Limiting the destruction wrought by irrational exuberance in a one-party state

By Edward Harrison of Credit Writedowns

As a writer, Matt Taibbi is a lot more vitriolic than I am. He curses, makes some pretty over-the-top personal attacks, and divines a policymaker’s intent where I don’t think he can. But, this goes mostly to style.  Substantively speaking, he has a lot to say and we should take notice. 

I wanted to highlight a piece he wrote yesterday called Fannie, Freddie, and the New Red and Blue. The crux of his argument is this: The partisan rhetoric is on full display in the dust-up over the unlimited liabilities coming from Fannie and Freddie thrust upon taxpayers on Christmas Eve. This rhetoric is not just beside the point, it is specifically designed to obscure the point, namely that both Democrats and Republicans, private industry and the government are culpable in the shambles our economic system has become.

Taibbi says:

Over the Christmas holiday a nasty thing happened: Tim Geithner’s Treasury Department decided to lift the cap on aid to the Government-Sponsored Entities, Fannie Mae and Freddie Mac, apparently in response to Obama administration fears that the two agencies would become insolvent. The cap was raised from $200 billion on each and government backstopping of the mortgage market will apparently now extend into infinity for at least three years, through 2012.

The move has already inspired a mini-firestorm, with several outlets delving deeply into the recent history of the GSEs and uncovering some disturbing new facts…

Sometimes I’m amazed at the speed with which highly provocative information like this GSE business can be converted into distracting propaganda in this country…

What worries me is that we’re… starting to see fault lines develop, where one side blames the government while another side blames Wall Street for the messes of the last two decades…

Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar’s loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious and extended from coast to coast, sinking one lender after another in Ponzoid debt and indictments….

Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs to the Fed to the banks to the ratings agencies to the lenders. I don’t think it’s really controversial to say that, but it does seem like there’s an argument brewing about what that across-the-board complicity means.

This is kleptocracy, of course. Crony capitalism. And by that I mean the system Taibbi lucidly breaks down for us is one of privatized gains and socialized losses. Incumbent politicians and policymakers retain power by looking the other way and allowing special interests an unfair profit advantage. Usually, this goes to excess. Irrational exuberance takes over and losses ensue – losses which are not borne by the economic actors but taxpayers. That is how it always happens, but in this case it happened on a grander scale. And both Democrats and Republicans were complicit.

The question is: what can be done?  Can we really spot this kind of ‘irrational exuberance” when it permeates the entirety of the social fabric? Barring another Great Depression, I don’t think any one President or one party is going to be the agent of change – Barack Obama has demonstrated this quite effectively. Both major political parties have too much at stake in the status quo. So, if the question goes to the whole Red/Blue partisan back and forth, Taibbi is right that this is a side-show. We effectively have a one-party system when it comes to investment in the present economic, power, and wealth structure.

But, the question also goes to Greenspan’s argument about not spotting bubbles, but cleaning up after the mess. Greenspan feels the Fed’s job is not to regulate and not to target asset prices as a bubble forms. Rather, the Greenspan view has the Fed acting asymmetrically by raising rates slowly so as not to cut off a boom, but cutting them quickly to forestall depression – something I see as hopelessly blinkered and outright dangerous.  Greenspan, in his ideological fervor, is presenting an extreme form of an argument that has some basic merit.

Mark Thoma presents a much more sensible argument based on this same we-can’t-stop-bubbles view. In reviewing Bernanke’s recent defense of Fed policy, Thoma says the following (emphasis added):

there is blame to be placed, plenty of it, but I don’t think it should be concentrated as much as it is on Bernanke and the Fed (Greenspan may be a different story, but he was also going along with the majority of the profession, or at least the powerful voices in the profession at that time). The blame is on the entire profession, and those who study the structure of the banking industry and regulation in particular. Many of the economists who are the most critical today were among those supporting deregulation (or they said little or nothing about it).

Finally, as I’ve noted before, I have come to the same conclusion that Krugman states today, that the most important thing we can do is to reduce the effects that bubbles have when they pop. We may never be able to prevent all bubbles or other problems in the financial sector, but we can do a better job of making sure that the effects of these problems are minimized. I’d start with limiting leverage ratios, the 30 or more to 1 we saw prior to the crisis is much too high and dangerous to unwind when problems hit, and I’d also restrict the other side of that coin and increase capital requirements. The system was far too fragile before the crisis, and that’s something that we need to fix.

The key in what Thoma says – and what connects it to Taibbi’s polemic is that the blame for this bubble and collapse is widely dispersed. That should give you pause as to whether any specific policy remedies are going to prevent a recurrence of the same in future. I certainly see the boom-bust cycle as endogenous to the capitalist system in a way that is unrelated to the Federal Reserve. Remember we had the panics of 1837, 1857, 1873, 1893 and 1907 before the Fed even existed.

So, Greenspan, Bernanke, and Thoma are asking the right question. Where I disagree most with Greenspan and agree most with Thoma is in the remedy. In making a remedy one has to first diagnose the problem, prioritize goals of remedial action and affect a decent plan of implementation.

  • The diagnosis seems correct: Irrational exuberance infects the very fabric of society in a way that makes boom-bust cycles impossible to prevent and little effort should be made to do so. 
  • The goal, in my view, should be to devise a way to prevent contagion when individual companies, sectors of the economy, or regions collapse without having a significantly negative effect on long-term growth or income and wealth distribution.
  • The implementation is the tricky part.
    1. Commercial banks as utilities model. One view says to firewall sectors of the economy, particularly the financial sector in a way that maintains its core function but allows peripheral ‘innovative’ functions to suffer with the swings in the economy. This is the Paul Volcker view.
    2. Regulation-Heavy model. Another view says to forget about the firewalls as they will be ineffective at best and retarding to growth at worst. Regulate the heck out of all actors and constrain their ability to be reckless.  This is the Geithner view.
    3. Regulatory and Resolution model. A third view says we should allow the actors to do as they wish but set up robust bankruptcy resolution process for all private sector companies, especially in the financial sector and including hedge funds and too-big-to-fail institutions.

I lean heavily toward the third view, but see a lot of merit in the first.  My bias is toward a relatively free market buttressed with adequate rules as a regulatory framework and sufficient regulation of those rules.  Clearly, existing rules on bank size as percentage of the deposit base and leverage would need to be enforced. But, I don’t see a need to create more rules. That would just retard growth and wouldn’t alleviate the problem of irrational exuberance. Certainly, bringing all financial agents (money market funds, insurance companies, derivatives and hedge funds) under a comprehensive regulatory umbrella is a priority but this can be done in a way that is consistent with the existing structure.  Why burden the system with a system risk regulator as another layer of oversight? Better to just hive off the essential bits into a tightly regulated oasis, de-coupled from the rest as Volcker suggests.

One last note, this time on Bernanke’s views.  I was struck by how much Bernanke tried to ‘defend’ Fed policy. His was not an objective assessment of a disinterested party in why we got to where we are and what we can do to fix it. It was a defense of his institution and his own role in it.  No good can come of such an analysis.

Update 2100ET: A reader chastised me for not being more explicit about the Geithner proposal’s loopholes. Just to be clear about choice number two, the regulation-heavy one, just because I am labeling the Geithner approach regulation-heavy doesn’t mean I think these regulations will be substantive. They will add a layer of regulation to seem substantive but will be filled with loopholes in order to allow business as usual. An example is the loophole in derivative regulation that allows for off-exchange customized derivatives. Everyone knows that means actors will gravitate to just those products. When Byron Wien predicts that regulation will be industry friendly, that’s what he means. Also note his discovery of Barack Obama by early 2007 from this post. Obama had strong Wall Street ties from the start.


Fannie, Freddie, and the New Red and Blue – Matt Taibbi

Did the Fed Cause the Recession? – Mark Thoma

Kleptocracy definition – Wikipedia

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This entry was posted in Banana republic, Banking industry, Federal Reserve, Free markets and their discontents, Guest Post, Regulations and regulators on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. James

    The government intervening in the markets to the extent they have in the last year. We are ruining any chance of fairness and destroying the whole country. Bernnake is an arrogant cluess dipsh$t who cant understand that he doesnt know everything.

  2. DoctoRx

    Love the post, but choice #3 for reform won’t be implemented. The panic factor re bank runs etc. will be too great if Citi or esp JPM go into bk. My vote is #1.

    IMO the Establishment cleverly switched to a fresh face in pushing BO in so that it could easily continue its depradations/looting. There was NEVER going to be real change other than in abortion policy and the peripheral stuff the PTB could care less about.

    1. mannfm11

      I’m not too sure the government shouldn’t own the banking system and spend the interest back into the economy as a tax revenue. This wouldn’t stop the private sector from attempting to earn interest on bonds, just keep the system of money itself in the hands of the government. Otherwise clean this up and get rid of the Fed and the FDIC.

      The problem with banking is the interest due on the loans is never created. If banking makes itself a growth industry, which government tends to aid and abet it doing because government wants to spend more than it takes in, then banking has to accumulate capital in the form of money. What they actually accumulate is imagined money, in that a portion of the loans are theirs. The problem is almost from the start the money in existance is less than is owed the banks. The whole matter of debt deflation and rich bankers revolves around the same component. There is nothing else that I would like to see the government own, but the right management of banking and credit money lending by the government could be a very prosperous situation for the economy.

    2. Edward Harrison Post author

      DoctoRx, I’m coming to the same conclusion too. I just posted 3 years worth of Byron Wien’s surprise predictions. And I added this line:

      The interesting bit is his confidence in Obama’s political fortunes, which obviously goes back to at least 2006 since he wrote the 2007 list at the beginning of 2007. Someone more plugged in can give me the scoop, but it sounds a lot like Obama had his Wall Street connections up and running pretty early.

      Does anyone have a read on this? It seems that BO was dialed into the Street by the beginning of 2007 at a minimum.

  3. gordon

    This whole post seems to breathe the air of unreality. I am much more inclined to believe Mr A. Doyle, author of the earlier post (also 5 Jan.): ‘Guest Post: Recent Lehman MD Reviews “The Murder of Lehman Brothers”’ who says: ‘…it appears increasingly unlikely as time goes on that any meaningful reform will be instituted to protect the public from what Simon Johnson so aptly refers to as the “rent-seeking behavior of the financial sector”’.

    1. Edward Harrison Post author

      gordon, just because I am labeling the Geithner approach regulation-heavy doesn’t mean I think these regulations will be substantive. They will add a layer of regulation to seem substantive but will be filled with loopholes in order to allow business as usual. An example is the loophole in derivative regulation that allows for off-exchange customized derivatives. Everyone knows that means actors will gravitate to just those products.

