Updated April 15, 2009...or How I Learned to Live in a Banana Republic
Don't count this as rational. I'm a Terminator kind of guy and just finished watching an episode of the Sarah Conner Chronicles and am in the midst of John Gresham's latest, The Associate. So don't mind my paranoia. If Arnold were to show up as a robot from the future, I wouldn't be shocked. And if we faced the devastation in some apocalyptic films, I would nod and say, "see, told you so!"
Imagine the worst, as I often do. What Joel Klein or Eva Moskowitz or Randi Weingarten does may soon be irrelevant.
I saw on 60 Minutes how people were lining up to buy guns so they can defend their food in case society falls totally apart. I ran and buried my favorite nuts under the floorboard and started thinking about Cormack McCarthy's The Road. Imagine hordes of people going postal. Or will we start seeing educators taking hostages and have that term morph into "going pedagogic?" Do we worry about charter schools when we are all living in the woods?
Think Germany c. 1930. Things get really bad. Like 25% or more unemployment. Deflation. Or printing money leads to hyperinflation. I can't tell which, but either scenario looks like disaster. I mean, what if we're in a decade long hole that could make the lost decade in Japan look like a sunny spring day? Jeez, am I channeling Glenn Beck, who I consider a right-wing nut?
A black president who the left looks at as a front man for a coup by wealthy bankers and the right views as a socialist supported by a rabid youth movement that some loonies are comparing to Hitler Youth. That makes him a centrist where the word CHANGE has been changed to small change.
Some think the crisis is manufactured to create a sense that these bailouts, which will shift even more wealth in the hands of the few, are necessary, while that was the plan all along. As things deteriorate, some of the people on the left, who might have been rioting in the streets, are mollified by their guy in office – liberals who will try to keep hope alive. But what if Obama was part of the plan all along to enable this coup?
I see rioting from the right as more likely than from the left, which always seems so week in this country compared to places like Europe. Just a few years before Hitler took power, the left in Germany was stronger than the Nazis, who were looked on as a fringe. Hitler exploited that fear of the left and the German oligarchy came to see him as the less fearsome threat.
You already hear the right calling for people to take up arms, directed at the black president. Look at the names of so many of the "villains" of the financial crisis: Rubin, Bernacke, Madoff. It would not be hard to target a certain group to blame for the crisis – Blacks and Jews. Could be a hit with the right wing. Remember Father Coughlin's populist rants in the 1930's which turned anti-semitic and ended up with supporting Hitler? (No I really don't remember but I was a history major.)
From an article in The Atlantic,
“The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says [Simon Johnson] a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.”
The entire article is worth reading and is at The Atlantic
The difference from other recent situations is that it is occurring world-wide so there is no one left to bail anyone out. The essence of Johnson's thesis is that bankers have done very well in this crisis. In his experience with emerging market economy crashes in the past, the small oligarchy, which had a symbiotic relationship with the government, always managed to glom the lion share for themselves, which hindered the recovery. These markets did not recover until these forces were broken up.
Now that the US is moving into banana republic territory (not the store), our own oligarchy must be damaged before recovery can begin. Batten down the hatches. In the US this relationship is more than symbiotic. They actually are the government (see one Goldman Sachs).
Related: Anything Reality-Based Educator writes over at NYC Educator. Start with this one.
Love Sarah Connor Chronicles. In case you haven't caught up to the season finale, let me just say OH MY G_D! Absolutely incredible!
ReplyDeleteUnitymustgo!
Quite to the contrary of your opening sentence here Norm ("Don't count this post as rational.") you have touched upon the existential dilemma the people of this country now face. You and many others have struggled so faithfully and diligently to protect public education from the corporate onslaught but the stakes here reduce that fight to irrelevance. We have arrived at the moment of truth in the United States of America.
ReplyDeleteMy apologies for the length of this posting. But I don't believe there is a more compelling and accurate accounting of the banker's coup underway in the US at this moment. The Goldman Sachs boys (Paulson, Summers, Rubin, Geithner, Blankfein) and their allies will direct this coup from the top and their shock troops will be in evidence this Wednesday at "tea parties" across the country. Unless President Barack Obama mounts an effective counter-coup, and I know this will sound overly dramatic to some, his government will be overthrown. His physical survival will be in question as well.
