perceive such moves as a sign that the artifice of strength is broken. It’s hard to tell.

As for the government’s too-big-to-fail guarantee, it’s probably still there. But who knows? Republicans have won back the House. The answer is up in the air.

The only certainty is there is none, aside from the knowledge that Bank of America’s top executives have no idea what goes on inside the bowels of their company. For all we know the stock could double, or be a donut. The fate of the financial system hangs in the balance. Once again, we’re all on the hook.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net


MERS fraud:

http://news.firedoglake.com/2010/11/21/ ... -question/

Deposition: Countrywide Never Sent Mortgage Notes to Trust; Mortgage-Backed Securities in Question
By: David Dayen Sunday November 21, 2010 12:01 pm


Christine at Foreclosure Industry gives her 10 reasons why the MERS problem cannot be fixed by legislation, and it’s a pretty good list. I would add that it’s simply not the only problem, or even the biggest problem, that the banks have. Of far bigger importance is the possibility that the trustees for the mortgage-backed securities they created never secured the assets from the originators. If the notes never transferred to the trust, there’s no way to retroactively do that now; the trusts are governed by very specific pooling at servicing agreements that for the most part give the trust 90 days to transfer all the required assets. You cannot transfer the loan after it’s slipped into default, 3 or 4 years after setting up the trust. It violates the laws and contracts under which the investors purchased the securities.

Now we have documented evidence, beyond anecdote, that Countrywide, one of the largest subprime lenders, which securitized almost all of the loans they made, never sent the notes to the trust. In a deposition provided to a US Bankruptcy Court in the District of New Jersey, Linda DeMartini, a supervisor for Bank of America Home Loans (BofA bought Countrywide in 2008), admitted that the original notes never transferred from Countrywide into the trusts.

The new allonge was signed by Sharon Mason, Vice President of Countrywide Home Loans, Inc., in the Bankruptcy Risk Litigation Management Department. Linda DeMartini, a supervisor and operational team leader for the Litigation Management Department for BAC Home Loans Servicing L.P. (“BAC Servicing” V testified that the new allonge was prepared in anticipation of this litigation, and that it was signed several weeks before the trial by Sharon Mason.)

As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affixed to the note. She testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents.

(An allonge is a slip of paper appended to a mortgage agreement, which gives room for signatures that function as an endorsement of the document.)

The entire court document is below.

CASE FILE New Jersey Admissions in Testimony Notes Never Sent to Trusts Kemp v Country Wide
http://www.scribd.com/doc/43537304/CASE ... untry-Wide

This is an enormous deal. If Countrywide never gave up possession of the note, then the trust has no standing to foreclose whatsoever. It also means that investors in the MBS don’t actually have securities backed by mortgages. The “allonge” appears to be an effort to clear up this situation, and it was signed years after the fact, well past the deadline of the pooling and servicing agreement, and not even affixed to the note as required by law.

This is a deposition from one supervisor, but it could mean that all mortgage pools that Countrywide sold are suspect. That would amount to perhaps hundreds of billions of dollars in MBS. And the law appears to be air-tight on this, and not governed by the Constitution but New York trust law and the specifics of the pooling and servicing agreement.

Now, tell me again how the banks are planning to get out of this.


Reader adds a comment:

Now, tell me again how the banks are planning to get out of this.

Are you kidding? They get out of this by genning up public panic about the consequences of wholesale MBS collapse, thereby getting Congress to pass some kind of “national emergency” handwaving that allows the notes to be transferred at this late date.

Such things are so easy when our political discourse is completely captured by people who serve at the pleasure of the banksters and their allies, and consumed by people who don’t know their ass from a public park bench when it comes to finance and economics.


http://www.dailyfinance.com/story/credi ... /19728402/

Countrywide's Mortgage Document Errors May Doom Bank of America
By ABIGAIL FIELD
Posted 1:30 PM 11/22/10

Testimony in a New Jersey foreclosure case decided last week may spell big trouble for Bank of America (BAC). If what one bank employee said on the stand proves to be accurate, paperwork problems it acquired when it purchased the failing mortgage provider Countrywide in 2008 could leave BofA on the hook for billions of dollars.

As first reported by Kate Berry for American Banker, Linda DiMartini, a supervisor and operational team leader for the Litigation Management Department of BAC Home Loans Servicing, testified in the foreclosure case of John T. Kemp that it was "customary for Countrywide to maintain possession of the original note and related documents."

If that's true, then Bank of America may discover that it has millions of loans on its books that it thought it had transferred to trusts that issued mortgage backed securities, because 96% of Countrywide loans were ostensibly securitized. As the Congressional Oversight Panel explained, that outcome alone could cause massive damage to a bank's balance sheet. And as bad as that would be, it isn't the only problem that could result from Countrywide hanging on to the notes.

If the mortgage-backed securities aren't in fact "mortgage-backed," investors who bought them could be able to force BofA to buy the securities back. A significant number of buybacks could on its own destroy BofA's balance sheet. Nor could BofA stave off either outcome retroactively by delivering those notes today. First, the contracts that created the trusts would typically forbid transferring the loans into the trusts now. Second, even if somehow that could happen, such a transfer would destroy the special tax status the mortgage backed securities enjoy and give the investors a different reason to put back the securities or sue over them.

Retaining Documents While Servicing the Loans

At oral argument, BofA's attorney conceded that DiMartini's testimony was accurate and that as a result, BofA had failed to deliver the note at issue in that case to the trust under the contract or otherwise applicable law:
"[A]lthough Your Honor is right and the UCC and the Master Servicing Agreement apparently requires [physical delivery of the note to the trustee], procedure seems to indicate that they don't physically move documents from place to place because of the fear of loss and the trouble involved and the people handling them. They basically execute the necessary documents and retain them as long as servicing's retained. The documents only leave when servicing is released."
The judge ominously replied: "They take their chances."

Bank of America, via its spokesman Larry Platt, who is a partner at K&L Gates in Washington, told DailyFinance:
"Countrywide's policy and practice has been and remains to fully comply with the pooling and servicing agreements, including forwarding any necessary documents to the trustee. The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked. A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee."
Bruce Levitt, the attorney representing Kemp commented:
"DeMartini was flown to New Jersey from California to testify as the document custodian, the person BofA chose to get the note and other documents admitted as evidence. She was refreshingly unrehearsed; she testified with confidence and candor. She wanted the judge to understand that BofA was very careful with the notes."
Moreover, if Platt is right and Countrywide always delivered the notes, why did BofA's attorney in the Kemp case make the admission to the contrary quoted above?

If Countrywide didn't deliver the notes, how many loans are at issue? Well the loan in question in the specific court case -- Kemp v. Countrywide Home Loans -- was supposedly securitized in June 2006. So securitizations involving Countrywide loans for at least some time before that date and certainly thereafter are affected. And this case begs the wider question: Is it really possible that it was only Countrywide that followed the practice of not physically delivering the documents of securitized mortgages?

"There's been talk on the street for years that banks didn't send the notes up the line when they did securitizations," explained Max Gardner, a consumer bankruptcy attorney not affiliated with this case but who has litigated foreclosures based on bad bank documents for years. "But this is the first time I've seen someone under oath admit there was a policy not to deliver the notes. I had to read it twice to make sure that's really what she said, but she did: It was customary."

The Kemp Case


Bank of America made at least three attempts to fix its note problem in the context of the Kemp bankruptcy case. To prove it had the right to foreclose on Kemp's house, BofA needed to show that Bank of New York, the trustee for the 2006 securitization, had the right to foreclose. If BoNY had the right to foreclose, BofA could foreclose on its behalf. But for BoNY to have that right, the trust had to have the note and mortgage, which is why Countrywide's hanging on to the notes was a problem.

One effort BofA made was to file an assignment of mortgage and note to BoNY from March 2007. But under the contracts for securitizations in general -- those under New York law, which is most of them -- that assignment would have been too late, and thus void. The judge didn't address that issue, simply noting that the note wasn't delivered, so the assignment didn't cure BofA's problem.

Related Stories
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DiMartini also admitted that another document -- an "allonge" -- that BofA submitted to try to solve its note problem hadn't been created in 2006, as BofA was implicitly suggesting by giving it to the court, but had been created only a few weeks before, specifically for the Kemp trial. And created sloppily at that: It referred to the trust as "6006-8" instead of "2006-8." Again, the judge didn't address all the problems that flowed from the timing of the document's creation because the note was not delivered, which meant that BofA's problem remained.

BofA made at least one additional attempt to solve its note problem: At one point, it filed a "lost note affidavit" claiming the original note had been lost. Given DiMartini's testimony and the bank's later "discovery" of the note, BofA's attorney asked the judge to disregard that filing.

Clouded Title Means No Foreclosure

For Kemp, the upshot of all these document problems is that the claim of Bank of New York via BofA to get paid under Kemp's mortgage was disallowed by the bankruptcy judge.

Assuming the case follows the normal course going forward, that will mean that neither bank will be able to foreclose on Kemp's house, and his mortgage debt will become unsecured debt -- the banks will have to stand in line with the credit card issuers and get paid only a portion of the principal.

If it's true the securitization trusts routinely didn't get notes delivered from Countrywide, then all those properties -- millions of properties -- could have clouded titles. That hurts many people outside of the bank, because clouded title makes selling those properties much harder, and leaves the current owners in a kind of legal limbo. As the Congressional Oversight Panel warned:Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse. ... If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions.
So much for the banks' claims that these paperwork problems are technicalities that will be quickly resolved.


Dean Baker with a nice, short big-picture wrap-up:

http://counterpunch.org/baker09292010.html

September 29, 2010
How Banks Really Work
Foreclosure Funny Business


By DEAN BAKER

Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine print provision that we overlooked. Sometimes begging by good customers can win forbearance, but usually we are held to the written terms of the contract no matter how buried or convoluted the clause in question may be.

That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

The problem is that when mortgages got sliced and diced into various mortgage-backed securities it became difficult to follow who actually held the title to the home. Often the bank that was servicing the mortgage did not actually have the title and may not even know where the title is. As a result, if a homeowner stopped paying their mortgage, the servicer may not be able to prove that they actually have a claim to the property.

If the servicer followed the law on carrying through foreclosures then it would have to go through a costly and time-consuming process of getting its paperwork in order and ensuring that it actually did have possession of the title before going to a judge and getting a judgment that would allow them to take possession of the property. Instead banks got in the habit of skirting the proper procedures and filling in forms inaccurately and improperly in order to take possession of properties.

GMAC, the former financing arm of GM, has become the poster child for these sorts of practices. Jeffrey Stephan, a leader of one of its foreclosure units, acknowledged that he had signed thousands of affidavits claiming that he had reviewed documents that he had never seen.

In addition to being a major subprime lender during the heyday of the housing bubble, GMAC -- following its collapse last year -- also has the notoriety of being primarily owned by the federal government. This fact may ensure greater accountability at GMAC, but there is no reason to believe that its practices are qualitatively different than those of other servicers carrying through foreclosures. The basic point is that the banks foreclosing on homes don’t feel that they should be held to the letter of the law like ordinary people.

As we approach the two-year anniversary of the Troubled Asset Relief Program it is certainly understandable that the big banks would think that the laws that apply to others don’t apply to them. After all, the lesson of the TARP was that when the banks got themselves into trouble with their reckless lending, the taxpayers would come to the rescue with whatever loans and guarantees were needed to keep them in business.

In fact, many of the bankers who were begging Congress for below-market loans two years ago are now bragging about having paid back the money with interest. This should prompt ridicule. Instead, all the reporters and columnists who were too thick to see an $8 trillion housing bubble are repeating the banks’ lines and telling us how happy we should be about the bailouts.

In the financial crisis of two years ago, these banks would have been forced to pay enormous interest rates to borrow money in private markets. This would have pushed most of them into bankruptcy.

Instead, the Treasury and the Fed gave them money at near-zero cost. This was an enormous subsidy that allowed them to stay in business. It’s nice that the banks tossed us a few nickels in interest, but the taxpayers preserved trillions of dollars in wealth for their shareholders, top executives and creditors. We would have a very different economy, with a very different wealth distribution, if we had allowed the magic of the market to do its work on the financial industry.

But, that’s history.

[NO. - Ed.]

The current issue is whether we will again grant special treatment to the financial industry by allowing them to skirt the legal procedures required for foreclosures. In the land of endless affirmative action for the rich, the smart money is on the banks. After all, huge multi-national banks can’t be expected to read all the fine print that binds the rest of us.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.
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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 3:01 pm

Sorry but M. Hudson just keeps singing it!



http://www.counterpunch.org/hudson11252010.html

November 25, 2010
The Endless Thanksgiving
Next Up: a "Flat Tax" for the Rich

By MICHAEL HUDSON

The danger the United States faces today is that the government debt crisis scheduled to hit Congress next spring (when Republicans are threatening to vote against raising the federal debt limit as the government deficit soars) will provide an opportunity for the wealthy to give a coup de grace on what is left of progressive taxation in this country. A flat tax on wage income and consumer sales would “free” the rentiers from taxes on their property.

All governments have to levy taxes – that is, they have to tax somebody. Naturally, the super-rich would like this tax to be shifted off their shoulders onto those who have to work for a living. In diametric opposition to Adam Smith and other putative “founding fathers” of “free market” neoliberalism, the super-rich want to shift taxes off “free lunch” economic rent – off interest, dividends, rents and capital gains – onto wage-earners.

This tax shift already has been underway for the past thirty years. It has doubled the proportion of the returns to wealth (interest, dividends, rents and capital gains) enjoyed by the wealthiest 1 per cent, from a reported one-third in 1979 to an estimated two-thirds of the U.S. total today.

This regressive tax shift off wealth onto wage earners has occurred in three ways. The largest and most egregious was the Greenspan Commission’s ploy of moving the cost of Social Security and Medicare out of the general budget (where it would have to be financed by taxpayers in the higher brackets) onto the bottom of the scale in 1982.

Instead of being treated as “entitlements” paid by the highest tax brackets, it is treated as “user fees” by employees with a cut-off (currently about $102,000) for higher-income earners. The pre-saved “Social Security fund” was invested in Treasury bills and then lent to the government – enabling it to cut taxes on the higher brackets. “Social Security and Medicare” became a euphemism for giving the government enough “forced saving” of labor so that the Treasury could cut taxes on the higher income and wealth brackets.

This First Great Republican Tax increase was folded into a reduction in tax rates across the board – above all on the highest tax brackets. This has been ongoing since 1981. The 1981 tax “reform” also gave an accelerated depreciation allowance to absentee property owners, permitting them to pretend that their real estate was losing value even as it was soaring in market price. The effect of this “fictitious property accounting” was to free the real estate industry as a whole from having to pay income tax. (The loophole was not available to homeowners!) The rental income thus “freed” was available to be paid to banks as interest.

Meanwhile, at the state and local level, governments have scaled back property taxes and replaced them with income taxes and sales taxes. These taxes fall mainly on wages and on consumer goods, not financial and property income.

The trick has been for Republicans (and “Blue Dog” Democrats) to pose as “tax cutters” rather than tax shifters. Many wage earners now pay more in FICA paycheck withholding and other taxes cited above than they do in income tax. These changes over the past thirty years have reversed the 20th century’s tendency toward progressive taxation with a regressive tax system.

The 2000 Republican presidential primaries saw Steve Forbes run on a plank that would be the capstone of this tax shift off wealth: a “flat tax,” one that would do away with taxing the wealthy more than blue-collar labor. Mr. Forbes was laughed out of the presidential primaries for proposing this flat tax. It was promoted as being “tax simplification.” The problem was that it is so “simple” that it falls only on employees and their employers as a wage tax.

The details are much more regressive than seem at first glance. The flat tax actually would tax wage earners much more steeply than the wealthy, whose income it would largely exempt! The flat tax is supposed to fall on employment, not returns to wealth. Employees and their employers would pay the tax, as they pay today’s 12.4 per cent FICA paycheck withholding, but the flat tax would not be levied on financial and property income.

The flat tax is supposed to be accompanied by a European-style regressive value-added tax (VAT). By taxing “value,” it essentially falls on labor – as in “the labor theory of value.” The tax does not fall on “empty” pricing in excess of value – what the classical economists termed “economic rent,” that element of price (and income) that has no counterpart in actual cost of production (ultimately reducible to labor) but is a pure free lunch: land rent, monopoly rent, interest and other financial fees, and insurance premiums. This economic rent is the major return to wealth. It is grounded in the finance, insurance and real estate (FIRE) sector.

The effect of untaxing the FIRE sector is twofold. First, it increases the power of wealth, privilege, monopoly rights and property over living labor – including the power of hereditary wealth over the living. Second, it helps “post-industrialize” the economy, creating a “service” economy. A service economy is mainly a FIRE-sector economy.

Can a regressive flat-tax be pushed through U.S. Congress?

The wealthy want just what bankers want: the entire economic surplus (followed by a foreclosure on property). They want all the disposable income over and above basic subsistence – and then, when this shrinks the economy, they want the government to sell off the public domain in “privatization” giveaways, and they want people to turn over their houses and any other property they have to the creditors. “Your money or your life” is not only what bank robbers demand. It is what banks themselves demand, and the wealthy 10 per cent of the population that owns most of the bank stock.
And of course, the wealthy classes want to free themselves from the share of taxes that they have not already shed. The flat-tax ploy is their godsend.

Here’s how I think the plan is intended to work. Given the fact that voters have already rejected the flat tax in principle, it can only be introduced by fiatunder crisis conditions. Alan Simpson, President Obama’s designated co-chairman of the “Deficit Reduction Commission” (the euphemistic title given to what is in reality a “Shift Taxes Off Wealth Onto Labor” commission) already has suggested that Republicans close down the government by refusing to increase the federal debt limit this spring. This would create a fiscal crisis and threat of government shutdown. It would be a fiscal 9/11, for the Republicans to trot out their “rescue plan” for the emergency breakdown of government.

The result would cap the tax shift off finance and wealth onto wage earners. Supported by Blue Dog Democrats, President Obama would shed crocodile tears and sign off on the most right-wing, oligarchic, anti-labor, anti-black and anti-minority, anti-industrial tax that anyone has yet been able to think up. The notorious Flat Tax would fall only on wage income (paid by employees and employers alike) and on consumer goods (the value-added tax, VAT), while exempting returns that accrue to the wealthy in the form of interest and dividend income, rent and capital gains.

If you think I’m too cynical, just watch …

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com



Catching up - this one's from September:

http://counterpunch.org/hudson09292010.html

September 29, 2010
A Short Tour of Junk Economics
America's China Bashing


By MICHAEL HUDSON

It is traditional for politicians to blame foreigners for problems that their own policies have caused. And in today’s zero-sum economies, it seems that if America is losing leadership position, other nations must be the beneficiaries. Inasmuch as China has avoided the financial overhead that has painted other economies into a corner, U.S. politicians and journalists are blaming it for America’s declining economic power. I realize that balance-of-payments accounting and international trade theory are arcane topics, but I promise that by the time you finish this article, you will understand more than 99 per cent of U.S. economists and diplomats striking this self-righteous pose.

The dollar’s double standard gives America an international free ride

For over a century, central banks have managed exchange rates by raising or lowering the interest rate. Countries running trade and payments deficits raise rate to attract foreign funds. The IMF also directs them to impose domestic austerity programs that reduce asset prices for their real estate, stocks and bonds, making them prone to foreign buyouts. Vulture investors and speculators usually have a field day, as they did in the Asian crisis of 1997.

Conversely, low interest rates lead bankers and speculators to seek higher returns abroad, borrowing domestic currency to buy foreign securities or make foreign loans. This capital outflow lowers the exchange rate.

There is a major exception, of course: the United States. Despite running the world’s largest balance-of-payments deficit and also the largest domestic government budget deficit, it has the world’s lowest interest rates and easiest credit. The Federal Reserve has depressed the dollar’s exchange rate by providing nearly free credit to banks at only 0.25 per cent interest. This “quantitative easing” (making it easier to borrow more) aims at preventing U.S. real estate, stocks and bonds from falling further in price. The idea is to save banks from more defaults as the economy slips deeper into negative equity territory. A byproduct of this easy credit is to lower the dollar’s exchange rate – presumably helping U.S. exporters while forcing foreign producers either to raise the dollar price of their goods they sell here or absorb a currency loss.

This policy makes the dollar a managed currency. Low U.S. interest rates and easy credit spur investors to lend abroad or buy foreign assets yielding more than 1 per cent. This dollar outflow forces other countries to protect their currencies from being forced up. So their central banks do not throw the excess dollars they receive onto the “free market,” but keep them in dollar form by buying U.S. Government bonds. So the “Chinese savings,” “yen savings” and “Euro savings” that are spent on U.S. Treasury securities (and earlier, on Fannie Mae bonds to earn a bit more) are not really what Chinese people save in their local yuan, or what Japanese or Europeans save. The money used to buy U.S. Government securities consists of the excess dollars that the American military, American investors and American consumers spend abroad in excess of U.S. earning power. To pretend that these savings are “saved up” by foreigners (who save in their own currency, after all) is Junk Economics Error #1.

By lowering U.S. interest rates to near zero, the U.S. Federal Reserve is doing what the Bank of Japan did after its financial bubble burst in 1990, when it helped Japanese banks “earn their way out of negative equity” by providing cheap credit to obtain a markup by lending to speculators and arbitrageurs to buy foreign bonds paying higher rates. This came to be known as the “carry trade.” Arbitrageurs borrowed yen cheaply and converted them into Euros, dollars, Icelandic kroner or other currencies paying a higher rate, pocketing the difference. This threw yen onto foreign-exchange market, weakening the exchange rate and hence helping Japanese automotive and electronics exporters.

This is the easy credit policy that the Fed is following today. U.S. banks borrow from the Federal Reserve at 0.25 per cent, and lend to speculators at a markup of one or two percentage points. These speculators then look for companies, government bonds, corporate stocks and bonds and any other asset in a foreign currency that they believe may yield more than about 2 per cent (or that are denominated in currencies that may raise in price against the dollar by more than 2 per cent annually), hoping to pocket the difference.

Accusations that Japan, South Korea and Taiwan are “making their currencies cheaper” by recycling their dollar inflows into U.S. Treasury securities simply means that they are trying to maintain their currencies at a stable level. Even so, the yen’s exchange rate has risen as international borrowers pay off their carry-trade debts by re-converting the Euros, dollars and other currencies they borrowed in yen to play the arbitrage game. Paying back these foreign currency loans raises the yen’s price. To prevent this from pricing Japanese exporters out of world markets, Japan’s central bank is trying to stabilize the yen/dollar exchange rate by recycling these payments into the purchase of U.S. Treasury securities – exactly what U.S. officials accuse China of doing. It is how most central banks throughout the world are responding to the global dollar glut. They are increasing their international reserves by the amount of surplus free credit” dollars that the U.S. payments deficit is pumping out. To pretend that China is “manipulating its currency” by doing what central banks have done for over a century is Junk Economics Error #2. Back in the early 1970s, U.S. officials told OPEC governments that if they did not do this, it would be deemed an act of war. And Congress has refused to let China buy U.S. companies – so China can only recycle its dollar inflows by buying Treasury securities, thereby financing the U.S. federal budget deficit.

Every currency is managed by recycling dollars to avoid distorted exchange rates

To pretend that exchange rates are determined mainly by international trade is Junk Economics Error #3. International currency speculation and investment is much larger than the volume of commodity trade. The typical currency bet lasts less than a minute, often being computer-driven by arbitrage swap models. This financial fibrillation has dislodged exchange rates from purchasing-power parity or prices for export and imports.

The largest payments imbalances have little to do with “market forces” for imports and exports. They are what economists call price-inelastic – money spent without regard for price. This is true above all for military spending and maintenance of America’s vast network of foreign bases and political maneuverings to control foreign countries. During the 1960s and ‘70s U.S. military spending accounted for the entire balance-of-payments deficit, as private sector trade and investment remained in balance. Escalation of America’s oil war in the Near East and Pipelinistan, and the hundreds of billions of dollars spent to prop up America-friendly regimes, end up in central banks – whose main option, as noted above, is to send them back to the United States in the form of purchases of U.S. Treasury bills – to finance further federal deficit spending!

None of this can be blamed on China. But any nation that succeeds economically is assumed to be doing so at America’s expense if they do not let U.S. investors siphon off the entire surplus. This attitude that other countries should sacrifice themselves is sweeping Congress, whose China bashing is reminiscent of the Japan-phobia of the late 1980s. The United States convinced the Bank of Japan to raise the yen’s exchange rate in the 1985 Plaza Accord, and then to turn Japan into a bubble economy by flooding it with credit under the 1987 Louvre Accord. Tokyo was humorously referred to as “the 13th Federal Reserve district” for recycling its export earnings in U.S. Treasury bills, becoming the mainstay of the Reagan-Bush budget deficits that financed U.S. global military spending while quadrupling the public debt.

U.S. strategists would not mind seeing China’s economy similarly untracked by letting global speculators bid up the renminbi’s exchange rate – by enough to let Wall Street speculators make hundreds of billions of dollars betting on the run-up. “Free capital markets” and “open financial markets” are euphemisms for setting the renminbi’s exchange rate by U.S. and European currency arbitrage and capital flight. The U.S. balance-of-payments outflow would increase rather than shrink, thanks to the ability of American banks to create nearly “free” credit on their keyboards to convert into Chinese or other currencies, gold or other speculative vehicles that look to rise against the dollar.

“In a world awash with excess savings, we don’t need China’s money,” writes Prof. Krugman. After all, “the Federal Reserve could and should buy up any bonds the Chinese sell.” It’s all just electronic credit. From reading such diatribes, or President Obama’s exchange with Prime Minister Wen Jiabao at the United Nations on September 23, one would not realize that Chinese savers have not sent a single yuan of their own money to the United States.

But that is the point! Krugman should have reminded his readers that the balance of payments consists of much more than just the trade balance in today’s world swamped by financial speculation and military spending. What China “invests” in the United States are the dollars thrown off by the U.S. payments deficit. China would take a loss on the yuan-value of these dollars if it revalues its currency – as it has lost on the dollars it has turned over to Blackrock in the hope of making more than the minimal 1 per cent available on U.S. Treasury securities.