      1. alex

        That wasn’t clear in your post. I took your post to mean that #2 is an approach that Geithner claims to support. That doesn’t mean the idea is bad, just that a crooked, gutless implementation of it is. But that’s true of any approach.

        If OTOH what you meant was that #2 means “do what Geithner says” then of course it’s worthless. Who but an apologist would disagree?

      2. gordon

        Thanks for the clarification. I must say I’m a bit saddened to learn that you think none of your 3 alternatives could be more than a temporary measure, a band-aid, and not “substantive”. I understand by that word a sort of “final solution” whereby the US (and maybe by extension the world) financial systems could be put on a sensible basis as the supports of the “real economy” and not as its parasites. But maybe I’ve mistaken your meaning of “substantive”.

        Frankly I doubt whether a major collapse would lead to major reform. The regulatory frameworks (or moral climates) of poorer countries aren’t notably better than those of richer countries, are they? If anything, I would have thought they’re worse.

  4. alex

    I come to the opposite conclusion as Ed Harrison.

    1. Commercial banks as utilities model
    That worked for a long time, but the growth of the shadow banking system means it’s not enough anymore. As new scams (oops, financial innovations) are invented new regulations have to be put into place. Let’s not forget that the failure of Lehman was the straw that broke the camel’s back, so just regulating and limiting commercial banks wouldn’t be enough anymore.

    3. Regulatory and Resolution model
    The resolution model is like saying it’s ok to store gasoline next to your fireplace as long as we have a good fire department. Resolution can be expensive (the FDIC often looses money on the banks they take into receivership). Worse TBTF means there’s always an excuse for the government to say they needed to keep a zombie alive. As William K. Black is fond of pointing out, existing federal law not only permits but requires prompt corrective action when a bank becomes insolvent. So why is Citi still alive?

    2. Regulation-Heavy model
    Only realistic way to go. This model worked from it’s onset in the Great Depression until recently. In fact it didn’t fail at all; it was simply abandoned by a new group of clowns saying “ignore the last 800 years – this time it’s different”. Before that was the longest financial crisis free period in our history. And it corresponded with some of the greatest periods of economic growth in our history, so it was clearly no drag on the economy. Nor does it necessarily mean more regulations – effective regulation often means fewer, simpler rules with fewer loopholes. As for stifling financial innovation, where has financial innovation gotten us lately? A financial sector that doubled in size relative to GDP and grew to 30-40% of corporate profits and then resulted in a meltdown of the world economy. That’s a drag on the economy that we can do without.

    1. Edward Harrison Post author

      In the present system of crony capitalism any reforms will be gutted by lobbyists. It’s unrealistic to expect any substantive reforms from a heavy regulation approach.

      1. alex

        But that’s true of any regulatory change, so 1, 2 and 3 all fare the same. Crony capitalism means any change will be window dressing. Worse, even if by some miracle substantive regulation is put into law, it’s worthless without people actually enforcing it. Puppet/crony regulators are worse than nothing at all, as they give some naive souls an illusion of regulation.

        If you want to take crony capitalism into account, then any proposals are moot until we have real campaign finance reform. I’m not holding my breath on that, but it’s a change that has to take place before any other real reform can.

        1. Edward Harrison Post author

          No, that isn’t true of the three proposals – they are very different. The third is not trying to firewall sectors of the economy or regulate away problems. You yourself said crony capitalism means any change is window dressing, so why make huge new agencies?

          And campaign finance reform won’t work either. The only thing that WILL work is a serious depression that reduces crony capitalism. Until then, ‘substantive’ reform is only the degree to which we bring the shadow banking system, money markets and insurance companies under one umbrella, regulate derivatives, and set up mechanisms to reduce bank size to where they can all fail with less systemic. But, we would be fooling ourselves that any of these things are going to prevent another crisis.

          1. alex

            “that isn’t true of the three proposals”

            All 3 proposals involve regulatory change and hence are subject to gutting by vested interests. How can you refute that? Which one doesn’t involve any change?

            “And campaign finance reform won’t work either.”

            Why? Bribes (a/k/a campaign contributions) are what gives lobbyists their power. Finance “contributed” $475 million to the 2008 elections (#2 was healthcare at a paltry $167 million). They were the biggest contributors to Obama, and the likes of Schumer and Frank need no mention. The Dems appointed freshmen in vulnerable seats to the House Committee on Financial Services so they could lap up bribes.

            You can argue that we won’t get effective campaign finance reform, but how do you argue that it wouldn’t matter if we did?

          2. DownSouth

            I’m throwing my hat in with you, alex.

            As Amatai Etzioni observed in The Moral Dimension: “If those whose duty it is to set and to enforce the rules of the game are out to maximize their own profits, a la Public Choice, there is no hope for the system.”

            Unless there is a major change in the moral climate that leads to a considerable reduction in political corruption and a significantly improved environment necessary for a modern economy, ranging in trust in financial institutions to curbing the ability of monopolistic firms to use the state to restrain competition, there is no hope.

        2. Edward Harrison Post author

          alex, if what you and DownSouth are saying is that the moral climate and the crony capitalism probably won’t end unless we get an economic collapse or are relegated to former leading power a-la Great Britain, then I would agree. The U.S. has had declining power written all over it for decades. This is what broke Bretton Woods apart.

          If I were Michael Panzner and had thrown in the town already, i would be writing about Financial Armageddon and how to prepare for its inevitability. But, I’m not there yet. i still hold some hope that we can avoid a worst case scenario.

          Yesterday, I wrote a post at CW about Paul Volcker. Charlie Rose asks him about reform and option number one, “Do you think that Congress will see it your way?” His response was “Eventually, yes. They need a little more persuasion.” I have heard him make this remark twice now and it seems to me he’s saying what I am saying: the system is going to collapse eventually. At a minimum, I’ll get the reforms I want then. I hope it doesn’t have to come to that to get substantive change.

          1. alex

            An economic collapse would do it (it worked during the Great Depression) but I’m not saying it’s necessarily necessary. An alternative would be real campaign finance reform, as it’s the biggest source of the problem. You can’t get elected or stay elected in most cases without cultivating copious bribes. I’m not optimistic about the possibilities, as I’ve been going on about this for 30 years. One bright spot is that a number of states, such as Arizona, Maine and Vermont, have publicly funded campaigns for their state offices, in spite of the Supreme Court’s bizarre interpretation that bribery = free speech.

            One thing I am sure of is that absent very strong public opinion for campaign finance reform, it will never happen. That’s why I wish people would see that the bribery is the reason for the lack of finance industry reform and the horrible excuse for health care “reform”. I’m not a nihilist but until people know in their gut and recite as obvious that this is the source of the problem, nothing will change.

            Who knows, maybe a collapse would give us real reform on all fronts. Alternatively we’ll muddle along with half-baked reform and having the taxpayers prop up Wall Street’s curious notion of “free enterprise”. I certainly don’t claim to have a crystal ball.

          2. Walter

            I strongly believe real campaign finance reform would go a long way to making it at least possible for the Crony Capitalism / Kleptocracy to be addressed by those whose job it is to address it…

            But the question is how do you convince the Foxes that they should voluntarily take away their own access to the hen house?

            In all liklihood the only way the rampant bribery will be brought under control is via a “guillotine” moment, which won’t happen until after the aforementioned crash.

            Personally if we don’t want to limit the bribery let’s at least require them to do it more out in the open. Require the politicians to wear NASCAR style suits with their “sponsors names” all over their body when they make their speeches. Have them referred to by their owners in their congressional debats… “The chair recognizes the Senator from the great institution of Goldman Sachs”. Something like that.

        3. Josh

          I’m not the expert some of you are, but it seems to me we’re looking to the wrong institutions to fix the problem. The government is simply, and can always be, overwhelmed in enforcement. The SEC cannot keep up with “insider” trading complaints (and so must focus on showcase trials like Marthe Stewart to scare the rest), and most definately can’t keep up with allegations of illegal short selling.

          One bit of history may be instructive though. Prior to the passage of the Commodity Futures Modernization Act (which allowed the emergence of unregulated “insurance” policies in the form of Credit Default Swaps, and which were subsequently abused in exactly the same way standard insurance policies would be, and were, prior to their regulation) the President’s Working Group on Finance (under Clinton)stated that the bill was needed to establish “legal clarity.” This was the exact language used by the bill’s sponsor (a Republican) in the floor debate in the House, and his counterparts in the Senate.

          What this meant was the industry backers weren’t going to engage in “bucket shop” gambling, and taking multiple side-bets against, in some cases, the very investment instruments they created and peddled to the unwary, if they couldn’t be sure of immunity from prosecution under state gaming laws.

          Proposal One: Repeal that law, or sections of it, and require that Credit Default Swaps only be available to those with an “insurable interest” in the underlying assets. In other words: One MBS (or CDO)gets one CDS….and no more. That’s indemnifiaction. Anything more is gambling and only invites the conflicts of interest we’ve seen among Broker-dealers.

          Yves: in an earlier post, you cited Greg Zuckerman’s book on John Paulson, The Greatest Trade Ever. I totally agreed with your point, but, with all due respect, I think you cited the wrong passage (page 86, where Greg Lippmann et. al. met to apply CDS’s to Mortgage Backed Securities). I think the more relevant passage (pages 179-182) was when Paulson met with Bear Stearns, Lippmann from Deutsche Bank and Goldman Sachs to get them to create CDOs, in which he woud take enough of an equity position to allow him to veto the components – having done the research and knowing which were the “pigs with lipstick” – so he could short them….and which Deutsche Bank and Goldman Sachs subsequently did as well. Bear Stearns, to their credit, wasn’t having any.

          The Food and Drug Administration was started when a guy in Pennsylvania put posion in a bottle and sold it as a “cure-all” elixer. Nobody asseted “caveat emptor” then.

          Now we require that drugs be both “safe and efficacious.” Well, you can never get “efficacious” required on Wall Street, but we should be able to stop people from knowingly putting poison in a bottle and selling it.

          And, we should be able to remove their incentives (what I believe is Wall Street’s perverse appetite for crappy mortgages – Davis of Ownit told the NYT he was paid more by Wall Street for “no doc” mortgages than he was for mortgages with documentation)for doing so in the form of multiple CDS’s against a single asset.

          Proposal Two: Get the Justice Department off their collective asses; call a spade a spade (and fraud, fraud) and prosecute, prosecute, prosecute. Make some of these guys the “smartest guys on Cell Block D” and it will go away.

          In the future, the “wiz kids” can be as inventive as they like, but if it doesn’t pass what Eichel of Bear Stearns called the “ethical standard” (i.e. doesn’t constitute constructive fraud) people will stay away from it…..just like they did before the passage of CFMA.

