On fraud

on fraud
Yves Smith has an excellent piece on some of the financial shenanigans, that is fraud, that occurred to bring about the financial crisis. It's a little technical for the financial unwashed, but I think anyone who reads it can get the basic idea. Particularly in this case, Goldman's selling of what they knew were worthless bonds and then on the backside covering with AIG the losses for when it was found it this paper was worthless.

The term "predatory" in business concerns a company that treats its customers as prey, that is it does not serve their interest, but simply is looking to gain the greatest profit in whatever way possible. The top of our financial system is predatory to the rest of the economy, they serve little interest but their own, and at this point provide little or more appropriately negative value to the rest of the economy, that is to you and me. An essential read.

PS. The AIG email trail is under investigation and it spells F-R-A-U-D.

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Chart Shows Lobbying=TARP

To follow up on my earlier post on how the revolving door brouhgt us the too-big-to-fail, Barry Ritholtz has a chart that lays it out here.

In order of biggest: Bank of America, Citigroup, AIG, JP Morgan Chase, Wells Faro, General Electric, Goldman Sachs....

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How to cut through the mess that is politics

US' political system is a disheartening broken mess and that is why we all need to ask ourselves how we can most strategically change the very structure of the political system. The answer is why I helped start Open Congress or why we're working on ANWF. We must get at a root problem in politics - the marriage of policy to money and the extreme growth of corporations that has taken over politics and everything else. Ezra Klein of the Wash Post agrees that structural change is the only way out. He urges us to think more concretely about cutting through the mess.

There is a Glass-Steagall bill introduced in the Senate. Does this cut through?

Why is the political system disheartening? Partly because the dream of Obama was a dream and this post lays out the issue.

Arianna Huffington and Rob Johnson had some contact with our plans for a break up with your bank/credit card/debt campaign and ran with it. Their campaign is Move Your Money. We're glad and want to work with them.

Our campaign will be out in a few weeks in time for Valentine's Day. Time to stop funding the political system with our money and fee payments.

And at least there are a few lawsuits out and AIG is getting found out.

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The Problem with the Revolving Door - It Brought Us Too-Big-To-Fail

Bailouts and political connections go hand in hand according to a just released academic study. The study, which was conducted by the Ross School of Business at the University of Michigan researchers, shows concretely that lobbying, campaign contributions, and the finance/federal government revolving door has helped the most damaging banks despite the dangers they pose to our economy.

In the age of the bailout, blaming the revolving door between corporate lobbying and politics is so obvious that it has become almost cliche. But the reason why it is one of the greatest handicaps to our political system is critically important. The revolving door turns "survival of the fittest" on its head by masking failure, propping up underperforming companies, and hiding inefficiencies in the markets. The new study  shows the extent to which political connections influenced how TARP bailout funds were paid out.

The researchers found that there was a 31% increase in the likelihood of receiving bailout funds at financial companies whose executives had served on the board of the Federal Reserve. Banks that had connections with members of Congress who serve on key finance committees were found to be 26% more likely to receive bailout funds than banks without those kinds of connections. It is the revolving door between lobbyists and politicians that undermine a fair and accurate system for determining healthy policy.

But the research hits just the tip of the iceberg. Zach Carter at The Nation recently reported on a much deeper case of how the revolving door shapes U.S. policy. Our "too-big-to-fail economy" was developed in large part by one of the country's current top bank regulators; someone who has major conflict of interest with the banks he is supposed to regulate, Carter reports. John Dugan is now chief regulator of the largest US banks at the Office of the Comptroller of the Currency. In one of his former positions at the Treasury, he was a chief architect of the three most influential pillars of banking deregulation that have been blamed for causing the financial meltdown last year (hat tip The Big Picture). In 1991, Dugan published a 750-page book where he successfully pushed for policies allowing banks to operate in multiple states without additional regulatory oversight, to repeal the Glass-Steagall Act allowing safe commercial banks to merge with risky investment and insurance companies, and to allow corporations like General Electric and Sears to own banks.

