Monday, February 11, 2013

Too big to jail?

One of the great accomplishments of the financial services business is that they have managed to con people into believing that what they do is a force of nature.  During the days of Margaret Thatcher she popularized the expression "there is no alternative."  Of course, there always was an alternative—usually MUCH better than one she was offering—but she kept managing to steal the mantle of inevitability.  It is all a part of an act that has worked for centuries to keep people feeling guilty about debts, giving police and state power to the lenders, bestowing respectability on the whole edifice of moneychanging, but most of all, convincing everyone that the bankers are keepers of the secrets of money and anyone who threatens their freedoms is threatening to destroy the whole economy.

Not surprisingly, you can erect quite a racket behind a wall of lies that complex. What keeps surprising people is just how brazen the rackets have been.  And now the shock is that no matter how brazen, the perpetrators are going to get away with their thefts.  And the story du jour is that during the fiscal meltdown of 2008, the only profitable activity at HSBC was laundering money for the Mexican Drug Cartels.  If prosecutors had punished the folks who set up that scam, the whole banking system would have been in danger of collapse.  That, according to Lanny Breuer of the DOJ's enforcement division, was official government policy.  So an old banking myth (regulate us and you will destroy our magic) saves their thieving asses one more time.  You cannot make this shit up!

The clip at the bottom is our old pal Max Keiser.  He's pretty steamed about the criminals running the banks.  What I like about Keiser (in small doses) is that he has worked in the moneychanging business and clearly does not believe most of the myths the bankers use to fool us.  He thinks it funny that the gangs of Wall Street, who have made cocaine their overwhelming recreational drug of choice, have gone to such (profitable) efforts to make the cocaine trade possible.

February 10, 2013

Too Big To Fail, Too Big To Jail? That Means Too Big To Exist

By Mike Lux


But I remain troubled, profoundly troubled, by the fact that fundamental economic issues seem to be the last thing on anybody’s minds in DC. Our economy may be slowly getting better, but we still have a very serious jobs crisis in this country-nowhere near to full employment and not on a path to get there for many years to come. Our manufacturing sector is still only limping along and our trade deficit remains catastrophically high. Our infrastructure is still badly in need of repair. Wages for most workers are still stuck in neutral or slipping compared to inflation, and a third of those who found new jobs after losing them in the great recession are being paid less than in the old job. Our housing market is getting stronger in some metro areas, but is still very weak overall in terms of prices, homeowners under water, and numbers of foreclosures and empty homes.

And looming over these economic problems is quite literally the elephant in the room: these gargantuan Too Big To Fail, and apparently Too Big To Jail, Wall Street financial conglomerates.

Because of their massive economic and political power, the financial sector swallows up more than 40% of the economy in this country, and because they can make more money doing speculative high-speed trading than by investing in manufacturing or infrastructure or making loans to small businesses, those sectors get starved for capital. Because of Wall Street’s obsession with short-term profit, workers are not invested in and wages keep getting driven down. Because these banks’ accountants have figured out that their short term stock prices will stay higher if they continue to show inflated housing assets on their books, they have been unwilling to work with homeowners to write down underwater debt. Because of tax policies such as low capital gains and the carried interest loophole that favor the financial sector, the federal budget is starved for resources, and because Wall Street wants to be able to speculate with senior citizens’ money, the pressure keeps building to cut or privatize Social Security, as well as state and local government workers’ pensions.

Financial sector problems have been in the news a lot lately. Standard and Poor’s is finally (finally, finally) being sued. New emails from JP Morgan traders and execs have come out showing that they engaged in very shaky and probably fraudulent practices in bundling mortgage securities together. Ted Kaufman and activists are demanding more bank investigations and prosecutions. Frontline raised hell about DOJ dropping the ball on Wall Street prosecution, and the guy in charge of that for DOJ resigned the next week. Elizabeth Warren is investigating weak settlements between regulators and bankers. LIBOR prosecutions are still ginning up.

