James Galbraith on How Fraud and Bad Economic Thinking Got Us in This Mess

Yves here. Our resident mortgage maven Tom Adams pointed me to a speech by James Galbraith via selise at FireDogLake, which discusses, among other things, how certain key lines of thinking are effectively absent from economics, as well as a lengthy discussion of the failure to consider the role of fraud. Galbraith is not exaggerating. The landmark 1994 paper on looting, or bankruptcy for profit, by George Akerlof and Paul Romer, was completely ignored from a policy standpoint even though it explained why the US had a savings and loan crisis.

Similarly, Galbraith refers to an incident at the most recent Institute for New Economic Thinking conference, in which he stood up and said, more or less, that he couldn’t believe he has just heard a panel discussion on the financial crisis and no one mentioned fraud. The stunning part was how utterly unreceptive the panel and the audience were to his observation. You’d think he’d had the bad taste to say the host had syphilis.

I strongly urge you to read the entire piece; non-economists may want to skim the first third and focus on the crisis material and what follows. This is the key paragraph:

This is the diagnosis of an irreversible disease. The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable. It’s not just that restoring trust takes a long time. It’s that under the new technological order in this field, it can not be done. The technologies are designed to sow and foster distrust and that is the consequence of using them. The recent experience proves this, it seems to me. And therefore there can be no return to the way things were before. In other words, we are at the end of the illusion of a market place in the financial sphere.

By James Galbraith, delivered as the keynote lecture to the 5th annual “Dijon” conference on Post Keynesian economics. You may also listen to the audio recording

It’s of course a great privilege for me to be here in this role and especially on the occasion of the 75th anniversary of the publication of the General Theory.

Two years ago, as you may recall, our profession enjoyed a moment of ferment. Economists who had built their careers on inflation targeting, rational expectations, representative agents, the efficient markets hypothesis, dynamic stochastic general equilibrium models, the virtues of deregulation and privatization and the Great Moderation were forced by events momentarily to shut up. The fact that they had been absurdly, conspicuously and even in some cases admittedly wrong imposed even a little humility on a few. One senior American legal policy intellectual, a fellow traveler of the Chicago School, announced his conversion to Keynesianism as though it were news.

The apogee of this moment was the publication in the New York Times Sunday Magazine of Paul Krugman’s essay, How The Economists Got It So Wrong. And in it, I noticed, Krugman admitted, and I’ll quote, that:

… a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency


And I must say, looking out on this audience, it would be fair to say that there were more than just a few and it’s a pleasure to be here among you.

In keeping with mainstream practice, Krugman named almost nobody. So, in a reply essay entitled, Who Were Those Economists, Anyway?, I described the neglected, ignored and denied second and third generation work largely, though not entirely, in the tradition of Keynes which did get it right. I could have named many more than I did including many in this room.

Let me begin therefore here by distinguishing between the three major lines of Keynesian thought that did in fact get it right—that had bearing and application on the events through which we have just passed. And I will honor the well remembered and beloved by identifying these lines with Wynne Godley, Hyman Minsky and Galbraith père.

Godley, of course, worked in the Keynes, Kuznets, Kalecki, Kaldor tradition of macroeconomic models attentive to national income accounting identities and to consistency between stocks and flows. The virtue of this approach is clarity and a comparative lack of overreaching ambition. Models of this type say nothing false which may not seem like much, but it’s a huge advantage over the starting position in mainstream economics which consists of nothing which is true. And the models direct you to check whether factual claims make sense given everything that they may imply.

Thus, that the federal surpluses in the United States’ budget in the late 1990′s implied unsustainable private debts was clear to those working in this tradition at the time. Just as, the fact that household debt burdens were again unsustainable was clear in the 2000′s. Again, perhaps it seems like not much, because it is simply an argument rooted in the national income accounts, until you remember that policy in a country like the United States is very strongly influenced by the macroeconomic forecasting of institutions like the Congressional Budget Office which impose no such consistency constraints on their models and do not check to see whether forecasts in one area imply reasonable and plausible outcomes in another. For this reason, much of that work is essentially nonsense.

