Auerback/Wray: Memo to Greece: Make War, Not Love, With Goldman Sachs

By Marshall Auerback, a fund manager and investment strategist and L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City

In recent weeks there has been much discussion about what to do about Greece. These questions become all the more relevant as the country attempts to float a multibillion-euro bond issue later this week. The Financial Times has called this fund-raising a critical test of Greece’s credibility in financial markets as it battles with a spiraling debt crisis and strikes. (http://www.ft.com/cms/s/0/463b205e-1d93-11df-a893-00144feab49a.html ) The “credibility” of the financial markets is an important consideration in a country which has functionally ceded its sovereign ability to create currency, and thus remains dependent on the vagaries of the very banking institutions which helped create the mess in the first place.

Maybe Greece should secede from the European Union and default on its euro debt? Or go hat-in-hand to the International Monetary Fund (IMF) to beg for loans while promising to clean up its act? Or to the stronger Euro nations, hoping for charitable acts of forgiveness? Unfortunately, all of these options are going to mean a lot of pain and suffering for an economy that is already sinking rapidly.

And it is questionable whether any of them provide long term viable answers. Polls show that given the perception of fiscal excesses of Greece and the other countries on the periphery, the public in Germany opposes a bailout of these countries at its expense by a significant margin. Periphery countries such as Ireland that have already undertaken harsh austerity measures also oppose the notion of a bailout, despite—nay, because of–the tremendous pain already inflicted on their own respective economies (in Ireland’s case, the banks are probably insolvent as well). The IMF route is also problematic, given that Greece probably doesn’t qualify under normal IMF standards, and many euro zone nations would find this unpalatable from an ideological standpoint, as it would mean ceding control of EU macro policy to an external international institution with strong US influence.

The Wall Street Journal recently highlighted an article by Simon Johnson and Peter Boone, lamenting that the demands being foisted on Greece and other struggling Euronations would “massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed to the onset of the Great Depression in the 1930s” (http://online.wsj.com/article/SB10001424052748703525704575061172926967984.html ). Where we disagree with Johnson and Boone is the suggestion that the IMF be brought in to craft a solution. Any help from this organization will come with tight strings attached—indeed, with a noose around Greece’s neck. Germany and France would be crazy to commit their scarce euros to a bail-out of Greece since they face both internal threats from their own taxpayers and external threats from financial vampires who are looking for yet another nation to attack.

Here’s a more appropriate action: declare war on Goldman Sachs and other global financial firms that created this mess. Send the troops, the planes, the tanks, and the ships. Attack every outpost of the saboteurs on European soil. Blockade the airports and ports. Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel. Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.

Ok, if a literal armed attack on Goldman is too far-fetched, then go after the firm using the full force of the regulatory and legal systems. Close the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances. Make the internal emails public. Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed. Make life at least as miserable for them as it now is for Europe’s tens of millions of unemployed workers.
We know that the Obama administration will not go after the banksters that created this global financial calamity. It has been thoroughly co-opted by Wall Street’s fifth column—who hold most of the important posts in the administration. Europe has even more at stake and has shown somewhat more willingness to take action. Perhaps our only hope for retribution lies there.
Some might believe the term “banksters” is too mean. Surely Wall Street was just doing its job—providing the financial services wanted by the world. Yes, it all turned out a tad unfortunate but no one could have foreseen that so many of the financial innovations would turn into black swans. And hasn’t Wall Street learned its lesson and changed its practices? Fat chance. We know from internal emails that everyone on Wall Street saw this coming—indeed, they sold trash assets and placed bets that they would crater. The crisis was not a mistake—it was the foregone conclusion. The FBI warned of an epidemic of fraud back in 2004—with 80% of the fraud on the part of lenders. As Bill Black has been warning since the days of the Saving and Loan crisis, the most devastating kind of fraud is the “control fraud”, perpetrated by the financial institution’s management. Wall Street is, and was, run by control frauds. Not only were they busy defrauding the borrowers, like Greece, but they were simultaneously defrauding the owners of the firms they ran. Now add to that list the taxpayers that bailed out the firms. And Goldman is front and center when it comes to bad apples.

Lest anyone believe that Goldman’s executives were somehow unaware of bad deals done by rogue traders, William Cohan (http://opinionator.blogs.nytimes.com/2010/02/18/the-great-goldman-sachs-fire-sale -of-2008) reports that top management unloaded their Goldman stocks in March 2008 when Bear crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman’s stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman’s co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner’s NYFed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm. So much for the “savvy businessmen” that President Obama believes to be in charge of Wall Street firms like Goldman.

From 2001 through November 2009 (note the date—a full year after Lehman) Goldman created financial instruments to hide European government debt, for example through currency trades or by pushing debt into the future. But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece’s debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads.

But it gets even worse: An article by the German newspaper, FAZ, (“Die Fieberkurve der griechischen Schuldenkrise”, Feb. 20, 2010) strongly indicates that AIG, everybody’s favorite poster boy for financial deviancy, may have been the party which sold the credit default swaps on Greece (English translation here).

Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece’s credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.

Having been bailed out by the Obama Administration, Wall Street firms are already eyeing other victims (and for allowing these kinds of activities to continue, the US Treasury remains indirectly complicit, another good reason why one shouldn’t expect any action coming out of Washington). Since the economic collapse is causing all Euronations to run larger budget deficits and at the same time is raising CDS prices and interest rates, it is easy to pick off nation after nation. This will not stop with Greece, so it is in the interest of Euroland to stop the vampires now.

With Washington unlikely to do anything to constrain Goldman, it looks like the European Union, which is launching a major audit, just might banish the bank from dealing in government debt. The problem is that CDS markets are essentially unregulated so such a ban will not prevent Wall Street from bringing down more countries—because they do not have to hold debt in order to bet against it using CDSs. These kinds of derivatives have already brought down an entire continent – Asia – in the late 1990s (see here), and yet authorities are still standing by and basically doing nothing when CDSs are being used again to speculatively attack Euroland. The absence of sanctions last year, when we had a chance to deal with this problem once and for all, has simply induced even more outrageous and fundamentally anti-social behavior. It has pitted neighbor against neighbor—with, for example, Germany and Greece lobbing insults at one another (Greece has requested reparations for WWII damages; Germany has complained about subsidizing what it perceives to be excessive social spending in Greece).

Of course, as far as Greece goes, the claim now is that these types of off balance sheet transactions in which Goldman and others engaged were not strictly “illegal” under EU law. But these are precisely the kinds of “shadow banking transactions” that almost brought down the global financial system 18 months ago. Literally a year after the Lehman bankruptcy – MONTHS after Goldman itself was saved from total ruin, it was again engaging in these kinds of deals.