Describing China as “deliberately keeping its currency artificially weak. … feeding a huge trade surplus,” Krugman adds that “in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs.” In his reading the problem is not that America has let easy bank credit bid up housing prices for its workers and loaded down their budgets with debt service that, by itself, exceeds the wage levels of most Asian workers. This financialization is largely responsible for the U.S. trade balance moving into deficit (apart from food and arms exports). Homeowners typically pay up to 40 per cent of their income for mortgage debt service and other carrying charges, 15 per cent for other debt (credit card interest and fees, auto loans, student loans, etc.), 11 per cent for FICA wage withholding for Social Security and Medicare, and about 10 to 15 per cent in other taxes (income and excise taxes). To cap matters, the financial burden of debt-leveraged real estate and consumption is aggravated by forced saving pension set-asides turned over to money managers for financial investment in these debt-leveraged financial instruments, and “financialized” wage withholding for Social Security. All these deductions are made before any money is left to buy food, clothing or other basic goods and services.

Chinese currency appreciation would make its exports cost more. But would this spur America rebuild its factories and re-employ the workforce that has been downsized and outsourced? To imagine that long-term investment responds to immediately is Junk Economics Error #4.

The same is true of international commodity trade. “An undervalued currency always promotes trade surpluses,” Krugman explains. But this is only true if trade is “price-elastic,” with other countries able to produce similar goods of their own at only marginally different prices. This is less and less the case as the United States and Europe de-industrialize and as their capital investment shrinks as a result of their expanding financial overhead ends in a wave of negative equity. To assume that higher exchange rates automatically reduce rather than increase a nation’s trade surplus is Junk Economics Error #5. It is a tenet of the free market fundamentalism that Krugman usually criticizes, except where China is concerned.

Krugman urges the United States to do what it “normally does” when other countries subsidize their exports: impose a tariff to offset the supposed subsidy. Congress is increasing the drumbeat of accusations that China is violating international trade rules by protecting itself from financialization. “Democrats in Congress are threatening to … slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent.” The aim is to make China “lift the strict controls on its currency, which keep Chinese exports competitive and more factory workers employed.” But such legislation is illegal under world trade rules. This has not stopped the United States in the past, but the believe that it might succeed internationally is Junk Economics Error #6.

This kind of propaganda does not see the United States as guilty of “managing the dollar” by its quantitative easing that depresses the exchange rate below what would be normal for any other economy suffering so gigantic and chronic s payments deficit. What makes this situation inherently unfair is that while the Washington Consensus directs other countries to impose austerity plans, raise their taxes on consumers and cut vital spending, the Bush-Obama administration blames China, not the U.S. financial system or post-Cold War military expansionism.

The cover story is that foreign exchange controls and purchase of U.S. securities keep the renminbi’s exchange rate low, artificially spurring its exports. The reality is that these controls protect China from U.S. banks creating free “keyboard credit” to buy out its companies or load down its economy with loans to be paid off in renminbi whose value will rise against the deficit-prone dollar.

The House Ways and Means Committee is demanding that China raise its exchange rate by 20 per cent. This would enable speculators to put down 1 per cent equity – say, $1 million to borrow $99 million and buy Chinese renminbi forward. The revaluation being demanded would produce a 20,000 per cent profit, turning the $100 million bet (and just $1 million “serious money”) into making $2 billion. It also would bankrupt Chinese exporters who had signed dollarized contracts with U.S. retailers. So it’s the arbitrage opportunity of the century that lobbyists are pressing for, not the welfare of workers.

The Internal Revenue Service treats such trading gains as “capital gains” and taxes them at only 15 per cent, much less than the tax rate on earned income that wage-earners must pay. The Brazilian real has risen by about 25 per cent against the dollar since January 2009. Last week, Brazil’s state oil company, Petrobras, issued $67 billion in shares to exploit the nation’s new oil discoveries. Foreigners have been swamping Brazil’s central bank with a reported $1 billion per day for the past two weeks – about 10 times its daily average in recent months – but this was largely to absorb money entering the country to take part in last week’s issue by the national oil company.

The U.S. and foreign economies alike are suffering from the idea that the way to get rich is by debt leveraging, and that the wealth of nations is whatever banks will lend – the “capitalization rate” of the available surplus. The banker’s dream is to lend against every source of revenue until it ends up being pledged to pay interest. Corporate raiders use business cash flow to pay bankers for the high-interest loans and junk bonds that provide them with takeover credit. Real estate investors use their rental income to service their mortgages, while consumers pay their disposable income as interest (and late fees) to the banks for credit cards, student loans and other debts.

But Paul Krugman and Robin Wells blame China for Wall Street’s junk mortgage binge. Instead of pointing to criminal behavior by the banks, brokerage companies, bond rating agencies and deceptive underwriters, they take the financial sector off the hook: “Just as global imbalances – the savings glut created by surpluses in China and other countries – played an important part in creating the great real estate bubble, they have an important role in blocking recovery now that the bubble has burst.”

This sounds more like what one would hear from a Wall Street lobbyist than from a liberal Democrat. It is as if the real estate bubble didn’t stem from financial fraud, junk mortgages, NINJA loans or the Federal Reserve flooding the U.S. economy with credit to inflate the real estate bubbles and sending electronic dollars abroad to glut the global economy. It’s China’s fault for running large trade surpluses “at the rest of the world’s expense.” The authors do not explain how it helps China or other economies to let foreign investors buy their companies at a 20 per cent return and pay in dollars that must be recycled to the U.S. Treasury earning just 1 per cent. And Congress won’t let the Chinese buy U.S. companies. It blocks such inflows, managing the economy ostensibly on national security grounds – in practice a structural payments deficit.

Wall Street’s idea of “equilibrium” is for foreign countries to financialize themselves along the lines that the United States is doing, then global equilibrium could be restored. But the most successful economies have kept their FIRE-sector costs of living and doing business within reasonable bounds, and are not remotely as debt-leveraged as the United States. German workers pay only about 20 per cent of their income for housing – about half the rate of their U.S. counterparts. German practice is not to make 100 per cent mortgage loans, but to require down payments in the range of 30 per cent such as characterized the United States as recently as the 1980s.

The FIRE sector’s business plan has priced U.S. labor out of world markets. There seems little likelihood of making Chinese and German workers pay rents or mortgage interest as high as the United States? How can American economic strategists force them to raise the price of their college and university tuition so that they must take on the enormous student loans of the magnitude that Americans have to assume? How can they be persuaded to follow the high-cost U.S. practice of adding FICA-type wage withholding to the cost of living to save up pensions, Social Security and medical insurance in advance, instead of the pay-as-you-go basis that Germany quite rightly follows?

Such suggestions are a cover story for America’s own financial mismanagement. The U.S. idea for global equilibrium is to demand that that the rest of the world follow suit in adopting the short-term time frame typical of banks and hedge funds whose business plan is to make money purely from financial maneuvering, not long-term capital investment. Debt creation and the shift of economic planning to Wall Street and similar global financial centers is confused with “wealth creation,” as if it were what Adam Smith was talking about.

A Proposal

China is trying to help by voluntarily cutting back its rare earth exports. It has almost a monopoly, accounting for 97 per cent of global trade in these 17 metallic elements. These exports are “price inelastic.” There is little known replacement cost once existing deposits are depleted. Yet China charges only for the cost of digging these rare metals out of the ground and refining them. They are used in military and other high-technology applications, from guided missile steering systems and computer hard drives to hybrid electric automobile batteries. This has prompted China to recently cut back its exports to save its land from environmental pollution and, incidentally, to build up its own stockpile for future use.

So I have a modest suggestion. If and when China starts re-exporting these metals, raise their price from a few dollars a pound to a few hundred dollars. According to a theory put forth by Paul Krugman and the U.S. Congress, this price increase should slow demand for Chinese exports. It also would help promote world peace and demilitarization, because these rare metals are key elements in missile guidance systems. China should build up its national security stockpile of these key minerals for the future – say, the next prospective five years of production. Let this be a test of the junk paradigms at work.


Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com



At a conference in Brasilia, he summed up a new deal for the globe:

http://counterpunch.org/hudson09202010.html

September 20, 2010

A CounterPunch Special Feature
Challenging the Model of the North
Where is the World Economy Headed?


By MICHAEL HUDSON

Last Thursday Michael Hudson addressed the Council of Economic Advisors to the President of Brazil (CDES) . He offered an unsparing description of how the global economy is being shaped and exploited by Northern bankers. Then he outlined the ways in which Brazil and other major “BRIC” economies – Russia, Chinas, India – can steer an independent path and thus preserve and improve their nations’ condition . CounterPunch is delighted to feature here Dr Hudson’s very striking address. AC/JSC

Brasilia

Toward what goal is the world economy steering?

That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies.

Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily. But the aim is the same: to make subject populations pay – as debtors and as dependent junior trade partners. Indebted “host economies” are in a similar position to that of defeated countries. Their economic surplus is transferred abroad financially, while locally, debtors lose sovereignty over their own financial, economic and tax policy. Public infrastructure is sold off to foreign buyers, on credit and therefore paying interest and fees that are expensed as tax-deductible and paid to foreigners.

The Washington Consensus applauds this pro-rentier policy. Its neoliberal ideology holds that the most efficient path to wealth is to shift economic planning out of the hands of government into those of bankers and money managers in charge of privatizing and financializing the economy. Almost without anyone noticing, this view is replacing the classical law of nations based on the idea of sovereignty over debt and financial policy, tariff and tax policy. Ideology itself has become an economic weapon. Indebted governments have been told since 1980 to sell off their public infrastructure to foreign investors. Extractive “tollbooth” charges (economic rent) replace moderate or subsidized public user fees, making economies less competitive and painting them even more into a debt corner as the surplus is transferred abroad, largely tax-free.

What the world is experiencing in the face of today’s globalism is a crisis in the character of nationhood and economic sovereignty. Bankers in the North look upon any economic surplus – real estate rent, corporate cash flow or even the government’s taxing power or ability to sell off public enterprises – as a source of revenue to pay interest on debts. The result is a more debt-leveraged economy – in all countries. Foreign investment, bank lending, the privatization of public infrastructure and currency speculation is now viewed from this bankers’-eye perspective.

There is one great exception to relinquishing national policy to foreign control: the United States itself is by far the world’s largest debtor economy. While mobilizing creditor power to force other debtors to privatize their public sectors and acquiesce in a one-sided U.S. trade protectionism, the United States is the only nation able to issue its own currency (Treasury debt) and international bank credit without limit, at a lower interest rate than any other country, and even without any foreseeable means to pay.

This double standard has transformed the character of international finance and the meaning of capital inflows. Money no longer is an asset in the form of gold or silver bullion reflecting what has been produced by labor. Money is credit, and hence finds its counterpart in debt on the liabilities side of the balance sheet. Since the United States suspended gold convertibility of the dollar in 1971, international money – the savings of central banks – has taken the form mainly of U.S. Treasury debt, that is, loans to the United States to finance its twin balance-of-payments and budget deficits (both of which are largely military in character). Meanwhile, domestic commercial bank credit takes the form of private debt – mortgage debt, corporate debt (increasingly for debt leveraged takeovers), and even loans for speculation on financial derivatives and currency gambles.

Little bank credit has gone to finance tangible capital investment. Most such investment has been paid for out of retained business earnings, not bank loans. And as banks and brokerage houses have financed corporate takeovers, the new buyers or raiders have had to divert corporate cash flow to paying back their creditors rather than expanding production. This is how the U.S. and other economies have become financialized and post-industrialized. Their experience should serve as an object lesson for what Brazil and other countries need to avoid.

U.S. bank lending has been the major dynamic fueling a global inflation of real estate, stock and bond prices, bolstered over the past decade by European bank lending. Dollar credit (like yen credit after 1990) is created “freely” without the constraint that used to occur when capital outflows forced central banks either to raise national interest rates or lose their gold stocks. In fact, any economy today can create its own domestic credit on its own computer keyboards – those of its central bank and commercial banks. Under today’s conditions, foreign loans do not provide resources that host countries cannot create for themselves. The effect of foreign credit converted into domestic currency is merely to siphon off interest and economic rent.

It is not widely recognized that most commercial bank loans merely attach debt to existing assets (above all, real estate and infrastructure) rather than being invested in creating new means of production, or to employ labor, or even to earn a profit. Banks prefer to lend against assets already in place – real estate, or entire companies. So most bank loans are used to bid up of prices for assets, especially those whose prices are expected to rise by enough to pay the interest on the loan.

The fact that bankers can create interest-bearing debt on computer keyboards with little cost of production poses the question of whether to leave this free lunch (economic rent) in private hands or treat money creation as a public “institutional” good. Classical economists urged that such rent-yielding privileges be regulated to keep prices and incomes in line with necessary costs of production. The surest way to do this was to keep monopolies in the public domain to provide basic services at minimum cost or for free while land taxes and user fees could serve as the main source of public revenue. This principle has been flagrantly violated by the practice of erecting privatized “tollbooths” that extract rent revenue without a corresponding cost of production. This has been done in a way that benefits only a select few.

The unchecked explosion of global credit and debt – and hence, pressure to sell off natural monopolies in the public domain – is largely a result of the credit explosion unleashed after gold convertibility ended in 1971. The ensuing U.S. Treasury-bill standard left foreign central banks with no vehicle in which to hold their international reserves except loans to the U.S. Treasury. This gives the U.S. balance-of-payments deficit a free ride, which translates into a military free ride. After the Korean War forced the dollar into deficit status in 1951, overseas military spending throughout the 1950s and ‘60s equaled the entire U.S. payments deficit. The private sector was almost exactly in balance during these decades, while U.S. “foreign aid” actually generated a balance-of-payments surplus, as a result of aid tied to U.S. exports rather than to the needs of aid-recipient countries.

While other countries running trade and payments deficits must increase their interest rates to stabilize their currencies, the United States has lowered its interest rates. This has increased the “capitalization rate” of its real estate rents and corporate earnings, enabling banks to lend more against higher-priced collateral. Property is worth whatever banks will lend against it, so the U.S. economy has been able to use the dollar standard’s free ride to load itself down with an unprecedented debt overhead – an overhead that traditionally has been suffered only by countries fighting wars abroad or burdened with reparations payments. This is the Treasury-bill standard’s self-destructive blowback.

It is an object lesson for Brazil to avoid. Your nation today is receiving balance-of-payments inflows as foreign banks and investors create credit to lend against your real estate, natural resources and industry. Their aim is to obtain your economic surplus in the form of interest payments and remitted earnings, turning you into a rentier tollbooth economy.

Why would you need these “capital inflows” that extract interest, rents and profits as a return for electronic “keyboard credit” that you can create yourself? In today’s world, no nation needs credit from abroad for domestic-currency spending at home. Brazil should avoid letting foreign creditors capitalize its economic surplus into debt service and other payments.

The way to avoid this fate was outlined from the French Physiocrats and Adam Smith through John Stuart Mill and Progressive Era reformers: by ending the special privileges bequeathed by Europe’s military conquests (privatization of land rent), and by collecting “free lunch” rentier income as the tax base to save it from being privatized and capitalized into bank loans. Taxing land and resource rent lowers the cost of living and doing business not only by removing the tax burden on labor and industry, but by holding down housing and real estate prices, because whatever the tax collector relinquishes is available to be pledged to carry bank loans to bid up property prices.

In the 19th century the American System of political economy was based on the perception that highly paid labor is more productive labor, such that well-educated, well-fed and well-clothed labor undersells “pauper” labor. The key to international competitiveness is thus to raise wages and living standards, not lower them. This is especially the case for Brazil, given its need to raise labor productivity by better education, health and social support systems if it is to thrive in the 21st century. And if it is to raise capital investment and living standards free of debt service and higher housing prices, it needs to prevent the economy’s surplus from being turned into a “free lunch” in the form of land rent, resource rent and monopoly rent – and to save this economic surplus from bankers seeking to capitalize it into debt payments. This is best achieved by taxing away the potential rentier charges that turn the surplus into unnecessary overhead.

But because the wealth of nations is now calculated from the banker’s perspective, surplus income is viewed as potentially available to capitalize into debt service. Rather than using the surplus to invest in capital formation and public infrastructure, the distinguishing characteristic of our time is financialization – the capitalization of the economic surplus (corporate cash flow, real estate rent and other economic rent, and personal income over and above basic living costs) into interest payments for bank loans.

This is the business plan of bank marketing departments and is a far cry from what Adam Smith wrote about in The Wealth of Nations. Loan officers see any net flow of income as potentially available to be pledged as interest payment. Their dream is to see the entire surplus capitalized into debt service to carry loans. Net real estate rent, corporate cash flow (ebitda: earnings before interest, taxes, depreciation and amortization), personal income above basic spending needs, and net government tax revenues can be capitalized into as much as banks will lend. And the more credit they lend, the higher prices are bid up for real estate, stocks and bonds.

So bank lending is applauded for making economies richer, even as families and businesses are loaded down with more and more debt. And the easier debt leveraging becomes, the more asset prices rise. Lower interest rates, lower down payments, more stretched-out amortization periods, and even fraudulent “devil may care” lending thus increase the “capitalization rate” of real estate and business revenue. This is applauded as “wealth creation” – which turns out to be debt-leveraged asset-price inflation and can infect an entire economy.

The limit of this policy is reached when the entire surplus is turned into debt service. At this point the economy is fully financialized. Income spent to pay debts is not available for new investment or consumption spending, so the “real” economy is debt-shackled and must shrink.

The financial takeoff thus ends in a crash. That is what the world is seeing today, at least outside of Brazil and its fellow BRIC countries. For these economies, the question is whether they will follow the same financialization path.

The World Bank and IMF are Not Reformable

A document put out by the Council of Economic Advisors to the President (CDES) speaks of “reforming” the IMF, World Bank and even the United Nations. I don’t believe that this hope is realistic. As I analyzed in Super Imperialism (1972 and 2002), the World Bank and IMF are committed to a basically destructive economic philosophy.

In the case of agricultural development, the World Bank is authorized only to make foreign-currency loans aimed at increasing exports. Its lending accordingly has been for roads and export infrastructure, not to develop the local economy. The effect has been to shift agricultural patterns away from feeding domestic populations with domestic grain crops, to exporting plantation crops. The latter’s global oversupply has lowered Third World terms of trade while enabling the United States and Europe to become major grain exporters.

This trade pattern benefits the industrial grain-exporting core while driving the periphery into food and debt dependency – for which “interdependence” has become a bureaucratic euphemism. I note that this happy-face word – interdependence – appears in the first sentence of this meeting’s brochure. It implies acquiescence in globalization, as if it is desirable in itself as mutually beneficial to all parties. But in today’s world, interdependence implies three modes of dependency: (1) food dependency, (2) military dependency, and (3) debt dependency. The Washington Consensus promoted by the International Monetary Fund (IMF), World Bank and U.S. bilateral aid reinforces these three modes of dependency, bolstering U.S. financial and military hegemony.

The drain of payments to creditors and absentee investors forces countries to balance their budgets by selling off their public domain. Credit rating agencies threaten to downgrade counties that do not “play ball” by giving up their commanding heights on the cheap. Lower bond ratings would make these countries pay much higher interest. This system traps them into letting privatizers extract economic rent.

From about 1950 to 1980, World Bank and commercial bank consortia lent governments money to put these assets in place. Now that these loans are paid off, banks are lending all over again to private buyers of these assets. The new owners erect tollbooths on this hitherto public infrastructure – and “expense” their revenue in the form of tax-deductible interest, underwriting charges, high management fees and other largely fictitious “costs of production.” Globalized accounting orthodoxy enables foreign investors to transfer their receipt of user fees and other economic rent out of the country, tax-free. This drives the host economies further into balance-of-payments deficit, leading to even more sell-offs at even steeper distress-price discounts.

In times past, population provided a military advantage, as well as supplying labor for production. But finance wields dominant control today. The lead nations are willing to see Brazil and other BRIC countries grow and export enough labor-intensive goods and raw materials to pay their growing debts. What rentier interests want is the economic surplus, in the form of debt service (interest, amortization and fees) and monopoly rents in the form of tollbooth charges for the roads and other public infrastructure that is being privatized. They add insult to injury by also demanding that governments refrain from taxing these takings, by permitting interest and other technologically unnecessary charges such as depreciation to be tax-deductible. An illusion of non-profit (and hence, non-taxable) business also is given by going along with the accounting pretense of fictitiously low transfer prices for exports.

Corporate accountants quantify these stratagems with an eye to leaving little net income to be reported and taxed. Under this false map of economic reality, seemingly empirical statistics serve mainly to preserve the deceptive neoliberal economic theory behind them.

To keep their monopoly of money creation, creditor nations demand that governments not use their central banks to do what central banks all over the world originally were founded to do: finance public budget deficits by monetizing them to become the national credit base. The pretense is that it would be inflationary for central banks to finance their government’s budget deficits. But it is no more inflationary than permitting central banks to create credit on their own keyboards!

The European Central Bank insists that governments borrow only from commercial banks and other private-sector creditors – and even that foreign bank branches in host countries can denominate loans in the currency used by the head office or other foreign currencies. Swedish branch banks in Latvia and Austrian bank branches in Hungary thus make loans denominated in Euros. Creditor-nation banks thus can invade and conquer by creating their own local electronic credit, violating the prime directive of wise financial management: never denominate debts in hard foreign currency, when your income is in soft domestic currency.

The demand that countries “balance their budgets” is a euphemism for selling off the public domain and slashing pensions and public spending on education, medical care and other basic preconditions for raising labor productivity. Such austerity demands the opposite of the Keynesian policies followed by the United States itself. Economies subjected to the Washington Consensus fall further and further behind, making the global economy more polarized and unstable. The collapse of the “Baltic Tigers” and other post-Soviet economies where neoliberal planners had a free hand stands as an object lesson for how self-destructive these policies are for nations that submit to them.

What turns out to be ironic is that the tax philosophy favoring debt leveraging rather than equity investment is destroying the creditor core economies as well as the financialized periphery. That is the blowback that Europe and North America are now experiencing. They have let free credit creation subject their own economies to debt deflation – the same dysfunctional policies that impaired Third World development from the 1960s onward!

It is to prevent the resulting shrinkage of the “real” economy – and indeed, debt peonage – that European labor unions are mounting a general strike on September 28, 2010, against austerity plans that would roll back living standards. The move by the BRIC countries to create an alternative financial system and trade and development philosophy for themselves is a kindred reaction against the neo-rentier counter-Enlightenment that is determined to undermine classical economic reform.

The Importance of Economic Ideology to Make a New Beginning

The most important factor in the economic strength of Brazil and its fellow BRIC countries is that you are not yet as debt-ridden as North America and Europe. Your advantages do indeed include your population and natural resources, but you have had these all along. What makes you so attractive to the North is that you are the remnant of the global economy that has not yet buckled under their debt burden. Your economic surplus is not yet pledged to pay debt service, so bankers eye you as not yet “loaned up.”

Your main economic problem is how to protect yourself from the proliferation of credit and debt that has dragged down the North like an invading army, along with the privatization of natural monopolies and financial privileges. Your solution must be to follow an alternative to the regressive financial and tax ideology promoted by today’s international institutions.

What is needed today is not just a “global governance revision” but an outright break from the past. Revision tends to be merely marginal, not the structural change that is called for.

When building a new foundation, it is easier to replace old institutions and start afresh than to try to modify bad institutions and retrain personnel who are committed to entrenched, dysfunctional past policies. An outstanding example of this is U.S. policy after its Civil War. To develop the logic for their economic program, the Republican Party at that time (not today’s neoliberal Republicans!) founded land-grant state colleges and endowed business schools to teach the protectionist and technology-based alternative to the British free trade doctrine being taught at the most prestigious colleges such as Harvard, Yale and Princeton. The result was the doctrine that would propel the United States to world leadership by means of protective tariffs, a national bank and public infrastructure investment.

We have before us four objectives for discussion:

(1) Globalization and labor markets under today’s push for austerity. Under the euphemism of “balanced budgets,” fiscal austerity aims to prevent countries from using their economic surplus to raise living standards. This policy is self-destructive. Austerity prevents productivity from being raised, stifling domestic markets by “freeing” government revenue for paying debt service, bailouts and other transfer payments or subsidies to the finance, insurance and real estate (FIRE) sector at home and abroad.

(2) New development indicators are indeed needed to replace the GDP accounting format with a better map of the economy. Accounting categories reflect economic theory. Classical doctrine divided economies into two parts: (A) the production-and-consumption sector that textbooks usually refer to as the “real” economy, and (B) the extractive FIRE sector (finance, insurance and real estate), which today’s mainstream analysis and GDP accounts define as producing “output” equal in value to what FIRE rentiers charge. So what used to be viewed as overhead is now treated as output, as if it were a necessary part of economic activity.

This accounting format rejects the classical definition of economic rent as the excess of market price extracted over and above the necessary costs of production. The result is merely a map of the economy as seen by a predatory bankers’-eye view of the world – a view of how they play only a productive role, as if all credit and debt leveraging were productive rather than extractive.

Obviously, this view fails to reflect today’s economic problem or how industrial economies are being post-industrialized and financialized. “The devil wins at the point where he convinces the world that he does not really exist,” quipped Charles Baudelaire. Providing privatized services, including bank credit, health insurance and other “tollbooth”-type fees at a price in excess of these necessary costs should be treated as transfer payments, not as output.

The GDP accounting format and national balance sheet analysis are asymmetrical in undervaluing land and other natural resources relative to capital and rent imputations. The pretense is that buildings grow in value even while being depreciated. Meanwhile, free market ideology deters governments from calculating the economic cost of recovering the exhaustion of mineral and subsoil wealth and forests from private exploitation. A depletion allowance is given to private investors for making holes in the ground and cutting down forests. It would be more economically fair for them to make payments to reimburse the national economy that is losing this patrimony or suffering environmental cleanup charges.

Free traders have opposed including such calculations for national depletion, cleanup or other restoration charges in national accounts. Taking them into account would reduce the gains-from-trade calculations with which neoliberal trade theory indoctrinates students and public officials. This ideological prejudice makes current practice doctrinaire, not empirical science.