"[Dugan's book] was unquestionably the blueprint for the major Clinton-era deregulation," says Arthur Wilmarth Jr., a longtime banking scholar at George Washington University Law School. "It was the first real recipe for too big to fail."

A few years after publishing his book, Dugan was out of government and in a new job as a lobbyist with the American Bankers Association working his political connections to help pass the financial deregulatations he described in his book. From his earlier years in government, he had enough pals in Congress and the Clinton administration to get many of his policies enacted. Now he's back playing the game from the government side as one of the country's chief regulators. Same guy, same mind, same mission; just working from the inside at the moment. Indeed, "as head of the Office of the Comptroller of the Currency, Dugan played a leading role in gutting the consumer protection system, allowing big banks to take outrageous risks on the predatory mortgages that led to millions of foreclosures," Carter reports.

The revolving door actively hurts our economy because it puts our country on a path of survival of the richest, most connected lobbyists with cover-ups of market inefficiencies and bad consumer products.  Dugan helped dangerous-for-the-consumer, highly-profitable-for-the-bank consumer products pop up throughout the 90's as subprime and adjusted rate loans.   The Ross researchers agree that "the effects of political ties on federal capital investment are strongest for companies with weaker fundamentals, lower liquidity and poorer performance — which suggests that political ties shift capital allocation towards underperforming institutions." When money determines political power, the political system itself encourages corporations to put profit and lobbying above developing consumer products people actually need. We need more common economic indicators that define underperformance as anything that bankrupts consumers or puts them at an economic disadvantage (similar to indicators proposed by the Institute for Policy Studies and David Korten).

Dugan's role in aiding the creation of too-big-to-fail banks was born out of industry.  Because Dugan has a highly influential political position, his weaving of politics and private interests which has spanned a career is problematic: "Over the course of nearly a quarter-century, Dugan has proved himself a staunch ally of the American financial elite as a Senate staffer (1985-89), a Treasury official (1989-93) and a lobbyist (1993-2005), building a career that culminated in 2005 when George W. Bush appointed him comptroller of the currency. When the financial system finally succumbed to its own excesses in September 2008, Dugan’s fingerprints were all over the economic wreckage, but almost nobody noticed." Dugan's work is exemplary of the phenomena of policy being determined by webs of influence.

To be fair, lobbying presents opportunities for busy politicians to learn about issues.  But, unfortunately the weaving of long tentacles in private and public sectors is a prerequisite to effective lobbying. Last week in DC, I met young career politicos who saw Capitol Hill jobs as a first stop on the road to high-paying lobbying jobs later on. Their political connections are golden resume nuggets. This complicated climb to the top is bearing down on policies we see today - President Obama made a campaign promise to keep out the lobbyists in his administration and failed, but the disheartening part is the bottom to top entrenchment of Citigroup executives and lobbyists and their work on financial reform policy.

At its inception, corporations were allowed to exist when they served the public's interest; the Supreme court ended that in the 1800-1900's . No longer bound by public duty, shareholders' returns have become a singular goal in the free market and politics race to the top  -  Congress seems to have understood less and less the impact these policies have on the economy at large.  The money and secret inner circle of influence in DC is unfair because it creates a snowball effect of making the powerful more powerful and policy less about policy. Thus lobbying and its powerful cousin, the revolving door serve to prop up companies that may be weak or have bad products, leading to an economy that is more likely than not to become fractured or in other words, too big to fail.

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Ben's Bet

ben's bet

FT has a good piece with Chinese premier Wen Jiabo on the value of the renminbi, and as those concerned about global currencies say, "When Mr. Wen talks, people listen." Ho, Ho Ho. Mr. Wen states plainly that calls for appreciating the value of the yuan's only "purpose is to hold back China’s development."