And it wasn’t exactly a low-level functionary or “rogue trader” who was carrying out these transactions on behalf of Goldman. Gary Cohn is Lloyd “We’re doing God’s work” Blankfein’s number 2 man. So it’s hard to believe that St. Lloyd did not sanction the activities as well in advance of collecting his “modest” $9m bonus for last year’s work.

If these are examples of Obama’s “savvy businessmen”, then heaven help the global economy. The transaction highlighted, if reported that way in the private sector, would be accounting fraud. Fraud – “Go to jail, do not pass Go” fraud. That senior bankers had no problem in structuring/recommending/selling such deals to cash-strapped governments should probably not surprise us at this point. However, it would be interesting to know if the prop trading desks of those same investment banks, purely by coincidence of course, then took long CDS (short the credit) positions in the credit of the countries doing the hidden swaps. A proper legal investigation by the EU could reveal this and certainly help to uncover much of the financial chicanery which has done so much destruction to the global economy over the past several years.

In this country, we have had a “war on terror” and a “war on drugs” and yet we refuse to declare war on these financial weapons of mass destruction. We all remember Jimmy Carter’s “MEOW”—the attempt to attack creeping inflation that was said to sap the strength of the US economy in the late 1970s. But Europe—and indeed the entire globe—faces a much more dangerous and immediate threat from Wall Street’s banksters. They created this mess and are not only profiting from it, but are actively preventing recovery. They are causing unemployment, starvation, destruction of lives, and even violence and terrorism across the world. They are certainly more dangerous than the inflation of the 1970s, and arguably have disrupted more lives than Osama bin Laden—whose actions led the US to undertake military actions in at least three countries. That should provide ample justification for Greece’s declaration of figurative war on Manhattan.

However, in an ironic twist of fate, it was just announced that Petros Christodoulou will take over as the head of Greece’s national debt management agency. He worked as the head of derivatives at JP Morgan, and also previously worked at Goldman—the firm that got Greece into all this trouble!

Dimitri Papadimitriou has recently made what we consider to be an important plea for moderation of the hysteria about Greece’s debt. Writing in the Financial Times, he complained that

The plethora of articles in your pages and others, some arguing in favour and other against a bail-out, contribute to market confusion and drive the country’s financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government’s ability to achieve its deficit goals ever more difficult.

Indeed, we suspect that the same financial firms that helped to get Greece into its predicament are profiting from—and stoking the fires of—the hysteria. He goes on, “what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary”.

Greece, Euroland in general, and the rest of the world all need a holiday from the manipulation and destruction of our economies by Wall Street firms that profit from speculative bubbles, from burying firms, households, and governments under mountains and debt, and even from the crises that they create. Governments all over the globe should use all legal means at their disposal to ferret out the bad faith and even fraudulent deals that global financial behemoths are foisting on us.

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65 comments

  1. Jim in SC

    Since when has it been legal for an officer of a company to short its stock? I thought this has been illegal since the Great Depression. Not so?

  2. steve from virginia

    It figures, Auerback doesn’t have any real solutions other than to go after a bank. Okay, fine! What’s next?

    The entire Eurozone has little choice but to buy time and print some euros. Having a deflationary collapse in Greece means the Eurobanks fail in turn and the end of the euro. The issue is as it always is and will be; valuable currency or valuable commerce. Right now, the desire is for the currency and the devil take commerce’s hindmost.

    Which doesn’t help where commerce is really constrained by high energy costs and a super- hard dollar, which is pegged to crude oil! Bagging the euro buys some time, but unless the European nations get serious about energy conservation there is no escape from deflation … which will impose energy conservation on the Eurozone its own way.

    The Eurozone must cut fuel imports in half.

    The solution to the Greek issue is identical to the CreditAnstalt failure in 1931. Greece must be bailed at once and then a framework for fiscal unity – and sharp energy cuts – created in the interim. It’s that or disaster, there is no other way!

    BTW, in order for the US toe break the crude oil peg and ‘go off oil’ it must become a net exporter of crude oil. That is, it must cut crude consumption TO 25% of current, to -4 mbpd, to export 800 thousand barrels per day. It can then become swing producer and put Saudia out of business. Again, there is NO OTHER WAY.

    1. charcad

      The Eurozone must cut fuel imports in half.

      Germany and Holland can most conveniently do this by disconnecting from southern Europe and making new economic arrangements with Russia.

      I checked your blog briefly, Steve. It’s written somewhere or another that no Luddite will ever inherit either the Earth or the Kingdom of Heaven.

    2. Bill

      At this point in time, only a banker or a banker shill would dismiss, in one line, what could be a effective plan to try to stop the looting by Wall St Uberbanks.

    3. charcad

      It figures, Auerback doesn’t have any real solutions other than to go after a bank.

      I was able to take the Auerback/Wray piece infinitely more seriously than your stuff. I think I already know your “real solutions”, judging from your blog. Everyone go to Wal-Mart and buy packets of seeds and imported Chinese-made hoes and shovels. And then start digging like Egyptian peasants circa 3000 B.C. fyi, 19th Century farmers had a far higher level of organization, similar to 21st Century Amish.

      Here’s a “solution” along the line of “reducing oil consumption”. Begin electrifying the freight railroads and forcing long distance linehaul cargo back to the rails. Power them with new nuclear power plants.

      Here is vast stimulus for our vanishing domestic steel industry (2009 production down 50% from 2008), cement plants, aluminum industry, civil engineering sector and many other industrial works.

  3. Independent Accountant

    If Greece declares war on the Vampire Squid, it should have no problem raising an army. Tens, perhaps, hundreds of thousands of American peasants will come, pitchforks in hand, to do battle. Greece can easily form a modern Abraham Lincoln Brigade in the US.

  4. charcad

    However, in an ironic twist of fate, it was just announced that Petros Christodoulou will take over as the head of Greece’s national debt management agency. He worked as the head of derivatives at JP Morgan, and also previously worked at Goldman—the firm that got Greece into all this trouble!

    If this were the USA in late 2008 I’d be anticipating “Greek reform” that ensures Goldman’s profits are first protected and then enhanced. I will admit this appointment proves I overlooked a method of raising German public opposition to any “bailout” still higher, say into the mid 80s.

    1. Evelyn Sinclair

      I think Goldman may have quietly taken over the entire world. I was interested in Canadian currency as a perhaps more rational way to keep a bank account than in dollars. Thats when I found out their version of the Fed had been taken over by a Goldman guy!

  5. NotTheSecretary

    Here’s a simpler solution — why not just let them go bust or into receivership when they lose all their equity value like all other non-sovereign economic players?

    Oops, horse is out of the barn on that one. Thanks, Hank, Tim and Ben.

  6. Eagle

    Are posts like this really constructive? Can’t they at least come with a disclaimer (e.g. this post is not to be taken seriously, is posted to get more hits on my blog).

    Although I would truly enjoy reading Yves try to defend the notion that the EU would be improved by closing all their investment banks.