The international economy needs an accounting format to calculate the national ability to pay foreign debts. In 1929 the Young Plan averted global financial breakdown by finally limiting Germany’s reparations payments for World War I in the context of calculating how much foreign exchange Germany could earn (and pay) in the normal course of trade, as distinct from simply borrowing new money or selling off assets. Trying to pay by taking on more debt or selling assets is not to be viewed as a normal ability to carry debt in equilibrium.

In such circumstances the debts should be deemed to have gone bad and be written down. The alternative is the kind of asset stripping that Iceland and Latvia are now suffering, and that Third World countries suffered in the late 1970s and ‘80s. This is the road to debt peonage, shrinking the economy and spurring emigration of the labor force as well as capital flight, benefiting the few at home and abroad.

These shortcomings prevent the GDP format from being a good guide for public policy-making. The two above problems – austerity policy and the current pro-rentier map of the economy – have promoted a bankers’-eye view of the world advocating

(3) An unsustainable development policy. Debts growing at exponential rates (“the magic of compound interest”) are not sustainable. Trying to pay them makes economies less competitive and impoverishes populations, leading to defaults both in domestic and foreign currency, and hence to social unrest.

In terms of international balance, the cost of labor is inflated by payments owed to the FIRE sector. By contrast, when trade theory was elaborated by British free traders, American protectionists and other economists in the 19th century, it was spending on food and other consumer goods that provided the basis for labor cost comparisons among nations. Today’s U.S. trade deficit, for example stems largely from the fact that homeowners typically pay up to 40 per cent of their income for mortgage debt service and other carrying charges, 15 per cent for other debt (credit card interest and fees, auto loans, student loans, etc.), 11 per cent for FICA wage withholding for Social Security and Medicare, and about 10 to 15 per cent in other taxes (income and excise taxes). So debt-leveraged real estate and consumption are aggravated by forced saving set-asides in the form of “pension fund capitalism” run by money managers. And this brings us to the topic of

(4) Global governance. Who shall set the rules? And in whose interest are they to be set? When discussing austerity in (1) above, we need to ask, “austerity for whom?” Will mortgages and other debts be written down to the ability to pay? If they are, banks and the wealthiest 10 per cent of the population will have to lose some of the financial advantage that enable them to reduce the bottom 90 per cent to a state of debt peonage. But if debts are not written down, the result will be debt deflation that can destroy entire economies. Homeowners and businesses have to use their income to pay their bankers, not spend on goods and services. So employment and national output will continue to shrink. The corrosive role of debt is the major choice facing countries today, and hence the focus of rival plans for global governance.

Summary

It seems obvious that financial reform is needed – and this requires fiscal reform as well. The fact that whatever the tax collector relinquishes is available (“free”) to be pledged to creditors as interest makes the fiscal problem part and parcel of this financial problem. The economic rent that governments relinquish is “free” to be captured by the banks, which capitalize untaxed revenue into bank loans. This is how economies load themselves down with debt. Lower taxes on rent leave more revenue available to pay interest on loans made to enable borrowers to bid up prices. Meanwhile, cutting taxes on unearned income obliges the government to make up the gap by taxing labor and tangible industrial investment more, raising their supply price, or borrowing from the banks at interest.

Today’s budget deficits thus have gone hand in hand with over-indebted economies, and with a regressive tax shift that burdens productive labor and industry. The tax systems of nearly all countries today favor debt financing – and hence, asset-price inflation – by permitting interest and financial fees to be tax-deductible, while dividends and earnings must be paid after taxes. This un-taxing of land and rent-extracting monopolies goes against the logic of Saint-Simon and other 19th-century reformers who sought to free markets from debt overhead, not to free bankers and financiers from regulation and taxation.

Today’s financialized world is paying a steep price for its rentier-sponsored reaction against classical economics. This reaction distracted attention from the fact that economies suffer a rising “free lunch” of what J. S. Mill called unearned income and unearned increments in the form of higher land rent and land prices. Rent extraction is the business plan of privatizers of public infrastructure and natural monopolies – and of their financial backers seeking to provide buyout loans. The tragedy of our epoch is that most credit is extended to buy rent-extracting opportunities, not for productive capital formation. Banks prefer to lend against property already in place – real estate or companies – than to finance tangible new capital formation. This poses the threat of globalization taking a corrosive form, ending in debt deflation, privatization and a rentier tollbooth economy rather than becoming a system of mutual gain.

The neoliberal motto of Margaret Thatcher, “There is No Alternative” (TINA), ignores the alternative advocated by two hundred years of classical economists. The original liberals – from Adam Smith and the Physiocrats through John Stuart Mill and even Winston Churchill – urged that the tax system be based on the economic rent of land so as to keep down the price of housing (and hence labor’s cost of living). The Progressive Era followed this principle by aiming to keep natural monopolies such as transportation, communication and even banks (or at least, free credit creation) in the public domain. But the post-1980 world has encouraged private owners to buy them on credit and extract economic rent, thereby shifting the tax burden onto labor, industry and agriculture – while concentrating wealth, first on credit and then via the enormous recent public bailouts of this failed financial debt pyramiding and deregulation.

This is what is shrinking the Northern economies today as they suffer from economic polarization between creditors and debtors, property owners and an increasingly insecure labor force – insecure because it is so deeply in debt that losing a job or being fired threatens loss of one’s home and solvency.

Austerity and economic shrinkage are not necessary. There is an alternative. Given the bankers’-eye view of the world promoted by the IMF, World Bank and most mainstream economists, your task must be to stay free of globalization in today’s financialized form. Your counter is simple enough: Do not permit outsiders to buy your assets and drive up your currency’s exchange rate with “computer keyboard” credit that you do not need. Commercial banking requires careful public regulation, with the government itself controlling money-creation, leaving banks to act as intermediaries. The aim of financial regulatory policy should be to make sure that Brazil’s economic surplus is invested in production to raise living standards rather than relinquishing money creation to foreign and domestic financial interests aiming mainly at currency speculation, interest and rent extraction.

You face a danger from mounting global pressure backing policies to slash your living standards, capital investment and infrastructure spending in order to pay exponentially growing private and public debts. Unless debts are written off, or at least reduced to the reasonable ability to pay, economies throughout the world will suffer waves of foreclosure, financial polarization between creditors and debtors, and ultimately social collapse.

At issue is the concept of free markets. Are they to be free from monopoly and special privilege, or free for the occupying financial invaders and speculators? The reform of classical political economy in the 18th and 19th centuries was to keep “free lunch” rent from rising land and raw materials prices, financial credit creation and related monopolies in the public domain.

Looking back on history, we can see how the economies created by the conquerors of Europe and its subsequent colonies were based on war making and looting, seizure of the land, taxation, royal war debts – and, by the 17th century, the creation of Crown monopolies to sell off to raise the money to pay off these debts. (The South Sea and Mississippi Companies in the 1710s are the culminating examples of this practice.) This led to high-cost, debt-ridden economies in Britain and France. It was against such wasteful – and technologically unnecessary – overhead that classical economics was developed as a reform program. The main aim was to make these nations more competitive by freeing their markets from rent and monopolies, and from taxes levied mainly on labor and industry for unproductive spending on wars and empire building. A kindred aim was to reform the financial system to replace debt financing with equity investment. And increasing reform pressure grew for public subsidy of basic infrastructure, especially outside of Britain.

Neoliberals advocate the opposite policy. They define a free market as one that is free for rentiers to extract economic rent and interest. The effect is to turn the public domain into a field of tollbooths for roads and other basic infrastructure charging entry prices and user fees that are loaded with built-in financial charges, exorbitant salaries and rake-offs that raise the economy’s cost of living and doing business.

So we are brought back to how privatizing the public domain and financializing the economy is akin to military defeat. To defend themselves, the BRIC countries need to isolate themselves from global debt creation. The “dialogue” your conference calls for with regard to rules for “new global governance” is unlikely to reach a consensus under today’s conditions where the United States and EU, the World Bank and IMF are urging austerity. They are calling for a sacrifice of labor’s Social Security and pension savings in order to extract payment for the debt overhang that has been allowed to develop.

Debt leveraging and asset-price inflation have been encouraged by the past generation’s fiscal ideology giving tax favoritism for interest and capital gains. This pro-rentier tax favoritism was the opposite of classical free-market reforms and was bound to fail. Yet its sponsors have the audacity to claim Adam Smith, J. S. Mill and their followers as the patron saints of neoliberalism. Classical political economy endorsed a broadening array of public services and social support outside of the market. The United States subsidized its industrial takeoff by realizing that roads, public health and other basic services should be provided freely rather than burdened with intrusive toll charges. Neoliberal ideology asserts that such public investment and regulation is the “road to serfdom” and proposes in its place what may best be thought of as the real road to debt peonage – tax favoritism for debt leverage followed by debt deflation and austerity.

A century ago, even fifty years ago, most of the world was embarking on a program of public infrastructure investment, including central bank or treasury credit for government spending. This was the classical policy program to free economies from the rentier overhead that now is proliferating in much of the world. It is this financial, real estate and monopoly overhead that is pricing Northern Hemisphere labor and industry out of world markets – and leading its investors to look south for more to plunder.

Fortunately, Brazil and its fellow BRIC members have an opportunity to create the classical 19th-century version of free markets, checks and balances that has failed in the North.



Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com
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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 9:00 pm

.

Two recent ones from Pam Martens. I think the 10 ideas are alright far as they go. The big one (reflected in several of the proposals) is move your money (if you have any) away from the big banks and corporations and into credit unions and local businesses.

http://counterpunch.org/martens09272010.html

September 27, 2010
The SEC's Rocket Scientist: He Aimed for the Stars, He Hit ...
Scientists, Secrets and Wall Street's Lost $4 Trillion


By PAM MARTENS

Thanks to an ever growing influx of Ph.D.s from the Ivies and an insatiable demand for an algorithmic trading edge by secretive hedge funds and proprietary trading desks at the largest firms, Wall Street has become part physics lab, part casino, part black hole.

What Wall Street bears no relationship to any longer is its primary mission in the U.S. economy: to be a fair and efficient allocator of capital to worthy businesses and innovators to propel job growth while also providing a medium for allowing investors to buy or sell stocks and bonds of those businesses at a fair price.

Stock brokers who previously scoured over annual reports and price to earnings multiples and bond prospectuses to build individualized portfolios for clients based on the client’s investment time horizon and comfort level with risk are so yesterday. The big firms lean on their brokers to turn their clients’ money over to impersonal “money managers” who use incomprehensible computerized risk modeling to manage the life savings of people they’ve never met. The business motivation for this was that the earnings of the big firms would not be dependent on the brokers’ inconsistent commission streams from trading by replacing them with a steady annual stream of money management fees. These huge pools of consolidated money have now joined the huge pools of hedge fund and proprietary trading monies, leaving small investors at the mercy of giant “pools,” the exact same word that dominated investigations after the 1929 crash. (Those intensive Senate investigations of the early 30s that turned up corruption at the highest echelons of Wall Street are also so yesterday.)

Taking the human relationship, and human brain, out of investing for others and turning it over to computer formulas has produced stark results: a lost decade of retirement savings for most Americans; a multi-trillion dollar collapse of the financial system; a taxpayer bailout of the most incompetent and negligent firms in finance; the greatest wealth transfer to the top 1 percent in the history of the country -- which has contributed to 43.6 million people in America, including one in every five children, living below the poverty level.

And despite all this, Wall Street’s top cop, the Securities and Exchange Commission (SEC), continues to treat Wall Street as an overly rambunctious adolescent that needs merely a little slap on the wrist from time to time.

Consider the recent example of how Citigroup was punished by the SEC for willfully “scripting” announcements to investors to hide $39 billion of its exposure to subprime debt. According to the SEC’s order of July 29, 2010, only Gary Crittenden, CFO during the period of the order, and Arthur Tildesley, head of Investor Relations at the time, were singled out and given fines of $100,000 and $80,000 respectively. They were not barred from Wall Street; their collaborators in the debt deception, who were known to the SEC via emails obtained from the firm, were not named in the SEC order or fined. The following is from the SEC order:

In late September and early October 2007, Crittenden, the chief financial officer (“CFO”) of Citigroup Inc. (“Citigroup”) and Tildesley, the head of Citigroup’s Investor Relations (“IR”) department, both helped draft and then approved, and Crittenden subsequently made, misstatements about the exposure to sub-prime mortgages of Citigroup’s investment bank. Citigroup then included a transcript of the misstatements in a Form 8-K that it filed with the Commission on October 1, 2007. The misstatements were made at a time of heightened investor and analyst interest in public company exposure to sub-prime mortgages and related to disclosures that the Citigroup investment bank had reduced its sub-prime exposure from $24 billion at the end of 2006 to slightly less than $13 billion. In fact, however, in addition to the approximately $13 billion in disclosed sub-prime exposure, the investment bank’s sub-prime exposure included more than $39 billion of “super senior” tranches of sub-prime collateralized debt obligations and related instruments called “liquidity puts” and thus exceeded $50 billion. Citigroup did not acknowledge that the investment bank’s sub-prime exposure exceeded $50 billion until November 4, 2007, when the company announced that the investment bank then had approximately $55 billion of sub-prime exposure.

There are systemic ramifications to secrets like the above which, still today, proliferate across Wall Street. The SEC has assigned a former rocket physicist, Gregg Berman, to lead the investigation into the Flash Crash of May 6, 2010. On that day the market lost a staggering 998 points intraday, sold off some blue chip stocks at 20 to 40 per cent below their opening price, knocked some S&P 500 stocks to a penny, then turned on a dime and shot upward in a bizarre financial bungee jump, with the Dow closing down 348 points. It apparently hasn’t occurred to the SEC that the American people do not want their life savings in a venue that requires a rocket scientist to explain how it works. (A CNBC/Associated Press poll conducted between August 26 and September 8 of this year found that 86 percent of survey respondents view the stock market as unfair to small investors. Half the respondents say they have little or no confidence in the ability of regulators to make the market fair for all investors.)

Dr. Berman holds a B.S. in Physics from M.I.T. and a Ph.D. in Physics from Princeton. On September 24, 2009, the SEC announced that Dr. Berman had been named “a Senior Policy Advisor in its newly-established Division of Risk, Strategy, and Financial Innovation.” Queried last week, a spokesman for the SEC says Dr. Berman is now working for the Division of Trading and Markets.

Prior to joining the SEC, Dr. Berman served in various executive positions over 11 years with RiskMetrics Group, a risk modeling firm incubated at JPMorgan in the early 90s, spun off as a separate firm in 1998, and became a publicly traded company on January 25, 2008, making a lot of instant multi millionaires among the ranks of senior executives. According to the company’s web site, RiskMetrics serves 72 of the 100 largest investment managers, 35 of the 50 largest hedge funds, 16 central banks.

RiskMetrics is acknowledged as the firm that created a highly complex model called Value at Risk, or VaR, which attempts to express how much money a financial institution or trading desk can lose over a set period of time, such as the next 24 hours, week or month. As can be seen by the SEC order against Citigroup officials, if the risk modelers are not aware of an extra $39 billion of risk hiding in an offshore vehicle, the risk model is worse than useless because it’s actually creating a false sense of security. Or, as another example, you could run a computer calculation as to the probability of a $10 billion portfolio of AAA collateralized debt obligations blowing up over the next 3 months and find you had a 1 per cent probability of that happening. But if you ran the same calculation through your brain, it might go like this: what is the probability that you can bundle $10 billion of loans from high risk borrowers who have low credit scores and get a legitimate AAA rating on that paper. (Brain: probability zero.) What is the probability that if you go ahead and bundle junk bonds and get the credit rating agencies to rate them AAA, they will perform like a AAA bond . (Brain: probability zero.) Across Wall Street, human questioning was getting in the way of taking those oversized, insanely leveraged risks that would lead to fat bonuses. So the human brain was turned off and the VaR brain, or a proprietary clone of it, was turned on. According to insiders, those highly complex Collateralized Debt Obligations (CDOs) that consisted of subprime loans stacked in convoluted tranches were plugged into the risk model as a simple AAA bond. Garbage in, garbage out.

The risk models used computer methodology; the corruption that was human-inspired could not be adequately translated to binary code. The risk models, for example, did not understand the ramifications of actions like the ones described by an Assistant Manager, Gail Kubiniec, at a unit of Citigroup, CitiFinancial:

“I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level. If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the coverages CitiFinancial offered. The more gullible the consumer appeared, the more coverages I would try to include in the loan….”

A patent application pending at the U.S. Patent and Trademark Office naming Dr. Berman and two others as inventors, and RiskMetrics as the assignee, suggests where the idea of risk modeling is heading next. The patent, if approved, would enshrine a concept of allowing money managers such as hedge funds to keep the actual positions in their portfolio a secret while providing a risk analysis to investors. (According to a spokesman at the patent office, the application has been pending since 2008 because their examiners are swamped with backlog.)

One of the most outspoken critics of the risk modeling technique known as VaR is Dr. Nassim Taleb, who holds impressive academic credentials himself: a Wharton M.B.A., a B.S., M.S. and Ph.D. in Management Science from the University of Paris. Dr. Taleb testified as follows on September 10, 2009 before the U.S. House Subcommittee on Investigations and Oversight of the Committee on Science and Technology. (Despite this testimony, fourteen days later, the SEC hired Dr. Berman.)

“Thirteen years ago, I warned that ‘VaR encourages misdirected people to take risks with shareholders,’ and ultimately taxpayers’ money.’ I have since been begging for the suspension of these measurements of tail risks [fat tail or extreme events]. But this came a bit late. For the banking system has lost so far, according to the International Monetary Fund, in excess of 4 trillion dollars directly as a result of faulty risk management… My first encounter with the VaR was as a derivatives trader in the early 1990s when it was first introduced. I saw its underestimation of the risks of a portfolio by a factor of 100 --you set up your book to lose no more than $100,000 and you take a $10,000,000 hit. Worse, there was no way to get a handle on how much its underestimation could be. Using VaR after the crash of 1987 proved strangely gullible. But the fact that its use was not suspended after the many subsequent major events, such as the Long-Term Capital Management blowup in 1998, requires some explanation. [Long Term Capital Management was a hedge fund blown up by a group of Ph.D.s using massive leverage.] Furthermore, regulators started promoting VaR (Basel 2) just as evidence was mounting against it.

VaR is ineffective and lacks in robustness…VaR encourages ‘low volatility, high blowup’ risk taking which can be gamed by the Wall Street bonus structure. I have shown that operators like to engage in a ‘blow-up’ strategy, (switching risks from visible to hidden), which consists in producing steady profits for a long time, collecting bonuses, then losing everything in a single blowup. Such trades pay extremely well for the trader –but not for society. For instance, a member of Citicorp’s executive committee (and former government official) [former Treasury Secretary Robert Rubin] collected $120 million of bonuses over the years of hidden risks before the blowup; regular taxpayers are financing him retrospectively.”

The comments in [brackets] above are mine. I don’t know why Dr. Taleb is only picking on Mr. Rubin’s $120 million when Sanford Weill, former CEO of Citigroup, sucked $1 billion out of the firm in compensation under the same set of circumstances. Dr. Taleb goes on to chronicle in Appendix 1 of his testimony just how long he has been sounding the warning. His prior statements are as follows:

“1996-97:VaR is charlatanism because it tries to estimate something that is scientifically impossible to estimate, namely the risk of rare events. It gives people a misleading sense of precision… 2003: Fannie Mae’s models (for calibrating to the risks of rare events) are pseudoscience. 2007: Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deems these events “unlikely.” [Fannie Mae is now a ward of the state.]… Banks are now more vulnerable to the Black Swan [high impact, rare event] than ever before with “scientists” among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people’s risks…”

One certainly does have to wonder why, if the RiskMetrics risk model was so accurate and valuable for trading, JPMorgan effectively gave it away to the street by publishing the methodology publicly in 1994. Having read reams of lawsuits filed in Federal Court where Wall Street firms pound the table to keep their proprietary trading secrets under seal, this whole episode does raise a few eyebrows. To add to the curiosity, RiskMetrics, the firm created inside an incubator at JPMorgan was acquired on June 1 of this year by MSCI, a firm created inside an incubator at Morgan Stanley. In other words, two of the largest investment banks whose primary job is to allocate capital fairly to the marketplace frequently create their own finance-related firms, then proliferate the “science” masterminded by these firms by spinning them off to the marketplace.

Within a few weeks, the SEC will be releasing its investigative report of the May 6, 2010 Flash Crash. Gregg Berman, a key executive of RiskMetrics just one year ago, whose clients at that time are the same firms engaged in the questionable events of May 6, will serve up the results of that investigation to the American people. In the book “How I Became a Quant: Insights from 25 of Wall Street’s Elite,” Dr. Berman shares this with us: “…I learned that once the billion-dollar spacecraft I had worked on finally reached Mars, it exploded.” Dr. Berman is now two for two. Is he the right man for unraveling the events of May 6?


Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com.


http://counterpunch.org/martens11232010.html

November 23, 2010
A Citizen's Counter Strategy
Ten Ideas to Starve the Wall Street Beast


By PAM MARTENS

Dialogue on the economic crisis has focused on symptoms: bailouts, corruption on Wall Street, collapse in housing prices, intractable unemployment, Federal Reserve monetary policy. Most people have been socialized to silence on the topic of the disease itself: debilitating wealth concentration. We hear little on the overwhelming argument that wealth concentration is the root cause of the lingering crisis because within milliseconds of the words escaping into the public arena, screams of “Socialist! Socialist!” proliferate; an army of right wing talk radio buffoons fill the airwaves with dire warnings of the growing communist threat of wealth redistribution; Rick Santelli spazzes out on CNBC; and the Tea Partiers figuratively (or literally) stomp on us.

The people who scream the loudest aren’t the super rich who control the wealth; they’re part of a labyrinthine network of hired hands who function as high pitch bodyguards for the wealth hoarders. The actual super rich are the folks who appear on the Forbes list of the wealthiest Americans; people like Charles and David Koch, each worth $21.5 billion, who create multi layers of front groups, like Americans for Prosperity, to make it not only socially acceptable to hoard wealth but social nirvana. The Kochs hold secret confabs with their wealthy friends once a year, fingering their worry beads and plotting to keep the Bush tax cuts for the wealthiest, lest they become number 6 on the Forbes list of billionaires instead of number 5. This, while 43 million of their fellow Americans live beneath the poverty level; including one in every 5 children.

David Barber, Associate Professor of American History at the University of Tennessee, is not afraid of the cacophony from the wealth hoarders’ cabal, writing bluntly about the dangers of wealth concentration. In response to an email query last week, Dr. Barber said:

“American society’s fantastically skewed distribution of wealth stands as one of the main structural fault lines underpinning the Crash. America’s richest one percent of the population own over forty percent of America’s wealth — exclusive of home ownership — in this, the most opulent society history has ever known. On the other hand, the bottom sixty percent of Americans own approximately one percent of all of America’s wealth. Maintaining the Bush tax cuts for the rich only perpetuates a part of the contradiction which brought on the present phase of the world economic crisis.”

Dr. Barber’s statistics come from a study conducted by Edward N. Wolff for the Levy Economics Institute of Bard College in March 2010. Other findings from that study include the following:

The richest 1 percent received over one-third of the total gain in marketable wealth over the period from 1983 to 2007. The next 4 percent also received about a third of the total gain and the next 15 percent about a fifth, so that the top quintile collectively accounted for 89 percent of the total growth in wealth, while the bottom 80 percent accounted for 11 percent.

In 2007, the top 1 percent of households owned 38 percent of all stocks; the top 5 percent owned 69 percent; the top 10 percent held 81 percent.

Debt was the most evenly distributed component of household wealth, with the bottom 90 percent of households responsible for 73 percent of total indebtedness.

Wealth concentration in too few hands while the general populace is saddled with too much debt to buy the goods and services produced by the corporations, in whom the wealthiest hold 81 percent of the stock, is a replay of the conditions leading to the crash of 1929 and the ensuing Great Depression. (The Social Security system was borne out of that debacle. This time around, the wealthiest hope to use the funds from the bottom 90 percent flowing into the Social Security trust to prop up stock prices for the benefit of the top 10 percent. Any action today which postpones the inevitable process of more equitable wealth distribution, such as privatizing Social Security or retaining the Bush tax cuts for the wealthiest, will simply hasten the onset of more economic pain which will broaden out to devour the wealth of the upper quintiles through deflation.)

Writing in his book, “The Worldly Philosophers,” Robert Heilbroner explained the situation leading up to the depression of the 1930s:

"The national flood of income was indubitably imposing in its bulk, but when one followed its course into its millions of terminal rivulets, it was apparent that the nation as a whole benefited very unevenly from its flow. Some 24,000 families at the apex of the social pyramid received a stream of income three times as large as 6 million families squashed at the bottom -- the average income of the fortunate families was 630 times the average income of the families at the base…And then there was the fact that the average American had used his prosperity in a suicidal way; he had mortgaged himself up to his neck, had extended his resources dangerously under the temptation of installment buying, and then had ensured his fate by eagerly buying fantastic quantities of stock – some 300 million shares, it is estimated – not outright, but on margin, that is, on borrowed money.”

In both eras, Wall Street ceased being an allocator of capital to worthy enterprises and became an institutionalized system of rigged wealth transfer. The primary artifices this time around included issuing knowingly false stock research; lining up large institutional clients to buy at predetermined prices (laddering) on the first day of a new issue of stock – this made the price appear to soar and thus sucked in the small investor; threatening to take the stock broker’s commission away (penalty bid) if the broker let the small investor take profits in the newly issued stock – the practice was known as flipping and was reserved for the big boys. When the tech mania went bust and the rigged game was revealed, the small investor left in droves. Wall Street, with the Fed’s able assistance, fueled the next bubble – housing – and crafted complex derivatives to turn this market into a cash cow for Wall Street and foreclosures for Main Street.