          It seems to me, this would also do a great deal to restore America’s reputation for fairness in the world, and many people’s confidence to invest. The Free Market on Wall Street would realize what Tocqueville called “self-interest rightly understood.”

          Otherwise, if the “caveat emptor” crowd has its way (and carrying their logic further) perhaps we should abolish the FDA.

    2. mannfm11

      I have seen enough of Blacks interviews to know why Citi is still alive. Because the rest of them are broke as well is #1. Rubin was at Citi and a GS alum and friend of the administration is #2. Rubin and Sandy Weill would go to a confined country club is #3. The government has no clue how to get the derivatives animal back in the box so they allow these insolvents to make believe everything is okay. Government did the same thing when inflation and deposit deregulation broke the S&L industry in 1980. Instead of stepping up and taking the debt off the hands of the S&L’s and giving them some kind of new start, they came up with a scam to let crooks gamble with the money they were allowed to imagine was still there. Unlike a bank, an S&L couldn’t create its own money, but had to attract deposits. Money naturally ends up in banks because people need to write checks so there was a cheap source of deposits S&L’s didn’t have. Still the US banking system was pretty much insolvent in the 1980’s. My guess is they hope they can wait this one out as they waited that one out. No dice, as there is not much chance they are going to maintain an upward sloping curve nor are they going to be earning 10% on cheap money as they were in the 1980-1995 period. Plus, the economy needs so much more credit pressure to keep the collateral in force.

    3. dave

      The post Great Depression economic model got mauled by inflation and subsequent soaring interest rates in the 70s. The regulated model isn’t build for that instability.

        1. aet

          Late seventies inflation?
          You mean when the bills for the Vietnam war became due?

          What’ll happen when the time for the Iraq/Afpak bills to be paid rolls around? I predict a similar wave of high inflation, and with high interest rates similar to the late seventies/early eighties…co-incidentally, that was just in time for the boomers borrowing to buy their homes.

          But this time around the boomers won’t be enjoying high interest rates on their lifetime savings. Interest rates will stay low until the boomers die off.
          Why not higher interest rates NOW to pay the boomers investment income on their retirement savings? Is there a surplus of capital, that interest rates ought to now be so low?

    4. kievite


      This approach “regulation as a Swiss knife” has obvious problem of corruption of regulators. In other words it’s unclear who prevents the capture of regulators. If the appoint Fed chairman does not like part of Fed mandate related to regulation it can simply ignore it as long as he is sure that he will be reappointed. That happened with Greenspan.

      You need to understand that in essence the Fed is a political organization. As such it serves the elite which rules that country, whether you call then financial oligarchy or some other name.

      And the Fed Chairman is one of the most powerful political figure in the USA. May be the second in command. And definitely the most powerful unelected official. If you compare this position with the role of the Chairman of the Politburo was in the USSR you’ll might find some interesting similarities.

      In other words it is impossible to prevent appointment of another Greenspan by another Reagan without undermining the power of Financial Oligarchy. And the transition to banana republic that follows such appointment is irreversible even if the next administration waterboards former Fed Chairman to help him to write his memoirs ;-).

      Entrenched Financial Oligarchy is probably a more serious threat to the country then someone hiding in a cave in Afghanistan or Pakistan.

      You need to reform political system to be able to regulate financual industry.

  5. Ben

    Change is going to happen, whether our two-party system likes it or not. If they don’t respond, a social movement will bypass them, and we’ll end up with an ugly outgrowth like the teabaggers – or worse – behind which the powerless majority can rally.

    Whoever successfully harnesses the anger growing in the country’s core will ride the wave to power. Obama was the left’s hope. The right could do worse than Ron Paul, but I fear he doesn’t sufficiently represent the haters.

    The banner won’t be one of hope; it will be one of anger and fear.

    1. psychohistorian

      Excuse me! What is this BS about Obama being the Left’s wet dream. What new definition of Left has the continuation of the Bush policies become?

      1. aet

        People disappointed with Obama won’t be turning into Reagan Republicans, you know.

        They’ll find people who actually will support their interests, and not simply pay lip service to their ideals on TV while actually running legislative and executive interference, almost a rear-guard action, to prevent those responsible for these crimes from being named, much less punished.

        1. dave

          No they won’t. They will vote for whoever the Ds put up. You know it and I know it, so bark all you want, you’ve got no bite.

  6. mannfm11

    Having spent some time in the mortgage business and having worked for a guy who spent time as an underwriter for FNMA, I can tell you that nothing happened in this mess that didn’t lead right to the top of FNMA and FHLMC. Both of these companies passed out loot to the politicians and to their politically connected management. They were both called on the carpet in a report by Armando Falcon early in the Bush administration and from what I understand had their wings clipped somewhat.

    The point here is that FNM and FRE called the tune in the mortgage business and basically se the tone for what could be bought and sold in regard to mortgages. Being they were privately owned companies, no matter whether they were backstopped by the government or not, their rules set the tone and if the rules led to losses, then it is clearly on the shoulders of men like Franklin Raines.

    Unlike the 1980’s, there wasn’t an interest rate shock in the 2000’s. When the Fed cut rates in early 2001, the 10 year treasury was in the 5.45% range. The majority of the time the 10 year was above 4%, which indicates that mortgage rates were not below 5% for long at any time. At the peak, they might have made near 7% in 2007, so we aren’t talking about a bubble popping rate. Nor are we talking about a rate induced boom from the Fed, though I think Greenspan was complicit. More than anything, the sudden appearance of rates 2% or so lower than anything seen pushed demand against supply and created a price spiral. In places like California, people have been lying in wait for price spirals for the past 40 years, so it is really hard to say this time should have been different.

    FNM got all the money because it could. There is talk about ARM’s, but FNM held the key to what kind of qualification they could allow on these programs. Clearly they weren’t expecting the rate to go down and if the market was passing on ARM’s at rates in excess of fixed rates, then there were bad decisions made.

    The credit based scoring used in the modern finance market had no basis for existence. There was no real experience to use that kind of underwriting, only bigger bonuses to be paid those working in the business. 28/36, 25/33 and 33/38 ratios and experience with them dated back to the 1980’s. My experience with residential real estate goes back to 1976 and FHA had a 3% downpayment requirement on cheap homes back then and they would finance the closing costs to boot. FHA wasn’t used by a lot of agents just because there was some math above first grade involved in figuring the loan amount and the downpayment and loan amount never added up to the sales price.

    My sister has brokered loans for 20 years and when she described the socalled science involved with the credit score nonsense, I had to laugh. I already knew the mortgage business was headed for collapse. Doug Noland had drummed FNMA since before I started reading his articles in 2001.

    I lived through the late 1980’s collapse in the DFW housing market. So much of the bad debt in housing is covered up by rising prices and they overbuilt Dallas and created a glut at exactly the wrong time. During the early years of the 1980’s when interest rates were in the teens, buydown financing became a literal necessity. They had to do it or the market would have collapsed. It worked short term because of the inflation that was going on at that time, but if something occurred to stop prices from going up, the market was suddenly glutted. People had to have an increase to sell a house and once the rates moderated to around 10% to 11%, the buydown financing was no longer necessary. They also came out with structured negative amortization loans, so there wasn’t much cushion. The market soured and more than 100,000 homes were forclosed in what remained one of the faster growing cities in the country.

    Michael Lewis did an article in Vanity Fair in late 2008 and the main character was a guy named Steve Eisner. Eisner found out that the real estate bubble only needed for prices to quit going up. I recall in 2006 there were monthly foreclosure filings here of around 4000 and there were about the same number of new homes being built, so the new market was pretty much being put right back out there. There wasn’t much suburban appreciation in the DFW area so there was no bailout and if there were speculators, they were stuck.

    The point of all of this is that FNM took a bath in some areas in the 1980’s and then went out and made even worse mistakes. I know some of this was because they could get reinsurance, but most of it was just because they could that they did it. I don’t know that they intended to run the business off the cliff, but something tells me the business has been hanging for a longer time than imagined. It is only the size of the bubble that made it this big, as they had to do something to keep the game going. That is the way credit bubbles are. Things haven’t changed and the massive credit and debt overhang on the economy hasn’t gone away. Recovery and prosperity are a long ways off. The whole matter may have been totally inevitible.

    1. aet

      Oh the US mortgage business has contrary to what people may think, always been a public-sector thing: so the bail-outs of non-deposit taking investment houses is a-ok…because this crisis is actually all the Government’s fault, and those lazy lying shiftless poor people getting a free ride…

  7. Dave Raithel

    “I certainly see the boom-bust cycle as endogenous to the capitalist system in a way that is unrelated to the Federal Reserve. Remember we had the panics of 1837, 1857, 1873, 1893 and 1907 before the Fed even existed.” Yep. We just need ourselves an experiment to separate out all other variables but the Fed and the monetary scheme afore it ….

  8. Doc Holiday

    One of the main problems with the current systemic failure, is that no one is accountable for anything, including the co-pirates Paulson and Geithner. The inability of society to view these type of people as predatory instigators of collusion and treason-like activities is a massive problem, because people like these and a very long list of wall street mafia-crooks are responsible for economic genocide — these wall street bastards are financial terrorists and they are hidden behind the corrupted shields of homeland security, the SEC, FTC, Treasury, DOJ and all the corruption that is beneath the umbrella of the American government at this point. If that seems a bit harsh, then why the fuck are there not investigations going on — to place people in jail from Fannie, freddie, AIG, Citi, Lehman, JPM and the vast majority of crooked bastards that were bailed out by TARP collusion? No one cares I assume …. so, let’s let them take more and more … barf!

  9. Ishmael

    Mr. Harrison:

    I agree with your selection of Number 1, but I believe there needs to be some accountability system to go along with this.

    This means accountability for honesty. We let too many white collar criminals walk and this is at all levels.

    If you unknowingly buy stolen property or accept counterfeit money you lose. Accordingly, I do not want to get into the details of how a transaction takes place or who was the fraudulent party be it the mortgage banker, the rating agency the IB who packaged it. This was basically securities fraud and you profited from the scheme so give the money back. All of these people should be made to give the money back net of taxes paid. Don’t have the money, get it or other measures are implemented ie jail, garnishment etc. Of course if large somes are given to related parties or charities there should be claw backs.

    Keep it simple. This is easy to implement and not a hard concept to understand. No one should profit from a crime either knowingly or unknowingly. Exactly defining the crime might be difficult and this should not be handled by a jury but maybe by a three judge panel or similar. Nothing but the fear of god is going to change this.

    Of course such action would never be implemented with the current crony government.

    That takes care of such things as the Dot.con and the recent housing securitization problems but there are a large number of areas where accountability need to be implemented and that is especially true through out the government.