    1. charcad

      “Are posts like this really constructive?”

      Every one knows Auerbach and Wray are having fun. Look at this:

      “Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.”

      Totally impractical. And culturally insensitive. With Europe’s population density and numbers of castles everyone knows an Abu Ghraib type facility is more appropriate for incarcerating Wall Street banksters apprehended in Europe.

      Tropical Guantanamo and tents for crying out loud! A complete lack of imagination. Why not just give them an all-expenses paid cruise on a Carnival lines ship?

      Damp, unheated cells in the bowels of a Central European castle in January are far better. You gotta make them look forward to having their testicles hooked up to the electric wires.

      In the case of Oxford & Cambridge alumni banksters there’s the Tower of London just waiting to be mobilized. Afterwards condemned banksters can be taken to Tyburn to be hanged, drawn and quartered. Admittedly 17th Century. I’m just outbidding “Steve From VA” here for this thread’s civilizational regression prize.

  7. Matt T

    “lose the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances…”

    Mm. Sounds a lot like Vladimir Putin’s inauguration gift to various Russian conglomerates. Of course, the end result certainly wasn’t to bring on a new age of kumbaya social equality, or impeccable and acceptably left-wing business ethics.

    Of course these companies ought not to be backstopped, but it’d be even worse to start using the state judicial machinery for a politically-motivated hatchet job.

    Oh, and by the way – why on earth can’t Greece et al live within their means? That’s the central problem here, not “evil bankers.” Ireland has managed to cut budgets, civil-service pay, etc. and the world did not implode.

    1. attempter

      You mean the gangsters of Ireland who refuse to live within their means are trying to prop themselves up by stealing further from the people.

      I very much want people to live within their means. So let’s start with the fat, low-hanging fruit – let’s end corporate welfare and end welfare for the rich.

      We can start by recouping the $14 trillion stolen via the Bailout and the $1+ trillion laundered through the so-called Global War on Terror. (And of course end that private, corporate war.)

      And there’s plenty more limousine welfare to cut and redeem where that came from.

      Once we’ve done all that, we can see about any trivial, miniscule offenders.

    2. DownSouth

      Matt T,

      Ah yes, what you offer up is the same old warmed-over hash we’ve heard ad infinitum from the defenders of the ruling oligarchy.

      How is it that you and your fellow defenders of the international criminal banking cartel always manage to frame the debate such that the only options are Bush/Obama’s state capitalism or Putin’s state socialism? It’s kind of like having the choice between the hangman’s noose or the firing squad.

      As far as protecting the interests of the common man, it’s not really important whether the operative paradigm is capitalism or socialism. What is important is whether or not a functioning democracy with strong democratic institutions is in place.

      Funny how the defenders of the plutocrats never talk about that, but instead always fan the flames of this Chiliastic battle between capitalism and socialism.

      1. Siggy

        Nice point. For me, however, a Republic is far more appealing than a Democracy. My problem with our social contract, as now interpreted and as it is being executed, is that we have a lot of dummnies running around screaming for one man one vote without regard to the fact that our society is comprised of haves and have nots. Renters and Landlords.

        Now, we’ve all been getting poorer by the day; thank you for the easy money and the government stimulus. Charlie DeGaulle is rolling in his grave and his dirge is: ‘Told You So’. But then now comes the rentier class who really understand what is going on and they create nasty little financial derivatives that accelerate the continuing loss of purchasing power and they say: borrow and spend today for tomorrow it will cost more. And then when tomorrow comes we’ll just repudiate all that debt. Oh, and by the wat I’ve got some lovely CDS that will give comfort, even if I can’t honor the contract when it comes due. As to borrowing we’ll do that with other borrowed monies. Well not exactly, we’ll just repudiate by borrowing a trillion more. Well we won’t actually borrow it, we’ll just print it. Sorry, we’ve run out of ink, will some electronic pulses, little ons and offs fill the coffers?

        I expect that Greece will get some degree of accomodation and it will have to demonstrate that it has begun to fess up and control its profligate spending.

        In some respects, Auerback/Wray are looking at the wrong clock. The money’s been spent, the shopping bag is empty, get a life and lets address the fact that everyone is trying to game the financial reporting mechanisms.

        Rogue traders get sent to jail, when do sovereign ministers of finance get to go to jail?

        1. DownSouth

          Hell, a benevolent monarch would be better than what we’ve got now. But besides the fact there have only been a handful of those surface in all of recorded history, you eventually wind up back in the soup again because of that little problem called succession.

          Is it “the haves and the have nots” that’s got so many folks ticked off, or the fact that there are too many undeserving haves? I’d toss in that there’s a lot of have nots that have gotten the shaft as well, who deserve to have more than they’ve got.

          And I’m with you 100 percent on the punishment bit. If the perpetrators of the biggest robbery in the history of mankind walk, the glue that holds society together will dissolve like sugar in hot coffee.

    3. Doug Terpstra

      “…politically-motivated hatchet job”?

      Well, how about real, honest audits and fraud investigations? The circumstantial evidence is overwhelming and damning, and the smoke is choking the public from all the toxic garbage smoldering under the carpet. This dark shroud of secrecy may do more to destroy confidence than the confidence games themselves.

  8. giggty

    I’m all for mass purging of banksters. If we continue to play by the rules, we’ll only suffer more. Bankster pogroms would be a beautiful thing to behold.

  9. DownSouth

    Marshall Auerback,

    You say: “In this country, we have had a ‘war on terror’ and a ‘war on drugs’ and yet we refuse to declare war on these financial weapons of mass destruction.”

    The problem is that the “war on drugs” and the “war on terror” are the gimmicks used to justify the unleashing of the “financial weapons of mass destruction” upon the world, first upon the developing nations, and now increasingly upon the developed nations.

    When the Berlin Wall came tumbling down, some substitute for communism had to be found to justify US neo-imperialism, or our “economic, political and military supremacy” in our “zone of influence,” as the Mexican politilogue Adolfo Aguilar Zinser put it. The “war on terror” and the “war on drugs” fit the bill perfectly, and they were escalated appropriately.

    Osama bin Laden did the neo-imperialists—-a seamless synthesis of neo-liberals with neo-conservatives—-a great favor. He’s been a terrific marketing tool for them. But in the long run Obama may prevail.

    The problem the United States (that is to say, the neo-imperialists) faces is the same dilemma the old Soviet Union faced: it is built upon a political-economic philosophy that is rotten to the core, and therefore the entire structure is so rickety that it may come tumbling down upon itself. In the Soviet Union that philosophy was state socialism, or a political-economic system where government controls industry. In the US, it’s state capitalism, or a political-economic arrangement where industry controls government. Even though there’s a great deal of debate, in Mexico for instance, over whether the country is ruled under a system of state capitalism or of state socialism, the question is really mute. This is so because, as Hannah Arendt has pointed out, what “we have here are twins, each wearing a different hat.”

