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FRAUDONOMICS
May 5, 2010 4:28 AM   Subscribe

-Confessions of a Wall St. Nihilist: Forget About Goldman Sachs, Our Entire Economy Is Built on Fraud by Mark Ames (note: polemic)
-The Feds vs. Goldman by Matt Taibbi (note: vampire squid reprise)
-The Goldman Casino: Do investment banks do anything that helps America anymore? by Eliot Spitzer (cf. Robert Rubin, oh and Dick Fuld)
-William Black on Fraud interviewed by Bill Moyers (note: Moyers' penultimate PBS show)

Bill Stensrud on making financial agents accountable:
The key problem in the financial industry is not the institutions, it is the people. The people in the financial industry are mercenaries. They owe no allegiance to their employer, to their shareholders, to their clients or to their peers. They are in it for themselves. The problem they work on, every hour of every day, is how to maximize their personal financial reward.

[The fix] lies with two principles...

Fiduciary DutyMake it a key legal obligation for EVERYONE involved in a transaction to have a fiduciary duty to their client. Make it incumbent on them to represent to the client that they have done their homework, they have disclosed everything and that they believe this to be a good transaction for the client.

ClawbacksCreate a system where if the banker (the person not the institution) does not responsibly discharge his fiduciary duty then any and all compensation earned on that and all related transactions will be forfeited. You might even want to put some or all of the compensation into escrow for a while (a few years) to make enforcement easier and the message clearer.
BONUS!
-The Economic Rewards of Virtue
-Is the "Invisible Hand" Still Relevant?
-Just how limited should "limited government" be?
-Democrats, Republicans just can't quit Wall Street money

also btw here's a VF profile on Ames and Taibbi :P
posted by kliuless (57 comments total) 63 users marked this as a favorite

 
kliuless -

Thanks for those links, great post. I cannot stress enough how great people like Bill Black and Taibbi have been throughout this whole mess. Their reporting and commentary has been brutally honest and welcome sunlight on an otherwise obscure industry.

Our entire government has been captured and held hostage by these goons in high finance. Sadly, this will continue until we push back...HARD.
posted by tgrundke at 4:44 AM on May 5, 2010 [1 favorite]



We can blame Goldman Sachs and Wall Street for what collapsed in 2008, but the next one is on the guys writing this stuff. For all the time spent wagging the finger saying "shame-shame" there are measures that could be taking place right now. Brainstorming, and ideas for the next shift in economic paradigms.

We got it. K? Thank you for picking this apart and figuring out what went kablooey, but 2009 is over and it's time for fixing this mess rather than rubbing someone's nose in it. GS is that guy in high school who knocked up those four girls and wouldn't throw in for the respective abortions. You can continue to tell him what a creep he is, but he's still going to say "Yeah, whatever. I still got laid and I'm probably gonna get my dick sucked tonight. What's it to me and what's it to you?"
posted by Bathtub Bobsled at 4:45 AM on May 5, 2010


There was a VoxEU article on regulation that I thought made a good point:
Often, policy-makers talk of improved corporate governance to stop senior managers and CEOs from ‘ripping off’ shareholders. But for firms relying on the protection of taxpayers, the conflict of interest is not fundamentally between bank managers and shareholders because the manager wants to earn too much or wants to build an empire or to own a private jet.

Instead, the conflict is between, on one side, managers and shareholders and, on the other side, taxpayers. Both managers and shareholders (and even holders of corporate debt) take advantage of the protection of the state to take excessive risks, since it is the taxpayer who ends up paying. Therefore proposals to improve transparency and corporate governance are completely useless for solving these problems.
posted by TheophileEscargot at 4:50 AM on May 5, 2010 [3 favorites]


Pretty much.

Now, where did I leave my pitchfork?
---
Also The Baseline Scenario is a great blog on all of this. One of the authors (Simon Johnson) was the head of the IMF for a while, and his experience had been seeing other countries economies implode, and need an IMF bailout. Almost always, there would be a group of elites who would have caused the problem, and then suddenly become much more powerful because of it (because the were the only ones who knew "how to fix the problem").

The IMF would always try to get these guys out of power. And he saw the same thing happening here in the U.S, except the elites had captured the fed, so there was really no one who could push them out of power.

It's been interesting to see them get more and more anti-banker as time went on.
posted by delmoi at 4:51 AM on May 5, 2010 [4 favorites]


Both managers and shareholders (and even holders of corporate debt) take advantage of the protection of the state to take excessive risks, since it is the taxpayer who ends up paying.

*Sigh* When will our government stop lending these institutions legitimacy in the first place? Is it because we're addicted to them (read: money, growth, or the illusion thereof) in the same way we're addicted to oil (the effects of which are not quite so illusive...)?

Sadly, this will continue until we push back...HARD.

Or more likely until we move on, forging ways of living without a need for high finance or cheap energy. Bathtub Bobsled's hit that nail on the head.
posted by symbollocks at 4:53 AM on May 5, 2010 [1 favorite]


Thank you for picking this apart and figuring out what went kablooey, but 2009 is over and it's time for fixing this mess rather than rubbing someone's nose in it.
I don't believe that anybody is above the law. On the other hand I also have a belief that we need to look forward as opposed to looking backwards. --Barack Obama
posted by DU at 4:59 AM on May 5, 2010


We can blame Goldman Sachs and Wall Street for what collapsed in 2008, but the next one is on the guys writing this stuff. For all the time spent wagging the finger saying "shame-shame" there are measures that could be taking place right now. Brainstorming, and ideas for the next shift in economic paradigms.