The January 21, 2010 Supreme Court decision to allow corporations to have staggering financial influence in our elections (Citizens United v. Federal Election Commission) and the November 2, 2010 results of the midterm election should send a bone chilling message. Help is not on the way. The end game of this massive wealth concentration is long-term deflation, economic misery and multiple generations who will look back on us as the hapless society who couldn’t tame the Wall Street greed machine for want of a plan.

Thinking Americans can no longer wait for politicians to save us. When a dedicated public servant like Senator Russ Feingold from Wisconsin is unceremoniously tossed out and a billionaire-financed Senator like Rand Paul from Kentucky is sworn in on a so-called populist mandate, the baton for economic salvation falls to the individual. I offer below ten ideas to get started on the first course of starving the Wall Street beast. And, just to be clear to those perched on the edge of their seats preparing to scream “Socialist!,” I’m not suggesting “redistributing” wealth; I’m suggesting putting the wealth back into the hands from which it was taken in a rigged wealth transfer scheme.

(1) Shorten Your Home Mortgage: Former Supreme Court Justice Louis Brandeis summed it up: "We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both." The Wall Street beast is thriving on interest on our debt and using it to hire lobbyists and fund politicians who will work for their interests, not ours.

According to March 31, 2009 data from the Federal Deposit Insurance Corporation, four Wall Street behemoths control 35 percent of all the insured bank deposits in the U.S. and 46 percent of the assets (although the quality of those “assets” is very much a subject of debate). Those firms are: Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup, Inc. That leaves the other 8,242 FDIC insured banking institutions to share the balance. The total domestic deposits were $7.5 trillion with total assets of $13.5 trillion as of March 2009. That is far too much wealth concentration in too few hands as we’ve sadly learned from having to bail out those four institutions.

Seek your accountant and/or financial advisor’s advice about converting your 30 year mortgage to a 15 year to move wealth from the bank’s shareholders pockets to yours. Rates have never been more favorable for such a move. Typically, over the life of the loan, you will save tens of thousands of dollars of interest. You can look at the savings for your specific situation by clicking on the mortgage calculator at www.bankrate.com. (I’m not endorsing any of the bank loans offered at this site since I haven’t done any research in that area; I’m just suggesting the use of the mortgage calculator.)

Talk to your children before they buy a home about the interest differential between a 30-year and 15-year mortgage over the life of the loan. Show them how to use the mortgage calculator.

(2) Think Local: Consider moving money as it becomes liquid out of the big Wall Street banks that have an iron grip on your Congress and moving it into FDIC insured certificates of deposit at your community bank (being careful not to exceed the insurance limits). A good rule of thumb is to ladder maturities to coincide with when you will need the money. Again, you should consult with your accountant and/or financial advisor. This will also help provide loan funds to local businesses and residential housing in your area.

(3) Start a Business: Don’t worry about the possible arrival of the pink slip; be proactive. Start a business on the side. Do well by doing good: what product or service can you provide that a struggling consumer wants and can afford. (Ideas might include: debt counseling, low cost child care, foreclosure counseling, a pick-your-own fruit and vegetable business if you own farm land, consignment shop, home staging services to help with quicker resales.)

(4) Invest Wisely: Get smart with your 401(k). Investing in the S&P 500 is simply feeding the beast; the beast that’s using your cheap capital to hire lobbyists, create PACs and separate you from representative government. Some 401(k) plans allow you to roll over 50 percent or more to your own IRA after reaching a certain age. Call your benefits office and find out what your options are. Speak to your accountant and/or financial advisor before making any move. You may also want to consider opening an IRA at a community bank and buying insured CDs as an alternative to putting more funds in the 401(k).

(5) Check Out Credit Union Membership: Do you have a family member that belongs to a Credit Union? Chances are they can get you an account there. If you need to use a credit card, try to get one through the credit union at a reasonable rate and then cut up any high-rate card. It’s an outrage that some of the banks that required a citizen bailout are getting their money from the Federal Reserve at almost no cost while charging struggling citizens 20 percent interest.

(6) Don’t Use Credit Cards from Corporations That Abuse You: All of the following have one thing in common: Home Depot, Exxon Mobil, Shell, Macy’s, Sears, Zales. They all extend credit to their customers on a Citigroup credit card. Forty million customers are helping to prop up Citigroup and its anti-consumer, anti-citizen practices by using these cards. Citigroup makes its workers sign away their rights to go to court (see number 8 below) and has serially abused investors through corrupt practices.

(7) Brand Attacks: Chances are high that your local storeowners don’t have a PAC and lobbyists on K Street working against your interests? Reward them with your business and starve the S&P 500 firms until they get the message: if you want me to honor your brand, honor my right to representative government.

(8) Return the Courts to Workers: Many of the largest corporations force workers to sign away their rights to the Nation’s courts as a condition of employment. It’s called mandatory arbitration and it’s an unfair process that is rigged to favor the corporation. If you interview for a new job, ask if the company has such a policy and walk away if they do.

(9) Complain: Don’t let shady practices go undetected. Write a detailed report and file it with the appropriate body: local district attorney, state attorney general’s office, consumer protection groups; and write a letter to the editor to the local paper. This helps good businesses prosper and starves dirty businesses of customers.

(10) Just Say No: To frontal nudity photographs/skin radiation/genitalia groping; all just to board a plane. Don’t fly. You will be standing up for civil rights and starving Wall Street. Body scanner companies trade on Wall Street and the banksters are hoping domestic surveillance is their new cash cow.


Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

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I am by virtue of its might divine,
The highest Wisdom and the first Love.

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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 9:03 pm

Bill Moyers on the Citigroup "Plutonomy" memo and more:

http://www.truth-out.org/bill-moyers-mo ... 4766?print

Bill Moyers: "Welcome to the Plutocracy!"

Wednesday 03 November 2010

by: Bill Moyers, t r u t h o u t | Speech

Bill Moyers speech at Boston University on October 29, 2010, as a part of the Howard Zinn Lecture Series.

I was honored when you asked me to join in celebrating Howard Zinn’s life and legacy. I was also surprised. I am a journalist, not a historian. The difference between a journalist and an historian is that the historian knows the difference. George Bernard Shaw once complained that journalists are seemingly unable to discriminate between a bicycle accident and the collapse of civilization. In fact, some epic history can start out as a minor incident. A young man named Paris ran off with a beautiful woman who was married to someone else, and the civilization of Troy began to unwind. A middle-aged black seamstress, riding in a Montgomery bus, had tired feet, and an ugly social order began to collapse. A night guard at an office complex in Washington D.C. found masking tape on a doorjamb, and the presidency of Richard Nixon began to unwind. What journalist, writing on deadline, could have imagined the walloping kick that Rosa Park’s tired feet would give to Jim Crow? What pundit could have fantasized that a third-rate burglary on a dark night could change the course of politics? The historian’s work is to help us disentangle the wreck of the Schwinn from cataclysm. Howard famously helped us see how big change can start with small acts.

We honor his memory. We honor him, for Howard championed grassroots social change and famously chronicled its story as played out over the course of our nation’s history. More, those stirring sagas have inspired and continue to inspire countless people to go out and make a difference. The last time we met, I told him that the stories in A People’s History of the United States remind me of the fellow who turned the corner just as a big fight broke out down the block. Rushing up to an onlooker he shouted, “Is this a private fight, or can anyone get in it?” For Howard, democracy was one big public fight and everyone should plunge into it. That’s the only way, he said, for everyday folks to get justice – by fighting for it.

I have in my desk at home a copy of the commencement address Howard gave at Spelman College in 2005. He was chairman of the history department there when he was fired in 1963 over his involvement in civil rights. He had not been back for 43 years, and he seemed delighted to return for commencement. He spoke poignantly of his friendship with one of his former students, Alice Walker, the daughter of tenant farmers in Georgia who made her way to Spelman and went on to become the famous writer. Howard delighted in quoting one of her first published poems that had touched his own life:

It is true
I’ve always loved
the daring ones
like the black young man
who tried to crash
all barriers
at once,
wanted to swim
at a white beach (in Alabama)
Nude.


That was Howard Zinn; he loved the daring ones, and was daring himself.

One month before his death he finished his last book, The Bomb. Once again he was wrestling with his experience as a B-17 bombardier during World War II, especially his last mission in 1945 on a raid to take out German garrisons in the French town of Royan. For the first time the Eighth Air Force used napalm, which burst into liquid fire on the ground, killing hundreds of civilians. He wrote, “I remember distinctly seeing the bombs explode in the town, flaring like matches struck in the fog. I was completely unaware of the human chaos below.” Twenty years later he returned to Royan to study the effects of the raid and concluded there had been no military necessity for the bombing; everyone knew the war was almost over (it ended three weeks later) and this attack did nothing to affect the outcome. His grief over having been a cog in a deadly machine no doubt confirmed his belief in small acts of rebellion, which mean, as Howard writes in the final words of the book, “acting on what we feel and think, here, now, for human flesh and sense, against the abstractions of duty and obedience.”

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His friend and long-time colleague writes in the foreword that “Shifting historical focus from the wealthy and powerful to the ordinary person was perhaps his greatest act of rebellion and incitement.” It seems he never forget the experience of growing up in a working class neighborhood in New York. In that spirit, let’s begin with some everyday people.

***

When she heard the news, Connie Brasel cried like a baby.

For years she had worked at minimum-wage jobs, until 17 years ago, when she was hired by the Whirlpool refrigerator factory in Evansville, Indiana. She was making $ 18.44 an hour when Whirlpool announced earlier this year that it was closing the operation and moving it to Mexico. She wept. I’m sure many of the other eleven hundred workers who lost their jobs wept too; they had seen their ticket to the middle class snatched from their hands. The company defended its decision by claiming high costs, underused capacity, and the need to stay competitive. Those excuses didn’t console Connie Brasel. “I was becoming part of something bigger than me,” she told Steven Greenhouse of the New York Times. “Whirlpool was the best thing that ever happened to me.”

She was not only sad, she was mad. “They didn’t get world-class quality because they had the best managers. They got world-class quality because of the United States and because of their workers.”

Among those workers were Natalie Ford, her husband and her son; all three lost their jobs. “It’s devastating,” she told the Times. Her father had worked at Whirlpool before them. Now, “There aren’t any jobs here. How is this community going to survive?”

And what about the country? Between 2001 and 2008, about 40,000 US manufacturing plants closed. Six million factory jobs have disappeared over the past dozen years, representing one in three manufacturing jobs. Natalie Ford said to the Times what many of us are wondering: “I don’t know how without any good-paying jobs here in the United States people are going to pay for their health care, put their children through school.”

Now, if Connie Brasel and Natalie Ford lived in South Carolina, they might have been lucky enough to get a job with the new BMW plant that recently opened there and advertised that the company would hire one thousand workers. Among the applicants? According to the Washington Post; “a former manager of a major distribution center for Target; a consultant who oversaw construction projects in four western states; a supervisor at a plastics recycling firm. Some held college degrees and resumes in other fields where they made more money.” They will be paid $15 an hour – about half of what BMW workers earn in Germany

In polite circles, among our political and financial classes, this is known as “the free market at work.” No, it’s “wage repression,” and it’s been happening in our country since around 1980. I must invoke some statistics here, knowing that statistics can glaze the eyes; but if indeed it’s the mark of a truly educated person to be deeply moved by statistics, as I once read, surely this truly educated audience will be moved by the recent analysis of tax data by the economists Thomas Piketty and Emmanuel Saez. They found that from 1950 through 1980, the share of all income in America going to everyone but the rich increased from 64 percent to 65 percent. Because the nation’s economy was growing handsomely, the average income for 9 out of l0 Americans was growing, too – from $17,719 to $30,941. That’s a 75 percent increase in income in constant 2008 dollars.

But then it stopped. Since 1980 the economy has also continued to grow handsomely, but only a fraction at the top have benefitted. The line flattens for the bottom 90% of Americans. Average income went from that $30,941 in 1980 to $31,244 in 2008. Think about that: the average income of Americans increased just $303 dollars in 28 years.

That’s wage repression.

Another story in the Times caught my eye a few weeks after the one about Connie Brasel and Natalie Ford. The headline read: “Industries Find Surging Profits in Deeper Cuts.” Nelson Schwartz reported that despite falling motorcycle sales, Harley-Davidson profits are soaring – with a second quarter profit of $71 million, more than triple what it earned the previous year. Yet Harley-Davidson has announced plans to cut fourteen hundred to sixteen hundred more jobs by the end of next year; this on top of the 2000 job cut last year.

The story note: “This seeming contradiction – falling sales and rising profits – is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and unemployment shows few signs of easing.”

There you see the two Americas. A buoyant Wall Street; a doleful Main Street. The Connie Brasels and Natalie Fords – left to sink or swim on their own. There were no bailouts for them.

Meanwhile, Matt Krantz reports in USA TODAY that “Cash is gushing into company’s coffers as they report what’s shaping up to be a third-consecutive quarter of sharp earning increases. But instead of spending on the typical things, such as expanding and hiring people, companies are mostly pocketing the money or stuffing it under their mattresses.” And what are their plans for this money? Again, the Washington Post:

“…. Sitting on these unprecedented levels of cash, U.S. companies are buying back their own stock in droves. So far this year, firms have announced they will purchase $273 billion of their own shares, more than five times as much compared with this time last year… But the rise in buybacks signals that many companies are still hesitant to spend their cash on the job-generating activities that could produce economic growth.”


That’s how financial capitalism works today: Conserving cash rather than bolstering hiring and production; investing in their own shares to prop up their share prices and make their stock more attractive to Wall Street. To hell with everyone else.

Hear the chief economist at Bank of America Merrill Lynch, Ethan Harris, who told the Times: “There’s no question that there is an income shift going on in the economy. Companies are squeezing their labor costs to build profits.”

Or the chief economist for Credit Suisse in New York, Neal Soss: As companies have wrung more savings out of their work forces, causing wages and salaries barely to budge from recession lows, “profits have staged a vigorous recovery, jumping 40 percent between late 2008 and the first quarter of 2010.”

Just this morning the New York Times reports that the private equity business is roaring back: “While it remains difficult to get a mortgage to buy a home or to get a loan to fund a small business, yield-starved investors are creating a robust market for corporate bonds and loans.”

If this were a functioning democracy, our financial institutions would be helping everyday Americans and businesses get the mortgages and loans – the capital – they need to keep going; they’re not, even as the financiers are reaping robust awards.

Yes, Virginia, there is a Santa Claus. But he’s run off with all the toys.

Late in August I clipped another story from the Wall Street Journal. Above an op-ed piece by Robert Frank the headline asked: “Do the Rich Need the Rest of America?” The author didn’t seem ambivalent about the answer. He wrote that as stocks have boomed, “the wealthy bounced back. And while the Main Street economy” [where the Connie Brasels and Natalie Fords and most Americans live] “was wracked by high unemployment and the real-estate crash, the wealthy – whose financial fates were more tied to capital markets than jobs and houses – picked themselves up, brushed themselves off, and started buying luxury goods again.”

Citing the work of Michael Lind, at the Economic Growth Program of the New American Foundation, the article went on to describe how the super-rich earn their fortunes with overseas labor, selling to overseas consumers and managing financial transactions that have little to do with the rest of America, “while relying entirely or almost entirely on immigrant servants at one of several homes around the country.”

Right at that point I remembered another story that I had filed away three years ago, also from the Wall Street Journal. The reporter Ianthe Jeanne Dugan described how the private equity firm Blackstone Group swooped down on a travel reservation company in Colorado, bought it, laid off 841 employees, and recouped its entire investment in just seven months, one of the quickest returns on capital ever for such a deal. Blackstone made a killing while those workers were left to sift through the debris. They sold their homes, took part-time jobs making sandwiches and coffee, and lost their health insurance.

That fall, Blackstone’s chief executive, Stephen Schwarzman, reportedly worth over $5 billion, rented a luxurious resort in Jamaica to celebrate the marriage of his son. According to the Guardian News, the Montego Bay facility alone cost $50,000, plus thousands more to sleep 130 guests. There were drinks on the beach, dancers and a steel band, marshmallows around the fire, and then, the following day, an opulent wedding banquet with champagne and a jazz band and fireworks display that alone cost $12,500. Earlier in the year Schwarzman had rented out the Park Avenue Armory in New York (near his 35-room apartment) to celebrate his 60th birthday at a cost of $3 million. So? It’s his money, isn’t it? Yes, but consider this: The stratospheric income of private-equity partners is taxed at only 15 percent – less than the rate paid, say, by a middle class family. When Congress considered raising the rate on their Midas-like compensation, the financial titans flooded Washington with armed mercenaries – armed, that is, with hard, cold cash – and brought the “debate” to an end faster than it had taken Schwartzman to fire 841 workers. The financial class had won another round in the exploitation of working people who, if they are lucky enough to have jobs, are paying a higher tax rate than the super-rich.

So the answer to the question: “Do the Rich Need the Rest of America?” is as stark as it is ominous: Many don’t. As they form their own financial culture increasingly separated from the fate of everyone else, it is “hardly surprising,” Frank and Lind concluded, “ that so many of them should be so hostile to paying taxes to support the infrastructure and the social programs that help the majority of the American people.”

You would think the rich might care, if not from empathy, then from reading history. Ultimately gross inequality can be fatal to civilization. In his book Collapse: How Societies Choose to Fail or Succeed, the Pulitzer Prize-winning anthropologist Jared Diamond writes about how governing elites throughout history isolate and delude themselves until it is too late. He reminds us that the change people inflict on their environment is one of the main factors in the decline of earlier societies. For example: the Mayan natives on the Yucatan peninsula who suffered as their forest disappeared, their soil eroded, and their water supply deteriorated. Chronic warfare further exhausted dwindling resources. Although Mayan kings could see their forests vanishing and their hills eroding, they were able to insulate themselves from the rest of society. By extracting wealth from commoners, they could remain well-fed while everyone else was slowly starving. Realizing too late that they could not reverse their deteriorating environment, they became casualties of their own privilege. Any society contains a built-in blueprint for failure, Diamond warns, if elites insulate themselves from the consequences of their decisions, separated from the common life of the country.

Yet the isolation continues – and is celebrated. When Howard came down to New York last December for what would be my last interview with him, I showed him this document published in the spring of 2005 by the Wall Street giant Citigroup, setting forth an “Equity Strategy” under the title (I’m not making this up) “Revisiting Plutonomy: The Rich Getting Richer.”

Now, most people know what plutocracy is: the rule of the rich, political power controlled by the wealthy. Plutocracy is not an American word and wasn’t meant to become an American phenomenon – some of our founders deplored what they called “the veneration of wealth.” But plutocracy is here, and a pumped up Citigroup even boasted of coining a variation on the word— “plutonomy”, which describes an economic system where the privileged few make sure the rich get richer and that government helps them do it. Five years ago Citigroup decided the time had come to “bang the drum on plutonomy.”

And bang they did. Here are some excerpts from the document “Revisiting Plutonomy;”

“Asset booms, a rising profit share and favorable treatment by
market-friendly governments have allowed the rich to prosper… [and] take an increasing share of income and wealth over the last 20 years.”

“…the top 10%, particularly the top 1% of the United States –
the plutonomists in our parlance – have benefitted disproportionately from the recent productivity surged in the US… [and] from globalization and the productivity boom, at the relative expense of labor.”

“… [and they] are likely to get even wealthier in the coming years. Because the dynamics of plutonomy are still intact.”


I’ll repeat that: “The dynamics of plutonomy are still intact.” That was the case before the Great Collapse of 2008, and it’s the case today, two years after the catastrophe. But the plutonomists are doing just fine. Even better in some cases, thanks to our bailout of the big banks.

As for the rest of the country: Listen to this summary in The Economist – no Marxist journal – of a study by Pew Research:

More than half of all workers today have experienced a spell of
unemployment, taken a cut in pay or hours or been forced
to go part-time. The typical unemployed worker has been
jobless for nearly six months. Collapsing share and house
prices have destroyed a fifth of the wealth of the average
household. Nearly six in ten Americans have cancelled or
cut back on holidays. About a fifth say their mortgages are
underwater. One in four of those between 18 and 29 have
moved back in with their parents. Fewer than half of all adults
expect their children to have a higher standard of living than
theirs, and more than a quarter say it will be lower. For many
Americans the great recession has been the sharpest trauma since
The Second World War, wiping out jobs, wealth and hope itself.


Let that sink in: For millions of garden-variety Americans, the audacity of hope has been replaced by a paucity of hope.

Time for a confession. The legendary correspondent Edward R. Murrow told his generation of journalists that bias is okay as long as you don’t try to hide it. Here is mine: Plutocracy and democracy don’t mix. Plutocracy too long tolerated leaves democracy on the auction block, subject to the highest bidder.

Socrates said to understand a thing, you must first name it. The name for what’s happening to our political system is corruption – a deep, systemic corruption. I urge you to seek out the recent edition of Harper’s Magazine. The former editor Roger D. Hodge brilliantly dissects how democracy has gone on sale in America. Ideally, he writes, our ballots purport to be expressions of political will, which we hope and pray will be translated into legislative and executive action by our pretended representatives. But voting is the beginning of civil virtue, not its end, and the focus of real power is elsewhere. Voters still “matter” of course, but only as raw material to be shaped by the actual form of political influence – money.

The article is excerpted from Hodge’s new book, The Mendacity of Hope. In it he describes how America’s founding generation especially feared the kind of corruption that occurs when the private ends of a narrow faction succeed in capturing the engines of government. James Madison and many of his contemporaries knew this kind of corruption could consume the republic. Looking at history a tragic lens, they thought the life cycle of republics – their degeneration into anarchy, monarchy, or oligarchy – was inescapable. And they attempted to erect safeguards against it, hoping to prevent private and narrow personal interests from overriding those of the general public.

They failed. Hardly a century passed after the ringing propositions of 1776 than America was engulfed in the gross materialism and political corruption of the First Gilded Age, when Big Money bought the government right out from under the voters. In their magisterial work on The Growth of the American Republic, the historians Morrison, Commager, and Leuchtenberg describe how in that era “privilege controlled politics,” and “the purchase of votes, the corruption of election officials, the bribing of legislatures, the lobbying of special bills, and the flagrant disregard of laws” threatened the very foundations of the country.”

I doubt you’ll be surprised to learn that this “degenerate and unlovely age” – as one historian described it – served to inspire Karl Rove, the man said to be George W. Bush’s brain and now a mover and shaker of the money tree for the corporate-conservative complex (more on that later.) The extraordinary coupling of private and political power toward the close of the 19th century – the First Gilded Age – captured Rove’s interest, especially the role of Mark Hanna, the Ohio operative who became the first modern political fund-raiser. (David von Drehle wrote (“Washington Post, July 24, 1999) that “as a tenacious student of political history, Rove had dug so deeply into the McKinley era that he had become “the swami of McKinley mania.” Rove denied it to the writer Ron Susskind, who then went on to talk to old colleagues of Rove “dating back 25 years, one of whom said: “Some kids want to grow up to be president, Karl wanted to grow up to be Mark Hanna. We’d talk about it all the time. We’d say, ‘Jesus,Karl, what kind of kid wants to grow up to be Mark Hanna?”

“There are two things that are important in politics,” Hanna said. “The first is money and I can’t remember what the second one is.” He had become rich as a business man in Ohio, “the characteristic American capitalist of the Gilded Age” (Columbia Encyclopedia). He was famously depicted by one cartoonist as “Dollar Mark,” the prototype of plutocracy. Hanna tapped the banks, the insurance companies, the railroads and the other industrial trusts of the late 1800s for all the money it took to make William McKinley governor of Ohio and then President of the United States. McKinley was the perfect conduit for Hanna’s connivance and their largesse – one of those politicians with a talent for emitting banalities as though they were recently discovered truth. Hanna raised “an unprecedented amount of money (the biggest check came from the oil baron John Rockefeller) and ran a sophisticated, hardball campaign that got McKinley to the White House, “where he governed negligently in the interests of big business,” wrote Jacob Weisberg in “Slate” (November 2, 2005) His opponent in the l896 election was the Democrat-Populist candidate, William Jennings Bryan, whose base consisted of aroused populists – the remnant of the People’s Party – who were outraged at the rapacity and shenanigans of the monopolies, trusts, and corporations that were running roughshod over ordinary Americans. Because Bryan threatened those big economic interests he was able to raise only one-tenth the money that Mark Hanna raised for McKinley, and he lost: Money in politics is an old story.

Karl Rove would have learned from his study of Hanna the principles of plutonomy. For Hanna believed “the state of Ohio existed for property. It had no other function…Great wealth was to be gained through monopoly, through using the State for private ends; it was axiomatic therefore that businessmen should run the government and run it for personal profit.”

He and McKinley therefore saw to it that first Ohio and then Washington were “ruled by business…by bankers, railroads, and public utility corporations.” The United States Senate was infamous as “a millionaire’s club.” City halls, state houses and even courtrooms were bought and sold like baubles. Instead of enforcing the rules of fair play, government served as valet to the plutocrats. The young journalist Henry George had written that “an immense wedge” was being forced through American society by “the maldistribution of wealth, status, and opportunity.” Now inequality exploded into what the historian Clinton Rossiter described as “the great train robbery of American intellectual history.” Conservatives of the day – pro-corporate apologists – hijacked the vocabulary of Jeffersonian liberalism and turned words like “progress,” “opportunity,” and “individualism” into tools for making the plunder of America sound like divine right. Laissez faire ideologues and neo-cons of the day – lovers of empire even then – hijacked Charles Darwin’s theory of evolution and so distorted it that politicians, judges, and publicists gleefully embraced the notion that progress emerges from the elimination of the weak and the “survival of the fittest.” As one of the plutocrats crowed: “We are rich. We own America. We got it, God knows how, but we intend to keep it.”

And they have never given up. The Gilded Age returned with a vengeance in our time. It slipped in quietly at first, back in the early 1980s, when Ronald Reagan began a “massive decades-long transfer of national wealth to the rich.” As Roger Hodge makes clear, under Bill Clinton the transfer was even more dramatic, as the top 10 percent captured an ever-growing share of national income. The trend continued under George W. Bush – those huge tax cuts for the rich, remember, which are now about to be extended because both parties have been bought off by the wealthy – and by 2007 the wealthiest 10% of Americans were taking in 50% of the national income. Today, a fraction of people at the top today earn more than the bottom 120 million Americans.