  10. moslof

    Ah yes a long term trend towards solvency is now well established. However just like the deregulation phase of bubble blowing we cannot just let it run its course. We must add fuel to the fire and accelerate the trend towards solvency by zeroing in on the guilty ones among the insolvent and “punishing/regulating” to prevent a future trend toward insolvency.

  11. Guest

    Both Thoma and Tabby are card carrying dems. This is now Obama’s economy (and Summers’ and Rubin’s and Barney’s) and it is not going well. What better defense than the argument of original sin (i.e. we are all guilty and so assigning accountability is futile).

  12. Steven

    No, I’ll side with Matt Taibbi. He speaks his mind without attempting to hedge.
    In fact, I’ve noticed this articles writer (Edward Harrison)
    straddling the fence much of the time.

    Time to stop that and choose sides.
    Either you’re on the payroll of the 0.1% that own 1/3 the wealth in the U.S. OR, you’re on our side.

    There’s no doubt in my mind that Bernake, Obama, Geithner are merely order takers for the ultimate owners of the Fed & Goldman.

    There’s a war starting. Choose your side.

    1. Edward Harrison Post author

      Where am I straddling the fence when i call it crony capitalism or kleptocracy. None of these reforms are going to happen until we get a Great Depression style collapse. Its in No one’s interest in Washington or on Wall Street to reform the system. It works just fine for them.

      Do I have to spell it out Taibbi-style? C’mon, get serious for a second. If you can’t read an article and come to your own conclusion based on the facts, then you’re lost.

  13. drtor

    Great article!

    I also have a preference for setting up robust failure modes rather than trying to prevent all failures.

  14. Jon

    Wrong, Edward. It’s all Barney Franks fault. Charles Calomiris says so and so does Peter Wallison, and probably Larry Kudlow too. You can’t possibly disagree with them, can you?

  15. Edward Harrison Post author

    One more thing on the now deleted ‘limp dick’ comment. Election boycotts are pointless. None of this is going to change because you withheld your vote. Don’t kid yourself that makes a difference. Both parties are in bed with the same corrupt system of special interests. None of this is going to change until people get up off the couch, turn of the Bachelor, wake up and realize they are being robbed. Then maybe they will take civil action.

    Deception is the strongest political force on the planet.

    1. DownSouth

      That’s the spirit!

      As Peter Skerry wrote in Mexican Americans: The Ambivalent Minority, our elite-network approach to politics in the US “is profoundly antipolitical. It teaches those without political power that it can and should be bestowed on them by elite benefactors.”

      The famous WWII fighting ace “Boots” Blesse put it this way:

      No guts, no glory. If you are going to shoot him down, you have to get in there and mix it up with him.

      We shouldn’t dread the conflict. We should relish it.

    2. dave

      Do you really think demonstrations and protests matter? I think we’ve reached the point where the powers to be just don’t care unless there is violent revolt, and that’s just not going to happen.

      Besides, the only people who actually took your advice and protested are the tea party people, and it seems that apparently the blogosphere doesn’t want to be associated with the kind of people who actually go into the streets.

      1. DownSouth

        You damned right demonstrations matter.

        Here’s a perfect example from out of the not-too-distant past:

        Narrator: His first test would be civil rights. Racial tensions could no longer be tempered by compromise. The civil rights movement was demanding freedom — now. Johnson’s abrupt assumption of the presidency had converged with the fierce struggle for black equality.
        In 1964, racial segregation still ruled the South by both law and custom and Lyndon Johnson was a Southerner burdened by a history of vacillation, compromise and a long string of votes that had kept segregation strong. Civil rights would measure the limits of Lyndon Johnson’s moral imagination.

        Roger Wilkins: A Southern accent went a long way to raise my defenses, so when Johnson became president, I was fearful [and] very, very unhappy.

        Narrator: With civil rights activists confronting segregation all across the South, many Americans wondered how the new president would react.

        James Farmer, Civil Rights Activist, CORE: Johnson did not approve of, he did not like — I can even use a stronger term — he hated the demonstrations of the movement in the street. He hated them.

        Rep. James Pickle: But he had enough sensitivity that he knew that all hell was going to break loose if we didn’t do something about it.

        Narrator: Civil rights workers laid siege to a segregated society. There were sit-ins at lunch counters, on trains and buses, in hotels and theaters, forcing Johnson to act. When some of Johnson’s aides advised him not to lay the prestige of the presidency on the line, he responded, “What’s it for if it’s not to be laid on the line?”

        The political will just isn’t there yet to mount the kind of demonstrations that will be necessary to be effective. As Martin Luther King wrote:

        Our experience is that marches must continue over a period of thirty to forty-five days to produce any meaningful results. They must also be of sufficient size to produce some inconvenience to the forces in power or they go unnoticed. In other words, they must demand the attention of the press, for it is the press which interprets the issue to the community at large and thereby sets in motion the machinery for change.
        –Martin Luther King, Jr., “Nonviolence: The only road to freedom,” Ebony, October, 1966

        1. dave

          King was in the right place at the right time. He had a sympathetic president and legislator. They just needed a little push. Civil rights were popular in the country as a whole, even if unpopular in parts of the south.

          Do you not think there was an MLK equivalent in an earlier time? He simply didn’t get anywhere because he wasn’t in the right place at the right time.

          1. DownSouth

            Sympathetic president and legislator? Watch the documentary I linked to and tell me that again.

            Beyond that, I’m not sure what you’re trying to say.

            Sure, turbulent times make great men. Great men rise to the occasion. Lesser men are destroyed.

  16. Michael

    A link to Mr Taibbi’s article might be nice.

    I’m not sure if it is a peculiarly American trait to want to identify so closely with another group, or if it’s just because it’s the only culture we in the rest of the `west’ are exposed to any more. But within the American culture there does seem to be a strong bent toward wanting to label each other a particular way, as a member of given political party, a particular ‘school of thought’, or even associated with a given popular figure.

    Labels are ok and it helps start a discussion, but then to use it as a *badge of ignorance* to all those with a different label is juvenile. `My gang is better than yours! So nyer!’. Perhaps it is tied to the extreme competitiveness which also seems to pervade your culture – everyone wants to be on the ‘winning’ team (TBH that seems pretty juvenile too).

    So from this framework, what can any ‘side’ do but blame the other? And you MUST belong to some ‘side’ to even enter the debate of course – see any talking heads interview, the interviewer will ensure everyone takes sides even if they don’t want to.

    Is anyone important ever likely to admit that the system itself is simply unstable and fundamentally flawed? e.g.

    Could the media ever admit it has failed in it’s role to keep the powerful honest? That’s why you have ‘freedom of speech’ in the constitution, and journalists are extended the *privilege* of protecting their sources, after all.

    Or even perhaps more seriously, democracy itself has failed? (Which is pretty obvious given the whole ‘change’ thing you ALL VOTED FOR – not that the silly geriatric and gun-tot’n barbie were really valid alternatives – that they were even considered is only a further indictment). But such a proposition is simply unthinkable for the generation that `triumphed’ over the `evil empire’.

    No, it’s easier just to blame someone else. Bonus points if you pick on an ethnic minority whilst you’re at it.

    So along with the generation of `greed is good’, `might is right’, and `we’re the good empire’, and just like many ideas in science – it will probably take a generational change before any real attempt will be made at addressing these real problems. If it lasts that long.

  17. Doc Holiday

    Re: “the now deleted ‘limp dick’ comment”

    > Did I miss something? Is there a rewind or replay?? I can’t be here all the time — and now I feel cheated to have apparently missed a nakedcapitalism moment which might have possessed within itself a fleeting moment of sincere passion, which is now apparently deleted and now only a reference which will be lost upon the winds of shitty pixel dust — blowing like snowflakes in a forest of financial darkness, inhabited by no one and dreamed of by no one … just silence and emptiness mixed into forlorn despair. My desire ceases to be, I am so sad for the lost comment!

    Also see:

    Wake up, wake up dead man
    Wake up, wake up dead man.

    Jesus, were you just around the corner?
    Did you think to try and warn her?
    Were you working on something new?
    If there’s an order in all of this disorder
    Is it like a tape recorder?
    Can we rewind it just once more?

  18. Jim

    Our financial and political elites can live with the idea of democracy but not the practice of it.

    In the American agrarian populist movement on the late 19th century the farmers from the South and the West built marketing and purchasing cooperatives in the teeth of opposition from railroads, banks, and supply houses. As a consequence of such activity populist became more and more aware of the ability of concentrated economic and political power to shape not only the economy and the political process but culture itself. Later these alternative instituional structures and people’s experices in creating and running them gave activists the self-confidence to form a third party which contained in its platform a sophistcated analysis of the way the American economy functioned at that time and suggestions for how it could be changed.

    What are the ideas for new institutions of recruitment for a social movement in 2010? Does Steve Keen’s cutting edge work on credit flows indicate that we should consider creating a new type of local banking institution independent of Wall Street and the Federal Reserve?

    1. alex

      “Does Steve Keen’s cutting edge work on credit flows indicate that we should consider creating a new type of local banking institution independent of Wall Street and the Federal Reserve?”

      No, his work is neutral on that point. His real insight builds on Minsky, that excessive debt levels are inherently unstable. Keen and others have developed models that show why this is so.

    2. gordon

      I have often thought the same way – where are the positive alternative proposals? The despairing comments on this thread have a depressingly late-Weimar feel about them; “we need a depression”, “you can’t trust any politicians” and “democracy has failed” etc. We know that sort of despair can be a short road to a very ugly regime indeed.

      I really can’t believe that the entire US population is so morally decrepit that there is no hope of positive action before that stage is reached, but I am very worried about the apparent absence of positive programmes.

      Maybe the way Barack Obama’s campaign raised hopes that were later dashed has had an even worse influence than I thought.

  19. Joe Renter

    One thing to keep in mind is that this is a world wide problem that effect billions. The whole system will collapse soon and when it does there will be a system put forth that will not be based on corruption. It will take some time and we will all need to scale back (those in the west) on what we think we need for our material well being.
    “The American dream (myth)” is not sustainable scenario. An economical model made up of one third capitalism to two thirds socialism, a highly complex bartering system will be implemented. It will not be easy for those who think that having the most toys and status are the winners and those below are the losers. It will be a challenge, to be sure, but without drastic changes in the economic, political, and environmental fronts they will be no future for mankind. Share International’s web site has more information on this subject.
    There is hope.

  20. CaitlinO

    Mr. Harrison –

    Do you really believe people don’t understand that they’re being robbed? The fury and resentment are almost palpable. People just don’t know what to do with their anger, yet. Voting out one lying, thieving administration just to see the next one act the same way has increased, not diminished the fury. I think the recent flurry of announcements by democratic governors, representatives and senators that they will not run for re-election is an acknowledgment of that growing ire.