We got it. K? Thank you for picking this apart and figuring out what went kablooey, but 2009 is over and it's time for fixing this mess rather than rubbing someone's nose in it.
You don't really seem to be paying attention to what's going on. The same guys are the ones writing the new laws, or at least they're spending a ton of money lobbying to get the new laws written so as not to damage their position. They have a ton of "regulatory capture". We have solutions, but the problem is getting them passed in congress when these companies have so much control over everything.
GS is that guy in high school who knocked up those four girls and wouldn't throw in for the respective abortions. You can continue to tell him what a creep he is, but he's still going to say "Yeah, whatever. I still got laid and I'm probably gonna get my dick sucked tonight. What's it to me and what's it to you?"
I don't even understand how that metaphor applies. It's more like GS more like a Frat Boy who runs around date raping women but never gets in trouble because he's the Dean's nephew and his dad is best buds with the local DA. You can't just say "Well, he's always been an asshole and there's nothing you can do about it" Because, um, he's still out there raping chicks.
posted by delmoi at 4:59 AM on May 5, 2010 [9 favorites]


For a longer view, David Harvey was on the BBC's Thinking Aloud radio programme just, putting this in the context of the recurring crises of capital.
posted by Abiezer at 5:04 AM on May 5, 2010 [2 favorites]


The causes of the problem are clear, and have been known in principle for some time. The lovers of Smith's "invisible hand" seem also to be totally ignorant of Smith's ruminations on the consequences of unfettered markets. In terms of the banking crisis, Smith could be describing it in Wealth of Nations:

Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal, to the banking company which attempts it.


Of course, this understates the case, as it does not take account of the fact that the financial sector has become massively distended, and that almost all of the banks were involved. Still, it is a neat counterpoint to the 'how could we have known?' argument (usually from free-market advocates).

As to the regulations that will address the problem? Well, don't hold your breath. Also from Wealth of Nations:

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interests has been so carefully attended to

posted by Jakey at 5:13 AM on May 5, 2010 [4 favorites]


Thank you for picking this apart and figuring out what went kablooey, but 2009 is over and it's time for fixing this mess rather than rubbing someone's nose in it.

Yeah, and what the fuck am I being prosecuted for? I mean all I did was blow up three banks, but 2009 is over and it's time for fixing this mess rather than rubbing my nose in it!

Fuck that. It is only for crimes of the larger magnitudes that people make this bullshit argument. The powerful must never, ever be permitted to get away with this nonsense, or else you see the same sort of "Okay, well, if there's no consequences, I guess I'll just do whatever I want!" criminality that we've seen out of the White House since Ford pardoned Nixon. When you advocate for just moving on, looking forward instead of backward, you advocate for the commission of more crimes because you are advocating against there being any consequences for them.

Without powerful consequences to keep them in check, the powerful commit crimes. That is a central and fundamental truth of human history, and our determination to pretend that it is otherwise is what enables the cycle to continue. It is vitally important that we understand how we got where we are and ensure that it does not happen again. The idea that we should just move on ensures that we will find ourselves here again, time and time again.
posted by Pope Guilty at 5:52 AM on May 5, 2010 [22 favorites]


If more businesses operated like Goldman Sachs...
posted by swift at 6:10 AM on May 5, 2010 [3 favorites]


Fiduciary Duty – Make it a key legal obligation for EVERYONE involved in a transaction to have a fiduciary duty to their client. Make it incumbent on them to represent to the client that they have done their homework, they have disclosed everything and that they believe this to be a good transaction for the client.
But the transactions that have received the most criticism here were proprietary trades, I thought -- no client.
posted by planet at 6:14 AM on May 5, 2010


Our entire government has been captured and held hostage by these goons in high finance. Sadly, this will continue until we push back...HARD.

Those guys are the alpha males of capitalism. Your government runs on capitalism and for capitalism. It isn't going to do anything real to them. It's just going to show enough token yellow cards to appease the grumbling populace.
posted by pracowity at 6:19 AM on May 5, 2010 [8 favorites]


The steinsrud article is the most pertinent at this moment. What is the past is the past and the question now is how not to repeat it. (this is not an argument for not prosecuting those who committed crimes, just that focusing on that to the detriment of actual reform is massively problematic)

Require clawbacks, force underwriters of securities to actually you, know, underwrite (Actually have skin in the game). Eliminate prop trading at broker-dealers etc etc.

But the fiduciary duty issue is problematic. It is a shame that goldman's defense is so disingenuine that it may end up fucking things up for lots of people. Creating securities and selling them isn't market-making - its underwriting and the responsability they have towards the buyers is different then market-making. Underwriting you have to disclose everything, keep everything about board, be economically aligned with the success of the security etc etc. Market-making is you want something I got it for you at a price - in that case you owe no one anything - and it works best that way. I buy crappy companies for a living - if you require the broker dealers to actually care about what I am doing its pretty likely that a lot of times they wouldn't execute the transactions for me.

But the transactions that have received the most criticism here were proprietary trades, I thought -- no client.