This is a Barron's magazine interview of Professor William Black, who also gave a similar interview to Bill Moyers.
William Black: The Lessons of the Savings-and-Loan Crisis
William Black calls them as he sees them, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City.
At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud.
"It's like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement." –William Black
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Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?
Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama's administration, both economically and in terms of integrity.
Barron's: So you are saying Democrats as well as Republicans share the blame? No one can claim the high ground?
We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.
Barron's: So you aren't a fan of the recently announced plan for the government to back private purchases of the toxic assets?
Black: It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.
The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.
Geithner is mistaken when he talks about making deeply unpopular moves. Such stiff resolve to put the major banks in receivership would be appreciated in every state but Connecticut and New York. His use of language like "legacy assets" -- and channeling the worst aspects of Milton Friedman -- is positively Orwellian. Extreme conservatives wrongly assume that the government can't do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.
His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.
We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.
I keep asking myself, what would we do in other avenues of life? What if every time we had a plane crash we said: 'It might be divisive to investigate. We want to be forward-looking.' Nobody would fly. It would be a disaster.
We know that with planes, every time there is an accident, we look intensively, without the interference of politics. That is why we have such a safe industry.
Barron's: Summarize the problem as best you can for Barron's readers.
Black: With most of America's biggest banks insolvent, you have, in essence, a multi-trillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.
These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.
There need to be major task forces set up, like there were in the thrift crisis. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS -- and even our own Goldman Sachs. To me, the single most obscene act of this scandal has been providing billions in taxpayer money via AIG to secretly bail out UBS in Switzerland, while we were simultaneously prosecuting the bank for tax fraud. The second most obscene: Goldman receiving almost $13 billion in AIG counterparty payments after advising Geithner, president of the New York Fed, and then-Treasury Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government takeover -- and also receiving government bailout loans.
Barron's: What, then, is staying the federal government's hand? Have the banks become too difficult or complex to regulate?
Black: The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.
The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.
Barron's: Can you explain your idea of control fraud, and how it applies to the current banking and the earlier thrift crisis?
Black: Control fraud is when a seemingly legitimate corporation uses its power as a weapon to defraud or take something of value through deceit.
In the savings-and-loan crisis, thrifts engaged in control frauds in order to survive. Accounting trickery proved to be the weapon of choice. It is at work today with the banks, and it is their Achilles heel. You report that you are highly profitable when you engage in accounting-control fraud, not only meeting but exceeding capital requirements. These accounting frauds create huge bubbles, which in turn create large bonuses, which in turn lead to huge losses.
Barron's: Why then is there so much smoke and so little action?
Black: First, they are inundated by the problem. They are trying to investigate the major problems with severely depleted staffs. Honestly. We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.
Barron's: Are there any parallels between the current crisis and the savings-and-loan crisis that give you hope?
Of course. Objectively, our case was even more hopeless in the S&L debacle than in the current crisis. If we were able to do it in such an impossible circumstance back then, we have reason for hope in the current crisis. I know how easily things can get off course and how quickly things can turn back again. The thrift crisis went through several lengthy courses and distortions before it finally was resolved under the leadership of Edwin Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.
We went through almost a decade of cover-ups by a Washington establishment intent on helping thrift owners. Back then, we had the Justice Department threatening to indict Gray, the head of a federal agency, for closing too many thrifts. Next, there were those so-called resolutions, where the regulators worked day and night -- to create even bigger problems for the FSLIC. Years later, these so-called resolution deals had to be unwound at great expense by closing down even larger failures. Or how about the bill to replenish the depleted thrift-insurance fund that was blocked and delayed by then-Speaker of the House, Texas congressman Jim Wright?
Barron's: You say the evidence of a breakdown in the regulatory structure comes from the fact that America avoided an earlier subprime crisis in the 1990s.
Black: Exactly. Why had no one heard of the subprime crisis back in 1991? Because America's regulators also faced down the crisis early. The same thing happened with bad credits being securitized in the secondary market. Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem didn't spread -- because regulators intervened.
Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.
These Democrats want to maintain America's pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket -- one-stop shopping for all customers -- that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.