    You probably don’t need to go any further than Hollywood to see a reflection of the growth of the public’s resentment and suspicion. Compare the portrayals of corporate and government employers in “The Man in the Gray Flannel Suit,” “I Dream of Jeannie,” “Bewitched,” “The Constant Gardener,” and “Avatar.”

    Those portrayals moved from benign and wise to benign and befuddled to evil incarnate in two generations.

  21. Hugh

    I have never understood the idea that bubbles can’t be stopped. A bubble that is big enough to create a major shock to the system or even put it at risk can be seen literally years away. It’s not rocket science. The math doesn’t add up in an obvious way. The real reason they aren’t stopped is that politicians won’t brake the upside which makes them look good. And they are receiving strong pressure from those making a buck on the upswing to keep the game going. There is nothing mystical about bubbles that makes them hard to see. There is no political will to prevent them, especially in a kleptocratic state such as we have now.

    Even after your added note, I still don’t understand the association of Geithner with regulation. He is a financial industry sockpuppet.

    You also seem to think like Summers, Obama, Geithner, Bernanke, etc. that the current system can be maintained and no increase in rules? It makes me wonder where you have been the last two years. Our financial system is set up now as a casino. It is filled with players whose only function is geared to gaming the hell out of it. This is not a salvageable entity. It needs deep thoroughgoing reforms. It needs to be a lot smaller. The paper economy has to be dismantled in toto. Finance must be simplified and price must be tied to real, sustainable profitability.

    As it is now, the markets serve no positive societal function. They aren’t efficient. They misallocate. They incentivize systemic risk and moral hazard. They are ultimately wealth destroying and threaten both our own and the world’s stability. I have no sympathy for those who would perpetuate any part of the current system. Markets don’t need just to be reined in. They need to be completely reformulated and reset.

    Not going to happen I know, but that’s why I think the chances of depression are so high.

    1. Toby

      Yes indeed Hugh, and with bells on too.

      Wealth itself needs to be reassessed, re-understood culturally, so as to be based on the health of the ecosystem and the health of society, to the extent these things are measurable (we getting better at measuring both it seems). Money, at least initially, needs to be redesigned to function purely as a medium of exchange, NOT as a store of value (it’s actually an abstraction of value but that’s beside the point), not as a commodity in and of itself. That way we would have a systemic chance of perceiving wealth and profit in non-monetary things. Charles Eisenstein and Bernard Lietaer favour a money with demurrage (a monthly fee which would steadily diminish its value), which by design would disincentivize hoarding. I find the idea very promising. While money only comes into existence as interest bearing debt (money IS debt), we ensure society is addicted to “growth” as a junky to his drug, and also ensure money’s steady accumulation to the rich, which dangerously over-calcifies the status quo. Growth and decline are natural processes, healthy both. Economics needs to get up to speed on this, and not cling like Scrooge to the glitterning profit/greed paradigm, which is strip-mining existence, strip-mining our future in the interests of nothing but monetary accumulation. The process is frightening and absurd.

      The other problem we need to take seriously is technological unemlpoyment. I know orthodox economics dismisses the idea as a lump of labour fallacy, but the data suggests otherwise; it is real and becoming more serious by the decade. Factories and farms are close to 100% automated, and now soft skills are under profound attack too. Google “The Eureka Machine” and new software performing journalistic tasks for Bloomberg. Technological development is a serious challenge to the current model, is rendering it harmful, and certainly not something to be brushed aside with a theory not sufficiently supported by the data. For example, the US experienced a 60% increase in productivity in the last decade, but wages were either stagnant or fell.

      Only radical change can re-ignite progress. The current model is totally defunct and juiceless, nurturing nothing but its own decay. Defending it merely worsens the coming collapse. Excuse the cliche, but it really is time to wake up.

      1. aet

        Re Tech change.
        Solution: guaranteed annual incomes sufficient to buy food & shelter for all citizens.

        Automation is no joke: that its benefits are too concentrated is the unfunny part.

        Intelligent and sensitive tax policy, as a means to the redistribution of income, is the only way to deal with this one over time. Otherwise, lots of starvation and other privation – even though there’s never been so much food and other goods grown and produced by so few.

        Or so much leisure time in society as a whole, for that matter.

        1. Toby

          The GAI interests me, but until we get money’s design right, we’re just tinkering at the edges with such ideas. The other thing to try is reduction of the working week. Technological development should be embraced as a potential emancipation declaration, where we free people everywhere from drudgery and exploitation, thereby spreading the benefits of human ingenuity as broadly as we are able. The current system overrewards the rich and overpunishes the poor, WHILE raping the ecosystem. We have to change it.

  22. Brick

    OK lets talk about what really went wrong with Fannie and Freddie and where the blame lies. We can look at the orriginal regulator HUD which decided it was a good idea under government persuasion for them to buy sub prime loans. We can look at the accounting scandals in 2003 through to 2005 and how the regulator OFHEO was left with egg on its face for not doing a proper job.Next we ought to look at how many times proposals for new regulation and reform were put forward before congress and which were all rejected bar one and that was a watered down version. It was actually the Federal reserve through both Alan and Ben who were most vociferous in pushing for limits and new regulation on Fannie and Freddie. To blame lack of regulation is the easy answer and the real reason things went wrong may be subtly different. The real reason Fannie and Freddie went head long into sub prime during 2006 – 2008 was to gain political favour having lost much of it during the scandals leading up to 2005. The answer is probably that Barney Frank had brokered a deal were by GSE congresssional benefits were linked to affordable housing and in an effort to gain political favour the GSE’s went overboard.
    The solution was not necesaarily more regulation, because the regulations that were there were not enforced. The solution is for congress to stop interferring in the markets for political motives, get regulators to actually do their job, introduce a proper financial consumer protection agency and to really clamp down on capital requirements where leverage and risk is used. If I have sugegsted the FED was innocent then that is not true they should have been given a better mandate to look at both inflation and asset appreciation. While we are at it the government statistics departments ought to be divorced from government so that deliberate tampering for political means is clamped down on.

    1. aet

      The US public ought to stop giving taxpayer support to right-wing political lobby & dis-information groups like the AEI: which supports every increase in military spending and every mandatory imprisonment proposal for low-level street crime, but which thinks big-business ought to always and everywhere be exempt from any and all social control.

      “American Enterprise institute”: the St. Ronald Reagan Society.

  23. Glen

    Bubbles are not a FLAW of our current system, they are a feature. Bubbles are BIG MONEY for Wall St without having to actually do any real GDP growth. It’s all sizzle and no steak.

    I agree with Paul Volcker – the only real financial innovation in the last thirty years was the ATM.

    We need to turn banking back into the means to finance the creators of new technology, new industry, and real growth rather than a way to disguise the collapse of the middle class and the implosion of America’s technological and manufacturing core.

    This has to work both ends of the problem – failed companies have to FAIL. Regulatory laws to enforce a fair and level marketplace have to be fixed and enforced after a thirty year delusion that we can run our financial system without having to worry about crooks.

  24. sean

    Edward Harrison states:

    ”….This is kleptocracy, of course. Crony capitalism. And by that I mean the system Taibbi lucidly breaks down for us is one of privatized gains and socialized losses..”.

    Perhaps the case is the political and business structure is now more redolent of a form of soft fascism .
    The GSE’s ,Democratic and Republican parties,the military industrial complex as described by Eisenhower ( Defence contractors place constituent parts of their business in as many States as possible and align State senators and Reps with their needs as opposed to Defence needs) Corporate business ,Wall street and the Banks all have manged to align the power of the Federal government to their objectives.

    Lobbying as you describe ensures this trumps the Constitutional rights of US citizens.
    Indeed somehow the survival of the United States is linked to the survival of Wall street and the banks rather then the other way round.
    Consider the banks who were bailed out with taxpayers money and an ordinary US citizen whose property is foreclosed.
    In ordinary language it appears that Corporate entities have Constitutional rights as entities superior to those of US citizens.

    This scenario is not unique to the USA. Here in Ireland a very similar situation has developed.

    What I have noticed in comentary is how much ordinary citizens now view the state infratsructure here in Ireland as inclusive of the banks and other state sponsored entities as one integrated oppressive instrument.

    The philosophy behind the US constitution was to limit the power of the state and the Bill of Rights was to ensure its citizenry’ rights were paramount.
    The power of the state and crony capitalism are expanding whilst the rights of the citizenry are declining alsong with their capacity to a decent life.

  25. Moneta

    The problem is so insidious, it permeates every fibre of the American social fabric.

    Everyone seems to agree that there is a lack of morality, ethic, fairness and justice whatever you want to call it.

    This seems to bring many Americans back to the initial Constitution written at a time when there was vast amount of land still there for the taking.

    Fast forward a couple hundred years when all land has been claimed but the ownership society is still idealized.

    Let’s face it, the basic tenets of fairness vanished a long time ago. For example, how can someone who bought waterfront property 50-60 years ago often on a teacher’s income be worth millions while the typical young professional couple starting out can’t even dream of owning such a property in their lifetime.

    The game lasted while everyone thought they could get a piece of the pie. Slowly, everyone is going to understand that there is “royalty” in the US, just like what happened in Europe a long time ago.

    Everyone can blame everybody else but in my mind, the system evolved to what it is today because of prevalent ideologies. Ideologies which made sense when America was empty but don’t make sense today with 300 million people vying for the big life and being told they can get it if they work hard enough and just stay optimistic ALL the time.

    You can be disgusted at the biggest cheats but ALL North Americans are cheats. We are all taking more than our share on this planet. And human nature dicates that we never have enough. Going against the phenomenon of getting more was like standing in front of a moving train.

    Many American ideologies are still rooted in the past but times have changed. Something tell me that Americans won’t willingly change because it is the right thing to do. Circumstance will force them to.

    1. DownSouth


      Superb comment.

      The only thing I might add is that I believe the problem far transcends being just about America.

      Global contamination and peak oil are eminent, and these combined with the other problems you cite mean we’ve reached a triple witching hour. I don’t see tinkering with our ideologies at the edges as being sufficient. I think this is one of those fall-of-the-Roman-Empire or Renaissance moments.

      Hannah Arendt in The Human Condition examines the underlying ideologies upon which our lives are currently structured, politics and economics being just a part of the overall picture:

      [A]mong the outstanding characteristics of the modern age from its beginning to our own time we find the typical attitudes of homo faber: his instrumentalization of the world, his confidence in tools and in the productivity of the maker of artificial objects; his trust in the all-comprehensive range of the means-end category, which regards everything given as material and thinks of the whole of nature as of “an immense fabric from which we can cut out whatever we want to resew it however we like”; his equation of intelligence with ingenuity, that is, his contempt for all thought which cannot be considered to be “the first step…for the fabrication of artificial objects, particularly of tools to make tools, and to vary their fabrication indefinitely”; finally, his matter-of-course identification of fabrication with action.