Hmm. The abacus stuff certainly had a client, and the rise of CDO's and the related sub-prime/real estate bubble was driven by a desire to find new securities to sell products?
posted by JPD at 6:23 AM on May 5, 2010 [1 favorite]


There's a lot of faith built into free market worship, to the point where it is commonly associated with fate. The fact that people will become free market populists when it fails them (denial) is based on this magical thinking.
posted by Brian B. at 6:28 AM on May 5, 2010


Hurr Elliot Spitzer wants an economy based on Mom 'n' Pop bordellos.
posted by mccarty.tim at 6:33 AM on May 5, 2010


Hmm. The abacus stuff certainly had a client, and the rise of CDO's and the related sub-prime/real estate bubble was driven by a desire to find new securities to sell products?
Isn't the fundamental complaint about Abacus that Goldman screwed the buyers of the products? Some guy you sell stuff to isn't a client--that's a customer. Nobody has fiduciary duties to customers, if only because any time you sell any product to anyone, you and the customers have divergent views of whether it's better to have the thing or the cash.

It really appears that Goldman went beyond what you can do to customers, but it wouldn't make sense to impose a fiduciary duty with respect to customers.
posted by planet at 6:33 AM on May 5, 2010


There's a lot of faith built into free market worship, to the point where it is commonly associated with fate. The fact that people will become free market populists when it fails them (denial) is based on this magical thinking.

"Keynes, you are old-fashioned and useless. Modern economics has transcended you.

...Oh dear! I am plummeting over a cliff! Save me, Keynes!"

posted by Pope Guilty at 6:36 AM on May 5, 2010 [6 favorites]


George Friedman of STRATFOR cites Adam Smith in his new article on the nature of the crisis (he says it's political, not economic): "The Global Crisis of Legitimacy"
posted by AugieAugustus at 6:42 AM on May 5, 2010


planet - you are parsing client/customer too closely - its interchangeable in this instance.

The issue isn't even that they sold a bum security of a qualified investor (i.e. someone whom had a reasonable belief was sophisticated) what they have been charged with is lying to the nature of the Paulson's interest in the security as part of a discussion of the underlying securites in CDO with the third party guarantor/manager. What I take issue with is Goldman characterizing the sale of this security as market-making when clearly it was not.
posted by JPD at 6:47 AM on May 5, 2010


…this whole fucking economy is built on fraud and lies and garbage. So when Lehman collapsed, every single player panicked, going, 'If Lehman was nothing but a Ponzi scheme—and I know what I’m running is a Ponzi scheme—holy shit, that means everyone else is running a Ponzi scheme too! Run for the exits!' No one trusted anyone else, everyone pulled out, and the entire global economy collapsed just like that. And that meant your parents, my parents, every teacher, every fireman, every person in the country going into retirement, every price on every asset—wiped out.
Bring. It. On.

Complete asset forfeiture and liquidation should help keep the firemen employed for a few more decades. The Pay-Per-View revenues of the public executions alone should be enough to fund public education for a couple of years. And who knows, maybe by then we'll have figured out how to "make shit" that people in other parts of the world will want to buy. But wait, don't we already have some of that?

The levels of myopia necessary to suggest that "this whole fucking economy" is built on fraud and lies betrays so much effort, hard work and innovation that still, somehow miraculously manages to get accomplished in this country (by all those people that aren't bankers) makes me want to take my thumbs and jam them into his eye sockets.

These guys are fucking bullies. Their game runs on fear. "You wouldn't dare!" should be their fucking motto.
posted by Civil_Disobedient at 7:25 AM on May 5, 2010 [6 favorites]


JPD, I agree with most of what you said except for this:

force underwriters of securities to actually you, know, underwrite (Actually have skin in the game).

Having skin in the game is the main reason why the failed banks failed and Citi remains (indefinitely?) on govvy life support. Even the banks that survived took large writedowns on the CDO / MBS tranches they held on balance sheet--the difference was how much exposure net of hedging each firm was comfortable with. Citi, clearly, was comfortable with keeping a LOT of the high yield/high risk "mezz" CDO tranches for itself as unhedged as possible. Having too much skin in the game is what accelerated this whole crisis.

on other points:

1) clawbacks are being adopted at several banks already, including UBS and Morgan Stanley, though it's not yet industry norm. Though much of employee comp is already tied in 3-5 year vesting company stock, there still needs to be a clawback mechanism (beyond unemployment) to single out bad traders without punishing good ones at the same time.

2) on GS: until the SEC provides some concrete evidence that GS EXPLICITLY said to ACA and IKB that John Paulson was going "long" on the CDO, I will continue to see their lawsuit as purely politically motivated (to get some bipartisan action on the reform bill). The whole suit hinges on this one fact-claim: that Paulson's role was misrepresented to ACA/IKB (I call it a fact-claim because if you look at the SEC's filing documents, there is no exhibit showing those things were said). If I had to guess, the reason GS is contesting the suit and denying the charge is because the SEC does not have evidence on their claim.

The most important things that should be in the bill are 1) limiting the size of the banks, 2) doing something about the ratings agencies. The two best ways to do 1) are to separate depository/lending institutions from their investment banking siblings, and then lower leverage ratios and raise capital requirements for the investment banking companies. We know reinstating Glass-Stegal is not enough--the big banks that failed (Bear, Lehman, Merrill) and AIG were pure, highly-leveraged (Bear was like 32x) investment-bank-like firms with large trading / asset management divisions. Cap their leverage, close the loopholes that allow undisclosed off-balance sheet holdings. All the other stuff in the bill (eliminate prop trading completely? ALL exotic derivatives on exchanges?) is very, very secondary, and I'm not sure how we could practically carry them out.
posted by chalbe at 7:37 AM on May 5, 2010 [1 favorite]


The Pay-Per-View revenues of the public executions alone should be enough to fund public education for a couple of years.