You will hear it said, “Come on, this is the way the world works.” No, it’s the way the world is made to work. This vast inequality is not the result of Adam Smith’s invisible hand; it did not just happen; it was no accident. As Hodge drives home, it is the result of a long series of policy decisions “about industry and trade, taxation and military spending, by flesh-and-blood humans sitting in concrete-and-steel buildings.” And those policy decisions were paid for by the less than one percent who participate in our capitalist democracy political contributions. Over the past 30 years, with the complicity of Republicans and Democrats alike, the plutocrats, or plutonomists (choose your own poison) have used their vastly increased wealth to assure that government does their bidding. Remember that grateful Citigroup reference to “market-friendly governments” on the side of plutonomy? We had a story down in Texas for that sort of thing; the dealer in a poker game says to the dealer, Now play the cards fairly, Reuben; I know what I dealt you.” (To see just how our system was rigged by the financial, political, and university elites, run, don’t walk, to the theatre nearest you showing Charles Ferguson’s new film, “Inside Job.” Take a handkerchief because you’ll weep for the republic.)

Looking back, it all seems so clear that we wonder how we could have ignored the warning signs at the time. One of the few journalists who did see it coming – Thomas Edsall of the Washington Post – reported that “business refined its ability to act as a class, submerging competitive instincts in favour of joint, cooperative action in the legislative arena.” Big business political action committees flooded the political arena with a deluge of dollars. They funded think tanks that churned out study after study with results skewed to their ideology and interests. And their political allies in the conservative movement cleverly built alliances with the religious right – Jerry Falwell’s Moral Majority and Pat Robertson’s Christian Coalition – who zealously waged a cultural holy war that camouflaged the economic assault on working people and the middle class.

Senator Daniel Patrick Moynihan also tried to warn us. He said President Reagan’s real strategy was to force the government to cut domestic social programs by fostering federal deficits of historic dimensions. Senator Moynihan was gone before the financial catastrophe on George W. Bush’s watch that could paradoxically yet fulfill Reagan’s dream. The plutocrats who soaked up all the money now say the deficits require putting Social Security and other public services on the chopping block. You might think that Mr. Bush today would regret having invaded Iraq on false pretences at a cost of more than a trillion dollars and counting, but no, just last week he said that his biggest regret was his failure to privatize Social Security. With over l00 Republicans of the House having signed a pledge to do just that when the new Congress convenes, Mr. Bush’s vision may yet be realized.

Daniel Altman also saw what was coming. In his book Neoconomy he described a place without taxes or a social safety net, where rich and poor live in different financial worlds. “It’s coming to America,” he wrote. Most likely he would not have been surprised recently when firefighters in rural Tennessee would let a home burn to the ground because the homeowner hadn't paid a $75 fee.
That’s what is coming to America.

***

Here we are now, on the verge of the biggest commercial transaction in the history of American elections. Once again the plutocracy is buying off the system. Nearly $4 billion is being spent on the congressional races that will be decided next week, including multi millions coming from independent tax-exempt organizations that can collect unlimited amounts without revealing the sources. The organization Public Citizen reports that just 10 groups are responsible for the bulk of the spending by independent groups: “A tiny number of organizations, relying on a tiny number of corporate and fat cat contributors, are spending most of the money on the vicious attack ads dominating the airwaves” – those are the words of Public Citizen’s president, Robert Wiessman. The Federal Election Commission says that two years ago 97% of groups paying for election ads disclosed the names of their donors. This year it’s only 32%.

Socrates again: To remember a thing, you must first name it. We’re talking about slush funds. Donors are laundering their cash through front groups with high-falutin’ names like American Crossroads. That’s one of the two slush funds controlled by Karl Rove in his ambition to revive the era of the robber barons. Promise me you won’t laugh when I tell you that although Rove and the powerful Washington lobbyist who is his accomplice described the first organization as “grassroots”, 97% of its initial contributions came from four billionaires. Yes: The grass grows mighty high when the roots are fertilized with gold.

Rove, other conservative groups and the Chamber of Commerce have in fact created a “shadow party” determined to be the real power in Washington just like Rome’s Opus Dei in Dan Brown’s “The DaVinci Code.” In this shadow party the plutocrats reign. We have reached what the new chairman of Common Cause and former Labor Secretary Robert Reich calls “the perfect storm that threatens American democracy: an unprecedented concentration of income and wealth at the top; a record amount of secret money, flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to get it back to work. We’re losing our democracy to a different system. It’s called plutocracy.”

That word again. But Reich is right. That fraction of one percent of Americans who now earn as much as the bottom 120 million Americans includes the top executives of giant corporations and those Wall Street hedge funds and private equity managers who constitute Citigroup’s “plutonomy” are buying our democracy and they’re doing it in secret.

That’s because early this year the five reactionary members of the Supreme Court ruled that corporations are “persons” with the right to speak during elections by funding ads like those now flooding the airwaves. It was the work of legal fabulists. Corporations are not people; they are legal fictions, creatures of the state, born not of the womb, not of flesh and blood. They’re not permitted to vote. They don’t bear arms (except for the nuclear bombs they can now drop on a congressional race without anyone knowing where it came from.) Yet thanks to five activist conservative judges they have the privilege of “personhood” to “speak” – and not in their own voice, mind you, but as ventriloquists, through hired puppets.

Does anyone really think that’s what the authors of the First Amendment had in mind? Horrified by such a profound perversion, the editor of the spunky Texas Observer, Bob Moser, got it right with his headline: “So long, Democracy, it’s been good to know you.”

You’ll recall that soon after the Court’s decision President Obama raised the matter during his State of the Union speech in January. He said the decision would unleash a torrent of corrupting corporate money into our political system. Sitting a few feet in front of the president, Associate Justice Samuel Alito defiantly mouthed the words: “Not true.”

Not true? Terry Forcht knew otherwise. He’s the wealthy nursing home executive in Kentucky whose establishments is being prosecuted by Attorney General Jack Conway for allegedly covering up sexual abuse. Conway is running for the Senate. Forcht has spent more than $l million to defeat him. Would you believe that Forcht is the banker for one of Karl Rove’s two slush funds, American Crossroads, which has spent nearly $30 million to defeat Democrats?

What’s that, Justice Alito? Not true?

Ask Alan Grayson. He’s a member of Congress. Here’s what he says: “We’re now in a situation where a lobbyist can walk into my office…and say, ‘I’ve got five million dollars to spend and I can spend it for you or against it.’”
Alito was either disingenuous, naïve, or deluded. He can’t be in this world without knowing he and his four fellow corporatists were giving big donors the one thing they most want in their campaign against working people: an unfair advantage.

My friend and colleague, the writer Michael Winship, told a story this week that illuminates the Court’s coup de grace against democracy. It seems the incorrigible George Bernard Shaw once propositioned a fellow dinner guest, asking if she would go to bed with him for a million pounds (today around $1,580,178 US dollars). She agreed. Shaw then asked if she would do the same for ten shillings. “What do you take me for?” she asked angrily. “A prostitute?” Shaw responded: “We’ve established the principle, Madam. Now we’re just haggling over the price.”

With this one decision, the Supreme Court established once and for all that Shaw’s is the only principle left in politics, as long as the price is right.

Come now and let’s visit Washington’s red light district, headquarters of the U.S. Chamber of Commerce, the front group for the plutocracy’s prostitution of politics. The Chamber boasts it represents more than three million businesses and approximately 300,000 members. But in reality it has almost nothing to do with the shops and stores along your local streets. The Chamber’s branding, as the economics journalist Zach Carter recently wrote, “allows them to disguise their political agenda as a coalition of local businesses while it does dirty work for corporate titans.” Carter reported that when the Supreme Court came down with its infamous ruling earlier this year, the Chamber responded by announcing a 40% boost in its political spending operations. After the money started flowing in, the Chamber boosted its budget again by 50%.

After digging into corporate foundation tax filings and other public records, the New York Times found that the Chamber of Commerce has “increasingly relied on a relatively small collection of big corporate donors” – the plutocracy’s senior ranks – “to finance much of its legislative and political agenda.” Furthermore, the chamber “makes no apologies for its policy of not identifying its donors.” Indeed, “It has vigorously opposed legislation in Congress that would require groups like it to identify their biggest contributors when they spend money on campaign ads.”

Now let’s connect some dots. While knocking down nearly all limits on corporate spending in campaigns, the Supreme Court did allow for disclosure, which would at least tell us who’s buying off the government. Senate Republican Leader Mitch McConnell even claimed that “sunshine” laws would make everything okay. But after the House of Representatives passed a bill that would require that the names of all such donors be publicly disclosed, McConnell lined up every Republican in the Senate to oppose it. Hardly had the public begun to sing “Let the Sunshine In” than McConnell & Company went tone deaf. And when the chief lobbyist for the Chamber of Commerce was asked by an interviewer, “Are you guys eventually going to disclose?” the answer was a brisk: “No.” Why? Because those corporations are afraid of a public backlash. Like bank robbers pulling a heist, they prefer to hide their “personhood” behind sock masks. Surely that tells us something about the nature of what they’re doing. In the words of one of the characters in Tom Stoppard’s play Night and Day:: “People do terrible things to each other, but it’s worse in places where everything is kept in the dark.”

That’s true in politics, too. Thus it turns out that many of the ads being paid for secretly by anonymous donors are “false, grossly misleading, or marred with distortions,” as Greg Sargent reports in his website “The Plum Line.” Go to Sargent’s site and you’ll see a partial list of ads that illustrate the scope of the intellectual and political fraud being perpetrated in front of our eyes. Money from secret sources is poisoning the public mind with toxic information in order to dupe voters into giving even more power to the powerful.

On another site –“thinkprogress.com” – you can find out how the multibillionaire Koch brothers – also big oil polluters and Tea Party supporters – are recruiting “captains of industry” to fund the right-wing infrastructure of front groups, political campaigns, think tanks and media outlets. Now, hold on to your seats, because this can blow away the faint-hearted: Among the right-wing luminaries who showed up among Koch’s ‘secretive network of Republican donors’ were two Supreme Court Justices: Antonin Scalia and Clarence Thomas. That’s right: 2 of the 5 votes to enable the final corporate takeover of government came from justices who were present as members of the plutocracy hatched their schemes for doing so.

Something else is going on here, too. The Koch brothers have contributed significantly to efforts to stop the Affordable Care Act – the health care reforms – from taking effect. Justice Clarence Thomas has obviously been doing some home schooling, because his wife Virginia claims those reforms are “unconstitutional,” and has founded an organization that is fighting to repeal them. Her own husband on the Supreme Court may one day be ruling on whether she’s right or not (“Play the cards fair, Reuben; I know what I dealt you.”) There’s more: The organization Virginia Thomas founded to kill those health care reforms – also a goal of the Koch brothers, remember – got its start with a gift of half a million dollars from an unnamed source, and is still being funded by donors who can’t be traced. You have to wonder if some of them are corporations that stand to benefit from favorable decisions by the Supreme Court. Now guess the name of the one Supreme Court justice who voted against the disclosure provision. I’m not telling, but Mrs. Thomas can tell you – if, that is, she’s willing to share the pillow talk.

This truly puzzles me. It’s what I can’t figure out about the conservative mindset. The Kochs I can understand: messianic Daddy Warbucks who can’t imagine what life is like for people who aren’t worth 21 billion dollars. But whatever happened to “compassionate conservatism?” The Affordable Care Act – whatever its flaws – extends health care coverage to over 40 million deprived Americans who would otherwise be uncovered. What is it about these people – the Thomases, the secret donors, the privileged plutocrats on their side – that they can’t embrace a little social justice where it counts – among everyday people struggling to get by in a dog-eat-dog world? Health care coverage could mean the difference between life and death for them. Mrs. Thomas is obviously doing okay; she no doubts takes at least a modest salary from that private slush fund working to undermine the health care reforms; her own husband is a government employee covered by a federal plan. Why wouldn’t she want people less fortunate than her to have a little security, too? She headquarters her organization at Jerry Falwell’s Liberty University, a reportedly Christian school aligned with the Moral Majority. How is it she’s only about “Live and Let Live?” Have they never heard there the Old Time Religion of “Live and help live?” Why would this cushioned, comfortable crowd, pious crowd, resort to such despicable tactics as using secret money to try to turn public policy against their less fortunate neighbors, and in the process compromise the already tattered integrity of the United States Supreme Court?

I don’t get it.

You be the judge (Because if you don’t, Justice Thomas will.)

Time to close the circle: Everyone knows millions of Americans are in trouble. As Robert Reich recently summed it the state of working people: They’ve lost their jobs, their homes, and their savings. Their grown children have moved back in with them. Their state and local taxes are rising. Teachers and firefighters are being laid off. The roads and bridges they count on are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut.

Why isn’t government working for them? Because it’s been bought off. It’s as simple as that. And until we get clean money we’re not going to get clean elections, and until we get clean elections, you can kiss goodbye government of, by, and for the people. Welcome to the plutocracy.

***

Obviously Howard Zinn would not have us leave it there. Defeat was never his counsel. Look at this headline above one of his essays published posthumously this fall by the Progressive magazine: DON’T DESPAIR ABOUT THE SUPREME COURT. The Court was lost long ago, he said – don’t go there looking for justice. “The Constitution gave no rights to working people; no right to work less than 12 hours a day, no right to a living wage, no right to safe working conditions. Workers had to organize, go on strike, defy the law, the courts, the police, create a great movement which won the eight-hour day, and caused such commotion that Congress was forced to pass a minimum wage law, and Social Security, and unemployment insurance….Those rights only come alive when citizens organize, protest, demonstrate, strike, boycott, rebel and violate the law in order to uphold justice.”

So what are we to do about Big Money in politics buying off democracy? I can almost hear him throwing that question back at us: “What are we to do? ORGANIZE! Yes, organize—and don’t count the costs.” Some people already are. They’re mobilizing. There’s a rumbling in the land. All across the spectrum people oppose the escalating power of money in politics. Fed-up Democrats. Disillusioned Republicans. Independents. Greens. Even Tea Partiers, once they wake up to realize they have been sucker-punched by their bankrollers who have no intention of sharing the wealth.

Veteran public interest groups like Common Cause and Public Citizen are aroused. There are the rising voices, from web-based initiatives such as “freespeechforpeople.org” to grassroots initiatives such as “Democracy Matters” on campuses across the country, including a chapter here at Boston University. “Moveon.org” is looking for a million people to fight back in a many-pronged strategy to counter the Supreme Court decision.

What’s promising in all this is that in taking on Big Money we’re talking about something more than a single issue. We’re talking about a broad-based coalition to restore American democracy – one that is trying to be smart about the nuts-and-bolts of building a coalition, remembering that it has a lot to do with human nature. Some will want to march. Some will want to petition. Some will want to engage through the web. Some will want to go door-to-door: many gifts, but the same spirit. A fighting spirit. As Howard Zinn would tell us: No fight, no fun, no results.

But here’s the key: If you’re fighting for a living wage, or peace, or immigration reform, or gender equality, or the environment, or a safe neighborhood, you are, of necessity, strongly opposed to a handful of moneyed-interests controlling how decisions get made and policy set. Because most Americans are attuned to principle of fair play, of not favoring Big Money at the expense of the little guy – at the expense of the country they love. The legendary community organizer Ernesto Cortes talks about the “power to preserve what we value.” That’s what we want for Americans – the power to preserve what we value, both for ourselves and on behalf of our democracy.

But let’s be clear: Even with most Americans on our side, the odds are long. We learned long ago that power and privilege never give up anything without a struggle. Money fights hard, and it fights dirty. Think Rove. The Chamber. The Kochs. We may lose. It all may be impossible. But it’s OK if it’s impossible. Hear the former farmworker and labor organizer Baldemar Velasquez on this. The members of his Farm Labor Organizing Committee are a long way from the world of K Street lobbyists. But they took on the Campbell Soup Company – and won. They took on North Carolina growers – and won, using transnational organizing tacts that helped win Velasquez a “genius” award from the MacArthur Foundation. And now they’re taking on no less than R. J. Reynolds Tobacco and one of its principle financial sponsors, JPMorgan-Chase. Some people question the wisdom of taking on such powerful interests, but here’s what Velasquez says: “It’s OK if it’s impossible; it’s OK! Now I’m going to speak to you as organizers. Listen carefully. The object is not to win. That’s not the objective. The object is to do the right and good thing. If you decide not to do anything, because it’s too hard or too impossible, then nothing will be done, and when you’re on your death bed, you’re gonna say, “I wish I had done something. But if you go and do the right thing NOW, and you do it long enough “good things will happen—something’s gonna happen.”

Shades of Howard Zinn!

Watch a video of the full speech and the question and answer session here.


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Bill Moyers is an acclaimed American journalist, author, documentarian and public commentator.
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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 10:00 pm

INSANE CATCH-UP GRAB-BAG NOW!

Okay, I'm going to post my backlog since summer, and be done with this for a while!

...

Argentina 2001

seemslikeadream wrote:Documentary on the events that led to the economic collapse of Argentina in 2001 which wiped out the middle class and raised the level of poverty to 57.5%. Central to the collapse was the implementation of neo-liberal policies which enabled the swindle of billions of dollars by foreign banks and corporations. Many of Argentina's assets and resources were shamefully plundered. Its financial system was even used for money laundering by Citibank, Credit Suisse, and JP Morgan. The net result was massive wealth transfers and the impoverishment of society which culminated in many deaths due to oppression and malnutrition. Official name: Memoria del Saqueo by Fernando Solanas 2003.


Argentina's Economic Collapse - Part 1 of 12


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Ellen Brown's a deflationist and she has a pretty good cure (in bold). This was written before the Fed went for QE2.

http://counterpunch.org/brown09092010.html

September 9, 2010
How to Reverse a Deflation
It's Time for Helicopter Ben to Drop Some Money on Main Street


By ELLEN BROWN

In 2002, in a speech that earned him the nickname “Helicopter Ben,” then-Fed Governor Bernanke famously said that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” You could cure a deflation, said Professor Friedman, simply by dropping money from helicopters.

It seems logical enough. If there is insufficient money in the money supply (deflation), the solution is to put more money into it. But if deflation is so easy to fix, then why has the Fed’s massive attempts to date failed to do the job? At the Federal Reserve’s Jackson Hole summit on August 27, Chairman Bernanke said he would fight deflation with his whole arsenal, including “quantitative easing” (QE) – purchasing longterm securities with money created on a computer. Yet since 2008, the Fed has added more than $1.2 trillion to “base money” doing just that, and the economy is still in a serious deflationary spiral. In the first quarter of this year, the money supply actually shrank at a record annual rate of 9.6%.

Cullen Roche at The Pragmatic Capitalist has an answer to that puzzle. He says that as currently practiced, quantitative easing (QE) is not really a money drop. It is just an asset swap:

“[T]he Fed doesn’t actually ‘print’ anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset.”

The Fed just swaps Federal Reserve Notes (dollar bills) for other assets (promissory notes or debt) that can quickly be turned into money. The Fed is merely trading one form of liquidity for another, without raising the overall water level in the pool.

The mechanics of how QE works were revealed in a remarkable segment on National Public Radio on August 26, describing how a team of Fed employees bought $1.25 trillion in mortgage bonds beginning in late 2008.

According to NPR:

“The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so. So . . . the mortgage team would decide to buy a bond, they’d push a button on the computer – ‘and voila, money is created.’

“The thing about bonds, of course, is that people pay them back. So that $1.25 trillion in mortgage bonds will shrink over time, as they get repaid. Earlier this month, the Fed announced that it will use the proceeds from the mortgage bonds to buy Treasury bonds – essentially keeping all that newly created money in circulation. The decision was a sign that the Fed thinks the economy still needs to be propped up with extraordinary measures.”

“Extraordinary measures” was a reference to Section 13(3) of the Federal Reserve Act, which allows the Fed in “unusual and exigent circumstances” to buy “notes, drafts and bills of exchange” (debt instruments) from “any individual, partnership or corporation” satisfying its requirements. The Fed was supposedly engaging in these extraordinary measures to “reflate” the money supply and get credit flowing again. Yet the money supply continued to shrink. The problem, as Roche explains, is that the dollars were merely being swapped for other highly liquid assets on bank balance sheets. That this sort of asset swap will not pump up a collapsed money supply has been shown not only by the Fed’s failed experiments over the last two years but by two decades of failed QE policy in Japan, an economy which remains in the deflationary doldrums. To reverse deflation, it seems, QE needs to be directed somewhere else besides the balance sheets of private banks. What we need is the sort of helicopter drop described by Bernanke in 2002 – one over the towns and cities of the real economy.

There is another interesting lesson suggested by two decades of failed QE: it might actually be possible for the government to “print” its way out of debt, without triggering the dreaded hyperinflation long warned of by pundits. Swapping dollars for debt hasn’t inflated the circulating money supply to date because federal debt securities already serve as forms of “money” in the economy.
The Textbook Money Multiplier Model . . .

Beginning with some definitions,“quantitative easing” is explained in Wikipedia like this:

“A central bank . . . first credit[s] its own account with money it has created ex nihilo (‘out of nothing’). It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus a hopeful stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.”

“Deposit multiplication” is the textbook explanation for how credit expands as it circulates through the economy. In the textbook model, banks must retain “reserves” equal to 10% of outstanding deposits (including deposits created as loans). With a 10% reserve requirement, a $100 deposit can support a $90 loan, which gets deposited in another bank, where it becomes an $81 loan, and so forth, until a $100 deposit becomes $1,000 in credit-money.

The theory is that increasing the banks’ reserves will stimulate this process, but both the Federal Reserve and the Bank for International Settlements (BIS) now concede that the process has not been working in the textbook way. (The BIS is “the central bankers’ central bank” in Basel, Switzerland.) The futile effort to push more money into bloated bank reserve accounts has been compared to adding more apples to shelves that are already overstocked with apples. Adding more reserves to a banking system that already has more reserves than it can use has no net effect on the money supply.

The failure of QE either to increase bank lending or to inflate the money supply was confirmed in a March 24 paper by Federal Reserve Vice Chairman Donald L. Kohn, who wrote:

“The huge quantity of bank reserves that were created [by quantitative easing] has been seen largely as a byproduct of the purchases [of debt instruments] that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation.”

The textbook model is obsolete because banks don’t make lending decisions based on how many reserves they have. They can always get the reserves they need. If customers don’t walk in the door with new deposits, the bank can borrow deposits from other banks, something they can now do at the very low Fed funds rate of .2% (1/5th of 1%). And if those deposits are not available, the Federal Reserve itself will supply the reserves. This was confirmed in a BIS working paper called

“Unconventional Monetary Policies: An Appraisal”, which observed:

“[T]he level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. . . .

“The aggregate availability of bank reserves does not constrain the expansion [of credit] directly. The reason is simple: . . . in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system. From this perspective, a reserve requirement, depending on its remuneration, affects the cost . . . of loans, but does not constrain credit expansion quantitatively. . . . [A]n expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best.”

Again, one form of liquidity is just substituted for another, without changing the overall level in the pool.

If bank reserves do not constrain bank lending, what does? According to the BIS paper, “the main . . . constraint on the expansion of credit is minimum capital requirements.” These capital requirements, known as “Basel I” and “Basel II,” were imposed by the BIS itself. It is interesting that the BIS knows that the main constraints on bank lending are its own capital requirements, yet it is talking about raising them, in an economic climate in which lending is already seriously impaired. Either the BIS is talking out of both sides of its mouth, or its writers don’t read each other.

A Solution to the Federal Debt Crisis?

Another interesting aside arising from all this is the suggestion that the government could actually print its way out of debt – it could print dollars and buy back its bonds -- without creating inflation. As Roche observes:

“[Quantitative easing] in time of a balance sheet recession is not actually inflationary at all. With the government merely swapping assets they are not actually ‘printing’ any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits. . . . [T]his policy response would in fact be deflationary – not inflationary.”

Roche concludes, “the inflationistas have been wrong and the USA defaultistas have been horribly wrong.” The “inflationistas” are the pundits screaming that QE will end in hyperinflation, and the “defaultistas” are those insisting that the U.S. must eventually default on its debt. Representing both camps, for example, is Richard Russell, who writes:

“In my opinion, the US MUST default on its debt. There are two ways to default. One is simply to renege on the debt. . . . The other way to default on the debt is to inflate it away. I’m absolutely convinced that this is the path that the US will take. If the US inflates enough, then over time (many years) the devalued dollar will tend to reduce the power of the debts.”
The failed QE experiments in Japan and the U.S. suggest, however, that there is a third alternative. Printing dollars to pay the debt (referred to by Russell as “inflating the debt away”) might actually eliminate the debt without creating inflation. This is because federal bonds and Federal Reserve Notes are interchangeable forms of liquidity. Government securities trade around the world just as if they were money. A $100 bond represents a claim on $100 worth of goods and services, just as a $100 bill does. The difference, as Thomas Edison said nearly a century ago, is merely that “the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way. . . . Both are promises to pay, but one promise fattens the usurers and the other helps the people.”

The Fed’s earlier attempts at QE involved swapping $1.25 trillion in mortgaged-backed securities (MBS) for dollars created on a computer screen. As noted in the NPR segment, many of those securities have come due and have gotten paid off, putting cash in the Fed’s till. The Fed now proposes to use this money to buy long-term Treasury debt rather than MBS. That means the Fed will, in effect, be buying the government’s debt with dollars created on a computer screen. The privately-owned Federal Reserve is not actually an arm of the federal government, but if it were, the government would thus be printing its way out of debt – just as Helicopter Ben proposed in 2002. Recall that he said, “the U.S. government has a technology, called a printing press” – the U.S. government, not the central bank that has done all the QE to date.
Running the government’s printing presses to pay its bills has not seriously been tried since the Civil War, when President Lincoln saved the North from a crippling war debt at usurious interest rates by printing Greenbacks (U.S. Notes). Other countries, however, have tested and proven this model more recently. They include Germany, which pulled itself out of a massive financial collapse in the early 1930s by printing a form of currency called “MEFO bills”; and Australia, New Zealand and Canada, all of which successfully funded public works in the first half of the twentieth century simply by advancing the credit of the nation. China, Malaysia, Guernsey, Jersey, India, Argentina and other countries have also revived their economies at critical times by this means. The U.S. government could do this too. It could print dollars (or type them into electronic bank accounts) and spend the money on the sorts of local public projects that would put people back to work and get the economy rolling again.