Hyman Minsky developed an economics of financial instability, of instability bred by stability itself, the intrinsic consequence of overconfidence mixed with ambition and greed. Minsky’s approach, very different from Godley’s, is conceptual rather than statistical. A key virtue is that it puts finance at the center of economic analysis, analytically inseparable from what is sometimes called real economic activity, for the simple reason that capitalistic economies are run by banks. And, of course, his second great insight is into the dynamics of phase transitions: the famous movement from the hedge position to the speculative position to the intrinsically unsustainable, doomed to collapse ponzi position which arises from within the system and is subject actually to formalization in the endogenous instabilities of non-linear dynamical models.

To grasp what Minsky is about, it seems to me, is to go immediately beyond the coarse notion of the “Minsky moment,” a concept which implies falsely that there are also non-Minsky moments. It is to recognize that the financial system is both necessary and dangerous, that strict financial regulation is both indispensable and imperfect. Right away the idiocy of a concept like the “Great Moderation” becomes apparent. Just as with any machinery from an automobile to a nuclear reactor, a long record of stable performance does not prove that the controls and the backup systems are perfect anymore than it can show that they are unnecessary. Argument otherwise, whether made by the head of the central bank or an applicant for a license extension before the Nuclear Regulatory Commission is the mark of a crank.

The Galbraithian line, is allied to and descended from Keynes in the same sense that my father’s work was; accepting the central role of aggregate effective demand, the national income accounts, the credit circuit view of economic life and the financial instability hypothesis. But, it is also embedded in a legal institutionalist framework, rooted in pragmatism, framed by Thorstein Veblen and John Commons, forged in the political economy of the New Deal in the United States. This tradition emphasizes the role played in financial crisis by the breakdown of law and the failure of governance and regulation — and the role played by technology as a tool in the hands of finance for the purpose of breaking down and evading the law.

I want to stress this today, and not just for family reasons, because I think it remains the least familiar of the three, I would say, broadly Keynesian lines of analysis are most pertinent for an understanding of what we’ve been through and are still going through.

When you engage the mainstream on the national income accounts, at least they know what the damn things are. And these days you can even get, though for who knows how much longer, a respectful mention of Minsky even from someone like Larry Summers, if not any sign that he has actually read him.

What you cannot get – not at a meeting sponsored by the International Monetary Fund, not from the participants at the Institute for New Economic Thinking – is any serious discussion of contract law and fraud. I’ve tried, repeatedly. No one will deny, in response to the question, the role that fraud played in the financial debacle. How could they? But they won’t discuss it either. And it seems to me, this reflects a logic which bears pursuing.

Why not? Why is this one of the great taboo topics of our modern economic history? Well, personal complicity, frankly, plays a role among present and former government officials, regulators, consultants and the academics who advised them and those who either played the markets or took fees from those who did.

At the INET conference at Bretton Woods, a few weeks ago, Mr. Summers stated that he was — it was a wonderful phrase — that he was not among those who regard financial innovation as necessarily evil. I took a note as I heard him say that, I thought that really bears quoting.

There is a web of negligence and complicity here. Of culpability, abetted by the way universities are funded and by what they teach.

But it’s more than that. Let me try to frame it in somewhat more abstract terms. I would say that the commodity is the foundation stone of conventional economics. That the theory of exchange requires the commodification of tradable artifacts. Without that, there is no supply and demand. A world of contracts, each backed by a separate and distinct set of promises each only as good as the commitments made specifically and the ability of the laws and courts to enforce them, is a different sort of world. Just because you can call a set of such contracts by a name, “collateralized debt obligation” or “credit default swap”, and just because you can create something — you may even be able to create something called an exchange to trade them on — does not make them into commodities with a meaningful market price.