      It would lead us too far afield to follow the ramifications of this mentality, and it is not necessary, for they are easily detected in the natural sciences, where the purely theoretical effort is understood to spring from the desire to create order out of “mere disorder,” the “wild variety of nature,” and where therefore homo faber’s predilection for patterns for things to be produced replaces the older notions of harmony and simplicity. It can be found in classical economics, whose highest standard is productivity and whose prejudice against non-productive activities is so strong that even Marx could justify his plea for justice for laborers only by misrepresenting the laboring, non-productive activity in terms of work and fabrication. It is most articulate, of course, in the pragmatic trends of modern philosophy, which are not only characterized by Cartesian world alienation but also by the unanimity with which English philosophy from the seventeenth century onward and French philosophy in the eighteenth century adopted the principle of utility as the key which would open all doors to the explanation of human motivation and behavior. Generally speaking, the oldest conviction of homo faber—that “man is the measure of all things”—advanced to the rank of a universally accepted commonplace.

      I’ve been reading Nietzsche lately, and he was harping on some of the same things Arendt is here as far back as the late 19th century.

      Unfortunately Nietzsche, just like Marx and the Bible, have been so vitiated and cherry-picked for propaganda purposes that they have been reduced to mere caricatures of their former selves.

        1. DownSouth

          I’m not sure what you’re talking about. The West Roman Empire fell in the fifth century, and the East Roman Empire not until centuries later:

          But this does not mean that the fall of the West had to occur during the fifth century; indeed, at a number of points along the line, things might have gone differently, and the Roman position might have improved, rather than worsened…

          By contrast with the West, the eastern empire was relatively untroubled by civil wars and internal unrest during the period of the invasions, and this greater domestic stability was undoubtedly a very important fact in its survival. If the eastern empire had faced internal distractions in years immediately following the Gothic victory at Hadrianopolis in 378, similar to those that the West faced in the period following the 406-7 barbarian crossing of the Rhine, it might well have gone under. There is no very obvious reason for this greater stability in the East, beyond good luck and good management. In particular, through the dangerous and difficult years of Hadrianopolis, the eastern empire had the good fortune to be ruled by a competent and well-tried military figure, Theodosius (emperor 379-95), who was specifically chosen and appointed from outside the ranks of the imperial family to deal with the crisis. By contrast, the ruler of the West during the years of crisis that followed the Gothic entry into Italy in 401 and the great crossing of the Rhine in 406 was the young Honorius, who came to the throne only through the chance of blood and succession, and who never earned any esteem as a military or political leader. Whereas the figure of Theodosius encouraged a healthy respect for the imperial person, that of Honorius, dominated as he was by his military commanders, probably encouraged civil war…

          Honorius himself never took to the field, and his armies triumphed over very few enemies other than usurpers.
          –Bryan Ward-Perkins, The Fall of Rome and the End of Civilization

        2. DownSouth

          And I know that scholars have put forth over 100 theories as to why the Roman Empire fell, but here’s the thinking of Reinhold Niebuhr on the subject:

          All through history one may observe the tendency of power to destroy its very raison d’être. It is suffered because it achieves internal unity, and creates external defenses for the nation. But it grows to such proportions that it destroys the social peace of the state by the animosities which its exactions arouse, and it enervates the sentiment of patriotism by robbing the common man of the basic privileges which might bind him to his nation. The words attributed by Plutarch to Tiberius Gracchus reveal the hollowness of the pretensions which the powerful classes enlist their slaves in the defense of their dominions: “The wild beasts in Italy had at least their lairs, dens and caves whereto they might retreat; whereas the men who fought and died for that land had nothing in it save air and light, but were forced to wander to and fro with their wives and children, without resting place or house wherein they might lodge… The poor folk go to war, to fight and to die for the delights, riches and superfluities of others.” In the long run these pretensions are revealed and the sentiment of patriotism is throttled in the breasts of the disinherited. The privileged groups who are outraged by the want of patriotism among modern proletarians could learn the cause of proletarian internationalism by a little study of history. “It is absurd,” says Diodorus Siculus, speaking of Egypt, “to entrust the defense of a country to people who own nothing in it,” a reflection which has applicability to other ages and other nations than his own. Russian communists of pure water pour their scorn upon European socialists, among whom patriotism outweighed class loyalty in the World War. But there is a very simple explanation for the nationalism of European socialists. They were not as completely, or at least not as obviously, disinherited as their Russian comrades.
          –Reinhold Niebuhr, Moran Man & Immoral Society

    2. Mickey, Akron, Ohio


      If you haven’t read Federalist Paper # 10 by James Madison, I would strongly urge you to do so. It lays out the divide-and-conquer strategy of the propertied classes in this country right from the beginning. Madison and the Founding Fathers were not “democrats” by any stretch of the imagination – did not believe in direct majority rule. And the ruling fathers [patriarchy] of today aren’t any different.

      As for your AHISTORICAL notion that the dream worked so long as America was empty? It’s precisely that kind of thinking that externalized the costs of Manifest Destiny and which led to the GENOCIDE of millions of Native Americans. Ask them if their continent was “empty”! The “dream” you speak of was a nightmare for those on whose backs it was borne and built – Irish, African slaves, Chinese, Hispanics – immigrants in general – the people without a history.

      What has changed? Now, it’s the white American middle classes that are being EXTERNALIZED by the maximization of shareholder wealth on a global scale. Over the course of the past 40 years CLASS formation has taken place, but absent the class-consciousness that would make it a potent force in American politics as it is in Western Europe. And the entire ideological superstructure – religion, nationalism/patriotism, entertainment, sport, culture of rabid individualism, MSM – is intended to thwart the formation of any such consciousness in a divide and conquer strategy laid out by James Madison over 200 years ago.

      Ask yourself one simple question: Who/What is the most powerful minority in this country today? If you answer with anything but the wealthy then ask yourself why the rich are not considered a minority? Why not? That’s the more important question. Does anyone believe that such thinking happens by accident? Believe me, the wealthy are very class-conscious! Add to this the fact that most wealth is INHERITED and the “nobility” of which you speak is not a recent developemnt.

      Only when WE all realize that Capitalism is not intended to work for US collectively, but only for those individuals born into it or willing to climb the stairway to heaven doing god’s work… will anything change.

    3. Toby

      Two things:

      1. The Constitution was not designed to distribute wealth evenly, or even via a meritocracy. This work here is very important on that front: (I was linked to this by a poster here at NC.

      2. “And human nature dicates that we never have enough.” Please read Marshall Sahlins’ “The Original Affluent Society” and look into “St. Kilda, Island at the Edge of the World”. Human nature is a very slippery thing, probably the most we can say about it is that it is malleable and highly susceptible to influence. Imagine a child plucked at birth and kept magically alive in a featureless white room. Exposure it to the outside world at age ten. What kind of a human would it be? Would it be greedy and selfish? Ambitious? Could it walk? Talk? Also, how selfish, greedy and ambitious are the indigenous peoples of the Amazon Rain Forest? Or hunter gatherers of the African plains? They are homo sapiens sapiens too…

      1. DownSouth


        Fresia offers up his version of American history as a corrective to the myth that masquerades as history in the United States. And it is a corrective that is very much needed. But now, in reaction to the old myth, comes the manufacture of its opposite myth. European man, embodied in the Founding Fathers, once the hero of the conquest of the Americas, now becomes its demon; and the victims, who cannot be brought back to life, are canonized.

        I think it’s important to remember what the Founding Fathers didn’t do. They did not opt for the restoration of the monarchy, for an American aristocracy or nobility. And given the times they operated in, this was really quite revolutionary, quite a feat. Yes, they did have grave reservations about democracy, doubts that went all the way back to the Greek city states, and which were confirmed by contemporary experience. But Madison was not just concerned about preserving the rights of economic minorities (the rich). He was also concerned with the rights of religious minorities, something Fresia fails to mention. As Lance Banning wrote in “Madison, the Statute, and Republican Convictions”:

        On several occasions, he was quite explicit in suggesting that the struggle for religious freedom, not the clash of different economic interests, was the fundamental prototype for his solution of the democratic riddle, the model he had most in mind when he envisioned how the great republic would “control the violence of faction.”

        Banning goes on to explain Madison’s solution to the “democratic riddle”:

        The proper remedy, he said, was to “enlarge the sphere” of republican government

        “and thereby divide the community into so great a number of interests and parties that, in the first place, a majority will not be likely at the same moment to have a common interest separate from that of the whole or of the minority, and in the second place, that in case they should have such an interest, they may not be apt to unite in the pursuit of it.”

        Madison’s concept of a large republic with a strong central government was eventually to prevail.

        Though the rights of racial minorities were the farthest thing from the Founding Fathers’ minds, Fresia also fails to mention that the system conceived by Madison of a strong federal government was what intervened to trump states’ rights and implement civil rights reform.

        The need for absolute goodies and absolute baddiers runs deep in us, but it drags history into proaganda and denies the humanity of the dead: their sins, their virtues, their efforts, their failures.

        1. Toby

          Thank you for the information. I’m not a believer in goodies and baddies, but I do believe in progress, and in particular openness. Fresia’s work is important on that front, though perhaps, as you point out, a little too mythic itself, a little too corrective. That said, it is indeed in this direction that the mass of Americans needs to lean, to de-myth their history. This applies to all peoples of course (perhaps less so in Germany and others in Europe — there’s no corrective like collapse of empire) since we humans do like to mythologize ourselves, for various reasons. America seems particularly infatuated with its past at a time when ruthless self-honesty is more vital than ever. That, and America being very much in the spotlight and at the vanguard of this crucial historical period.

          From what I’ve read I would like to pick you up on this point though:

          “They did not opt for the restoration of the monarchy, for an American aristocracy or nobility.”

          Fresia characterizes the Framers as renegade and ambitious barons intoxicated with the scent of freedom from the old boss, and inspired by the enormous potential of the US. While they did not indeed institute a classical monarchy, the system they initiated has allowed a newer variant of Monarchy to flourish and set down very deep roots. Elitism is elitism is elitism. Hello to the new boss, just like the old boss, so to speak.