Pol-Pot goes to Wall Street?
posted by ennui.bz at 7:39 AM on May 5, 2010


Short of a storm-the-bastille, reign-of-terror French Revolution Part Deux where Wall Street is turned into a river of blood from the public beheadings of all these assholes, I just don't see any way there will be any meaningful change to the kleptocracy. Unfortunately, it's the right-wingers who are already armed and organized and ready for civil war, and you know whose side they're on.
posted by briank at 8:00 AM on May 5, 2010


Dear Briank:
If memory serves correctly, the liberals, or Democrats, were hand in glove with the GOP to tear down the regulations that had been in place.
posted by Postroad at 8:07 AM on May 5, 2010


The IMF would always try to get these guys out of power. And he saw the same thing happening here in the U.S, except the elites had captured the fed, so there was really

As I understood the Fed is owned by the member banks - thus the 'capture' was from the start.


Six Banks Control 60% of Gross National Product
And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent.

no one who could push them out of power.

Well, you could always deny them your money and tell others to do the same. "They" are only as powerful as "we" allow....
local banks
coming clean

A less than helpful (aka you would be between the grinding wheels and ground fine) position is to look at tax protesting - I'll let you find those links and the reasons behind them on your own.

Now when the bail out was going on there was hurf-durfing about how it was needed and how the anti-Fed/anti-bank people were wrong. I'd bother to go back but that might be rubbing someone's nose in it.
posted by rough ashlar at 8:19 AM on May 5, 2010 [1 favorite]


Unfortunately, it's the right-wingers who are already armed and organized and ready for civil war

Errr, when you say 'right wingers' what do ya mean? "right wing" as framed in the US of A or 'right wing' as framed by the world?
posted by rough ashlar at 8:21 AM on May 5, 2010 [1 favorite]


Yeah, do business with a local credit union if you can. It's the banking version of supporting a local business.
posted by Pope Guilty at 8:27 AM on May 5, 2010 [1 favorite]


I posted this in another thread, but it seems appropriate here too:

Michael Blim, over at 3QuarksDaily, wrote The Fiscal Crises of the States: The Morning After Greece:
As yet another act in the world economic drama concludes, and another troop of actors prepares to take the stage, the basic point of the play is being lost. As speculative manias overtake other countries and/or other assets, and as instances of fecklessness and fraud feed the public demand for vengeance, we are overlooking the fact that we are living through the most massive redistribution of wealth rich societies such as ours have seen since the Gilded Age at the end of the 19th Century. The massive debts of private capital are being socialized. States are taking on society’s debts at a rate not seen since the Second World War. They are creating public debt to pay off or at least absorb the debts arising from asset crashes, bank and brokerage failures and near-failures, and massive unemployment triggered by recession. Banks and other financial institutions could not carry their own debt, so now the government is carrying it for them, either directly or by providing them with new credit at no cost with which they can become profitable again. The banks and other brokerage institutions have effectively cleaned up their balance sheets with newly created public debt, while the U.S. and European central banks have laundered their bad debts.
The particular mix of free markets and socialism that we're pursuing at the far moment is far worse than either. We're taking the WORST features from both systems, the instability of free markets and the fiscal problems of socialism.

In essence, we believe in "the free market" only when markets are going up. But that's only half the equation. For free markets to work, they have to be free to go down too. Bad ideas need to be removed from the system, and since people really believe in their ideas, typically the only way for that to happen is failure, sometimes on a broad scale. It's called "creative destruction". The best ideas survive and prosper, the old ones wither.

And we refuse to allow that to happen. We are willing to accept only the up-swings of capitalism, but absolutely will not allow the downswings to take place. And that cripples free markets, and it leads to exactly what you see here: large-scale fraud. When nothing ever gets destroyed, the shit bubbles to the top. The conmen, the tricksters, the swindlers.... when the economy is never allowed to go into contraction, these guys prosper and grow, much faster than the honest people producing real value. Honesty and lots of hard work are what get you through bad economic times (and sometimes not even then, if you're not efficient enough). Fraud does not prosper in hard times. Everyone starts examining everything very closely, trying to eliminate waste. The whole economy goes through reflexive scrubbing, letting light into the dark places, and sending the frauds scurrying like the roaches they are.

As Warren Buffett says, it's only when the tide goes out that we can see who was swimming naked. I'd add to that observation that if the tide's not allowed to go out, swimming naked is more efficient.

This is not a pleasant process. People hate, hate, hate it. People lose their jobs, companies go away, banks fail. The less frequently it happens, the worse it is, because more fraud will have built up in the system. So the longer it's been, the more everyone fears the process... but the more it's actually needed. We just barely missed the Second Great Depression, and we only did it by perpetuating the original frauds.... primarily, issuing debt into a system that can't support what it already has. We need one if we're going to get healthy again, if we're going to put roaches like that guy in the first link out of business. That guy should be thanksful to have a job scrubbing toilets, not flashing high-end credit cards in pricey restaurants.

Make no mistake, it will be terrible to go through, but if we don't, the long-term pain will be much, much worse.

I'm not a total free-market champion by any means. An unrestrained capitalism is a terrible place to live, and I certainly wouldn't want to inflict that on anyone. But we need free markets more than we have in at least one sense: when players, regulated or no, go tits-up, we need to let them go tits-up, and the financial market needs to understand well in advance that this will happen. The combination of free market cheerleading, with a socialistic central authority that will never let things go too badly wrong, is a way of telling the roaches to load up on risk, to loot all the profit they can out of the system, and then stick Uncle Sam or the Federal Reserve with the bill.