    Great Britain and Europe were junior partners in the United States’ neo-imperial project. One doesn’t have to look very hard to find neo-imperial diehards in Brussels or London.

    One can only hope that democracy is not so dysfunctional in Europe as it is in the United States.

    1. john bougearel

      downsouth

      Yes, neo-imperialism and disaster capitalism continues to flourish on memes such as war on terror or war on drugs. But the model of neo-imperialism can be justified or rationalized any longer. What is crucial is that populists from all corners of the world expose the flaws in these rationals and point toward other models of establishing balance and harmony in the global community. We are still a few years away at least from such a paradigm shift, but a revolutionary paradigm shift appears inevitable and a cause to work towards

    2. charcad

      DownSouth,

      The problem is that the “war on drugs”

      There is 0.0 evidence that legalizing the “recreational” use of addictive drugs like opium and cocaine reduces the social and economic devastation.

      Exhibit “A” is 19th Century China. The Sassoons and Jardines literally chartered the Royal Navy to blast open China and impose a legalized opium trade against the will of the native Chinese government. Legalized on the “demand” side, that is. This didn’t mean they favored free markets on the “supply” side. Their sole idea there was imposing a cartel they completely controlled by using a government they’d completely purchased.

      Why would legalizing drugs in the USA moderate the behavior of the cartels in Mexico? Why wouldn’t drug lords continue and increase their violent behavior to establish supply monopolies ala the Sassoons and Jardines? The opium trade has done a lot in Afghanistan. Fostering democratic government, civil peace and free markets is not among these results.

      FDA? Big Pharma? The current state of tort law in the USA? Federal, state and local alcohol and tobacco taxes? DUIs and the fatalities associated with that? This idea of a social cost-free drug legalization is not how things work in the real world.

      If opium and cocaine were to be legalized the “legal price” is at least as likely to stay the same or increase over the “street price” as it is to go down. It takes a lot of money to pay off the government and legal parasites.

      You won’t get rid of a black market in drugs by “legalizing” them.

      1. DownSouth

        My comment wasn’t about legalizing drugs.

        But whichever side one takes in that debate, does that even impact upon the “War on Drugs” in the context I used it?

        Are you asserting that the “War on Drugs” is not a pretense under which the United States exerts economic, political and military supremacy in many parts of Latin America? Are you claiming that the United States’ constant meddling in the internal affairs of Latin American countries is not done in the name of the US’ hallowed “national security,” drug control being a key element of US national security policy? And how serious is the US government about fighting illicit drug usage within the US?

        I’ll throw a question at you that I threw at commenter taxpayer the other day, a question that’s become almost a chorus from Latin America:

        taxpayer,

        It’s an open question as to how deeply the US government is involved in the drug trade. One thing is for sure, and that is that the “War on Drugs” is a pretense under which the United States maintains economic, political and military supremacy in many parts of Latin America. All of this is of course done in the name of the US’s hallowed “national security,” drug control being a key element of US national security policy.

        One of the problems is that once the drugs cross the border to the US, they just disappear into a black box. There’s almost no drug enforcement in the United States, at least for higher-ups in the drug distribution chain. For instance, everyone knows who Joaquin “El Chapo” Guzman is, plus the heads of the other six major Mexican drug cartels. But, as Carlos Fuentes has queried:

        “Who in the United States is receiving drugs from Columbia, laundering money, marketing drugs every day to 30 million U.S. citizens, bribing lawyers, the police, the politicians? There must be drug barons far more powerful than any Columbian trafficker.”

        When I first arrived in Mexico about 10 years ago, it was estimated the flow of narco dollars from the US was about 20 to 25 billion a year. That figure is now estimated at between 30 and 35 billion. That’s wholesale, so those drugs probably generate five to ten times that much money on the Streets of the United States, or something on the order of $150 to $350 billion per year.

        And yet, as Fuentes points out, there are no known drug barons in the United States. None of that money gets laundered into US banks. Police and politicians are not corrupt in the US.

        How does one explain these contradictions?

        1. charcad

          DownSouth,

          How does one explain these contradictions?

          Personally I would explain this by systemically embedded corruption at the federal, state and metropolitan law enforcement, judicial, legal and political levels in the USA.

          A good friend of mine, a West Point graduate, nearly resigned his commission over message traffic he saw come through the CAC during Operation Just Cause in Panama. We were on different shifts. This stuff was as compartmented as its possible for electronic messages to get. So I never learned precisely what it was.

          The basic problem with the US As Devil theories is they don’t explain Latin America’s deep affinity for home grown dictators. Santa Annas, Perons, Pinochets, Trujillos, Ortegas, Noriegas, Chavezes, Castros, Batistas et al are the rule there, not the exception. But they do help distract highly excitable people from looking at local corruption.

          1. DownSouth

            Ah yes, those “US As Devil theories.”

            Those are certainly plentiful in Latin America. Oddly enough, it’s almost a universal refrain, the theories being as popular among the dictators who rose to power thanks to a helping hand from the US as those who didn’t. One must, after all, assert one’s independence from the US, whether there’s any truth to it or not.

            Another advantage is they’re almost a sure winner with the people. They’re great fodder for demagogues, since they’ve got just enough of a hint of truth to make them verisimilar. And the imagination can run wild imagining what might have been if the US hadn’t spent almost two hundred years mounting military invasions and suppressing internal dissent in Latin America, encouraging political assassination, civil wars and military coups, winking at torture, applauding fraudulent elections and ignoring genocide.

            And the US certainly doesn’t mind playing along. After all, a little verbal abuse is a small price to pay as long as the money keeps rolling in.

          2. Doug Terpstra

            “…the US As Devil theories is they don’t explain Latin America’s deep affinity for home grown dictators.”

            Noriega, Pinochet, Batista, home-grown? Hardly. You might as well add Somoza, Duvalier, Duarte and D’Aubuisson. Chavez for one was legitimately elected, according to international election observers including the Carter Center.

            Here’s a brief synopsis of CIA dirty wars in Latin America and interventions elsewhere. It’s “impressive”:

            http://nwoobserver.wordpress.com/2009/08/26/a-history-of-cia-coups-and-atrocities/

            and: http://silent-nation.com/us-foreign-policy-1940-present

          3. charcad

            Tuned the first one out fast. Just some old commie unhappy the Cold War ended like it did.

            http://nwoobserver.wordpress.com/2009/08/26/a-history-of-cia-coups-and-atrocities/

            The next one was slightly more objective:
            http://silent-nation.com/us-foreign-policy-1940-present

            Watch out for all the “alleged” events. The CIA was never that masterful. One of the few things Bush did that I agreed with was to demote the DCI from his position presiding over the “intelligence community”.