Complexity here is what is going to defeat the market with, in principle, infinite variability, and in practice, more distinct features than one can keep up with. In great volume, contracts of these kinds are per se hyper-vulnerable to fraud. Examples range from the New Jersey phone company that simply printed made-up fees on its bills hoping that no one would notice and for a long time nobody did, to the fact that almost no one at the insurance giant AIG realized that the CDS contracts they were selling contained a cash collateral clause, something that would cost them billions at a time when they didn’t have access to the cash. They range from unnoticed provisions permitting CDO managers to substitute worse for better mortgages in previously sold packages without notifying the investors, to the Mortgage Electronic Registration System and the pervasive incentive to document fraud in the foreclosure process.

The concession that fraud was present in this process is like the phrase, “Minsky moment.” Although true and although it concedes something, it doesn’t begin to cover the case. Even to say that fraud overwhelmed the system doesn’t go far enough.

I highly recommend to you, if you haven’t done so, that you read the Financial Crisis Inquiry Commission Report just published in the United States, or the even more recent report of the Senate Permanent Committee on Investigations, the many reports of the Congressional Oversight Panel and the report of the Special Inspector General for the Troubled Asset Relief Fund, SIGTARP. These are, by the way, very, very good documents prepared by serious public servants and it’s plain as day. Fraud was not a bug in the system, it was a feature. The word itself, along with abusive, egregious, reckless and even criminogenic suffuses these accounts of what went on.

Godleyans teach that stocks can not be separated from flows. Minskyans teach that finance can not be separated from reality. And my father’s tradition is that the legal and the technological can not be separated. The financial world, as it exists, has nothing to do with the commodity world of real exchange economics with its delicate balance of interacting forces. It is the world of technology at play in the form of quasi mass produced legal instruments of uncontrolled complexity. It is the world of, in other words, of evolutionary specialization in the never ending dance of predator and prey. In nature, when predators achieve an overwhelming advantage, the prey suffer a population crash, from which the predators in turn suffer later on. In economics it’s a financial crash, but process and dynamics are essentially similar.

Corporate fraud is not new; financial fraud is not new. What was new here was the scale and complexity of debt obligations, backed by mortgages. Mortgages are not like, say, common stocks which although issued in the millions are each an identical claim on a company’s net worth. Mortgages are each a claim on the revenue stream of a different household, backed by homes of a diversity made irreducible by the simple fact that each one is in a different place. Long-term mortgages have existed since the New Deal, in the U.S., but they were rendered manageable for decades by their simple uniform structure, their substantial margin of safety and the fact that the secondary markets were public and imposed standards on what could be issued and on what could be passed on to the agencies created for refunding those markets. And what this meant was that supervision was possible. There could be a well understood code covering what was right and what was wrong along side practitioners who understood the ethics of the matter and enforcement officers who could work with them fairly smoothly for the most part and intervene when abuses became apparent.

In the computer age, on the other hand, we entered the world of private labeled securitization, of negative amortization payment optional Adjustable Rate Mortgage with a piggyback to cover the down payment. Oh, and documentation optional.

There was a private vocabulary, well-known in the industry, covering these loans and related financial products: liars’ loans, NINJA loans (the borrowers had no income, no job or assets), neutron loans (loans that would explode destroying the people but leaving the buildings intact), toxic waste (the residue of the securitization process). I suggest that this tells you that those who sold these products knew or suspected that their line of work was not one hundred percent honest. Think of the restaurant where the wait staff refers to the food as scum, sludge and sewage.

To learn as we do from the excellent book by Bethany McLean and Joe Nocera, All the Devils are Here, that at the dominant mortgage originator in the United States, Ameriquest, the office chiefs fed their sales staff crystal methamphetamine to keep them going. It just adds a touch of telling detail, as does the fact that the founder of Ameriquest ended his career as the United States Ambassador to the Netherlands.

Rendering such complex and numberless debt instruments comparable requires a statistical approach based on indicators. And that launches into a world which was not imaginable in, say, 1927. The world of credit scores, ratings and algorithms, a world of derivative and super derivative instruments of sliced and diced residential mortgage backed securities, collateralized debt obligations, synthetic CDOs, synthetic CDOs squared, credit default swaps — all designed to secure that triple-A rating and to place the instruments which had been counterfeited to begin with — they looked like mortgages but were not really mortgages. Laundered, that is to say, transformed from the trash that they were into a triple-A security and fenced, which is to say, sold to the legitimate investment market by an intermediary called a commercial or an investment bank. To place these counterfeit, laundered and fenced instruments into the hands of of the mark. The mark. And who was the mark? Michael Lewis, in the The Big Short tells us who the mark was. The mark had a name in the industry, they would say, “who are we selling this stuff to?” And the answer would come back, “Düsseldorf.”