How to Reverse a Deflation

The government could pay its bills by issuing Greenbacks as Lincoln did, but it probably won’t, given the current deadlock in Congress. Today only the Federal Reserve Chairman seems to be in a position to act unilaterally, without asking anyone’s permission. Chairman Bernanke could execute his own plan and generate the credit needed to get the economy churning again, by aiming his “quantitative easing” tool at the states. After all, if Wall Street (which got us into this mess) can borrow at .2%, underwritten by the Fed as “lender of last resort,” then state and local governments should be able to as well. Chairman Bernanke could credit the Fed’s account with money created ex nihilo (out of nothing) and swap it for state and municipal bonds at the Fed funds rate.

A “state” might not qualify as an “individual, partnership or corporation” under Section 13(3) of the Federal Reserve Act, but a state-owned bank would. Bruce Cahan, an attorney and social entrepreneur in Silicon Valley, California, proposes that the Fed could diversify its role by buying long-term bonds in existing or newly-chartered state-owned banks. These banks, which would have a mandate to serve state and local communities, would more quickly and accountably lend for in-state purposes than private banks do now. They could be required to use accepted transparency accounting standards to trace how the proceeds of their loans flowed into the economy. Local needs would thus determine how best to jumpstart and keep alive businesses and households that the “too big to fail” megabanks no longer want to fund on fair credit terms. Adding a state-owned bank would also bring competition to regional banking markets such as that of the San Francisco Bay area, which are now dominated by out-of-state megabanks. By funding state-owned banks, the Fed could inject “liquidity” where it is most needed, in local markets where workers are hired and real goods and services are sold.

Ellen Brown is the author of Web of Debt: the Shocking Truth About Our Money System and How We Can Break Free. She can be reached through her website.


...

Basel III

Have we done this yet?

http://www.bloomberg.com/news/print/201 ... omply.html

Basel Regulators to Bolster Bank Capital Requirements
By Yalman Onaran - Sep 12, 2010

Regulators from 27 nations more than doubled their capital requirements for banks, giving lenders as long as eight years to comply in full, as part of international efforts to prevent future financial crises.

The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 4.5 percent of assets, weighted according to their risk. Regulators will introduce an additional capital buffer of 2.5 percent to withstand future stress, the committee said in a statement today. Banks that fail to meet that second buffer would be stopped from paying dividends, though not forced to raise cash.

Under political pressure to rein in banks’ risk-taking, regulators have been tightening capital rules and introducing new measures such as liquidity requirements. Lenders have pushed back, lobbying their governments and supervisory bodies to soften the proposed regulations. The new rules and ratios, the strictest since nations began regulating the global banking system together in 1974, will force many lenders to sell new shares, while others will be restricted on how much cash they can return to their shareholders for years to come.

“The agreements reached today are a fundamental strengthening of global capital standards,” European Central Bank President Jean-Claude Trichet said in a statement. “Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.”

‘New Reality’

Trichet chairs the board of governors and heads of supervision from the countries that make up the Basel committee. U.S. representatives at today’s meeting included Federal Reserve Chairman Ben Bernanke, New York Fed President William Dudley and Federal Deposit Insurance Corp. Chairman Sheila Bair. U.K. Financial Services Authority Chairman Adair Turner and Bank of England Governor Mervyn King were also in attendance. Axel Weber, president of the German central bank, and Jochen Sanio, the country’s chief bank regulator, were also in Basel.

“Step-by-step, the Basel committee is delivering what it set out to do: change the business model of banking,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC in Washington. “Banks -- and their customers -- will have to adjust to this new reality.”

The rule-making process, which began in 2009, has pitted countries against each other. Some, including Germany, have said higher capital requirements will hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks.

Tier 1 Ratios

Lenders will also be required to maintain a Tier 1 capital ratio of at least 6 percent, the committee said today. Tier 1, a measure of financial strength, includes common equity and some equity-like debt instruments.

The capital ratios proposed to the committee when it met on Sept. 7 were 5 percent for common equity, with a 2.5 percent buffer for bad times, and 6 percent for Tier 1 with a 3 percent buffer. Under current Basel rules, the Tier 1 requirement is 4 percent. Half of that, or 2 percent, needs to be common stock. There’s no buffer requirement.

“The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress,” Nout Wellink, Dutch Central Bank president and chairman of the Basel Committee, said in a statement.

Counter-Cyclical Buffer

Another buffer, which would be required during times of faster credit growth, would be set at as much as 2.5 percent of common equity, the committee said today. The details of how and when that buffer would be employed haven’t been finalized yet. The proposal for the mechanism, the so-called counter-cyclical buffer, was released publicly in July, and banks had until Sept. 10 to submit comments.

Banks will have less than five years to comply with the minimum ratios and until Jan. 1, 2019 to meet the buffer requirements. Member countries will be expected to have adopted the regulations into their individual rule books by January 2013. The U.S., U.K. and Switzerland were insisting on a maximum of five years for transition, while Germany was pushing to extend it to 10 years, four people with knowledge of the talks said last week.

German Concessions

While Germany didn’t get the deadlines extended all the way, it won some concessions for its state-owned banks, which would have a harder time to comply. Government capital injections will continue to count as common equity until the end of 2017, even if they were in a form that the new Basel rules consider as not qualifying. State banks get an extra five years of exemptions to other rules tightening the definition capital.

“The gradual transition phase will allow all banks to fulfill the rising requirements for minimum capital and liquidity,” Weber, who attended today’s meeting, said in a statement. “The unique characteristics of German financial institutions that aren’t stockholder corporations are thus appropriately catered for.”

In an August report studying the economic impact of tighter capital rules, the Basel committee said that four years was the ideal time frame for implementing the new standards.

The Basel committee in previous meetings restricted what can be counted as bank capital, which would reduce current levels by deducting assets included in the calculation, such as mortgage-servicing rights. JPMorgan Chase & Co., the second- largest U.S. bank, said last month that the Basel rules would shave its capital ratio by as much as 2 percentage points.

Bank of America, Citigroup

Of the 24 U.S. banks represented on the KBW Bank Index, seven would fall under the new ratios based on calculations using the revised definitions of capital, Keefe, Bruyette & Woods analyst Frederick Cannon said in a Sept. 10 report. Bank of America Corp. and Citigroup Inc., the nation’s No. 1 and No. 3 lenders, would be among those, Cannon estimates. Bank of America would have to hold off paying dividends or buying back shares until the end of 2013, he said.

European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Deutsche Bank AG, Germany’s biggest lender, said today it plans to sell at least 9.8 billion euros ($12.5 billion) of stock. Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank AG, may need about 105 billion euros in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6.

‘Too-Big-To-Fail’

The European Banking Federation, a lobbying group, wrote to Trichet this week, warning once again that tighter rules may limit the amount banks lend to individuals and companies, Italy’s Il Sole 24 Ore reported yesterday.

Today’s agreement fails to address the so-called “too big to fail” challenge posed by banks of excessive size, said Daniel Zuberbuehler, vice-chairman of Switzerland’s Financial Market Supervisory Authority.

“Further efforts on that issue will have to be made at the international and the national levels,” he said in a statement.

With today’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul.

The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.

The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet short-term and long-term liabilities. The long-term requirement has been criticized the most by the banking industry, which claims it would force banks to sell $4 trillion of new debt.

The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net.
®2010 BLOOMBERG L.P. ALL RIGHTS RESERVED.


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"Philanthropists"

http://counterpunch.org/ginsburg08042010.html

August 4, 2010
The Great Marginalization
Buffett, Gates, Rockefeller and the Conscience of the Very, Very Rich

By CARL GINSBURG

Of all the farcical notions put forth during this time of high farce, casting America as “broke” places way up there on the list, as trillions of dollars are being stockpiled in the face of a national downsizing and its attendant growth in misery. Here we sit, a captive national audience to the president’s seemingly daily farce, “We are all in this together”.

Instances of hoarding in U.S. history are many, but the current example stands out for its enduring quality, as Congress reaches deep into corporate pockets, with occasional forays into legislation of the extreme incremental variety. Profits are up 41 percent since Obama’s election; yet half of American workers have suffered a job loss or a cut in hours or wages over the past 30 months--- hardly the recipe for togetherness.

More farce: that irresponsibility is the root of poverty, a stalwart theme in American political theater, with the latest reminder from Treasury Secretary Geithner in a New York Times op-ed this month, saluting Americans for “saving more” and “borrowing more responsibly”. These instructions from the government’s top economic point man were imparted in the face of continued wage stagnation, high foreclosure rates and new forms of financial foolery.
Now enter stage left: the ”Great Givers”, they come in the form of American billionaires proposing to give away half their wealth. Beware strangers bearing gifts.

The billionaire pledge – a broadside of noblesse oblige – was formulated by none other than two of the planet’s leading mega-billionaires, Warren Buffett and Bill Gates. These two American moneybags are imploring fellow prophets of profit to address global suffering by earmarking not less than fifty per cent of personal wealth for charity. First discussed at a dinner in May 2009, the specifics are just now surfacing thanks to Carol J. Loomis in the June 16 issue of Fortune.

According to Loomis, Buffett and Gates, who share a commitment to charity and to the Democratic Party, summoned a group of billionaires to dinner in New York City. David Rockefeller -- whose granddad cornered the market in kerosene, then gasoline – played host and invited this billionaire boys club to share their calling. Two subsequent dinners were held, expanding the group invited to take the plunge to about thirty. Areas of charitable concern shared by America’s very richest, Loomis says, include “education, culture, hospitals and health, the environment, public policy, the poor generally.” Generally.

Details are scarce because participating billionaires were promised privacy -- privacy being a constitutional commitment to enormous wealth. One detail that did get out was the name Buffett assigned his file on this new initiative: “Great Givers”.

It would appear that the ability to give greatly stops at the factory door. Buffett’s billions, for example, include holdings in Wal-Mart, a company fresh from victory in Chicago where, after years of resistance by community forces, construction of its first mega-store was just given a green light. Times as they are, with “jobless recovery” taken to new heights and millions looking for work, Wal-Mart offered a wage of $8.75 per hour to seal the deal. The amount Wal-Mart agreed to pony up is 50 cents over the Illinois minimum; still, at under $20,000 per year gross, no one would argue that it constitutes a living wage. Such are the elements of Great Giving.

Buffett’s profits are not tied exclusively to low wages stateside; his Wal-Mart earnings are a result of paying the lowest garment wages in the world, according to labor rights advocates. Wal-Mart has started moving some of its garment factories out of China, where garment workers have been making the princely sum of $147 per month, to Bangladesh, where monthly earnings total $64, the lowest wage of its kind. In this world of farce these wages are linked to Bangladesh’s low literacy rate—55 percent. Had workers only acquired educations, the master thespians of farce would say, wages would be higher.

It’s not fair, however, to solely tie Buffett’s billions to uneducated Bangladeshis.

This Great Giver also bought a stake in Goldman Sachs and its Ivy-educated money managers, doing his part to rescue the financial system by transferring $5 billion to America’s gilded investment bank (in exchange for a 10 percent per annum return). Yes, this is the same Goldman that last month admitted “a mistake” in selling subprime mortgage bonds destined to collapse; the same Goldman that set aside $9.3 billion the first half of this year for salary and bonuses; and, yes, the same Goldman that orchestrated speculation in the world wheat crop with disastrous results, according to Frederick Kaufman’s cover story in the July issue of Harper’s, “The Food Bubble.” Undoubtedly, Buffett’s due diligence uncovered the following when sizing up the Goldman investment:

“The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment…. [W]ith accustomed care and precision, Goldman’s analysts went about transforming food into a concept. They selected eighteen commodifiable ingredients and contrived a financial elixir that included cattle, coffee, cocoa, corn, hogs, and a variety or two of wheat…. They weighted the investment value of each element… that could be expressed as single manifestation, to be known thenceforward as the Goldman Sachs Commodity Index….

“Since Goldman’s innovation, hundreds of billions of new dollars had overwhelmed the actual supply of and actual demand for wheat….

“In 2008, for the first time since such statistics have been kept, the proportion of the world’s population without enough to eat ratcheted upward. The ranks of the hungry had increased in a single year, the most abysmal increase in all of human history.”
(pp. 27-28)

Clarifying what the Great Giver Buffett means by the poor generally.

Buffett’s Goldman investment remains solid, as the SEC fined Goldman for its “mistake” what amounted to little more than petty cash -- $550 million. It was, according to finance professor Charles Geisst, “like passing around the church collection plate and collecting a few extra bucks for sins.” Geisst summed it up this way: “This is unlikely to change much at all. I think it will be business as usual right away.” More money for Buffett to give greatly.

Warren Buffett’s fellow Giver of Great Gifts, Bill Gates, has diversified his holdings as well. But his tens of billions result chiefly from the company he co-founded and led for decades, Microsoft, where profits remain very strong. “Microsoft Still Earnings Powerhouse,” barked the headline in USA Today, July 23, 2010. In its fledgling years, profits on Gates’ software were reportedly 70 per cent annually. Otherwise, after all, you don’t make upwards of $50 billion charging cost plus five percent.

Current returns for this scion of the responsible class were reported at 48 per cent, as Windows 7, the latest software batch out of Microsoft, led the company’s product pack. “It certainly shows that Office and Windows franchises are as strong as ever and delivering huge revenue,” analyst Brendan Barnicle told the Wall Street Journal recently. Indeed, annual sales have hit new records year after year, tripling to $62.5 billion in fiscal 2010. Net income for Gates’ Microsoft grew from $9.4 billion per year a decade ago to $24.1 billion this year.

Another way to gauge Gates’s billions is by catching a glimpse of the multitudes of students priced out of the computer market – thanks in part to that Great Giver’s expensive software – lined up daily at community college libraries for some free access to computers, each machine an expression of Gates’ creative commitment to profit in the +40 percent range – a gift Gates gave himself that keeps on giving. As Gates told Fortune: “The diversity of American giving is part of its beauty.”

Carl Ginsburg is a journalist in New York City. He can be reached at carlginsburg@gmail.com.


...

When I read that, I wrote an e-mail to Ginsburg but he never answered:

Subject: Nice piece on how Buffett & Gates get their money...

You should follow up with one on how they then pretend to "give it away," with society and the media celebrating them endlessly for their acts of "charity." Conversion of the initial emerging market plunder into "non-profit" foundations is the tested, now centuries-old means by which robber barons have transformed themselves into PR-compatible "philanthropists" and secured their wealth on behalf of their dynasties -- against the tax man and the threat of antitrust or expropriation by the occasional anti-rich majority in power (which happens even in the US, if you think about it in centuries). I'm amazed at how this essential structure of wealth concentration and class rule is also passed over by the social scientists. It's a portfolio diversification strategy - the Gates Foundation for example is about the equity (in Gates-preferred industries), not the annual "charity" (in Gates-preferred social engineering, like replacing teachers with Windows 8+). You can download the annual reports at their site. The GF is supposed to finish its "giveaway" 50 years after the deaths of both Bill and Melinda, which could be a century from now. In the meantime, do you think maybe whatever family scions are running it in 90 years or more might by then decide it must be maintained for a few decades or a century more because the work it has done is so vital, etc.? It's fitting they're hooking up with Rockefeller, whose granddad was one of the pioneers and greatest success of the robber baron to philanthropist algorithm.

Nicholas


http://rigorousintuition.ca/board2/view ... =8&t=29333

...

From justdrew

Free market has turned us into 'Matrix' drones

Free market has turned us into 'Matrix' drones
Ha-Joon Chang, the new kid on the economics block, is out to bust open a few myths
By Rachel Shields Sunday, 29 August 2010

A leading economist has likened the nation's acceptance of free-market capitalism to that of the brainwashed characters in the film The Matrix, unwitting pawns in a fake reality. In a controversial new book, the Cambridge economist Ha-Joon Chang debunks received wisdom on everything from the importance of the internet to the idea that people in the United States enjoy the highest standard of living in the world; an iconoclastic attitude that has won him fans such as Bob Geldof and Noam Chomsky.

Dr Chang's 23 Things They Don't Tell You About Capitalism is one of a spate of tomes published in recent weeks that question the future of the current system, including Capitalism 4.0 by Anatole Kaletsky, and Ian Bremmer's The End of the Free Market. Economists are keen to tap into the market for popular books on seemingly impenetrable subjects - highlighted by the runaway success of Freakonomics, which has sold more than four million copies since it was published in 2005 and is about to be made into a film.

South-Korean born Dr Chang aims to disprove what he sees as economic myths, including the idea that people are paid what they are worth, that the "trickle down" effect of increasing wealth among the rich helps the poor, and that education makes countries more prosperous.

One of the modern idols Dr Chang seeks to bring down is the internet. He claims that we overestimate the importance of new technologies compared to older inventions - such as the washing machine - and criticises the way in which internet access has been seen as key to countries' development.

"If you had everything, then I'm in favour of it. But when children don't have safe drinking water and free school meals, is it really important?" he said. "We have a fascination with the new, and we have to be careful not to project our own vision on to other people's lives."

A leading development economist, Dr Chang was much lauded for his 2007 book Bad Samaritans, which looked at the negative effects of globalisation on developing countries. He is now bringing his focus closer to home, considering problems in the UK. "It is like The Matrix. There is a reality where things could and should be better," he said. "In order to wake people up to that alternative reality, you need to show them that it isn't impossible. I'm not necessarily saying that I have a solution, but we have to recognise that some of the things we accept as inevitable aren't."

But while Dr Chang may not have the answer, he is sure of the problem - arguing that free-market capitalism has left the global economy more unstable, and people with less job security and greater feelings of insecurity, than ever before. His conviction that, post-recession, we should be rebuilding our country in a "moral" way - by acknowledging the social consequences of economic choices such as benefit cuts and job losses - will strike a chord with many.

"Another myth that needs to be busted is the idea that we can discuss economics without any moral implications," he said. "What kind of economy we build changes us, so what we do in terms of monetary policy determines who we are."

Dr Chang also highlights the way in which economics impacts not just on our wages and living standards, but also on our characters. He said: "In conventional economic theory, it is thought that we are born as perfectly formed, rational, self-serving agents. But where you work and what kind of work you do are important in determining your character."

While Dr Chang may have many fans, his belief that the welfare state should be expanded has prompted criticism from some economists.

"It is a very unfashionable thing to say at the moment, but people have to realise that cuts have long-term implications on the fairness of the culture," he said.

Dr Chang, who moved to the UK in 1986 as a 23-year-old graduate student, argues that an emphasis on equality of opportunity is futile - likening life to a race which everyone starts at the same time, but where some have weights strapped to their legs - and that we should instead work towards greater equality of outcome.

"People have been drilled into thinking that there is equality of opportunity and whatever comes out at the end should be accepted. But the effects of not having equality of outcome are felt by the next generation. It is not simply that you don't have enough money; if your parents are from a certain background, you don't even aspire to another background. You can ameliorate some of these things through the school system, but not all of them."

What his peers say...

'I think the internet has probably changed the world more than the washing machine'

Dr Ruth Lea, Economic advisor to Arbuthnot Banking Group

'Different organisations do behave differently, and structures have an effect on our actions'

Professor Robert Wade, London School of Economics

'Of course the crisis revealed the futility of the dominant system of economics'

Professor James Galbraith, Lyndon B Johnson School of Public Affairs

'Just about every economic decision that you make has a moral aspect'

Dr Timothy Leunig, Reader, London School of Economics

'The dominant paradigm about capitalism being best for all is an illusion'

Professor Bob Rowthorn, Professor emeritus, Cambridge University


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Looking Back: The 1975 New York City Fiscal Crisis

Excellent show.

http://kpfa.org/archive/id/63365

Against the Grain

Economist William Tabb, author of "The Long Default," talks to Sasha Lilley about the 1975 New York City fiscal crisis--which was resolved with an attack on public sector workers, the gutting of public services, and the restructuring of the city--and the parallels with the current crisis in California today.


...

Thanks to Bruce Dazzling, Zero Hedge pointing out that inflation and hyperfinflation are different things, and laying out their imminent Mad Max scenario.

Zerohedge: How Hyperinflation Will Happen


How Hyperinflation Will Happen
Submitted by Gonzalo Lira
08/23/2010 10:56 -0500

http://www.zerohedge.com/article/guest- ... ill-happen

Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.

To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.

But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.

For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.

The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

So this is how hyperinflation will happen:

One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.

This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.

It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.

The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.

However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.

The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”

Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.

Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?

Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)

Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.

If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?

So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.

If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.

So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.

This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.

Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).

Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?

Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.

Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?

In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .

(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)

In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.

“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.

That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.

The question for us now—ad portas to this hyperinflationary event—is, what to do?

Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.

The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.

Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.

Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.

What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.

I think we’re going to have hyperinflation. I hope I have managed to explain why.


...

Based on the economics as I've understood them with due credit to Hudson and others, there will be deflation due to the debt-interest burden and austerity -- unless there is hyperinflation due to a complete international loss of confidence in the US dollar -- unless there is conventional inflation due to peak oil or commodity shortages caused by crises and war.

All of that is true, I believe. Crises are unpredictable.

...

Taibbi's Goldman Sachs history from July 2009 -- have we really not posted this here yet?

Original
http://www.rollingstone.com/politics/news/12697/64796

THE GREAT AMERICAN BUBBLE MACHINE

From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again

By MATT TAIBBI

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the rear end in a top hat chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York – which, incidentally, is now in charge of overseeing Goldman – not to mention …

But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere – high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth – pure profit for rich individuals.

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s – and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.

If you want to understand how we got into this financial crisis, you have to first understand where all the money went – and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long – including last year’s strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn’t one of them.

IF AMERICA IS NOW CIRCLING THE DRAIN, GOLDMAN SACHS HAS FOUND A WAY TO BE THAT DRAIN.

BUBBLE #1 – THE GREAT DEPRESSION

Goldman wasn’t always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids – just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.

You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.

This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an “investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.

Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund – which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah – which, of course, was in large part owned by Goldman Trading.

The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line; The basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.

In a chapter from The Great Crash, 1929 titled “In Goldman Sachs We Trust,” the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leverage-based investment. The trusts, he wrote, were a major cause of the market’s historic crash; in today’s dollars, the losses the bank suffered totaled $475 billion. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity,” Galbraith observed, sounding like Keith Olbermann in an ascot. “If there must be madness, something may be said for having it on a heroic scale.”

BUBBLE #2 – TECH STOCKS
Fast-Forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor’s assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.

It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “long-term greedy.” One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grownup’ corporate clients who had made bad deals with us,” he says. “Everything we did was legal and fair – but ‘long-term greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.”

But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.

Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliche that whatever Rubin thought was best for the economy – a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline THE COMMITTEE TO SAVE THE WORLD. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy – beginning with Rubin’s complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits.

The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system – one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.

“Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public,” says one prominent hedge-fund manager. “The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash.” Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there saying Bullshit.com is worth $100 a share.”

The problem was, nobody told investors that the rules had changed. “Everyone on the inside knew,” the manager says. “Bob Rubin sure as hell knew what the underwriting standards were. They’d been intact since the 1930s.”

Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. “In the early Eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future.”

Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.

How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,” which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show” to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of
the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price – let’s say Bullshit.com’s starting share price is $15 – in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day-trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit – a six percent fee of a $500 million IPO is serious money.

Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nichol as Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television rear end in a top hat Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman.

“Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “They totally fueled the bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation – manipulated up – and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed to pay $40 million for its laddering violations – a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)

Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price – ensuring that those “hot” opening price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business – effectively robbing all of Bullshit’s new shareholders by diverting cash that should have gone to the company’s bottom line into the private bank account of the company’s CEO.

In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman’s board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, Goldman gave special stock offerings to executives in 21 companies that it took public, including Yahoo! co-founder Jerry Yang and two of the great slithering villains of the financial-scandal age – Tyco’s Dennis Kozlowski and Enron’s Ken Lay. Goldman angrily denounced the report as “an egregious distortion of the facts” – shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. “The spinning of hot IPO shares was not a harmless corporate perk,” then-attorney general Eliot Spitzer said at the time. “Instead, it was an integral part of a fraudulent scheme to win new investment-banking business.”

Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.

GOLDMAN SCAMMED HOUSING INVESTORS BY BETTING AGAINST ITS OWN CRAPPY MORTGAGES.

Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits – an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman’s mantra of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement.

The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else’s Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that “I’ve never even heard the term ‘laddering’ before.”)

For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent – they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.

BUBBLE #3 – THE HOUSING CRAZE
Goldman’s role in the sweeping disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that poo poo out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.

None of that would have been possible without investment bankers like Goldman, who created vehicles to package those lovely mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con’s mortgage on its books, knowing how likely it was to fail. You can’t write these mortgages, in other words, unless you can sell them to someone who doesn’t know what they are.

Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the lovely ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance – known as credit-default swaps – on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won’t.

There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated – and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.

More regulation wasn’t exactly what Goldman had in mind. “The banks go crazy – they want it stopped,” says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. “Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped.”

Clinton’s reigning economic foursome – “especially Rubin,” according to Greenberger – called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 1l,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.

But the story didn’t end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities – a third of which were subprime – much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.

Take one $494 million issue that year, GSAMP Trust 2006-S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation – no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.

Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners – old people, for God’s sake – pretending the whole time that it wasn’t grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions …. However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

“That’s how audacious these assholes are,” says one hedge-fund manager. “At least with other banks, you could say that they were just dumb – they believed what they were selling, and it blew them up. Goldman knew what it was doing.” I ask the manager how it could be that selling something to customers that you’re actually betting against – particularly when you know more about the weaknesses of those products than the customer – doesn’t amount to securities fraud.

“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”

Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. New York state regulators are suing Goldman and 25 other underwriters for selling bundles of crappy Countrywide mortgages to city and state pension funds, which lost as much as $100 million in the investments. Massachusetts also investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders who got stuck ho1ding predatory loans. But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million – about what the bank’s CDO division made in a day and a half during the real estate boom.