      2. Anonymous Jones

        Sorry to get in the middle of the thread (and to branch off-topic as I am wont to do), but I’d just like to make a brief comment about the statement, “There is 0.0 evidence…”

        It seems to me that there’s a lot of “arguments” and “evidence” on both sides of this debate. What I will agree with you on is that there are no definitive “conclusions” that can be drawn from these “arguments” and “evidence.”

        The evidence and exhibits you submit are not convincing, at least to me. That’s not to say you are incorrect, but I definitely remain unconvinced of your argument.

        Also, as everyone who pays attention knows, yes, the black market is not going away. There’s still a black market for something as common as cigarettes (because of taxes). Smuggling is never going to stop. That said, just because something cannot be reduced to zero does not mean it cannot be reduced.

      3. Evelyn Sinclair

        “You won’t get rid of a black market in drugs by “legalizing” them.”

        Oh yeah –that’s why, after the War on Alcohol was over, the black market in wine and liquor remained entrenched, why alcohol is so expensive and sold without proper government control.

        Of course (seriously now) it does seem that Prohibition provided criminals with a way of thriving and prospering as never before. Criminals just HATE it when the government moves in on — decriminalizes and taxes — their racket!

  10. john bougearel

    Marshall,

    You had me at Make War, Not Love with Goldman Sachs.

    And ” enemy financial combatants” is a colorful and effective use of language, but as Yves has pointed out, GS is not the only ” enemy financial combatant” out there which Americans must straightjacket (GS is simply the most brazen). If we adopt a non-violent posture of resistance, rather than a physical guantanamo-like facility, we can craft legislation and policy to straightjacket these enemy financial combatants.

    The 1933-1934 legislation effectively straightjacketed the enemy financial combatants of the 1920s for nearly 50 years.

    Unfortunately, a legislative straightjacketing won’t happen until 2013 at the earliest, because another financial crisis to blow up the US economy once again in 2011-2012 will have to happen first before lawmakers can be motivated
    to do anything. They will have to make an effort to make good on their 2012 populist campaign promises….that they don’t even know they are going to be making.

  11. gordon

    HERE’S the “Goldman Political Family Incest Tree” :

    High Profile Goldman Associates – Notable or Notorious?

    John Whitehead – Had a 38 year career at Goldman Sachs – he retired in 1984 as Co-Chairman and Co-Senior Partner. He served as United States Deputy Secretary of State in Ronald Reagan’s administration from 1985 to 1989 under George Shultz, and was awarded the Presidential Citizens Medal by President Reagan. In 1996, he was the campaign chairman for Michael Benjamin who ran for a seat in New York’s 8th congressional district. He is former Chairman of the Board of the Federal Reserve Bank of New York, the United Nations Association, and a former Chairman of The Andrew W. Mellon Foundation and the Harvard Board of Overseers. He is a former director of the New York Stock Exchange and Chairman Emeritus of The Brookings Institution.
    Robert Rubin – served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations. Before his government service, he spent 26 years at Goldman Sachs serving as a member of the Board, and Co-Chairman from 1990-1992.

    Henry Paulson – as the 74th United States Treasury Secretary. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs.

    John Thain – The last chairman and chief executive officer of Merrill Lynch before its merger with Bank of America. Before he came to Merrill, Thain was the CEO of the New York Stock Exchange from January 2004 to December 2007. He also worked at Goldman Sachs, as head of the mortgage desk from 1985 to 1990, and president and co-chief operating officer from 1999 to 2004.

    Robert Steel – Served as Under Secretary for Domestic Finance of the United States Treasury from 2006-08. He has also served as president and CEO of Wachovia Corporation and as vice chair of Goldman Sachs.

    Edward Liddy – Was on the board of Goldman Sachs from 2003 to 2008, when he resigned to become CEO of AIG. He was selected by Henry Paulson for both roles.

    Stephen Friedman – Former Chairman of the Federal Reserve Bank of New York, resigned on May 7, 2009. Worked for much of his career with investment bank Goldman Sachs, holding numerous executive roles. He served as the company’s co-chief operating officer from 1987 to 1990, was the company’s co-chairman from 1990 to 1992, and the sole chairman from 1992 to 1994; he still serves on the company board.

    William Dudley – Worked 21 years at Goldman Sachs, succeeded Tim Geithner as President of the New York Federal Reserve in 2009.

    Josh Bolten – Worked 5 years at Goldman Sachs, became White House Chief of Staff for George W. Bush.

    Reuben Jeffrey – Had an 18 year career at Goldman, left in 2001 when President Bush appointed him as his Special Advisor on Lower Manhattan Development, and in 2002, Jeffery left Goldman Sachs to take on this responsibility. In 2003, Jeffery became a Special Advisor to L. Paul Bremer, head of the Coalition Provisional Authority in Iraq and then became the Representative and Executive Director of the Coalition Provisional Authority Office in The Pentagon. He served as a member of the United States National Security Council until 2005, as a Senior Director responsible for International Economic Affairs. Jeffery was named the chairman of the Commodity Futures Trading Commission. On April 16, 2007 President Bush nominated Jeffery as Under Secretary of State for Economic, Business, and Agricultural Affairs.

    Arthur Levitt Jr. – Former Securities and Exchange Commission [S.E.C.] Chairman and senior advisor to the Carlyle Group began advisory role with Goldman Sachs in June 2009.

    Rahm Emanuel – Current White House Chief of Staff [Obama], was originally hired by Bill Clinton as his chief fundraiser. At that time [1992] Emanuel was on the payroll of Goldman Sachs, receiving $3,000 per month from the firm to ‘”ntroduce us to people” according to a Goldman partner.
    Gavyn Davies – Former Chief Economist at Goldman Sachs and current President of the British Boadcasting Corp. [BBC] is married to British Prime Minister Gordon Brown’s special adviser Sue Nye.

    Gerald Corrigan – Was a special Assistant to Federal Reserve Board Chairman, Paul Volcker in Washington, D.C. He went on to serve as president of the Federal Reserve Bank of Minneapolis from 1980 to 1984 and President of the Federal Reserve Bank of New York from 1985 until 1993. From 1991 to 1993 he was Chairman of the Basel Committee on Banking Supervision. From 1993 to 1995 he was director of the Council on Foreign Relations. Dr. Corrigan is currently a partner and managing director in the Office of the Chairman at Goldman Sachs and was appointed chairman of GS Bank USA, the bank holding company of Goldman Sachs, in September 2008. He is also a member of the Group of Thirty, an influential international body of leading financiers and academics.

    Duncan Niederauer – Was appointed chief executive officer and director of NYSE Euronext, effective December 1, 2007, after joining NYSE Euronext in April 2007 as a member of the Management Committee. Mr. Niederauer also serves on the boards of NYSE Group and Euronext N.V. Mr. Niederauer was previously a partner at The Goldman Sachs Group, Inc. (United States) (GS) where he held many positions, among them, co-head of the Equities Division execution services franchise and the managing director responsible for Goldman Sachs Execution & Clearing, L.P. (formerly known as Spear, Leeds & Kellogg L.P.). Mr. Niederauer joined GS in 1985. From March 2002 until his resignation in February 2004, Mr. Niederauer also served on the board of managers of Archipelago Holdings, LLC (United States).