Wall Street is not responsible for all the ills in our economy. I’m happy to give plenty of the blame to conservative politicians in the pocket of wealthy special interests, companies like Wal-Mart driving down wages and destroying small retailers, health industry companies driving our medical costs through the roof, carbon spewing polluters refusing to make way for the green jobs of the future, and big businesses driving their small business competitors out of business. But the damage Wall Street did to the economy, and the parasitic power they still hold over it, is at the very heart of why our economy has not been able to get back on the road to true prosperity and full employment. And all these stories make clear, the corruption on Wall Street stinks to high heavy. The biggest players there are playing a rigged game and screwing the rest of us badly.

The only answer to why all this is not getting fixed in spite of the flashing red warning signs is something America’s founders understood well: the problem of concentrated power. They constructed our entire system around the guiding principle of distributed power, checks and balances. They knew that there was no way a democracy would survive if any one politician, region, or business sector became too powerful for too long. That fear has been a real danger a few times over our country’s history- slave power in the years leading up to the Civil War and the Robber Barons’ power in the late 1800s being the two worst examples- but for most of our country’s history the pluralistic idea has kept our democracy healthy. But when something as central to a nation as its financial system is controlled by institutions that there are this monumentally huge, we have a serious problem. And if the problem doesn’t get fixed, it will crush either our economy or our democracy or- most likely- both.

When you have top officials like Lanny Breuer at the DOJ openly alluding to the fact that he won’t prosecute banks because of the harm it might do to the economy; when you have the most free market worshipping conservative President in modern history turning his philosophy upside down on a dime and handing out government bailouts like a drunken sailor; when you have a Democratic President presiding over record profits and bonuses for Wall Street banks less than a year after the biggest financial collapse in 80 years while the rest of the country’s economy is in terrible shape, and not seeming terribly upset by that dynamic; when you have the most blatant financial sector fraud in many decades, and not a single criminal prosecution of a major bank executive- when you have all that happening, it is clear enough to this old political guy that the guys at the top of the Wall Street system have amassed way too much power. more


  1. I'm reading a collection of John Kenneth Galbraith's works and found this gem in "The Great Crash, 1929". Keep in mind it was written back in the mid-1950s:

    "The machinery by which Wall Street separates the opportunity to speculate from the unwanted returns and burdens of ownership is ingenious, precise, and almost beautiful. Banks supply funds to brokers, brokers to customers, and the collateral goes back to banks in a smooth and all but automatic flow. Margins... are effortlessly calculated and watched. The interest rate moves quickly and easily to keep the supply of funds adjusted to the demand. Wall Street, however, has never been able to express its pride in these arrangements. They are admirable and even wonderful only in relation to the purpose they serve. The purpose is to accommodate the speculator and facilitate speculation. But the purposes cannot be admitted. If Wall Street confessed this purpose, many thousands of moral men and women would have no choice but to condemn it for nurturing an evil thing and call for reform. Margin trading must be defended not on the grounds that it efficiently and ingeniously assists the speculator, but that it encourages the extra trading which changes a thin and anemic market into a thick and healthy one. At best this is a dull by-product and a dubious one. Wall Street, in these matters, is like a lovely and accomplished woman who must wear black cotton stockings, heavy woolen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot."

    1. I was given a copy of Galbraith's then-new "New Industrial State" for high school graduation. Because of paragraphs such as you just cited, I became a BIG fan of his. Unfortunately he provided me with a wildly distorted view of the economics profession. Because of him, I expected economists to have a wide-ranging and encyclopedic knowledge of how the world works, a witty and informed view of history and the humans that screwed up a lot of it, and a desire to traffic in the issues that transcend borders and cultures. That doesn't sound like today's economists, huh? I have tried to be a good student of his and have read most of what he wrote. He has NO modern equivalent.

      This para is especially to the point. Whenever you criticize the Wall Street rackets, you are met with earnest explanations for the improbable circumstance where something like naked short selling is actually useful. The problem is that even when the examples are true, they constitute the tiniest sliver of the overall use of the financial instrument or strategy. 99.9999% of all credit default swaps served no useful purpose whatsoever, and when they went south, they dragged down the real economy so that it still staggers.