          1. DownSouth

            Here’s how Arendt sums it up the Forefather’s original intention of restoration and not revolution:

            If the case of modern revolutions were as clear-cut as a textbook definition, the choice of the word ‘revolution’ would be even more puzzling than it actually is. When the word first descended from the skies and was introduced to describe what happened on earth among mortal men, it appeared clearly as a metaphor, carrying over the notion of an eternal, irresistible, ever-recurring motion to the haphazard movements, the ups and downs of human destiny, which have been likened to the rising and setting of sun, moon, and stars since times immemorial. In the seventeenth century, where we find the word for the first time as a political term, the metaphoric content was even closer to the original meaning of the word, for it was used for a movement of revolving back to some pre-established point and, by implication, of swinging back into a preordained order. Thus, the word was first used not when what we call a revolution broke out in England and Cromwell rose to the first revolutionary dictatorship, but on the contrary, in 1660, after the overthrow of the Rump Parliament and at the occasion of the restoration of the monarchy. In precisely the same sense, the word was used in 1688, when the Stuarts were expelled and the kingly power was transferred to William and Mary. The ‘Glorious Revolution’, the event through which very paradoxically the term found its definite place in political and historical language, was not thought of as a revolution at all, but as a restoration of monarchial power to its former righteousness and glory.

            The fact that the word ‘revolution’ meant originally restoration, hence something which to us is its very opposite, is not a mere oddity of semantics. The revolutions of the seventeenth and eighteenth centuries, which to us appear to show all evidence of a new spirit, the spirit of the modern age, were intended to be restorations.


            If we want to learn what a revolution is—its general implications for man as a political being, its political significance for the world we live in, its role in modern history—we must turn to those historical moments when revolution made its full appearance, assumed a kind of definite shape, and began to cast its spell over the minds of men, quite independent of the abuses and cruelties and deprivations of liberty which might have caused them to rebel. We must turn, in other words, to the French and American Revolutions, and we must take into account that both were played in their initial stages by men who were firmly convinced that they would do no more than restore an old order of things that had been disturbed and violated by the despotism of absolute monarchy or the abuses of colonial government. They pleaded in all sincerity that they wanted to revolve back to old times when things had been as they ought to be.

            This has given rise to a great deal of confusion, especially with respect to the American Revolution, which did not devour its own children and where therefore the men who had started the ‘restoration’ were the same men who began and finished the Revolution and even lived to rise to power and office in the new order of things. What they had thought was a restoration , the retrieving of their ancient liberties, turned into a revolution and their thoughts and theories about the British constitution, the rights of Englishmen, and the forms of colonial government ended with a declaration of independence. But the movement which led to revolution was not revolutionary except by inadvertence, and ‘Benjamin Franklin, who had more firsthand information about the colonies than any other man, could later write in all sincerity, “I never had heard in any Conversation from any Person drunk or sober, the least Expression of a wish for Separation, or Hint that such a Thing would be advantageous to America.” ‘ Whether these men were ‘conservative’ or ‘revolutionary’ is indeed impossible to decide if one uses these words outside their historic context as generic terms, forgetting that conservatism as a political creed and an ideology owes its existence to a reaction to the French Revolution and is meaningful only for the history of the nineteenth and twentieth centuries. And the same point, though perhaps somewhat less unequivocally, can be made for the French Revolution; here too, in Tocqueville’s words, ‘one might have believed the aim of the coming revolution was not the overthrow of the old regime but its restoration’. Even when in the course of both revolutions the actors became aware of the impossibility of restoration and the need to embark upon an entirely new enterprise, and when therefore the very word ‘revolution’ had already acquired its new meaning, Thomas Paine could still, true to the spirit of a bygone age, propose in all earnestness to call the American and the French Revolutions by the name of ‘counter-revolutions’. This proposition, odd indeed from the mouth of one of the most ‘revolutionary’ men of the time, shows in a nutshell how dear the idea of revolving back, or restoration, was to the hearts and minds of the revolutionaries. Paine wanted no more than to recapture the old meaning of the word ‘revolution’ and to express his firm conviction that the events of the time had caused men to revolve back to an ‘early period’ when they had been in the possession of rights and liberties of which tyranny and conquest had dispossessed them. And his ‘early period’ is by no means the hypothetical prehistorical state of nature, as the seventeenth century understood it, but a definite, though undefined, period in history.

            –Hannah Arendt, On Revolution

          2. DownSouth

            And as to “classical monarchy” or the “newer variant of monarchy”…

            The battle between the aristocracy and the bourgeoisie (middle, merchant or business class) began with the rise of the European middle class, which was given moral and intellectual legitimacy by the Renaissance and the Reformation—that is the the rise of Protestantism—and eventually the Enlightenment. When Tocqueville warns of the “aristocracy created by business” he is making an argument in favor of the traditional aristocracy by asserting that the abuses of the bourgeoisie are worse than those of the aristocracy. And he certainly had good grounds for this. For instance, as C.R. Boxer points out in The Dutch Seaborne Empire: 1600-1800, the Dutch merchant class used the revolt against King Phillip II (read monarch or aristocracy) in 1581 to establish just the sort of new “aristocracy” Tocqueville warns of:

            The regents thus took advantage of the struggle with Spain to consolidate their position as a self-perpetuating burgher-oligarchy and to exclude the ordinary citizens from any direct say in either the local or provincial administration.

            And as Boxer goes on to point out, the life of the ordinary citizen under the burgher-oligarchy was just as bad, if not worse, than under the king and the feudal nobles.

            Tocqueville is suggesting that, instead of trying to work out democracy’s kinks, a return to traditional aristocracy is perhaps in order.

            It’s important to put Tocqueville in his proper historical context and realize that he was an advocate of the restoration of the monarchy/aristocracy, and as such was fighting a war on two fronts. First, he had to battle against the middle, business or merchant class—the bourgeoisie as it later came to be known. And then he had to battle against the ordinary citizens, who constitute the vast majority. Thus we have him inveighing not only against “democracy” and the majority, but against the “the aristocracy created by business” as well.

            It’s a little difficult for us today to understand some of Tocqueville’s comments, because in today’s America we do not have a traditional aristocracy, monarchy or nobility for which Tocqueville served as apologist, and furthermore any such apology today, because our republican form of government has become so ingrained, would be considered to be outlandish. But if we place Tocqueville within his historical context, and within the debates that were occurring at the time, what he had to say becomes much more coherent.

          3. Toby

            Thank you again DownSouth, fascinating quotes. I am always grateful to receive information that highlights just how complex historical momentum is, particularly in the inability of its agitators — who are themselves at the mercy of outside forces — to conceive whither their agitation will lead, and yet how simple in that the whole process rhymes, almost mercilessly. (For that rhyming I look not to human nature, but human ignorance of “how things work,” which is dimishing in fits and starts.) There are cycles, but we do learn, change does happen, and progress is possible, though not inevitable, and subject of course and as ever to interpretation.


  26. RebelEconomist

    More blaming easy targets: “Everyone was involved in the mortgage scam. At the lender level the deceptions were myriad; liar’s loans, fraudulent income documentation, negative amortization loans, HELOCs, etc. The rush to get as many loans written as possible and then get those hot potatoes moved to the next sucker in the line was furious……Everyone had a hand in the bubble, from the congressmen who killed regulatory initiatives to the regulators who snoozed at the wheel to the GSEs to the Fed to the banks to the ratings agencies to the lenders.”

    What about the borrowers (who if not actually lying about their income, had to turn a blind eye while it was exaggerated)? And what about the investors, or “suckers” as they proved to be who bought the securities? Surely they must share responsibility. If they are seen as only victims, another boom and bust will inevitably follow.

    From the estimates I have seen, the losses on toxic assets are in the order of trillions of dollars, while the bank employees and shareholders received in the order of hundreds of billions. Where did the balance go? Ordinary people, that’s where. People who occupied houses that they could not really afford and people who received benefits based on fund values that turned out to be fictitious.

    1. aet

      Received benefits?
      Those who purchased those funds lost money.
      Those who were induced to borrow upon the salesperson’s representations that “this is affordable for you” also gained nothing. What have they gotten for their mortgage payments? Foreclosed, once the economy threw them out of work.
      Yes, sure, everyone who lost something is to blame and had it coming…sheeesh!
      Fascists often blame their victims….

      1. Ishmael

        aet to follow up on your comment — most who lied to get their loans have either lost those assets or are on the verge of losing those assets. The law is there to protect the innocent not the stupid. If you could not afford the purchase price of an asset then you should be foreclosed upon and the asset put on the market so that everyone has a chance of owning it. There should not be forced cram downs on mortgages to the benefit of people who should not be in those assets originally. Accordingly, the borrowers have suffered.

        Now we need to make the banksters at all levels (commerical, mortgage and IB), regulators if they are tainted with kick backs in any manners, elected officials and Federal reserve members. This is a gigantic fraud and people should be held accountable.

        Please note the trillions and billions mentioned above. There is still value in many of those homes so a big part of the difference between trillions in loans and billions of skim sits in the remaining home value.

  27. Siggy


    “Let’s face it, the basic tenets of fairness vanished a long time ago. For example, how can someone who bought waterfront property 50-60 years ago often on a teacher’s income be worth millions while the typical young professional couple starting out can’t even dream of owning such a property in their lifetime.”

    Very interesting paragraph. Does it occur to you that imbeded in the described circumstance is the fact of the loss of purchasing power that transpired over the 50 to 60 year time frame. That imbeded fact is the reason why your young professional cannot afford the beachfront property. That is why your young professional is looking for yield in all the wrong places.

    When considered in light of the continuing loss of purchasing power, is there a rationale choice other than irrationally exuberant speculation?

    And, why limit the destruction that accrues to irrationale exuberance?

    At some point there is the necessity of a settling of accounts. It’s come to jesus time. It’s time to repudiate all that debt that cannot be serviced. It’s time to recognize that our fiat currency has failed. It’s time to recognize that a fractional reserve banking system is systemically toxic. It’s time to recognize that there has been a massive abrogation of regulatory responsibility.

    It’s time to recognize that markets are information systems and that the distribution of information is never Gaussian. It’s time to recognize that the imterpretation of available information is not homogenious amonst market participants.

    Most importantly, it’s time to recognize that fraud needs to be prosecuted and that to the extent that it goes unprosecuted, that absence of prosecution engenders more fraud.

  28. Matt T

    “I certainly see the boom-bust cycle as endogenous to the capitalist system in a way that is unrelated to the Federal Reserve. Remember we had the panics of 1837, 1857, 1873, 1893 and 1907 before the Fed even existed.”

    Credit expansion is the theme common to all historical boom/bust cycles (at least in the modern age). The Fed per se is not the problem, the problem is that fractional reserve banking and the resultant overleveraging of the whole economy creates an environment where bank runs, panics, massive booms and spectacular crashes are inevitable. Rather than addressing the underlying problem we created the Fed, the FDIC etc. to “manage” this instability. Of course, not even a government agency can defy gravity forever.

  29. gotgold

    Your option 3 says, allow a private company to grow to be TBTF and then ask them to adhere to the following bankruptcy process.

    Need I say more.