What we have is probably the worst economic system that's ever come to pass, and the wealth of the country is being bled dry. All your scrimping and saving and doing without, being fiscally sensible to give your kids or yourself a better life, is irrelevant in this kind of financial structure. You can spend your entire life building capital, and then one of these roaches can evaporate everything you've ever made with a few keystrokes in a computer, taking on a dangerous position that's insured by the government. It's not like Uncle Sam will show up at your door immediately to take your stuff, but over the next years and decades, either tax rates will rise and rise until your wealth is confiscated, or prices will rise and rise and eat your standard of living from the bottom. Either way, you end up poor, thanks to the government explicitly guaranteeing markets.

When YOU take the risk for THEIR profit -- well, the long-term outcome is completely obvious. The financial system will maximize risk at any opportunity. There's a lot of possible paths forward, but they all end up in the same place: fiscal ruin for the government, a destroyed economy, and a hyper-rich elite.

It would be most wise not to play that game, and bailouts absolutely need to be the first thing up against the wall.
posted by Malor at 8:47 AM on May 5, 2010 [27 favorites]


I always thought the problem with economic systems was that it never took the frailty of the human condition into their equations, and thus are either easy to exploit or inadvertently reward unhealthy methods of wealth accumulation. Too many people who truly are wealthy are economic hoarders who tightly hold their every penny while trying to nickel and dime everyone around them, including their own family members. They drive old cars and wear cheap clothes and they never truly contribute to the economic health of their region. Sure, they are rich, but they way they see the world and life, money is wasted on them.

At the other extreme are the poseurs who do a splendid job of pretending to be richer-than-you, and anyone who questions them are seen as petty or jealous -- never mind these are the people who overplay their hand and try to deflect criticism through big production numbers and cagey public relations. They spend money they don't have, live on credit, and while they may seem good for the economy in the short term, once their lies are exposed, everyone who hitched their ride on theirs gets dragged down and crashes once the truth comes out. They may be good liars who can say all the things people want to hear and can even sound more logical and worldy than their critics, but all the talking in the world can't alter the fact that they are con artists who have expensive tastes -- and like those things on someone else's dime.

It doesn't matter what the economic system happens to be -- if you don't take account the fact that some people are pathologically selfish, sooner or later, the whole system (or at least important parts of it) will have a melt down...
posted by Alexandra Kitty at 8:59 AM on May 5, 2010


Good stuff Malor.
posted by unixrat at 9:03 AM on May 5, 2010


What we have is probably the worst economic system that's ever come to pass

So what is the 'label' for the system? What is the 'name' that one could point to in a 'classical' economics text and go 'yup - that is the model'?
posted by rough ashlar at 9:06 AM on May 5, 2010


Look, there is a very simple solution to this shit. When I am dictator I will immediately implement it. Here it is:

1) All finance jobs are base salary only, no commission
2) All finance employees have a plastic cup on their desk with a sign that says "Tips Please"
3) Any client that feels any finance employee has performed adequately or above par may reward that monkey employee with spare change or other 'tips' as they deem fit
4) Profit
posted by spicynuts at 9:16 AM on May 5, 2010


We're taking the WORST features from both systems, the instability of free markets and the fiscal problems of socialism.

This trope reeks of the same simple political dichotomy that gets dragged out in other discussions. It does as much to obfuscate the issue as to clarify it.

"Socialism" has fiscal problems? No more or less than the systems I'm sure you'd consider approximate "free markets". And they aren't really free in any way that regular people think. They all float on an enormous legal infrastructure that has been built up for centuries.

I agree with you completely that (1) the rules are largely created to the advantage of the powerful and (2) in spite of this, the powerful are acting more brazenly criminal while the means to restrain them are becoming more feeble.

This is where the discussion needs to go. Talks of the limited advantages of "free markets", that's hogwash.
posted by Reasonably Everything Happens at 9:19 AM on May 5, 2010 [2 favorites]


The same is happening in South East Europe.
posted by zanesmtp at 10:48 AM on May 5, 2010


These guys are fucking bullies. Their game runs on fear.

this might make your blood boil: 'We are wall Street…we are smarter and more vicious than [dinosaurs]' :P
Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.

So now that we’re going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.
Short of a storm-the-bastille, reign-of-terror French Revolution Part Deux

well the greek rioters are certainly giving it a go... they make the tea partiers look like, uh, they're having a tea party!

btw, here's another voxEU article on clawbacks

re: ratings agencies, i thought this idea to 'opensource' them was interesting... also i wouldn't let goldman off the hook so easily.

i like the way elizabeth warren described the 'mechanics' of finreg as having robust consumer protections on the front end of the machine and resolution authority at the back end (the ability to wipe out shareholders, managers and pro rata creditors).

also on baselinescenario james kwak has a nice piece up on why harvard kids head to wall street (e.g. anna katherine barnett-hart) which i think gets at some of the cultural aspects of societal dysfunction...
I went to McKinsey for reasons that were only slightly different than those of the typical Ivy League undergrad; after getting a Ph.D. in history, I discovered that I was unlikely to get a good academic job and was pretty much unqualified for anything else, and McKinsey was one of the few places that would hire me into a “good” job with no discernible qualifications (other than academic pedigree). Now that I’m at Yale Law School, where maybe 15% of students (my wild guess) come in wanting to be corporate lawyers but 75% end up at corporate law firms...