Now, we saw Professor Bernanke on the front of Time taking George Washington's place on the dollar, people think he has a lot of control. Mr. Bernanke's policies have devalued the dollar and outside of global financial markets, the one great beneficiary are the Chinese. As FT states,

China dropped its formal dollar peg in 2005 and has since allowed the renminbi to trade within a narrow band. But since the middle of last year it has operated a de facto peg. This has meant that the renminbi
has depreciated about 9 per cent against the currencies of its main trading partners since early this year, even though the Chinese economy has rebounded quicker than any other major economy.

Phew, "de facto," I'll say. Professor Bernanke stated in the book he wrote on the Depression, currency devaluation had helped improve the situation. However, pre-monetarist thought and those who created the IMF considered the early 1930s beggar thy neighbor policies of currency devaluation having added globally to the deflationary environment. The Chinese have an advantage over a lot of manufacturers from this devaluation for sure. Ben's policies are causing problems in global manufacturing, people are reacting louder. I guess this is when Ben comes out and says as he wrote, what will really help is a coordinated global currencies devaluation, though first he and Mr. Geithner will have to quit claiming they're for a strong dollar. We'll see how that
goes.

The implications of Mr. Bernanke's unprecedented money policies are far from done playing out, any sharp waves in a very untethered global currency market would cause massive shifts.

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Forget The End Of A Decade Hype, What Should Progressives Do Now?

THE DECADE IS STILL WITH US: LOOK TO THE FUTURE, NOT THE PAST;
AS 2010 BIDS ADIEU, OUR CHALLENGE LIES AHEAD NOT BEHIND

By Danny Schechter
News Dissector, Author of Crime Of Our Time
(reprinted with permission from the author)

Lets drop all the decade hype. I know we tend to structure history in ten year swallows: The 60’s, the 70, the 80’s etc. It is all so neat and so clean but, alas, not quite true.

The decade that began with the new millennium, doesn’t really end unto the end of 2010, and that’s not this year, even though we may want it too.

History doesn’t self-package itself to fit a Greatest Hits song compilation. The 1950’s with its anti-communist craziness and nuclear arms race started after the war, in the l940’s and didn’t end until Eisenhower’s famous warning about the military industrial complex which is still with us all these years later. It was Ike who legitimated tricky Dick Nixon whose ride was just beginning. Tricky was devious but also an environmentalist and smarter than we gave him credit for.

The 60’s as an era of drugs, sex and rock and roll didn’t get going until mid decade as the Vietnam War’s impact drove a whole generation into opposition. The 60’s stayed with us, sparked by FM rock radio, until Nixon imploded and the war ended in l975.

Soon punk and disco brought on the Me generation and led us to Jimmy Carter’s “malaise” and then to the rise of Ronny Raygun. When the left splintered, the right organized, putting in place a network of think tanks to take over. The conservatives drove the 80’s until Clinton’s centrism snuffed the spirit of the sixties in a 90’s even as it appeared to be embracing it. It’s the Economy Stupid led to deregulation and the crisis we are now coping with.

That led us to the neo-con resistance and the stolen election of 2000, stolen by aggressive GOP tactics and Democratic inertia. With the help of various turncoats and media assets—like Fox and talk radio—they renergized their movement by adopting 60’s tactics while waging a culture war against 60’s values.

Al Gore, now seen as an agent of climate change, blew the election and in the process blew up the power and personage of a political chameleon/wannabe messiah named Joseph Lieberman, a civil right activists turned sleazy opportunist and health care reform killer. He’s still with us, like gum on your shoe, more obnoxious than ever, as a new year begins.

Barack Obama’s election seemed an anomaly, but clearly it was disgust with his predecessor that drove him from obscurity to the presidency. Obama’s “outside-inside” strategy inspired millions of new voters. But once in Office, the office took over, co-opting his populist inclinations and burying his grass roots movement in a miasma of paralyzing pragmatic centrism rationalized as the politics of the possible. Supporters became recipients of emails, not potential activists.