    Thats what we have with around 12 institutions today. They are beyond bankrupt but are considered TBTF. That leads us back to option 1. – the Volcker model.

    1. Edward Harrison Post author

      I already addressed this when I said “existing rules on bank size as percentage of the deposit base and leverage would need to be enforced.” Leverage of 12 to 1, the previous standard, is a far cry from 30 to one. If that is not sufficient, they should be broken up involuntarily.

      1. gotgold

        Is that your basis for a TBTF. TBTF should never be an option. If you have one window open for it, you will see everyone lined up there. I doubt that 12 to 1 would have saved the day.

  30. Mickey, Akron, Ohio

    “We effectively have a one-party system when it comes to investment in the present economic, power, and wealth structure.”

    And when haven’t we really had such a system? Since the founding of the republic there has never really been much more than “squabbling between two factions of the ruling elite”. [Federalist Paper #10] And whenever challenged from below, their differences have been quickly put aside and their response has been REPRESSION. Whiskey Rebellion? 1877 Railroad Strike? The Palmer Raids of the early 1920s? The violent suppression of the IWW? McCarthyism of the 50s? War on Terror?

    Only when working people organized themselves into UNIONS – 1935 to 1975 – with the ability to shut down production was there any “sharing of power” – something more than a one party state with two wealthy factions. But with the hollowing out/offshoring of manufacturing the electoral base – jobs – underlying such power has been emasculated with the result that the “crony capitalism” of which Ed Harrison speaks is just a return to the good old days – the gilded age of the robber barons. Now too, with the collapse of the Soviet Union, there is no “alternative” to the capitalist road is there? And that was never really an alternative to begin with.

    So the only real alternative to this one-party state is an organized working class that can shut down the production of goods and/or services. But I haven’t heard too many economists arguing for more unionization or supporting the Employee Free Choice ballot initiative. And I don’t think we will. Besides, the production cat has jumped to the offshore bag making it difficult to shut anything down.

    The SYSTEM is broke and no amount of reform from above by the one party state is going to fix it. But here’s one suggestion: change your W-4 form to 0 deductions. Then forget about paying your income taxes! If enough of US “starved their beast” and were willing to go to prison – they cannot imprison all of us – it would expose the system for what it is.

    Nonviolent refusal to pay taxes on a massive scale just might get their attention, particularly when who went to prison and who didn’t was scrutinized closely. And this isn’t some well-funded Tea Party shill who is doing the dirty work of the one party state. I’m talking about shutting the one party state down without violence. Let’s see who resorts to violence first – US or them?

  31. Ishmael

    A comment from Winston Churchill to keep in mind “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

    The constitution gave us equal rights under the law (which we appear to have now lost and need to recover) not equality in wealth.

  32. Eric L. Prentis

    Edward Harrison says, “blah, blah, blah, blah.” What we are dealing with are Republican and Democratic politicians, and the plutocracy who control them; both groups are racketeering thugs who pay no attention to laws, regulations, nor have any morals. It is all about fraudulently stealing the taxpayers money, covered up by self-serving theories, everything else can go to hell.

  33. bobh

    I think the consensus view here–that we live in an oligarchic kleptocracy, that our political system is controlled by bad people who shun the golden rule, that our economy is in for an eventual nasty collapse– is pretty much on the money. It is also a minority view discounted by most of the general public. What I want to know is: is there a way I can make money using this information assymetry in order to increase the likelihood that my lovely granddaughters will have decent lives?

  34. Barry

    Edward Harrison: “But, I don’t see a need to create more rules. That would just retard growth and wouldn’t alleviate the problem of irrational exuberance. ”

    Edward, we’ve seen piss-poor growth in the deregulated era, and that’s *before* we take into account at least one lost decade + the trillions of $ in damages caused by the crash.

  35. Jim

    I would like to add an important dimension to the dynamics of the cvil rights movement mentioned by Down South.

    At the origins of the movement was also King’s father,who over the years, had managed to build a vigorous black community in Southern towns and cities under the most unpromising of conditions The core of that community was the church and the civil rights movement was strong– as Beynard Rustin pointed out “because it was built upon the most stable institution of the Southern Negro community–the Church.”

    The church furnished institutional as well as moral support. In Montgomery, Birmingham and Selma it was the organizational structure of the church as much as its vision of the promised land that sustained the movement.
    The clergy provided indigenour leadership and the churches served both as channels of communication and as sources of funds.

    During the boycott of segregrated buses in Montegomery the churches raised most of the money that sustained a car pool for twelve months. The success of the boycott also depended on at least the willingness of the black cab companies to charge passengers the standard bus fare–a reminder that the black community in the South had other resources besides the church. It had stable families, businesses, newspapers, radio stations and colleges and enough buying power in some localities to make boycotts an effective economic weapon.

    In building a successful social movement it seems imperative to have a foundation of indigenours institutions.

    In addition, MLK also spoke directly to the regional culture of the South. He understood that the history of Southern blacks was intimately tied with that of their opressors. King often spoke of the positive attractions of the land of his youth. “The South, after all. was our home. Despite its shortcomings we loved it as home and had a real desire to do something abouth the problems that we had felt so strongly as youngsters.”

    By often addressing their opressors as fellow Southerners King exposed the moral claims of the white supremist regime in the South to the most damaging scrutiny and his appeal to a common regional past was probably an important part of the eventual victory over segregation.

    Lyndon Johnson was a fellow Southerner concerned about civil rights. Johnson perhaps sensed that King spoke not only to black people but to the soul of the South.

    It was only when the civil rights movement moved North (after 1964)into impoverished communities, that it began to flounder and certainly part of the reason was the absence of a self-sustaining network of black institutions that had gave the movement its strength in the South.

    1. gordon

      Thanks. That’s the sort of insight that non-Americans can never get except from comments like yours. I now wonder to what extent movements like the Black Panthers and Black Muslims (which I think both were Northern movements) were an attempt to fill that gap.

  36. craazyman

    I’ve had the somewhat distressing thought lately that the system and all the loathsome looters will be bailed out by the 6 billion people on the planet who want to live like Baywatch lifegaurds. I’ve thought a lot about this lately.

    If we do the math, China (1.3 bil) + India (1.2 bil) + Indonesia (0.23 bil) + Brazil (0.2 bil) = about 3.0 billion people. No, that’s not a surprise.

    Pakistan (0.17 bil) + Bangladesh (0.16 bil) + (Mexico 0.107 bil) + (Phillipines 0.1 bil) + Vietnam (0.1 bil) = about 500 million people.

    That’s 3.5 billion people. And there are many other countries, like Turkey, Morocco, Columbia, Argentina, etc. They all have lots of people

    US GDP in 2008 was $14.4 billion. China ($4.3 bil), India ($1.2 bil), Indonesia ($0.5 bil) and Brazil ($1.6 bil) had combined GDP of only $7.8 billion.

    That’s half the GDP for 10 times the number of people — most of whom want to live like a Batwatch lifegaurd with a an IPOD and hybrid car. Now most of the countries have accepted, to varying degrees, capital markets, private property and fractional reserve lending.

    Most of these folks have two goals in mind: survival and prosperity. They will do anything it takes. And so that makes me think that global growth is looking at a 20 bagger, at least, as these 3 billion people work to be Baywatch lifegaurds, or at least put their kids in a position to be a Baywatch lifegaurd. Provided they don’t get killed first.

    There’s a lot of what I call “Potential Demand” there to be unlocked, even if a few looters disgustingly get rich on the side, as nauseating as that is to see.

    I suspect that these 3.0 billion people will be the receptacle into which the global financial system reinflates itself, in a slow baloon, provided, again, that they don’t kill each other first.

    A hard working immigrant, or someone back in the homeland, can generate enough productivity to work off a lot of “our” debt.

    It’s easy to get lost in all the details of the moment and lose sight of the big Dionysus, sitting in the chair with the tan. It’s easy to erect an aparatus of despair, like Kafka’s Hunger Artist, and concoct all sorts of equations with the little squiggles and equals signs. These are like the bison on the caves at Lascaux, they are gateways of perception and demonstrations of a mastery of a certain craft of expression, but they are not reality. Reality is the big dude in the chair with the whistle, flexing the bod and checking the surf, like the big God he is. And 3.0 billion people want to be that God or the Goddess in the bikini. I hate to say it, but I’m bullish. ha ha ha.

    1. Moneta

      Growth does not necessarily imply profits or gains.

      An overpopulated growth industry can be made up of non-profitable companies.

    2. Ishmael

      crazyman — you are confused in believing desire leads to purchase (of course with credit bubbles this does happen). Lots of people want Ferraris but that does not mean they get one.

      Articles I have seen indicate that if all of the population of the earth had a middle class American standard of living we would need 6 earths of natural resources. So, you are talking about an additional 50% of the earth achieving a middle class standard of living so we need 3 earths to do that.

      Accordingly, there is a limiting factor of natural resources for those people to achieve the desired standard of living. To put in perspective, the US population which represents 5% of the world population uses 25% of the earth’s natural resources.

      Regarding your thesis, as they say in Texas, that dog just don’t hunt. If anything you might see limited improvements of the standard of living for 50% of the world with a significant decline in the US standard of living.

    3. Toby

      Crazyman, do you think there will be labour for the aspiring ones to earn the money to become the tanned beach Gods you so deliciously describe?

      Do you think that further stoking the consumption beast is wise?

      Do you think perpetual growth is wise?

      Do you think only an economics which gives rise to a socioeconomic addiction to perpetual growth is possible, i.e. that there is “no alternative?”

      Please limit your answer to 500 words or less.

  37. Another Hugh

    Here I go again on my favorite hobby horse ….

    All this focus on regulation or the lack thereof, and on various regulators and other personalities, obscures one important thing. During the years leading up to the crash, the US ran a CA deficit with the ROW that peaked a few years ago at 6.5% of GDP. This deficit had a corresponding funding flow that was ultimately invested in treasuries, agencies, stocks, bonds and securitized debt.

    Now suppose that we did have an iron-clad financial system overseen by suitably fascist regulatory apparatchiks. Could someone please explain how it’s remotely plausible that we could have ever spent this used this from our “benefactors” on anything other than an unsustainable binge of consumption and malinvestement?

  38. superman07

    Reform often comes delivered through the barrel of a gun.

    In just 3 months Americans bought enough guns to outfit the entire Chinese and Indian army’s combined.

    You also bought 1,529,635,000 rounds of ammunition in just the month of December 2008. Yeah that is right, that is Billion with a “B”.

    This is an evaluation of overall firearms and ammunition purchases based on low end numbers per Federal NIC instacheck data base Statistics. The numbers presented are only PART of the overall numbers of arms and ammunition that have been sold. The actual numbers are much higher.

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