Barron's: What needs to be done?
Black: Well, these international behemoths need to be broken down into smaller units that can be managed effectively. Maybe they can be broken up the way that the Standard Oil split up back in the early 1900s, through a simple share spinoff.
The big problem for the last decade is that we have had too much capacity in the finance sector -- too many banks have represented a drain on our talent and resources. All these mergers haven't taken capacity out of the system. They have created even bigger banks that concentrate risk to the taxpayer, and put off dealing with problems.
And a new seriousness must be put into regulation. We don't necessarily need new rules. We just need folks who can enforce the ones already on the books.
The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don't directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That's big bonuses for the folks who make the best numbers. It sends the message -- making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.
Compensation systems like I have just described discourage whistleblowing -- the most common way that frauds are found in America -- because the system draws upon the cooperation of everyone.
The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.
Unity Must Go:
ReplyDeleteWe just watched the next to last episode but the machine didn't tape the first 20 minutes.I think Skynet is doing it. By the way, I named my home network Skynet. New Terminator movie out in May I believe. Just what we need. But who needs machines to screw us when we have Timothy Geitner, who just may be Kromartie.
Paul- I haven't absorbed all you sent but having lived through the Kennedy thing and all the others, I do dread for Obama's safety and can just see Biden somehow ending up as pres. Imagine the reaction and the counter reaction as we spiral down into hell. What an oppty to impose martial law- hey, i did just watch another episode.
Gotta get back to Greshom and more paranoia - like is my keyboard bugged? Or my cats?
ed notes online = Miles Dyson
ReplyDeleteMore evidence to support the case.
ReplyDelete‘Government Sachs’ Is Back
Who's designing Geithner's rescue plan? Goldman guys, of course.
Michael Hirsh
Newsweek Web Exclusive
As it was in the beginning, so shall it be in the end: Goldman Sachs will be there.
Back in the '90s and through the mid-'00s, major figures from Goldman Sachs such as Robert Rubin, Gary Gensler and Hank Paulson stood fast against derivatives regulation (Rubin and Gensler) and lobbied successfully for higher leverage ratios so they could bet more of their capital on the market boom (Paulson). When those policies came to grief and Wall Street imploded, and the Feds scrambled to rescue stricken insurance giant AIG, Goldman CEO Lloyd Blankfein was reportedly the only bank executive invited to an emergency meeting at the New York Federal Reserve (convened by then-Fed president Tim Geithner).
Now Treasury Secretary Geithner—a Rubin protégé, of course—has assigned two more ex-Goldman men to fix the vast mess their colleagues helped to create.
They are Steve Shafran, a former favorite of Paulson's, and Bill Dudley, Goldman's former chief economist and now the successor to Geithner as head of the New York Fed. Shafran and Dudley have been given the mind-bending task of resurrecting the market for securitized assets, a policy that is linked to an effort to lure the private market back in to bid on the toxic securitized assets that sit like dead weight on major banks' balance sheets. This vast project is being designed in two parts. First, revive the asset securitization market, frozen since last year's crash, through the TALF, the Term Asset-Backed Securities Loan Facility (don't try to say this at home!), started up on Tuesday. This program will bundle triple-A-rated loans into new securities and market them. Second, begin to sell off the toxic assets to private funds, in hopes that some day the TALF-revived securitization market will create demand for the lower-rated assets as well. According to a Treasury spokesman, the TALF plan and the troubled-asset buy-up program are "operating on parallel tracks."
The key now is to bring in hedge funds and other hoards of private capital by giving them government guarantees limiting their potential losses. The pitfall is that if the American public, already riled to populist fury over Wall Street's postcrash perks, finds out what a sweet deal these new investors are getting—without any limitations on executive compensation like those imposed on banks—people might get more upset.