As the decades pass and you realize that no, you’re not going to save the world, the money becomes a more and more important part of the justification. And when you have kids, you’re stuck; it’s much easier to deprive yourself of money (and what it buys) than to deprive your children of money. More importantly, you internalize the rationalizations for the work you are doing.
oh and on local banks/credit unions, i find the growing movement for publicly-owned banks intriguing (bank simple, yodlee & p2p lending ;) consider...
But nations had no choice but to bail out their banks, did they? Well, actually... the central banks and their owners – the private commercial banks – have been running the printing presses for hundreds of years.

Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won’t even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II’s capital requirements – but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).

The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.

It is – in fact – a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).

At the very least, the system must be changed so that it is not – by definition – perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.
anyway, i've mentioned it before, but if it looks like the fed and central banks are making it up as they go along, it's because they are...
posted by kliuless at 11:50 AM on May 5, 2010 [4 favorites]


Fraud at the Credit Rating Agencies: By first instilling unwarranted confidence in high risk securities and then failing to downgrade them in a responsible manner, the credit rating agencies share blame for the massive economic damage that followed
posted by adamvasco at 11:51 AM on May 5, 2010


Short of a storm-the-bastille, reign-of-terror French Revolution Part Deux where Wall Street is turned into a river of blood from the public beheadings of all these assholes, I just don't see any way there will be any meaningful change to the kleptocracy. Unfortunately, it's the right-wingers who are already armed and organized and ready for civil war, and you know whose side they're on.

Worse than 1789?

I would bet the "right-wingers who are already armed and organized" aren't on the side of the bankers.

you could always deny them your money and tell others to do the same

As naive and cliched as it sounds, it is the truth. There are still non-profit financial institutions (for now).
posted by mrgrimm at 1:48 PM on May 5, 2010


Galbraith: The Role of Fraud in the Financial Crisis: In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

Financial Reform for the Long Term: Finance is an intermediate input. At the margin, every little innovation that makes markets more liquid does provide a small benefit to the economy in the form of better capital allocation; but in many cases those benefits are not enough to justify their transaction costs, let alone the negative systemic externalities we saw recently. The flowering of finance in the past three decades gave us the illusion of growing real GDP — especially in the past decade, when GDP growth was dominated by finance and real estate. Now we need to rebalance the economy toward productive activities.

Is The Tea Party A Reaction To Capitalism?
We’re at a weird point in history, and the Tea Party is a symptom of it. Now, if you’ll allow me to get all Clay Shirky on your ass, we are in a point in history when institutions that appeared solid are dissolving. The internet has thrashed the old information asymmetry, the monopoly on data that institutions used to have back when the boomers were young and new models aren't appearing fast enough. And of the models that do arise, not one is going to dominate. It'll be, for good or bad, a world of choice.

The costs of organizing people has fallen through the floor, so large institutions, while still extant, are going to have to shrink and take up new policies of transparency in order to survive. We’re going through a cycle of demystification, so it makes sense that folks are clinging to symbols... One downside to all the constant tidal pressure of innovation that is our postmodern condition is it becomes very easy to cling to outmoded ideologies (I mean ideology in the broadest sense here, not just politics, but modes of life). When the world you knew is upended, all you can depend on is your grievances.
Supercapitalism: The Transformation of Business, Democracy, and Everyday Life
This is aiming to be something like The Affluent Society or The New Industrial State for modern times; it does a pretty good job. Basically, his argument is that Galbraith was more or less right about how the economy worked during the post-WWII golden age of capitalism: large, autonomous, oligopolistic firms more interested in continued steady growth, exploiting economies of scale, than anything else. JKG's mistake was in thinking this regime would continue. Reich sees Galbraithian capitalism as being upset not so much through deliberate political action in the 1980s as through new technologies in the 1970s, especially improvements in logistics, communications and information technology, which made it possible and efficient to replace the vertically-integrated firm with global supply networks, and to replace investment financed out of retained earnings with global financial markets. (As Reich points out in some detail, all of the key technologies, from container shipping through microelectronics and the Internet, were devised by the military-industrial-university complex to fight the Cold War; sowing the dragon's teeth, as it were.) Deregulation, to Reich's way of thinking, was more a consequence than a cause — the legal superstructure accommodating changes in the forces of production, though he doesn't use such language. The result, he says, is a system more responsive to consumer demand and to investors, but where most of the population sees no gains from economic growth, inequality sores, countervailing power evaporates, security is steadily eroded, and the primary check on the political influence of corporations is the opposing commercial interests of other corporations...

The way the system is set up, he says, the people running corporations simply have no choice but to do whatever they can to maximize profit in the short term; if they won't, they will shortly be replace by those who will. Calls for corporate social responsibility, still less trying to shame or pressure individual corporations, therefore misses the point. The goal, rather, has to be to change the laws under which all corporations must act, ultimately, to neuter corporations politically, and creating a non-corporate social safety net.
that is all :P

cheers!
posted by kliuless at 1:49 PM on May 5, 2010


Fucking markets, how do they work?
posted by TrialByMedia at 2:59 PM on May 5, 2010 [3 favorites]


"Republicans are having difficulty determining how they can continue making love to Wall Street," -- Harry Reid
posted by delmoi at 3:56 PM on May 5, 2010


I don't understand how people like the dinosaur in that blog post can take credit for their financial whizbangery when things are going good and then suddenly don't have any power over anything when the bubble bursts and takes half the economy along with it.

They make themselves out to be wizards, but anyone can build the prettiest castle in the world so long as enough people are willing to believe it actually exists. As soon as it's revealed to be a fraud, they want to know how it could possibly be their fault; after all, they're experienced castle makers.