    Lawrence Summers – Director of the White House’s National Economic Council for President Barack Obama and former Secretary of the U.S. Treasury [Clinton].. In 2008, Summers was paid 135,000 for giving a speech to Goldman executives.

    Jon Corzine – Served five years of a six-year Senate term before being elected Governor in 2005. He was defeated for re-election in 2009 by Republican Chris Christie. Former Chairman and co-CEO of Goldman Sachs. Left firm in 1998 and entered politics.

    Gary Gensler – Chairman of the U.S. Commodity Futures Trading Commission [CFTC] under President Barack Obama. Gary Gensler spent 18 years at Goldman Sachs, making partner when he was 30, becoming head of the company’s fixed income and currency trading operations in Tokyo by the mid-’90s.

    Robert Zoellick – Is the eleventh president of the World Bank, a position he has held since July 1, 2007. He was previously a managing director of Goldman Sachs, United States Deputy Secretary of State (resigning on July 7, 2006) and U.S. Trade Representative, from February 7, 2001 until February 22, 2005.

    Neel Kashkari – In July 2006, Kashkari was appointed as a special assistant to Treasury Secretary Henry Paulson. In the summer of 2008, he was appointed assistant secretary for international economics and was confirmed in that post by the U.S. Senate. On October 6, 2008, Paulson named Kashkari interim head of the new Office of Financial Stability. Overseen by the treasury secretary, he is in charge of creating and implementing the United States government’s $700 billion financial stabilization program. Prior to joining the Treasury Department, Kashkari was a Vice President at Goldman, Sachs & Co. in San Francisco.

    Mario Draghi – Head of the Bank of Italy and former mentor to current U.S. Treasury Secretary, Tim Geithner. Draghi was vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002-2005).

    Mark Carney – Governor of the Bank of Canada. Before joining the public service, Carney had a thirteen-year career with Goldman Sachs in its London, Tokyo, New York and Toronto offices.
    http://www.financialsense.com/fsu/editorials/kirby/2010/0216.html

  12. Kid Dynamite

    there is at least one MEGA flaw in this article: the authors never once mention holding the Greek Financiers who did these trades responsible.

    there has been ample policy response here in the US too designed to extend and pretend – avoid recognizing debts now, postponing them until later – which is what GS did (technically legally, as Yves has noted) with Greece.

    the story with GS and Greece is that, although it was technically legal, GS basically helped Greece lie to get into the E.U.. That is a deep and potentially interesting topic for discussion.

    The fact that GS helped Greece (again, technically legally) hide its debt AFTER they got into the E.U. is no different from what we’re doing right now in the US, helping banks hide their insolvency.

  13. MichaelC

    If the Euro’s value is based on the relative debt levels of each country and each country is understating their debt levels on a par with Greece, is it possible all debt levels are proportionately mistated and the Euro is not exceedingly mispriced.

    It’s an open secret that each country has lied about their official debt levels. The working assumption has been that none have lied unreasonably. They’ve all used similar OBS arrangements as Greece. Is Greece the only egregious liar? Let’s hope so.

    But just in case the EU audit should be expanded, and quickly, to include not just GS,the ‘Wall St’ banks and Greece but the London offices of the Eurobanks as well, to determine the reliability of all the reported sovereign debt levels.

  14. gael

    Declare war on Goldman Sacks? That’s a show I’d love to see. O the drama! But who really has the courage to do that?

  15. liberal

    OT: here’s the msg I got in response to an email against confirming Ben “Helicopter” Bernanke from my senator:

    Dear Dr. xxxx:

    Thank you for getting in touch with me about Ben Bernanke’s nomination to chair the Federal Reserve. It’s great to hear from you.

    Americans are angry and they are anxious. In diners and at the dry cleaners, I’m hearing tremendous anxiety about the economy. People are feeling like their middle class way is slipping away, and that brings a lot of anger, fear and frustration.

    When Chairman Bernanke thought Wall Street was on the verge of a crisis, he acted dramatically. He used new powers for new programs. Well, the job market is in a crisis now. But the Fed’s response has been tame and tepid. We need the same urgency from the Federal Reserve to jumpstart the job market that was given to Wall Street to jump start the financial markets.

    I voted to confirm Mr. Bernanke because he is not a man of ideology. When we needed him the most, his expertise and level-head probably helped prevent a catastrophe. Bernanke didn’t panic and he took his lessons from economic history, a subject which he has studied closer than anyone else. No one understands the risks the economy faces better than he does.

    I was advised that rejecting his nomination would cause markets to nose dive, which would hurt retirees and families saving for their future. I am not enthusiastic in my support. But I think Mr. Bernanke understands the job that he still has to do.

    We need bold new approaches – and I’ll fight for them. I let Mr. Bernanke know that I am focused on three things to get our economy going again: creating jobs, getting more lending to the middle economy and small businesses, and helping people get out from under the threat of foreclosure.

    Thanks again for getting in touch with me. Knowing of your views was helpful to me. Please let me know if I can be of any assistance to you in the future.

    Sincerely,
    Barbara A. Mikulski
    United States Senator

    1. charcad

      In diners and at the dry cleaners

      ?????

      This had to have been written by one of Mikulski’s DC urbanite staffers. Probably a person who hasn’t seen a farm field for 10 years, except from an airliner. When you work in DC long enough it’s easy to lose contact with reality, as that staff author clearly has.

      Hello, Capitol Hill and K Street bullshit artists! Anybody home???

      Struggling Americans outside Georgetown, Roslyn and Adams-Morgan stopped eating out at diners several years ago. And if they go out at all to clean their clothes they go to a laundromat and then come home to do their ironing themselves.

    2. Victor

      “I was advised that rejecting his nomination would cause markets to nose dive.”

      This, in a nutshell, encapsulates the impossible situation in which we now find ourselves. Forget about Bernanke. ANY attempt to rock the boat will “cause markets to nose dive.” So the politicians have their choice: either do nothing of any real substance, which means reinstatement of the status quo, which means another far worse collapse at some point down the road; OR take meaningful steps to correct the problem right now, which will, of course, “cause markets to nose dive” right now, which would probably lead to exactly the same collapse, only now instead of later. If you were a politician, which course would YOU choose?

      “So long as all goes well and there is nothing to regulate, then you can do your job of regulation really well. As soon as something goes wrong, however, then, simply by exercising your regulatory responsibilities, you run the horrible risk of precipitating the calamity you were hired to avert.

      And hence: the fatal flaw of capitalism is that it is fundamentally beyond regulation. QED.