The effects of the housing bubble are well known – it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It hosed the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and hosed the taxpayer by making him payoff those same bets.

And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm’s payroll jumped to $16.5 billion – an average of $622,000 per employee. As a Goldman spokesman explained, “We work very hard here.”

But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down – and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.

BUBBLE #4 – $4 A GALLON
By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn’t leave much to sell that wasn’t tainted. The terms junk bond, IPO, subprime mortgage and other once-hot financial fare were now firmly associated in the public’s mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years – the notion that housing prices never go down – was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.

Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market – stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.

That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be “very helpful in the short term,” while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.

GOLDMAN TURNED A SLEEPY OIL MARKET INTO A GIANT BETTING PARLOR – SPIKING PRICES AT THE PUMP.

But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling – which, in classic economic terms, should have brought prices at the pump down.

So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help – there were other players in the physical-commodities market – but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures – agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. The commodities market was designed in large part to help farmers: A grower concerned about future price drops could enter into a contract to sell his corn at a certain price for delivery later on, which made him worry less about building up stores of his crop. When no one was buying corn, the farmer could sell to a middleman known as a “traditional speculator,” who would store the grain and sell it later, when demand returned. That way, someone was always there to buy from the farmer, even when the market temporarily had no need for his crops.

In 1936, however, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission – the very same body that would later try and fail to regulate credit swaps – to place limits on speculative trades in commodities. As a result of the CFTC’s oversight, peace and harmony reigned in the commodities markets for more than 50 years.

All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren’t the only ones who needed to hedge their risk against future price drops – Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.

This was complete and utter crap – the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman’s argument. It issued the bank a free pass, called the “Bona Fide Hedging” exemption, allowing Goldman’s subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.

Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market – driven there by fear of the falling dollar and the housing crash – finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers – and that’s likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.

What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. “I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC,” says Greenberger, “and neither of us knew this letter was out there.” In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.

“1 had been invited to a briefing the commission was holding on energy,” the staffer recounts. “And suddenly in the middle of it, they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Duh, duh.’ So we went back and forth, and finally they said, ‘We have to clear it with Goldman Sachs.’ I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?’”

The CFTC cited a rule that prohibited it from releasing any information about a company’s current position in the market. But the staffer’s request was about a letter that had been issued 17 years earlier. It no longer had anything to do with Goldman’s current position. What’s more, Section 7 of the 1936 commodities law gives Congress the right to any information it wants from the commission. Still, in a classic example of how complete Goldman’s capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.

Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index – which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil – became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly “long only” bettors, who seldom if ever take short positions – meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it’s terrible for commodities, because it continually forces prices upward. “If index speculators took short positions as well as long ones, you’d see them pushing prices both up and down,” says Michael Masters, a hedge-fund manager who has helped expose the role of investment banks in the manipulation of oil prices. “But they only push prices in one direction: up.”

Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an “oracle of oil” by The New York Times, predicted a “super spike” in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities-trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives.”

But it wasn’t the consumption of real oil that was driving up prices – it was the trade in paper oil. By the summer of2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.

In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees’ Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn’t just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World.

Now oil prices are rising again: They shot up 20 percent in the month of May and have nearly doubled so far this year. Once again, the problem is not supply or demand. “The highest supply of oil in the last 20 years is now,” says Rep. Bart Stupak, a Democrat from Michigan who serves on the House energy committee. “Demand is at a 10-year low. And yet prices are up.”

Asked why politicians continue to harp on things like drilling or hybrid cars, when supply and demand have nothing to do with the high prices, Stupak shakes his head. “I think they just don’t understand the problem very well,” he says. “You can’t explain it in 30 seconds, so politicians ignore it.”

BUBBLE #5 Rigging the Bailout

After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.

It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman's last real competitors — collapse without intervention. ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment banking competitor, Lehman, goes away.") The very next day, Paulson green-lighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.

BUBBLE #6 Global Warming

Fast-forward to today. It's early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.

Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm's co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade.

The new carbon credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.

Here's how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

The feature of this plan that has special appeal to speculators is that the "cap" on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison's sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.

Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they're the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank's environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson's report argued that "voluntary action alone cannot solve the climate change problem." A few years later, the bank's carbon chief, Ken Newcombe, insisted that cap-and-trade alone won't be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, "We're not making those investments to lose money."

The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There's also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy futures market?

"Oh, it'll dwarf it," says a former staffer on the House energy committee.

Well, you might say, who cares? If cap-and-trade succeeds, won't we all be saved from the catastrophe of global warming? Maybe — but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it's even collected.

"If it's going to be a tax, I would prefer that Washington set the tax and collect it," says Michael Masters, the hedge fund director who spoke out against oil futures speculation. "But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine."

Cap-and-trade is going to happen. Or, if it doesn't, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees — while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.

It's not always easy to accept the reality of what we now routinely allow these people to get away with; there's a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can't really register the fact that you're no longer a citizen of a thriving first-world democracy, that you're no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.

But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state, running on gangster economics, and even prices can't be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can't stop it, but we should at least know where it's all going.

This article originally appeared in RS 1082-1083 from July 9-23, 2009.


Well, cap and trade didn't happen yet.

...
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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 10:23 pm

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Hudson on the Angelides Commission...

Weekend Edition
September 3 - 5, 2010
The Angelides Commission Squints Back at the Bank Bailout and the Fall of Lehman
Does Our Economy Really Have to Run on Fraud?


By MICHAEL HUDSON

What is the difference between today’s economy and Lehman Brothers just before it collapsed in September 2008? Should Lehman, the economy, Wall Street – or none of the above – be bailed out of bad mortgage debt? How did the Fed and Treasury decide which Wall Street firms to save – and how do they decide whether or not to save U.S. companies, personal mortgage debtors, states and cities from bankruptcy and insolvency today? Why did it start by saving the richest financial institutions, leaving the “real” economy locked in debt deflation?

Stated another way, why was Lehman the only Wall Street firm permitted to go under? How does the logic that Washington used in its case compare to how it is treating the economy at large? Why bail out Wall Street – whose managers are rich enough not to need to spend their gains – and not the quarter of U.S. homeowners unfortunate enough also to suffer “negative equity” but not qualify for the help that the officials they elect gave to Wall Street’s winners by enabling Bear Stearns, A.I.G., Countrywide Financial and other gamblers to pay their bad debts?

There was disagreement last Wednesday at the Financial Crisis Inquiry Commission now plodding along through its post mortem hearings on the causes of Wall Street’s autumn 2008 collapse and ensuing bailout. Federal Reserve economists argue that the economy – and Wall Street firms apart from Lehman – merely had a liquidity problem, a temporary failure to find buyers for its junk mortgages. By contrast, Lehman had a more deep-seated “balance sheet” problem: negative equity. A taxpayer bailout would have been an utter waste, not recoverable.

Lehman CEO Dick Fuld is bitter. He claims that Lehman was unfairly singled out. After all, the Fed lent $29 billion to help JPMorgan Chase buy out Bear Stearns the preceding spring. In the wake of Lehman’s failure it seemed to gain the courage to say, “Never again,” and avoided new collapses by bailing out A.I.G. – saving all its counterparties from having to take a loss.

Was this not a giveaway? .Fuld implied. Why couldn’t the Fed and Treasury do for Lehman what they did with other Wall Street investment firms and stock brokers: let it reclassify itself as a bank so it could pawn off its junk mortgages at the Fed’s discount window for 100 cents on the dollar, sticking taxpayers with the loss? (And by the way, will these firms ever be asked to buy back these mortgages at the price they borrowed against from the government? Or will they be allowed to walk away from their debts in a Wall Street version of “jingle mail”?)

This is the soap opera that Americans should be watching, if only it weren’t conducted in the foreign language of jargon and euphemism. At issue is whether Lehman’s crisis was merely a temporary “liquidity problem,” that time would have cleaned up; or, did the firm suffer a more deep-seated “balance sheet problem” (negative equity), as Federal Reserve Chairman Ben Bernanke claims – a junk balance sheet, composed of assets that not only had no buyers at the time, but had no visible likelihood of recovering their market price even after the $13 trillion the Treasury and Federal Reserve have spent to bail out Wall Street.

Insisting that Lehman should have shared in Washington’s $13 trillion giveaway, . Fuld testified that his firm was just as savable as Countrywide or A.I.G. – or Fannie Mae for that matter. Lehman was perversely singled out, he claims. Was it not indeed as savable as the Fed and Treasury claim the U.S. real estate sector is? Like over-mortgaged homeowners, all it needed was enough time to finish selling off its portfolio, given enough loan support to tide it over.

The problem, of course, is that the securities that Lehman hoped to pawn off were fraudulent junk. American homeowners are victims, not crooks. Wall Street bailed out crooks at Countrywide and its cohorts. The credit-rating agency Fitch has found financial fraud in every mortgage package it has examined. And these are the packages that have made Wall Street rich and powerful enough to gain Washington bailouts to establish them as a new ruling class, bailouts to use for buying up Washington politicians and lawmakers, and for buying out the popular press to tell people how necessary Wall Street financial practice is to “support” the economy and “create wealth.”

Could any other daytime telecast have a more typecast villain than Fuld? A novelist would be hard-put to better personify greed, arrogantly playing bridge with his boss while Lehman burned. Yet his testimony has a certain logic. If the negative equity suffered by a quarter of U.S. homeowners can be saved, as the Fed claims it can, where should the line be drawn?

Or to put this question the other way around, why are ten million American homeowners being treated like Lehman, if the Fed believes that they are as savable as Countrywide and A.I.G.?

Huge sums are at stake, because the bailout has left little for Social Security, and nothing to bail out the insolvent states and cities, or for more stimuli to pull the national economy out of depression.

Most relevant in Fuld’s self-pitying defense before the Angelides Committee is not what he said about his own firm, but his accusation that the Fed and Treasury rescued the rest of Wall Street. Weren’t other firms just as bad? Why was Lehman singled out?

The Fed’s witnesses gave a devastating reply. They drew a clear distinction between a temporary “liquidity problem” and outright negative net worth – the “balance-sheet problem” of insufficient assets to cover one’s debts. Lehman was so badly managed, the Fed claimed, so reckless and arrogant in its belief that it could cheat its customers by selling junk at a huge markup, that it could not have been rescued except by an outright taxpayer giveaway. As the Fed’s Chief Counsel, Scott Alvarez, put matters: “I think that if the Federal Reserve had lent to Lehman … in the way that some people think without adequate collateral … this hearing and all other hearings would have only been about how we had wasted the taxpayers’ money – and I don’t expect we would have been repaid.” Like the city of Oakland, in Gertrude Stein’s derisive phrase, there wasno “there” there.

Included in the hearings’ evidence is an exasperated e-mail sent by Treasury Secretary Hank Paulson’s chief of staff, Jim Wilkinson, on Sept. 9, 2008: “I just can’t stomach us bailing out Lehman. Will be horrible in the press.” Five days later, on Sept. 14, he added that unless a private buyer could be found (e.g., as JPMorgan Chase stepped forward to buy Bear Stearns), “No way govt money is coming in … also just did a call with the WH [White House] and usg [U.S. Government] is united behind no money … I think we are headed for winddown.” (1)

Lehman’s problem was not just temporary illiquidity. It had a fatal balance-sheet problem: Its assets were not worth anywhere near what it owed. So with poetic justice, it was in the same position as the subprime borrowers whose junk mortgages it had underwritten and sold to investors gullible enough to believe Moody’s and Standard and Poor’s AAA ratings. This fraudulent junk was supposed to be as safe as a U.S. Treasury bond. But it turned out to be only as safe as Social Security and state pension promises are in today’s “Big fish eat little fish” world.

Yet . Fuld is correct in pointing out that not only Bear Stearns and A.I.G., but also Morgan Stanley and Goldman Sachs would have failed without state support. So the question remains: Why bail out these firms (and their counterparties!) but not Lehman?

This is too narrow a scope to pose the proper question. What needs to be discussed is the result of Washington arranging for Wall Street to repay its TARP, A.I.G. and other bailout money – including that of Fannie Mae and Freddie Mac – by “earning its way out of debt” at the “real” economy’s expense. Why has Washington refused to write down the bad debts of homeowners, states and cities, and companies facing bankruptcy unless they annul their pension promises to their employees? Why is Washington is treating the American economy like it treated Lehman and telling it to “drop dead”?

The explanation is that a double standard exists. The wealthy get bailed out – the creditors, not the debtors. And even the fraudsters, not their victims.

Sidestepping the Fraud Issue

Recent federal bankruptcy proceedings have exposed Lehman’s deceptive off-balance-sheet accounting gimmicks such as Repo 105 to conceal its true position. No fraud charges have yet been levied, but this is the invisible elephant in the Washington committee rooms. “Everyone was doing it,” so that makes it legal – or what is the same thing these days, non-prosecutable in practice. To prosecute would be to disrupt the financial system – and it is Fed doctrine that the economy cannot survive without a financial system enabled to “earn its way out of debt” by raking off the needed wealth from the rest of the economy?

So the Fed, the Treasury and the Justice Department have merely taken the timid baby step of pointing out that Lehman suffered from such bad management that no firm was willing to buy it out. Barclay’s was interested, but . Fuld was so greedy that he found its offer not rich enough for his taste. So he ended up with nothing. It is a classic morality tale. But evidently not fraud.

The fraud issue lies as far outside the scope of the financial committee meetings as the question of how the economy should cope with its unpayably high mortgage, state and local debts in the face of its inadequately funded pension obligations. Fed Chairman Bernanke testified on Thursday, September 2, that “the market” itself breeds what most people would call fraud. Widening the market for home ownership necessarily involves lowering loan standards, he explained. But as the Lehman failure illustrates, where should we draw the line between “illiquidity” and insolvency on the one hand, and higher risk and outright fraud?

The Fed argues that the economy cannot recover without a solvent financial system. But what about that large part of the financial system based on fraud? Would the economy fall apart without it – without mortgage fraud, without deceptive packaging of junk mortgages, and for that matter without computerized gambling on derivatives? What of the credit-ratings agencies whose AAA writings were as much up for sale as the conscience and honesty of politicians on the Senate and House Banking Committees? Do we really need them?

And does the economy need more credit (that is, debt)? Or does it need jobs? Does it need to un-tax the banks and give tax-favoritism to Wall Street (“capital gains” tax rates) to enable it to earn its way out of debt at the expense of the production-and-consumption economy?

The question that Washington financial committees should be asking (and economics textbooks should be posing) is whether wider home ownership is really dependent on easier and looser lending standards. After all, the effect of easy credit is to enable borrowers to bid up housing prices. Is this really how to make the U.S. economy more competitive – given the fact that industrial labor now typically pays 40 per cent of its wage income for housing?

Or, does the Fed’s easy-money policy deregulation of oversight open the way for asset-price inflation that puts home ownership even further out of reach – except at the price of running up a lifetime of debt to the banks that write the loans on their keyboard at steep markups over their cost of funding from the compliant Fed?

Qui bono?

Who is to benefit from the Fed’s easy money policy – consumers and homeowners, or Wall Street? This is the broad issue that should be discussed. What would have happened without the bailout? (Remember, Republican Congressmen opposed it – before that fatal Friday when “maverick” John McCain rushed back to Washington and said he would not debate . Obama that evening unless Congress approved the bailout of his Wall Street backers.) What if it had been the debtors who were bailed out by a write-down of bad debts, instead of the lenders who had made bad loans and the large institutions that bought them?

The bailout has saddled taxpayers not only with $13 trillion that now must be sacrificed by the economy at large (but not by Wall Street), with the cost of a decade-long depression resulting from keeping the bad debt on the books. This is what rightly should be deemed criminal.

Defenders of Wall Street insist that there was no alternative. And the committee hearings are carefully only listening to such people, because these are very respectable hearings. They are writing mythology, almost as if they are crafting a new religion. In this new ethic, Wall Street financial institutions – “credit creators,” that is, debt creators – are supposed to fund industry, not strip assets or make bad loans. Without rich people, who would “create jobs”? Such is the self-serving logic of Wall Street. For them, Wall Street is the economy. The wealth of a nation is worth whatever banks will lend, by collateralizing the economic surplus for debt service.

What the Angelides Commission really should focus on is whether this is true or false. That would make it a soap opera worth watching. The Fed so far has stonewalled attempts to discover just who was bailed out in autumn 2008? But most important of all is, what dynamic was bailed out? What class of people?

The answer would seem to be, financial firms employing and serving the nation’s wealthiest 1 per cent? Any and all fraudsters among their ranks? (There has not been a single prosecution, as Bill Black reminds us.) Or the remaining 99 per cent of the population – their bank deposits and indeed, their jobs themselves?

Academic textbooks pretend that the economy is all about production and consumption – factories producing the things their workers buy. The distribution of wealth does not appear, nor is it regularly tracked in statistics. But in Washington and at the hearings, the economy seems to be all about lending and debt, all about balance sheets.

I believe that the beneficiaries were fraudsters, and that the system cannot be saved. Trying to save it by keeping the debts in place – and letting Wall Street banks “work their way out of debt” at the U.S. economy’s expense – threatens to lock the economy in a chronic debt deflation and depression.

At issue is the concept of capital. Does money that is made by short-term, computer-driven financial trades qualify as “capital formation” and hence deserving of tax breaks? Are the billions of dollars of “earnings” reported by Wall Street speculators to be taxed at the low 15 per cent “capital gains” rate? That is only a fraction of the income-tax rate that most workers pay – on top of which is piled the 11 per cent FICA wage withholding for Social Security and Medicare that all workers have to pay on their salaries up to the cut-off point of about $102,000. (This cut-off frees from this tax the tens of millions of dollars that hedge fund traders pay themselves.) Or should these trading gains – a zero-sum activity where one party’s gain is, by definition, another’s loss (usually one’s customers) – be taxed more highly than poverty-level income of workers?

A short while ago the Blackstone hedge fund’s co-founder, Stephen Schwarzman, characterized the attempt to tax short-term arbitrage trading gains at the same rate that wage-earners pay as analogous to Adolph Hitler’s invasion of Poland in 1939. It is a class war against fraudsters and criminals – an unfair war as serious as World War II. In Schwarzman’s apocalyptic vision the Democrats are re-enacting the role of Adolph Hitler by mounting a fiscal blitzkrieg to force billionaires to pay as high a tax rate as workers. Are not Wall Street firms doing “God’s work,”as Goldman Sachs chairman Lloyd Blankfein, put it last fall? And if they are, then are not those who would tax or criticize Wall Street “God-killers”?

If religion can be turned on its head like this – where the Invisible Hand of Wall Street (invisible to the Justice Department, at least) is elevated to a faux-Deist moral philosophy – is it any surprise that economic orthodoxy and formerly progressive tax policy are succumbing? The rentiers are fighting back – against the Enlightenment, against Progressive Era tax policy, and against hopes for U.S. economic recovery. Given today’s florid emotionalism when it comes to discussing Wall Street finances, it hardly is surprising that the Angelides hearings do not dare venture into such territory as to ask whether the bottom 90 per cent of the U.S. economy might need to be bailed out with debt relief just as Wall Street’s elites were.

On Thursday, Fed Chairman Bernanke tried to put the financial flow of funds that led up to the crisis in perspective. In his testimony before the Financial Crisis Inquiry Commission he described a self-feeding process that actually started with the U.S. balance-of-payments deficit that made foreigners so flush with dollars. They understandably wanted yields higher than the Treasury was paying, as the Fed was flooding the economy with credit to keep asset prices afloat to save the banks from having to take loan write-downs and admit that debt creation was not really the same thing as Alan Greenspan euphemized in calling it “wealth creation.” So foreign financial institutions became a large but overly trusting market for packaged junk mortgages.

When asked just who was pushing the great explosion of mortgage lending, Bernanke pointed to the mortgage packagers – Wall Street profiting from the commissions and rake-offs it was making by pretending that the loans were not bad. However, he reminded his audience, there also had to be popular demand for housing. People were panicked. They worried that if they did not buy a home back in 2005, they could not afford to buy in the future. And they were cajoled with financial televangelists assuring them that they would always enjoy the option of selling at a profit. But Bernanke said nothing about fraud in all this. To widen the market for home ownership, banks had to write more mortgages, and this required lowering their standards.

So they did it all for us, for “the people” – and the backers of Fannie Mae and Freddy Mac who egged them on.

Where does “lowering loan standards” turn into outright fraud? Has that simply become part of “the market”? This is what the commission seems to fear to address. But it is getting late – already we are in September, and the report is scheduled for December. So is this really going to be “it”? This would be like a soap opera ending in the middle of the desert, with the main protagonists stranded. This seems to be where the Commission is leaving the U.S. economy as it waits for the recommendations of the Joint Commission to Roll Back Social Security, or whatever the name of Obama’s Republicanized Democratic commission is more formally called. The result is more like the cliffhanger of a serial, leaving the viewer to try and imagine how the protagonist – in this case, the economy – will ever manage to be saved.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

(1) Tom Braithwaite, “Fuld criticises Fed for letting Lehman fail,” Financial Times, September 2, 2010, and John D. McKinnon and Victoria McGrane, “Clashing Testimony Over Lehman Bankruptcy,” Wall Street Journal, Sept. 2, 2010.


///

Thanking justdrew for this
http://rigorousintuition.ca/board2/view ... =8&t=29103

Market Data Firm Spots the Tracks of Bizarre Robot Traders
Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation's stock exchanges.

What they do doesn't show up in Google Finance, let alone in the pages of the Wall Street Journal. No one really knows how they operate or why. But over the past few weeks, Nanex, a data services firm has dragged some of the odder algorithm specimens into the light.

The trading bots visualized in the stock charts in this story aren't doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

In fact, it's hard to figure out exactly what they're up to or gauge their impact. Are they doing something illicit? If so, what? Or do the patterns emerge spontaneously, a kind of mechanical accident? If so, why? No matter what the answers to these questions turn out to be, we're witnessing a market phenomenon that is not easily explained. And it's really bizarre.

It's thanks to Nanex, the data services firm, that we know what their handiwork looks like at all. In the aftermath of the May 6 "flash crash," which saw the Dow plunge nearly 1,000 points in just a few minutes, the company spent weeks digging into their market recordings, replaying the day's trades and trying to understand what happened. Most stock charts show, at best, detail down to the one-minute scale, but Nanex's data shows much finer slices of time. The company's software engineer Jeffrey Donovan stared and stared at the data. He began to think that he could see odd patterns emerge from the numbers. He had a hunch that if he plotted the action around a stock sequentially at the millisecond range, he'd find something. When he tried it, he was blown away by the pattern. He called it "The Knife." This is what he saw:

Image

"When I pulled up that first chart, we saw 'the knife,' we said, that's certainly algorithmic and that is weird. We continued to refine our software, honing the algorithms we use to find this stuff," Donovan told me. Now that he knows where and how to look, he could spend all day for weeks just picking out these patterns in the market data. The examples that he posts online are just the ones that look the most interesting, but at any given moment, some kind of bot is making moves like this in the stock exchange.

"We probably get 10 stocks in any 10 minutes where we see something like this," Donovan said. "It's happening all the time."

-- more at link above --



http://www.nanex.net/FlashCrash/CCircleDay.html

In our original Flash Crash Analysis report, we dedicated a section to an observed phenomena we termed "Quote Stuffing", in which bursts of quotes (at very high rates) with extremely unusual characteristics were observed.

As we continue to monitor the markets for evidence of Quote Stuffing and Strange Sequences (Crop Circles), we find that there are dozens if not hundreds of examples to choose from on any given day. As such, this page will be updated often with charts demonstrating this activity.

The common theme with the charts shown on this page is they are obviously all generated in code and are algorithmic. Some demonstrate bizarre price or size cycling, some demonstrate large burst of quotes in extremely short time frames and some will demonstrate both. In most cases these sequences are from a single exchange with no other exchange quoting in the same time frame.


Later in that thread:

justdrew wrote:
smiths wrote:a ghost in the machine?


ghost perhaps, but probably only like the ghosts in scooby-doo always turned out to be. Let's hope some meddling kids wander through.

I still think high speed trading should simply be banned.
and that every issued share should have a unique serial number, a 64bit GUID.
no given share should be able to trade more than once per day.
this would automatically prevent so many abuses.
so trades would occur at the end of each day and be resolved in some auction fashion.

http://en.wikipedia.org/wiki/Auctions#Types_of_auction

wintler2 wrote:The market itself ? Do you mean the automated software platform, or..?

Imho it is much more likely that some actors in the market have nontransparent access, and are using it to work prices up or to weaken them, at little cost or risk.


yeah, I'm thinking the people who run the electronic trading floor would be responsible. Why would they tolerate non-transparent orders in their market, that would be major long running hacking were that going on. Or maybe it's from a government mandated secret backdoor?


///
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 10:32 pm

...

Thanks to operator kos:
http://rigorousintuition.ca/board2/view ... =8&t=29020

22 Statistics That Prove The Middle Class
Is Being Systematically Wiped Out Of Existence In America

Michael Snyder, Business Insider -- July 15, 2010

01 ) 83% of all U.S. stocks are in the hands of 1% of the people.

02 ) 61% of Americans "always or usually" live paycheck to paycheck, which was up from 49% in 2008 and 43% in 2007.

03 ) 66% of the income growth between 2001 and 2007 went to the top 1% of all Americans.


04 ) 36% of Americans say that they don't contribute anything to retirement savings.

05 ) A staggering 43% of Americans have less than $10,000 saved up for retirement.

06 ) 24% of American workers say that they have postponed their planned retirement age in the past year.


07 ) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32% increase over 2008.

08 ) Only the top 5% of U.S. households have earned enough additional income to match the rise in housing costs since 1975.

09 ) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

10 ) In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to 1.

11 ) As of 2007, the bottom 80% of American households held about 7% of the liquid financial assets.

12 ) The bottom 50% of income earners in the United States now collectively own less than 1% of the nation’s wealth.

13 ) Average Wall Street bonuses for 2009 were up 17% when compared with 2008.