What the whole "If you take us out you're doomed...DOOOMED!" threat fails to appreciate is that our 401ks and paltry stocks and such have ALREADY tanked. It's not that we're afraid we can't get a new Audi, it's that we're worried the Honda won't last the two more years we need it to. To have a 401k you have to have a job, and thanks to them a lot of folks don't.

That, and the fact that most jobs require you to actually be able to DO something, not just turn imaginary money into more imaginary money.
posted by Legomancer at 4:42 PM on May 5, 2010 [1 favorite]


I'm not a total free-market champion by any means. An unrestrained capitalism is a terrible place to live, and I certainly wouldn't want to inflict that on anyone. But we need free markets more than we have in at least one sense: when players, regulated or no, go tits-up, we need to let them go tits-up, and the financial market needs to understand well in advance that this will happen.

My problem with this is that it's the entire notion of a 'free market' that is the utopian pie-in-the-sky; even when it's ostensibly working what's actually going on is that a set of vested interests are creating the conditions for the inevitable crisis to come:
...
One of its basic principles that was set up in the 1970s was that state power should protect financial institutions at all costs. This is the principle that was worked out in the New York City crisis in the mid-1970s, and was first defined internationally when Mexico threatened to go bankrupt in 1982. That would have destroyed the New York investment banks, so the US Treasury and the IMF combined to bail Mexico out. But in so doing they mandated austerity for the Mexican population. In other words, they protected the banks and destroyed the people – and this has been the standard practice in the IMF ever since. The current bailout is the same old story, one more time, except bigger.
...
Throughout the history of capitalism, the general rate of growth has been close to 2.5 per cent per annum, compound basis. That would mean that in 2030 you’d need to find profitable outlets for $3 trillion dollars. That’s a very tall order. I think there has been a serious problem, particularly since 1970, about how to absorb greater and greater amounts of surplus into real production. Less and less of it is going into real production, and more and more into speculation on asset values, which accounts for the increasing frequency and depth of the financial crises we’ve been having; they are all crises of asset value...
The dilemma various states and international institutions now face is that this process of financialisation has allowed these profiteers to become so embedded in our economies that they can't be allowed to fail and it's idle and disingenuous - or profoundly misinformed - to call for that unless you truly are calling for a revolutionary change - and not one that would restore the fiction of the free market.
posted by Abiezer at 3:51 AM on May 6, 2010


The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.

This sounds to me exactly like someone who is very good at playing WoW or Magic or something similar and because of this has deluded himself into thinking that he is good at fistfighting, and posts a challenge to that effect (or responds to one) on the forums. It's an Internet Tough Guy post.

Of course these guys work fourteen-hour days. So does uber-WoW guy. Of course they don't get up to pee. Neither does uber-WoW guy. That isn't stoic, tough, heroic behavior - it's addiction.
posted by aeschenkarnos at 4:34 AM on May 6, 2010 [5 favorites]


Not to mention, the kind of jobs where you need permission to go pee, they don't pay 87k. Or 50k. Or even 40k.
posted by delmoi at 9:20 AM on May 6, 2010


Abiezer: You phrase that like you disagree with my post, but your quotes and other statements seem to be in near-perfect agreement with my overall stance, so I'm a little confused. Bailing out the banks at the expense of the population was exactly the wrong thing to do, and was profoundly anti-free-market. If any entity in a market is 'too big to fail', then it's not free.

This is also, by the way, why I think a commodity money standard is so important to fixing what's wrong with us... the financialization of the world, the shifting away from production and into manipulating wealth tokens, wouldn't be possible without undefined wealth tokens that can be issued at will to suit political whims. Make them concrete, a real thing, and most of the present abuses will simply not be possible anymore.

In exchange, we get a new set of abuses, but they're much less destructive, much easier to handle, and they become visible much sooner, when the problems are small enough to still be successfully dealt with. All money systems have problems, because money is a poor abstraction for actual wealth (energy, stuff, and knowledge), but money with a hard tie to something physical, one of the components of actual wealth, can't be corrupted nearly as badly.

I don't particularly care what actually gets used. However, as someone pointed out to me in MeMail, gold might be an excellent solution precisely because it isn't actually all that valuable. It doesn't get permanently consumed, and mostly just sits there being pretty, which is very money-like. Transitioning it back to 'money' status will stop most uses of gold in the main economy, but since it hardly gets used anyway, the damage will be minimal. Backing money with gold assigns an arbitrary and excessive value to a fairly worthless metal, but that's better than assigning an arbitrary and excessive value to nothing at all.

One of the primary problems of the current system is the expectation and explicit guarantee of unlimited liquidity under all circumstances. This allows financial instruments to be created that allow ridiculous, insane amounts of leverage. 100:1 leverage is pretty common... that is, for every dollar you put into a bet, you get the profit or loss of a hundred. But if enough people have taken a loss position at that kind of leverage, that immediately impairs liquidity, so the Fed gallops to the rescue, and the temporary money flood returns the leveraged instruments to profitability. This, as you can imagine, is making bankers very, very wealthy. That kind of nonsense simply can't happen with a commodity currency.

Further, it simply shouldn't be possible for the central authorities to orchestrate bailouts of the magnitude we just saw, using wealth tokens from thin air. No entity in the economy should have that power. And commodity money, assuming that it's a real commodity money, and not just a market-based exchange mechanism that treats the paper like a separate currency to be balanced against the commodity price, will stop that nonsense dead in its tracks. We can still bail things out if we really want to, but we'll have to commit real resources to do so, and beyond a certain point, it simply won't be fiscally possible.