      (Of course, for some, that is its supreme strength.)”

      http://amoleintheground.blogspot.com/2009/05/stress-tests-regulatory-capture-and_12.html

  16. sam hampster

    If U.S. consumers are not likely to resume the consumption binge, then what does the citizenry have to bargain with? Why should politicians care about our needs and interest?

    Why shouldn’t the banks be coddled? The banks can be used to drain the remaining wealth from U.S. citizens and open the doors for the oligarchs into the BRIC nations.

    Have you ever seen road-kill jump up and frighten away the vultures? I haven’t.

  17. Hugh

    Goldman and the other big Wall Street firms are the financial terrorists of our times and should be treated as such.

    Much as I sympathize with this post, I wonder how aggressive the Europeans will be. How involved are French and German banks in what is happening in the other Club Med countries?

    The important points about our current financial system are that it is ultimately wealth destroying and that it is completely unreformable. We have to keep in mind that these institutions are filled with people whose whole careers and identities have developed around rigging and gaming markets. It is all they know. It is what they will do until their companies are dismantled and they themselves are put in prison. They will not stop. They only can be stopped.

    Given today’s crop of corrupt and bought politicians this is unlikely to happen short of another collapse. My guess for that is 2011. YMMV.

  18. Tortoise

    Who would fight for the Greek government? Their civil servants? Sadly, most of them would be on strike or on coffee break. The forces of the evil empire (GS) would have the upper hand.

    That is exactly why this is an opportunity for Greece to do some necessary but painful reforms.

  19. Canucklehead

    I wanted to add “neo” to some phrase but all the good ones were taken. Oh well. It appears Auerback and Wray are lobbying for some consultancy contracts on this matter.

    … Stupid is as Stupid does…

    Greece (and Argentina) are not serious countries. The sooner the IMF runs their affairs, the better.

    1. charcad

      Neither is the USA.

      Primary industrial production collapsed across the board in the 2010. See the USGS 2010 mineral commodity summaries. And what is Washington’s top legislative priority this month? Passing a bill to further increase industry costs.

      Presidential politics defined by Barrack Obama and Sarah Palin? These are already the elections of Mike Judge’s “Idiocracy”, for God’s sake.

  20. ds

    Great post. GS isn’t telling us where all of these financial weapons of mass destruction are hidden. We can’t let another one explode. We need to bring these GS execs to Guantanamo and waterboard them.

  21. reprobate

    I see you picked a suitable handle for your comments. “Stupid is as stupid does” is a perfect fit.

    If you knew anything about consulting, you’d know this type of piece is a way to guarantee NOT getting hired. The idea of using PR/profit motives to to undermine a demand that the banks’ activities be inspected closely is typical of a bank booster or neoliberal diehard.

  22. Jeff Rosenberg

    I’ll just point out that all the finger-pointing at the banksters, while very deserved, helps pull attention away from the failure of the gov’t legislators, administrators, and regulators.

    Attacking the banksters will not solve the problems (however just it would be), as others would spring up in their place. We must focus on clearing the rot out of our various governments. Without a rejuvenated gov’t enforcing just regulations and ensuring that the system doesn’t reward perverse behavior (as it currently does), nothing will be cleansed and new growth will not occur.

  23. charcad

    “However, in an ironic twist of fate, it was just announced that Petros Christodoulou will take over as the head of Greece’s national debt management agency. He worked as the head of derivatives at JP Morgan, and also previously worked at Goldman—the firm that got Greece into all this trouble!”

    There’s a primeval artistry there that is truly awe-inspiring. A true Colonel Kurz diamond-bullet-between-the-eyes moment when he confronted the piles of amputated vaccinated children’s arms.

  24. Jim

    It’s almost quaint how advocates of Modern Monetary Theory (like Auerback and Wray) still have confidence in the State to somehow remoralize American culture.

    They clearly indicate in their essay, however, that U.S. politicians and public bureaucrats are really no longer capable of making wise decisions in the public interest (because, primarily, of the revolving door)–although they still hope that somehow European bureacrats may have more of an independent backbone.

    MMT’s brilliant analysis of how the modern monetary system operates only collapses into naivete when it advocates that somehow the national government (i.e. the Treasury, the Congress, and the Federal Reserve) is still capable of advancing the public interest.

    If anything, the financial/political events of the past two years have proved that this is no longer the case. The breakdown of market self-regulation due primarily to a breakdown of self-restraint in both public and private sector elites now demands something more profound.

    1. Matt Franko

      Jim,

      “MMT” cannot advocate, people advocate…salutes to Mr. Auerback. and Prof Wray.

      Within the reality of MMT, the govt sector can always provide enough NFA to the non-govt sector to maintain full employment/output and adequate price stability…..even if the govt sector is corrupt.

      Resp,

      1. Dave Raithel

        Isn’t this still the problem: Government policies determine the goods and services the government will purchase to sustain the net surplus to the private sector (the complement to the net deficit of the public sector). So, is the Fed Gov going to – for example, revitalize the rail system for long haul transport as Charcad suggests above in a relevant context – or is the Fed Gov going to buy drones to bomb peasants in Afghanistan? Jim describes Auerbach’s and Wray’s contention that the Fed Gov can act in the public interest as “quaint” – and though I don’t want to use the same word, I understand his choice – it’s not as condemning as “naive.” It isn’t necessary to suppose that government failures are matters of outright corruption – since that’s really a matter of degree within schemes grounded on the supposition that each is out to do best for him or herself and well, there’s no accounting for tastes or preferences. Honesty is not the best policy – the deceptive appearance as being honest is…

  25. Ron C

    Its funny I had the same thoughts the other day.The misery and suffering even to the point of some starving to death these guys have caused creates a reason for criminal charges.Maybe even crimes against humanity.Seems I remember reading somewhere that both world wars were caused by economic crisis’s caused by bankers.Are we ready for WWIII?

  26. Jim

    Matt

    Maybe I’ve missed something. Explain to me again how wise value choices (policy decisions)emerge from this corrupt governmental structure (i.e. bought off Treasury Secretary, Congress and Federal Reserve)?

    In a more general sense, in my opinion, MMT has some keen insights into the working of the monetary system which are a necessary but not sufficient condition for the formulation of sound public policly.

    You’re not saying that the fiat money producer (the state)has compassion built into its rule making? If you are then indeed, that is quite an innovation!!

    1. Matt Franko

      Jim,
      MMT does not differentiate between whether govt sector deficit spends to create the NFA or tax cuts/credits/rebates to create the NFA. Other than most MMTers I have read prefer the latter! The Bush Admin started to do this in 2Q CY2008 with the $650 rebate they sent to every taxpayer for a total fiscal transfer the Q of I think $165B, that was working but when it was not repeated in 3Q, things fell apart rapidly right after the Olympics and then Lehman went down and here we are.