Obama realized that the Bush era had not ended in the bureaucracies or in the media and halls of Congress. To undercut its lingering impact, he embraced some of its tough-guy national security boilerplate. He got along with Pentagon power by going along. Compromise began to become his mantra. Miniscule reforms were presented as great victories. Withdrawal from Iraq was delayed as was the closing of GITMO.

Had he become a Bush 2? Many think so. Was he selling out or buying in? , Ross Douthat argues in the Times that Obama is a knee-jerk liberal who believes in working within institutions for change. According to Douthat, reports Naked Capitalism, “that makes him…an odd bird who seems a Machiavellian willing to cut any deal juxtaposed with the soaring rhetoric of fairly ideological big government liberalism.” The problem with institutions is that they rarely change without exposes or outside pressure.

It was not that the he owed anything to “the left,” once his radical preacher Rev Wright and one time buddy Bill Ayers had became albatrosses. He was now trying to appear non-partisan and non-ideological, but progressives read into his victory much more than was ever possible to achieve, much more than even he pledged. He took the liberals for granted with lip service, not major policy shifts.

As the blogosphere blathered and the unions splintered, there was very little leverage or organizing underway to reach out to his campaign activists. As the right built people power, the left built polemics. As his opponents—those that hated him and denied his legitimacy--- seized the initiative, the Obamacrats moved into defensive bunkers keeping up appearances, one step forward, two back.

Once he realized that the most “powerful man in the world,” only had the power to propose while Congress disposes; once he realized that the right not only would not play bi-partisan games and that the GOP had been taken over by the bully boys; once he realized that they would intimate their own to enforce “discipline;” once he realized that they would not even accept the legitimacy of his election or citizenship; once he realized that to survive he needed to embrace the Pentagon’s logic and the dictates of the Wall Street donors who had backed him….

Once he realized he was virtually alone in the Big House (yes, it is a metaphor, too, for a prison), the die was cast. He was captured with a chorus of naysayers on the right and left. He was trapped by the logic of his choices and the limits of his vision.

Which is not to say he was ever a man of the left. He told us that he would escalate the Afghan war during the campaign. He showed us where he stood on the economic collapse with his appointees like Summers, Geithner et.al. To fight off the right, he needed the center and the media on his side. He is by nature cautious and cunning, moving step by step, winning some, losing a lot. He knows that he can’t pitch a perfect game. He’s a perception manager, not a street fighter. For many he is a big disappointment. For others, the question is ‘did you expect Che Guevara?’

The challenge now is not to walk down memory lane but to strategize about building the future in an imperfect world. What lessons can we learn and apply? How can progressive reenergize an outside-in strategy, how can they/we start framing issues, building a base and then mobilizing it. Will there be a return to the streets or more co-optation by the illusions of power in the streets? Think about the choices. What are you going to do?

News Dissector Danny Schechter edits Mediachannel.org. His new book is THE CRIME OF OUR TIME on the financial crisis as a crime story. Comments to dissector@mediachannell.org

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Bernanke Year in Review

Post has a real good piece of journalism on why Ben Bernanke should not be reappointed Fed chief. It's not correct to say it was the Fed's failure, but more importantly and accurately, the Fed's culpability in bringing about the whole bubble, of course bubbles don't exist in Econ 400 and above. Yves
Smith has some good comments.

Make no mistake, everything the Fed has done in response to the popping has been an attempt to blow a larger bubble with global currencies, keep that in mind as the coronation of Mr. Bernanke goes forth.

Update: Bloomberg says "U.S. senators are backing Federal Reserve Chairman Ben S. Bernanke for a second term by a 3-to-1 margin, based on a count of 77 lawmakers by Bloomberg News." We can push these senators: "Four Republicans -- John McCain and Jon Kyl of Arizona, Jeff Sessions of Alabama and Roger Wicker of Mississippi."