14 ) In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.

15 ) The top 1% of U.S. households own nearly twice as much of America's corporate wealth as they did just 15 years ago.

16 ) In America today, the average time needed to find a job has risen to a record 35.2 weeks.

17 ) More than 40% of Americans who actually are employed are now working in service jobs, which are often very low paying.

18 ) For the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.

19 ) This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.

20 ) Despite the financial crisis, the number of millionaires in the United States rose a whopping 16% to 7.8 million in 2009.

21 ) Approximately 21% of all children in the United States are living below the poverty line in 2010 - the highest rate in 20 years.

22 ) The top 10% of Americans now earn around 50% of our national income.

http://www.businessinsider.com/22-statistics-that-prove-the-middle-class-is-being-systematically-wiped-out-of-existence-in-america-2010-7#83-percent-of-all-us-stocks-are-in-the-hands-of-1-percent-of-the-people-1


Same thread:

stefano wrote:Saw this today, it's David McNally via Richard Seymour. The stat about the food stamps is almost unbelievable.
____________
The best description I have heard comes from an economist who I won't name for the moment because he's a real shithead. But he did nail this one when he said, "What the United States is experiencing is a statistical recovery and a human recession." That's precisely what's happened. A few statistical indicators have moved up, but for the vast majority of working class people, the recession continues.

If you add in the nearly 10 million who are involuntarily underemployed--they're taking part-time work because they can't find full-time work--you've got about 27 million people unemployed or underemployed in the U.S. economy right now. That translates into an unemployment rate of over 17 percent, and for Black and Latino workers, it's an unemployment rate of around 25 percent.

According to the Economist, one out of every six U.S. workers has taken a wage cut in this recession, and amazingly, four out of every 10 African Americans has experienced unemployment during this crisis. Looking at food stamps, an additional 37 million people went onto food stamps in the U.S. in 2009, and 40 percent of those recipients are working for a wage. They're not unemployed--they're simply the working poor that can't make ends meet.

As for the next statistic I'm going to give you, this one was so overwhelming that I did check it to be sure. Half of all U.S. children will now depend on food stamps at some point during their childhood, and the figure runs at 90 percent for African American kids. Imagine that--in the heartland of global capitalism.


///

PCR, but apropos lies, damned lies and statistics:

http://www.counterpunch.org/roberts08182010.html

August 18, 2010
While Economists Lied, the Economy Died
Deceptive Economic Statistics


By PAUL CRAIG ROBERTS

On August 17, Bloomberg reported a US government release that industrial production rose twice as much as forecast, climbing 1 percent. Bloomberg interpreted this to mean that “increased business investment is propelling the gains in manufacturing, which accounts for 11 percent of the world’s largest economy.”

The stock market rose.

Let’s look at this through the lens of statistician John Williams of shadowstats.com.

Williams reports that “the primary driver of a 1.0% monthly gain in seasonally-adjusted July industrial production” was “warped seasonal factors” caused by “the irregular patterns in U.S. auto production in the last two years.” Industrial production “shrank by 1.0% before seasonal adjustments.”

If the government and Bloomberg had announced that industrial production fell by 1.0% in July, would the stock market have risen 104 points on August 17?

Notice that Bloomberg reports that manufacturing accounts for 11 percent of the US economy. I remember when manufacturing accounted for 18% of the US economy. The decline of 39% is due to jobs offshoring.

Think about that. Wall Street and shareholders and executives of transnational corporations have made billions by moving 39% of US manufacturing offshore to boost the GDP and employment of foreign countries, such as China, while impoverishing their former American work force. Congress and the economics profession have cheered this on as “the New Economy.”

Bought-and-paid-for-economists told us that “the new economy” would make us all rich, and so did the financial press. We were well rid, they claimed, of the “old” industries and manufactures, the departure of which destroyed the tax base of so many American cities and states and the livelihood of millions of Americans.

The bought-and-paid-for-economists got all the media forums for a decade. While they lied, the US economy died.

Now, back to statistical deception. On August 17 the census Bureau reported a small gain in July 2010 residential construction housing starts. More hope orchestrated. In fact, the “gain,” as John Williams reports, was due to a large downward revision” in June’s reporting. The reported July “gain” would “have been a contraction” without the downward revision in June’s “gain.”

So, the overestimate of June housing not only made June look good, but also the downward correction of the June number makes July look good, because starts rose above the corrected June number. The same manipulation is likely to happen again next month.

If the government will lie to you about Iraqi weapons of mass production, Iranian nukes, why won’t they lie to you about the economy?

We now have an all-time high of Americans on food stamps, 40.8 million people, about 14% of the population. By next year the government estimates that food stamp dependency will rise to 43 million Americans. So last week Congress cut food stamp benefits. Let them eat cake.

Wherever one looks--food stamps, home foreclosures, bankrupted states, mounting joblessness, the message to long-suffering Americans from “their government” is the same: go eat cake, while we fight wars for Israel that enrich the military/security complex and while we bail out banksters whose annual incomes are in the tens of millions of dollars and up.

It is impossible to get any truth out of the US government about anything. If private companies used US government accounting, the executives would be prosecuted, convicted, and incarcerated.

“Our government” is committed to fighting wars to enrich the military/security complex and Israel’s territorial expansion at the expense of cuts in Social Security and Medicare.

All most members of Congress, especially Republicans, want to do is to pay for the pointless wars by cutting Social Security and Medicare.

When they worry about the deficit, it is usually Social Security and Medicare--so-called “entitlements” that are in the crosshairs.

You don’t have to be smart to see that Wall Street’s and the government’s response to the amazing US budget deficit is not to stop the senseless wars and bailouts of mega-millionaires, but to cut “entitlements.”

I will end this column on unemployment. “Our government” tells us that the unemployment rate is just under 10 percent, a figure that would have wrecked any post-Great Depression administration. But, again, “our government” is lying.

Compare this fact with the number you read from the financial press. Right now, if measured according to the methodology of 1980, the US unemployment rate is about 22%. Thus, the reported rate of unemployment hides more than half of the unemployed.

And Secretary Treasury Tim Geithner welcomed us in the August 2 NewYork Times to “the recovery.”

Utterly amazing.


Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury. His latest book, HOW THE ECONOMY WAS LOST, has just been published by CounterPunch/AK Press. He can be reached at: PaulCraigRoberts@yahoo.com


///
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

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Re: "End of Wall Street Boom" - Must-read history

Postby JackRiddler » Thu Nov 25, 2010 10:38 pm

... almost done! ...

Thanks to matrixdutch, Aug 2010:
http://rigorousintuition.ca/board2/view ... =8&t=29193

http://www.joebageant.com/joe/2010/08/u ... erica.html

Understanding America's Class System

Honk if you love caviar

By Joe Bageant


Urinals How about them political elites, huh? Five million bucks for Chelsea Clinton's wedding, 15K just to rent the air-conditioned shitters -- huge chrome and glass babies with hot water and everything. No gas masks and waxy little squares of toilet paper for those guys.

Yes, it looks big time from the cheap seats. But the truth is that when we are looking at the political elite, we are looking at the dancing monkey, not the organ grinder who calls the tune. Washington's political class is about as upwardly removed from ordinary citizens as the ruling class is from the political class. For instance, they do not work for a living in the normal sense of a job, but rather obtain their income from abstractions such as investment and law, neither of which ever gave anybody a hernia or carpal tunnel. By comparison, the ruling class does not work at all.

Moneywise, Washington's political class is richer than the working class by the same orders of magnitude as the ruling class is richer than the political class. This gives the political class something to aim for. To that end, they have adopted the ruling elite's behaviors, tastes and lifestyles, with an eye on becoming members. Moreover, it is a molting process that begins with the right university and connections, and culminates in flying off to Washington with the rest of your generation's most privileged and ambitious young moths.

They make enough dough to at least fake it until they make it. Fifty-one of the 100 members of the US Senate are at the very least millionaires -- probably more than that, since multi-million million dollar residences and estates are exempt from the official tally. For instance in the House, Nancy Pelosi's net worth is either $13 million, or $92 million, depending upon who is counting. Why they bother to shave such large numbers is a mystery. Thirteen million, ninety two million, the difference is not gonna change our opinion of Nancy. Our opinion being that the broad is loaded. More than loaded. The comparatively poor members of Congress, like Barney Frank, are near millionaires. His publicly declared net worth is $976,000. For the life of me, I cannot see how they get by.

Along with the habits, the political class adopts the ruling class's social canon and presumptions, especially the one most necessary for acceptance: That the public has the collective intelligence of a chicken. OK, so it may be very hard to disprove that at the moment, but we must maintain at least some egalitarian semblance here. Anyway, as a group, the political elites think, look and act alike, and act toward their own interests. That makes them a class.

Screw the proles, just count the money

This political class stands between all of us down here and the tiny minority in the ruling class waaaaaay up there, wherever the hell up there is. No use to squint. You can't see it from where we are. That comes in mighty handy in denying the existence of a ruling class.

On the other hand, you do not need to see an egg-sucking dog in action to know what to expect -- or not to expect. The track record of the political class is an open book. As the layer of millionaires buffering the elites who pay for their campaigns, they've done their jobs. They approved the Bush administration's massive tax cut for the rich. They dropped the per-child tax credit for families with incomes less than $20,000. They "reformed" prescription drugs right out of Medicare. They reformed health care into hundreds of billions of increased profits for the insurance industry.

However, the American political class' finest moment came in September 2008 when the financial greed machinery of American investment houses went tits up. The Republican and Democratic parties, major corporations, and manufacturers of US opinion came together in one of the greater bipartisan efforts in modern US history. There was nothing to do, they all agreed, but buy up $700 billion in "toxic asset" investments. "Otherwise," they prophesied, the world would end. Meaning that the ongoing national Ponzi scheme they have always sold to the American people as the US economy, would finally crash.

And in case there were any skeptics out there among the unwashed, the public was reminded just how much they stood to lose -- which was everything. Deep in the boiler room, the Goldman Sachs black bag crew had wired up the "economy" with enough explosive "financial instruments" to take out every working mook's home, or retirement savings, which the medical industry was already sucking up at an alarming rate. Something had to be done before the health care industry got it all, and repo the family ride.

Yessiree, it was gonna be a "systemic collapse," by god, and if you needed proof, just look at the way both George Bush and Barack Obama agreed that some American corporations were too big to let sink, therefore it was time for the public to start bailing out the boat. Meanwhile, the royal economists were unanimous in that this "rescue" was going to require another 10 trillion bucks somewhere down the pike -- a very short pike. So it must all be damned serious and we gotta do this thing. Right folks?

In an unusual display of common sense, the American public said "Bullshit," by margins of three or four to one, depending upon region. That did not bother political and economic elites much. What the fuck do the proles know anyway?

Then, in midstream, the political and economic owning classes switched horses, after realizing there was more gravy for the kingpins in buying up banks and big industries. It was unconstitutional, but what the hell, that's what Supreme Courts are for. The proles mumbled and peered into their TV sets for explanations that never came.

Of course, partisan opposition being what it is these days -- a blood-soaked ditch of snarling hyenas -- Obama's election meant the GOP needed to denounce the new Democratic president for display purposes. Or at least shit in the Oval Office, and then blame him. So most Republicans holding office in 2008 were forced to argue publicly against "troubled asset relief," "stimulus packages," and the huge bailouts. Besides, somebody had to unfurl the motley banner of a "self balancing free market," at least widely enough for the GOP to hide behind in the back room where the real deals are always cut. The place where the weapons companies propose systems, using congressional representatives and generals as sales reps. Where it is understood that, as John Kenneth Galbraith pointed out near the end of his life, when it was safe to tell the truth, "stockholders are just appendages, someone to hold the bag for the corporations, and stocks are just gambling chips for hedge funds and Wall Street," and for the suckers who think they can actually outwit High Frequency Trading -- a.k.a. High Speed Fraud. (Thanks to reader Brent B. for sending me that one).

Ah, but I have digressed. What else is new? The main thing is that the smoke has now cleared, the money is in ruling class coffers, and a spin the bottle game for a few prosecutions is underway to entertain the crowd for the next few years. Public burnings in the national town square of media always draw a crowd.

Bwaaaaaa! Obama won't let us play

Fortunately, for both parties, there is no such thing as an American political memory. That Lindsay Lohan dated fellow rehab client, snowboarder Riley Giles, yes, that can be remembered. That the Republicans signed off on similar, if smaller giveaways under Pappy Bush and Clinton -- well, that may as well be ancient Egyptian history. So is the fact that the both parties forced banks to make high rate home loans to people who people who did not qualify, because the inflated home values during the expanding bubble would make billions for big investors who knew when to get out. Should they stay too long at the fair and go bust, they would set up the howl of "too big to fail." The administration, which has no more a clue to what makes the economy tick, would then rush them pallets of money. That's what a banker calls a win-win situation: when the banker holds both ends of a winning deal.

Meanwhile, elite Republicans still needed a beef with the new black guy on the block who had just kicked their ass and was still very popular at the time. The best they could come up with on the bailouts was that they had been allowed too little input. "Obama won't let us play with him. Bwaaaaaa!" A smokescreen of course, since he was doing exactly what they would have done, handing Republican bankers every bit of money the people had and a helluva lot they didn't have, but could make payments on for the next, oh, 100 years or until the final miserable, smoking collapse, whichever comes first.

In the end though, nobody in Washington disputed the ruling class's right to dictate policy. After all, the political class agreed with the ruling class's major premise: The public does not know shit, never has, never will. Also that it is best not to get the public too riled up, not because the public has any power (power is money in America and the elites have it all now), but because elected officials would have to answer brainless questions from people such as Tea Partiers. Or Ron Paul cultists. Gawd!

Howard, won't you please come home

America has always had a ruling class, and it has always bullshitted the world that it doesn't. But at least the ruling class of the past was interesting and varied, because diverse sorts of Americans were getting rich.

You had Texas wildcatters in the "oil bidness." You had Southern cotton and tobacco aristocrats guzzling bourbon, fondling their stock portfolios and their black maids. You had industrialists and California and Florida real estate hotwires, Boston Brahmins and New York financiers. There was the bootlegginç g inside stock trader Joseph P. Kennedy, not to mention Prescott Bush moving financial assets around for the Nazis during WW II. They were products of varied educations, or in some cases, no education. They came from many regions, back when America still had distinct cultural regions, before it was completely homogenized and stratified for maximum capitalist efficiency.

Jane2 Whatever they may have been, they were seldom dull. I would love to have known Howard Hughes, a man who could direct a film, and build the largest aircraft ever built, the 200-ton, all-wood Spruce Goose, not to mention the busty Jane Russell's underwire bra. Stop and consider Bill Gates and the other colorless puds of today. Almost makes you miss the robber barons.

Think Tony Hayward gives a shit?

You hear it all the time these days: The top one percent of Americans own more wealth than the bottom 45% of the rest of Americans combined.

I have seldom met an American who thought this is a good thing, and seldom met one who understood how the ruling class got so rich. Simply put, it was through constant cultivation of bigger and more labyrinthine government, creating legal and technical complexities to sluice money nationally and globally in their direction, and to cover their asses in the process. The results are such things as 3,000 page health care bills (defining which corporate elites get which parts of the cake), or the 2,000-page NAFTA and its 9,000 tariff product codes.

Once the public was buried in such a maelstrom of legal paperwork, computer transactions, modeling, etc., it was easy to argue that the world had become so complex that the skills and brains to operate it were extremely rare and those who had them were fucking geniuses. These are people who dwell in such airy realms that we should pay them vast amounts of money and never question their decisions. That's how we got such oblivious duds as Timothy Geithner (who never held a nongovernment related job in his life) running the Treasury, and tens of thousands of the Empire's pud whackers, ranging from petty legal commissars, on up to the Alan Greenspans of this world -- a bumbling arrogant old fart who never had a clue but understood the rules: Look enigmatic and blow whichever administration is in power.

In fact, capitalist natural selection for mediocrity is how British Petroleum got Tony Hayward, who was unfortunate enough to be tossed out of the boat onto the media beaches of public awareness in his briefs. If ever there was a specimen of the slimy corporate salamander, we saw it in sniveling nakedness right there. Reportedly, the salamander will receive $18 million, plus annual pension payments totaling $1 million per year, the possible forfeiture of which makes good news copy to cover BP's ongoing negligence, theft and intimidation. So the public howls and throws eggs at the straw man, who has been making $1.6 million a year and is now sitting on his yacht "trying to get his life back." Does anybody really believe Tony Hayward gives a shit? Oh, there may be some news of BP's demise, its "absorption" by another corporation or something similar to Enron, sold off piecemeal to other massive corporations at a bargain prices, while everyone was watching the saga of the mediocre white collar criminal, Ken Lay. You'd think we'd learn. Corporations do not go away; they just morph along, sucking up generation after generation's money.

The rabble at the gates

You never hear them say it, but neo-conservatives understand that they have a mean streak down inside. They also know if they want to share in the national plunder, they must win hearts and minds. They must look pious and sound right while lying through their teeth and picking our pockets. In other words, they have an astute grasp of American politics and business -- which are the same thing, of course.

Most educated American liberals, however, believe simply being progressive makes them, by default, the nation's saviors -- morally and intellectually right in all things. As proof, they read more and, allegedly, are more open minded than most conservatives, except when it comes to their daughter dating a redneck named Ernest who lives in a trailer court behind the strip mall. They are certainly among the educated class in a country known for its lousy schools and a dull, sated and unquestioning public. Education and access to education are now our fundamental class delineators. Higher education is now for the privileged. And that privilege, almost regardless of profession or career, is a future that depends on government. Liberal or conservative, it matters little. In fact, this privileged class votes Democratic more predictably than the working class, Hispanics or Blacks.

So when educated liberals look up from their copy of The Nation or the Jon Stewart show, they behold a chilling sight: Beefy mobs waving teabags and demanding tax cuts to help pay for new schools and bridges, Sarah Palin emerging from the ashes of the McCain campaign to become the high priestess of the uncurried tribes, with a Mormon named Glenn Beck exhorting millions of fundamentalists to seize the country. They feel that something has gone terribly wrong with America.

Immediately they conclude that it is the American people's fault through their backwardness, incomprehension and misdirected anger, and that maybe it serves them right for not rallying behind the flying progressive standard. (I've been plenty guilty of this myself over the years, and am now a recovering American liberal, well on my way not to conservatism, but toward a strumpetocracy, government by strumpets. It's a real word, Google it.) Not that the progressive flag was actually flying; American liberals threw down their standard 40 years ago in the rush for comfortable technical, teaching and administrative jobs in government, universities and non-profits. "Ah yes," they wailed, the people have let us down. They are absolutely disgusting!" liberals agreed. And they still agree. Read the comments on Huffington Post or Daily Kos.

Or look at the arrogance of Barack Obama's characterization of American heartlanders "clinging to God and guns." Which we do. However, implicit in his statement was that both God and guns are indicators of an ignorant loser class. When opponents scalded him for his remarks, he justified them by pointing out he had said, "what everybody knows is true." Meaning everybody in his class, the educated liberal class. Hard to believe their predecessors were the point men and women for the Scopes trial, the eight-hour day, unions, anti-McCarthyism, Cesar Chavez, Negro civil rights.

Big dogs eat first

The ruling elite stays in power through the patronage both parties offer their supporters. They hang onto or follow their party's leaders much the same as remoras cling to big sharks, and pilot fish accompany sharks, happy to get the leftovers. Both parties provide their activists and followers with livelihoods, through programs or legislation that just happen to make the rich richer.

One good example is the psychologists, doctors and social workers who initiate the process of getting half the country on anti-depressants or mood stabilizers, a term that should scare the hell out of anyone who grasps the concept of the corporate state. They get their jobs through government funding, or research that defines behaviors as illnesses requiring powerful psychoactive drugs.

One new favorite is ODD, oppositional defiant disorder, in which children act like -- surprise, surprise -- the young assholes that children can sometimes be. Teenage rebellion becomes a psychological disorder. Diagnostic manual symptoms include "often argues with adults," an unheard of behavior of teenagers calling for antipsychotics such as Risperidone. Side effects of Risperidone include a mild speed like buzz, a super erection lasting hours, lactation and suicidal tendencies. Phew!

Big Pharma makes billions more in the name of alleviating the people's suffering. Obviously many millions are indeed suffering, but if that is the case, then American society is suffering. Never will it be asked publicly just what psychic anguish our society is suffering from. Because the answer is capitalist industrial commodity disease, and the psychic pathology of Americaness. That would mean consulting Mr. Marx, who predicted much of it, or Arthur Barsky, who brought the definition up to date.

For Americans, self-examination is not just rare, it is nonexistent, which one source of our pathology. Missing from our national character is love of the common good, and our collective civic responsibility toward one another. But if we acknowledged collective responsibilities to the individual members of our society, then we would have to deal with the issue of class in this country. Better to medicate the entire nation. To do that, you need big government.

In the process, the already rich get richer and the rest of the middle class commissariat becomes more dependent upon the rich. As conservative editor and writer Angelo M. Codevilla, pointed out in a July 2010 article: "By taxing and parceling out more than a third of what Americans produce, through regulations that reach deep into American life, our ruling class is making itself the arbiter of wealth and poverty." A third is more than enough to tip the scales at their will.

Keep ‘em dazzled with foot work

Meanwhile, there are the rest of us. That great throng of squawking, family loving folks, professionals and peasants alike, libertarians, patriots, people who worship god and those who loath religion -- people who still believe that hard work is the road to success despite the evidence, people who know differently because they sell used cars or work for the US Post Office -- citizens who rightfully suspect that government taxes merely feed the beast, or who believe, again rightly, that no politician truly represents their interests, and that the government is now in the business of social engineering for economic purposes. Fundamentalist Christians, gays, small businessmen, Hispanic Americans, organic farmers, pro-lifers and abortion supporters, union workers in the North and Southern anti-unionists, school teachers and stump preachers -- we all feel threatened by our government.

At the same time, in order to keep revolution at bay, and the military in cannon fodder and defense industry in contracts, we have been heavily indoctrinated to believe America leads the world in all things, and that the rest of mankind lives less prosperous, less free lives, coveting our "lifestyle." In short, they are lesser people.

Still though, we have in common that none of us like the idea of a ruling class. We did not from the very beginning. Yet, we no longer take effective action, because it has become impossible to identify what we might do to change anything. Instead, we react to events. That is what the ruling class wants, because if we are reactive, then outcomes can be controlled by controlling the stimuli. Keep 'em dazzled with foot work. So the stimuli keep coming at us faster than we can think. And they are presented as fate, or the result of "fast changing world events," or a banking collapse no one could have predicted -- things to which we must respond immediately. Most of us just give up. Which again, is what the ruling class wants us to do -- become a uniformly pliant mass.

Because the revolutionary destruction of the current economic system, bad as it is, would crash the country's economy even more quickly than the current process of theft, we are not likely to see an outright revolution that overthrows the ruling class. Look at the sorry assed "Tea Party Revolution," which will have to be allied with the GOP (which its backstage leadership has been anyway) in 2012 if it wants to be even a small factor. Media noise about the Tea Party doth not a revolution make, and it certainly does not overthrow the ruling class, who do not mind the wrath of the rabble, so long as it does not get in the way of the money.

And besides, the ruling class holds all the money, not to mention the media that informs the populace as to what is going on in our country. It controls our health care, our banking and retirement funds. It controls our education or lack of education, and it controls the price, quantity and quality of the food we eat. It controls the quality of the air we breathe, and soon, through pollution credits, even the price they will pay for that air. Most importantly, it holds concentrated legal and governmental authority, not to mention the machinery of both parties to grant itself more authority.

In the face of all this stands a very diverse public, which regardless of what some might claim behind a few beers, is not about to take up arms or use force to unseat the ruling class. When your life and your family are so utterly controlled by persons and forces that you cannot even see, you don't take such risks. That's not gutlessness. It's common sense.

Therefore, you are left with a rigged game called legislative action. This is an invisible power process, masked by another process called public relations strategy, which feeds it into yet another process called media, that makes "news decisions," as to what you need to hear or see. And there's plenty you don't need to hear. For instance, NPR, the New York Times and thousands of other outlets refuse to use the word torture to describe waterboarding, preferring instead "aggressive interrogation methods," unencumbered interrogation, free interrogation, or similar euphemisms. NPR's justification for sugarcoating US torture is, ""the word torture is loaded with political and social implications."

Ya think?

Truth is a hard road to travel

After decades of hyper-militant consumerism and its attending alienation, and a national consciousness spun from pure capitalist bullshit and mirrors, it is testimony to the American people that they can still see to piss straight, much less recognize any sort of truth whatsoever. Yet, a portion of Americans are beginning to grasp the truth about what has happened to their country -- that it has been bought and paid for by an elite class in a nation that is supposed to be classless. They are beginning to realize that, when it comes to actually governing our country, we are powerless as individuals -- even members of the political class -- and serve the overall will of its true owners. It's been that way so long we've become conditioned to accept it as a natural state, something we cannot change, and do not even know how to question, because, like the atmosphere, it's just there.

The higher truth is something we recognize when we encounter it. We may not have the right words, or all the facts, but we can feel it in our bones. Intuition is the first glimmer in the distance. It goes unsaid that we always have the choice of not looking in truth's direction, or not looking for it at all. Seldom is it a pleasant sight, which is the chief sign that it is truth. Even the best of it arrives to the sound of ominous bells.

I think about that young reader, Brent B., who takes time to email me now and then. Today he wrote, summarizing the only thing of which I am certain:

It's a hard thing to know the truth in this world, it's like something inside of you dies, but sometimes you still have to know it.

--------------------------------------------


JackRiddler wrote:Great stuff, but he omits the deep state - the "top secret" caste of 865,000 operators, the octopus with 50 (500?) heads and a thousand appendages and self-service plunder where one hand never knows what the other is seizing.

And honestly, he's too kind to the populace. Liberal book readers are looking down on them? Hardly, from my childhood (not privileged) on, I found it was the other way around - the book readers being bullied by the know-nothing majority, most everyone eagerly trying to find their place in a system of variable rewards and make sure they're kicking at the people just below them.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
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