      The MMTer that is out front politically right now is Warren Mosler. “www.moslereconomics.com” His political platform is to immediately implement a 2-year across the board full payroll tax holiday (net $650/mo for $100k household income)to fix this situation from the bottom up (rather than what we’re currently doing ie top down that has been overly favorable to the banksters, and left too many unemployed, imo an unmitigated disaster).

      Until we educate the public that Treasury Security issuance is not a financing operation (ie we’re not borrowing from the Chinese!), or just stop issuing Treasuries altogether (my preference), in order to remove any fears of deficits the public may have, we may be stuck in the current situation of high unemployment/low output and bankster favoritism; and the resultant frustration you can see here in the postings of the readers of NC.

      1. Dave Raithel

        An extra $650 a month in a $100,000 household is nice – if you’re in one. I can get the point (Stephen Waldman over at Interfluidity raises the matter often enough) that putting money into the hands of people who have to spend it is less likely to cause asset inflation or commodity bubbles (fueled by money from people who don’t have to spend it on groceries or keeping kids in college).

        But in a real economy with REAL unemployment at 15%, Wray’s contention that the Fed Gov must be the employer of last result rings more true than Mosler alone. I don’t see how repeating what Bush II did in 2008 isn’t subject to the same objections raised then: Those who don’t need the money will stash it, and those who do will purchase necessities and retire some debt (that’s what we did at our house.) Those who in turn collect on their debts may, or may not, invest those funds into capital goods and put people to work, or they may not – as THEY find to their benefit. Whether they find it beneficial (and broadly, let’s include “benefit” to mean “avoidance of penalties”) depends upon more details of the political nexus ‘tween capital and government and competing senses of “the public good” than is embedded within MMT alone – after all, Mitchell and Wray both repeat that they do not present anything more than a description (totally analytic) of how modern banking and fiat currency works. The ends to which the system is put are another matter.

        Truly, I am not trying to invent reasons to do nothing. But Jim’s point re what’s necessary, and what’s sufficient, are the matters that catch my eye.

        1. Matt Franko

          Dave,

          Prof Wrays ELR stuff is not going to happen any time soon, it may be a noble goal, but not possible in short term…

          However, back to reality, the tax holiday is doable short term here, or if you take the BushII approach of a rebate, then you do it again, and again, and again until unemployment falls to acceptable levels within an environment of reasonable price stability. If people save the rebate that is their choice/desire to do so, ie those people are demanding higher personal savings levels, the Govt sector should comply with these public demands, that is the role of govt sector at high levels. If anyone thinks we’re just going to do a 1 qtr fiscal adjustment of $165B and somehow everything will magically return to an equilibrium level at higher output, they are DELUDED…if you make sure the govt sector is transfering the appropriate amount of balances continuously (to support output/employment), then people will do what they want with it, “vote with their feet”. Seems very democratic to me! And a “no brainer” for where we are right now.

  27. Naive Child

    Greece has a long history of barrowing money and not repaying it; one might reasonably say it’s a part of the Greek culture. Since independence from Turkey in the 1820’s until now Greece has been in default on its debts 50% of the time. Goldman is just another vehicle to carry on the culture of borrowing money, spending it and not paying it back. If not Goldman, then Credit Suisse if not a bank they would have hired a consultant and done it through the back door of the National Bank. It is amazing to me how many people are willing to overlook the Greek culture of being a deadbeat and blame someone else for what Greek politicians clearly wanted to do; borrow, spend and default. Greece joined the EMU in order to get “welfare benefits” and lower their borrowing costs, since due to past defaults and chronically high inflation Greece’s barrowing rates were prohibitive when it came to piling on more Greek national debt. The strikers in the street are just another round of that Greece has an entitlement to do more of the same. The Germans just raised the retirement age to 67 while it remains at 55 in Greece, which is why the Germans who pay their bills refuse to bailout out a culture of deadbeat entitlement. The best aid program for Greece would be 10,000 well trained riot police to restore order in the streets, while the government privatized all of the corrupt state enterprises, cut wages and benefits to all but the most poor, raised the retirement age, increased tuition for education, and started stamping out the petty third world corruption that is such a part of everyday life in Greece.

  28. Paul Tioxon

    Kabul, Afghanistan (CNN) — The head of U.S. forces in Afghanistan, General Stanley McChrystal, expressed regret Monday after more than two dozen civilians were killed in a NATO airstrike.

    Twenty-seven civilians died and 14 others were wounded in the incident Sunday in the central Daikondi province, according to the Afghan Interior Ministry.

    Ground forces at the scene found women and children among the casualties, the Afghan government and NATO’s International Security Assistance Force (ISAF) said in a joint statement.

    The U.S military told CNN Pentagon Correspondent Barbara Starr they “accept” the Afghan government’s death toll. ISAF said it had ordered an immediate investigation into the incident, while the Afghan cabinet called the attack “unjustifiable.”

    “We are extremely saddened by the tragic loss of innocent lives,” said McChrystal, who spoke to President Hamid Karzai Sunday evening to express his sorrow and regret over the incident.

    Why not publish an old fashion proscription list of the Global 1000 Billionaires? That would be a huge capital pool to be used for financial reform emergencies. Since we regularly kill thousands every year accidentally while freeing people from their political subjugation and reducing the threat to us at home, what would be a few thousand more of people who are more valuable to us dead than they are alive, as parasites to the global economy? After all, Goldman Sachs are the paid agents of people who don’t have to actually do anything for a living anymore. I am sure we could get FEMA to apologize to the public for killing them, but at least they would not die in vain, but for the greater good.

  29. vlade

    “But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece’s debt—making income on bets that Greece would default.”

    This is spurious reasoning which unfortunately seems to catch on more and more. In the same vein you could reason that anyone who took out a fire insurance is implicitly trying to defraud and has interest in burining their house down. GS made a profit from the swaps transaction (putting aside everything else around this transaction(), and for a price it could hedge the credit exposure on this profit (locking it in) – so what? When people say “should not let buy CDSes w/o the underlying assets” – well, fee on another derivative transaction IS an insurable asset. In the same way I’d expect GS to hedge their interest and FX exposure on that transaction to the market. Does it mean that they were out to sink EUR and do things to interest rates?

    That is NOT to say that GS could not speculate on CDS market on Greece – but to prove it is much harder than just saying that GS did a swap with Greece and then bought CDSes on them. You could for example look and if their CDS on Greece position was a multiple of their exposure, it’s likely that they are speculating – but even then it does ot have to be the case, it’s just much more likely.

  30. williamtodd

    Great post. It’s good to see someone put the idea of treating the banksters like economic terrorists in print, even if it is just tongue in cheek.

    The trouble with any solution, rational or not, is that the inmates are still running the asylum. This makes any effective solution a non-starter. I guess we’ll just have to go down in flames a second time.

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