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The role of the Federal Reserve

A friend asked me the other day if the Federal Reserve isn't doing all it can to create jobs because of all the growing backlash against it by groups like "Audit the Fed". The Federal Reserve is the central bank, an institution founded by Congress to regulate the markets by setting our country's monetary policies on interest rates, inflation, etc. in order to protect the market against things like bank runs. I have commented before that there have been all kinds of populist-monetary activists that have gone back and forth on the creation of such an institution, wanting to abolish it when it has become the private bankers' piggy bank and wanting to erect it when the banks outright own the economy.

My friend asked, "is this a case where Ron Paul's "Audit the Fed" concept is putting pressure on the Fed to stop being active on jobs?" The question was spurred by an article Paul Krugman wrote where he suggests a few reasons why the Fed doesn't help to create more jobs even though it can. The Fed can help create jobs by promoting greater lending, greater production through low interest rates. We're at around zero interest rate now, but we still don't have the jobs. Krugman points out that the Fed can do other things to expand credit and create more jobs.

The Federal Reserve essentially is a private institution made legitimate by Congress. According to its "Purposes and Functions" documents and which was once posted on their website but is no longer available for whatever reasons, the Fed's primary duties involve maintaining the stability of the markets first and foremost as a means to maintaining high employment. It is their creed that the markets are primary in creating a vibrant economy. If we instead had a central bank that thought about maximum employment first, we might get a different story.

The answer I gave my friend was "I don't think so". The Federal Reserve tends to be more conservative about inflation and interest rates because Fed chiefs tend to worry more about inflation for the sake of investors and bankers. They ensure the safety of the markets as a way to create jobs, but not because they have ever shown any real dedication to jobs first. Liberal economists tend to think some inflation is good because you can create more jobs that way. Yet, there have been few liberal economists to serve as one of the 12 Fed governors who help to decide monetary policy.

That is to say the Fed can create jobs, but hasn't been sincere about jobs in of themselves and doesn't tend to do much by way of them.

Their duties are laid out as so:

Today, the Federal Reserve’s duties fall into four general areas:
• conducting the nation’s monetary policy by influencing the monetary
and credit conditions in the economy in pursuit of maximum employ-
ment, stable prices, and moderate long-term interest rates
• supervising and regulating banking institutions to ensure the safety
and soundness of the nation’s banking and financial system and to
protect the credit rights of consumers
• maintaining the stability of the financial system and containing
systemic risk that may arise in financial markets
• providing financial services to depository institutions, the U.S. gov-
ernment, and foreign official institutions, including playing a major
role in operating the nation’s payments system

Paul Krugman says it himself in the article as well: "The Fed sprang into action when faced with the prospect of wrecked banks; it doesn’t seem equally concerned about the prospect of wrecked lives."

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Subpoena

subpoenas

Yves Smith has an important piece about Goldman and AIG. She points to another good piece by Spitzer, Partnoy, and Black in the NYT calling for AIG and Goldman to unload their communications of the past few years. How is it Goldman had so much "coverage" exclusively with AIG? AIG is after all now a public company. And well even if they weren't, we need to get the info if we're going to be able to understand what happened, and how are we suppose to start fixing things, if we don't know what happened?

A few people with a little guts can do a lot right now, like subpoena a whole bunch of people involved in the financial industry over the last few years and the last couple decades. Have them put their right hand in the air and their left on something they hold sacred, like their fortunes, and start explaining how things went down. Now a lot of the problems with the financial system were perfectly legal, and we need to change that, but there was a ton of fraud, and we have to understand that too.

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On Money - II

On Money -- II

There is no subtler, no surer means of
overturning the existing basis of society than to debauch the
currency. This process engages all the hidden forces of economic law
on the side of destruction, and does it in a manner which not one man
in a million is able to diagnose. -- J.M. Keynes, The
Economic Consequences of the Peace

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