This is not to speak ill of Shafran and Dudley or, for that matter, Geithner. The plan his Treasury team is working on is intricate, and it may well be the only way to bring the private sector back in—and get the rest of us, the taxpayers, out. A Treasury spokesman says that Shafran and Dudley are not the only ones working on the plan, which Geithner is personally overseeing. "It's been a group effort," he says, adding that there are no price guarantees. The private funds and the government will "share" first losses and profits, though details haven't been fleshed out. Nor should we ignore the fact that Goldman's "best and brightest" have sometimes dug us out of holes in the past. Former Treasury Secretary Robert Rubin, for example, is often criticized these days (by me, among others) for quashing then-Commodity Futures Trading Commission Chairwoman Brooksley Born's 1998 proposal to discuss derivatives regulation. What is rarely noted is that Rubin, at the time, was in the middle of resolving the Asian financial contagion, and he was justly concerned with sending a chilling message to Wall Street.
Still, the omnipresence of Goldman Sachs does make one wonder about the insularity of this world—what economist Jagdish Bhagwati once called the "Wall Street–Treasury complex." Or as another joke has it, Goldman is so politically savvy in Washington, it should be called "Government Sachs." Is there no one else to fix the crisis but specialists from the company that helped create it? According to a new report out by the public advocacy group the Consumer Education Foundation, over the past decade Wall Street investment firms, commercial banks, hedge funds, real-estate companies and insurance conglomerates forked over $1.725 billion in political contributions. They spent another $3.4 billion on lobbyists.
"Our government has been misappropriated by Goldman Sachs," says Christopher Whalen of Institutional Risk Analytics, a long-time critic of Geithner, whom Whalen likens to Chauncey Gardiner, the clueless hero of "Being There," who is manipulated by everyone around him. And if Wall Street elites continue to make government policy, will the new regulatory controls we hear so much about—the ones that are supposed to prevent this from happening again—ever really be adopted?
This is the critical question. Despite continued public support for President Obama and early signs that Geithner's various rescue plans—including the $75 billion mortgage bailout scheme announced this week—may be starting to reassure the markets, there is little sign as yet that the administration is engaged in the kind of fundamental rethinking of financial safety and soundness that we need. The problem is not just that Wall Street giants like Goldman, Citigroup and AIG ran wild over the past 20 years, it is that they exist in their current form at all. These institutions are too big and too systemic to be allowed to fail according to normal free-market rules, and if they remain that way we will inevitably find ourselves in a situation where taxpayers must rescue them once again.
We have been through this nightmare before, almost step by disastrous step. From 1932 to 1934 the Senate banking and currency committee held hearings on the 1929 crash and found that commercial banks had misrepresented to their depositors the quality of securities that their investment-banking sides were underwriting and promoting. According to a history posted by the Federal Deposit Insurance Corp. on its Web site, among the culprits was First National City Bank (now Citigroup), which was found to have repackaged the bank's Latin American loans and securitized them without disclosing its own confidential findings that the loans posed adverse risks. Sound familiar? The response of the government in that era was decisive: the Glass-Steagall Act, which separated commercial banking from investment banking. It is a supreme historical irony that 65 years later it was Citigroup, grown monstrous again, that pushed hardest for the destruction of the Glass-Steagall reforms. And it had a big assist from Goldman grads such as Bob Rubin, who was soon afterward hired as chairman of Citi's executive committee.
As the new Consumer Education Foundation report concludes: "Glass-Steagall was a key element of the Roosevelt administration's response to the Depression and considered essential both to restoring public confidence in a financial system that had failed and to protecting the nation against another profound economic collapse." Even if we believe that the economic and financial system may be stabilizing five weeks into Obama's presidency, it's hard to conclude that fundamental confidence has been restored.
Perhaps the Obama administration will see the light and at some point forthrightly address the "too big to fail" problem that even Federal Reserve chairman Ben Bernanke said again this week was "enormous." But it is hard to imagine that a team composed largely of Wall Street's former finest will, all by themselves, push for the breakup of the firms that nurtured and enriched them. And there is scant evidence that Geithner is now soliciting advice from others on the outside, including the new panel led by Paul Volcker—a diehard skeptic of Wall Street's agenda—that Obama set up precisely for this purpose. Who is the Treasury secretary relying on? We don't really know, but certainly one close adviser must be Mark Patterson, Geithner's new chief of staff. Patterson is the former Washington lobbyist for Goldman Sachs.
Reizner talks about stocks, gold, inflation, the US dollar, and making money during a tumultuous political and economic climate.
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