That's exactly how we want it.... wealth tokens from thin air give the authorities unlimited power to screw things up, to get behind bad ideas (or simple cronies) and support them with all the resources of the real economy, pouring unlimited wealth down a rathole. And dear God, have they ever.
posted by Malor at 11:04 AM on May 6, 2010


You phrase that like you disagree with my post, but your quotes and other statements seem to be in near-perfect agreement with my overall stance, so I'm a little confused.
Only insofar as you seem to think that a free market has existed on a significant (larger than local) scale at any point in the past and that we can have or need them in the future. I think the history of the past several decades shows clearly how intertwined are the paths of capital and the actions of various states and multinational agencies, i.e. I don't think it's ever been free. The major crisis of the 1970s was resolved by a rapid expansion of globalisation and matching domestic policies in the developed world all of which required interventions by states, the IMF and so forth.
The second part of the quote (particularly in context at the linked article) suggests that even the more 'modest' required general rate of growth will no longer be attainable as we at long last hit some hard limits. You can never write off the possibility of some as yet unforeseen innovation rescuing the game once again, but in my view it's time more than ever to be looking for an economics beyond capitalism and markets in their current sense.
posted by Abiezer at 11:19 AM on May 6, 2010


wealth tokens from thin air give the authorities unlimited power to screw things up

GOOGLE RON PAUL
posted by Pope Guilty at 12:04 PM on May 6, 2010


With respect to fiat money:

For all intents and purposes, the Greeks have really got no control over the Euro. It's not working out well for them.

It also failed miserably when Argentina tried to switch to the USD. If everyone switched to gold, we could essentially be in the situation Greece is in now.

What Argentina did was introduce a new currency, which people didn't trust. Then they seized everyone's bank accounts, converted them to dollars, and then devalued, wiping out half of everyone's assets. Who knows what Greece is going to do.

We're not going to switch to carrying around big gold coins to buy stuff. So if we all use the same electronic systems, but filled with "gold credits" the government, in extreme situation might just re-de-couple those gold credits back to a fiat currency. So really it provides no more safety. Sure, you could hoard physical gold in your house, but you can already do that if you want
posted by delmoi at 6:39 PM on May 6, 2010 [1 favorite]


GOOGLE RON PAUL posted by Pope Guilty

At least he's written books about economics.
posted by rough ashlar at 2:54 PM on May 7, 2010


At least he's written books about economics.

And mighty comedies of the field they are!
posted by Pope Guilty at 3:30 PM on May 7, 2010


And mighty comedies of the field they are! posted by Pope Guilty

They may very well be, I've not read 'em. Dr. Ron is a Dr. of medicine and an elected poly-tick-er....

As you are still reading the comments lets see you rise to the challenge I posted:

Identify the name/definition of the economic system the US of A is operating under.

I'd like to see that as a name/definition you'd find in a college economics text at the 2nd year level.
posted by rough ashlar at 3:42 PM on May 7, 2010


If you're asking me to find an econ textbook that bears any resemblance to reality, I'm going to take option B and laugh at you.
posted by Pope Guilty at 3:56 PM on May 7, 2010


econ textbook that bears any resemblance to reality

Is that a failure of the idea of economics to show an actual model or a failure of books to say what the actual model is?
posted by rough ashlar at 5:23 PM on May 7, 2010


The name of the U.S. economic system is oligrachy but econ textbooks don't generally sit around trying to come up with names of systems, those are political. Econ is just about the numbers.
posted by delmoi at 8:56 PM on May 7, 2010


The name of the U.S. economic system is oligrachy

This post is titled Fraudonomics and the 'system' was supposed to be 'keynesian'. (At least that is what I remember being told the model was.)

Then you have supply side, ecological (eMergy), voodoo (ok - not really), laissez faire, Austrian, et la.

Lets look at the word Oligarachy:
An oligarchy (Greek Ὀλιγαρχία, Oligarkhía) (oligocracy) is a form of government in which power effectively rests with a small elite segment of society distinguished by royal, wealth, intellectual, family, military, or religious hegemony.
1. Government by the few. 2. A government in which a small group exercises control especially for corrupt and selfish purposes; also: a group exercising such control. 3. An organization under oligarchic control. [Merriam-Webster]

Now the CIA worldbook claims the government is Constitution-based federal republic. People running for office claim its a Democracy. Yet your defintion is supposed to be about economic system (which is just numbers, no?) and not a government system, no?

but econ textbooks don't generally sit around trying to come up with names of systems,

Really? I don't think so because while 'sitting around' is something a book can be accused of doing 'trying to come up with names of systems' is more of a human trait?

I'd think that part of the purpose of a book is to provide a basis for 'appeal to authority' arguments, that way a discussion/debate isn't mired in quicksand off the top. Like - is economics just numbers or something more?

those are political. Econ is just about the numbers.

Here all this time I thought Accounting was about JUST the numbers.

Others say: economics, economic science, political economy (the branch of social science that deals with the production and distribution and consumption of goods and services and their management)

"Political Economy"?

If agreement can't even be had on the purpose of books, if economics is "just numbers" or 'something more', or even what model best fits the present system (so then "we" can discuss if the model is bad or just the implementation is bad so thus "we" know what to attempt to change) then all the arguement is nothing more than how many angels can conga line on a pinhead. What then is the point of talking past one another?
posted by rough ashlar at 4:37 AM on May 8, 2010


Possible Supreme Court pick had ties with Goldman Sachs

Elena Kagan's Goldman Sachs Ties Brought Up Again
posted by homunculus at 9:50 AM on May 8, 2010


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