The Texas institutionalist, Clarence Ayres, to bring you a voice from my home territory in Austin, Texas, stressed most strongly the role of technology and the irreversible contribution of new tools to the production process. In finance, it’s the algorithm that is this tool, it seems to me. A radically cheap substitute for underwriting, a device for converting the financial gain into a computerized casino in the strict sense where one can never be sure by how much the house is bending the rules. We observed only, as I’ve already mentioned, that no one at AIG FP knew they had cash collateral clauses in those contracts, that the holders of synthetic CDOs did not know that they were getting a worse mortgage substituted for a better one, that the ratings model did not factor in the default risk when mortgages were issued with two-year teaser rates and so on and so forth.

Keynes, I think, understood these issues very well so far as they went in his time as an active player in the speculative markets. And this is what led him to argue that those markets should be small, expensive to access and restricted to those who could afford to play and lose. He did not think they should be repressed entirely, partly because he enjoyed them and partly because as he famously said, it is better for a man to tyrannize over his bank balance than over his fellow man. But in Keynesian terms, it seems to me, what we have seen since the financial crash should be no surprise at all. That is to say, the failure of the world economy and particularly of the financialized economies of Europe and North America, to recover from this debacle is a product of the character of the debacle itself. Absolute distrust, leading to absolute liquidity preference is the incurable consequence, it seems to me, of financial fraud.

I say incurable. This is the diagnosis of an irreversible disease. The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable. It’s not just that restoring trust takes a long time. It’s that under the new technological order in this field, it can not be done. The technologies are designed to sow and foster distrust and that is the consequence of using them. The recent experience proves this, it seems to me. And therefore there can be no return to the way things were before. In other words, we are at the end of the illusion of a market place in the financial sphere.

Let me take this analysis and bring it to bear momentarily on Europe. We speak in a common place way these days of the Greek crisis, the Irish crisis, the Portuguese crisis and so forth, as though these were distinct financial events. This fosters the impression that each can be resolved by appropriate agreement between the creditors, headquartered in Frankfurt, Brussels, Berlin, Paris, and the debtors taken one by one. Good behavior, taking the form of a suitable austerity will be rewarded by a return to normal credit conditions and market access. That, at least, is the official presumption. The financial market, in this imagery, is severe but fair, she cracks the whip on the profligate but praises and rewards the prim.

But that Greece has a weak tax system and a big civil service was hardly news. It’s a fact that’s been true for decades, overlooked in the good times and surfaced when convenient. That Ireland had a housing boom that was intrinsically unsustainable was surely hardly news. The initial shock to Europe didn’t come from the discovery of these facts, it came from American mortgage markets. When European banks and other investors realized the extent of their losses, beginning in late 2008, they looked for ways to protect themselves and they did this as any sensible investor would, by selling the weak assets and buying strong ones: German, French bonds and above all United States treasuries. That is why yields rose on all the small peripheral countries and fell on the big ones despite the very different circumstances in the countries that were badly affected.

It’s obvious that Greece cannot implement the programs demanded of it without crashing its GDP, and driving up its debt to GDP ratio on that account. But even if it could, any event, affecting any European country, or for that matter, some place else in the world, could sink Greece again irrespective of what Greece does. So, there is no national policy solution and no financial market solution. That is the meaning of the negotiations now underway in Luxembourg and elsewhere. There will be a restructuring or a default, and there must be an economic and not merely a financial rescue. And beyond that there obviously must be not only a new European architecture, but a new financial architecture that is not built around the banks as they exist today and the credit markets as they came to exist in the period before the crisis. Either that or the depression in Europe will simply go on and on. Until eventually the European Union falls apart.

That’s what I mean when I say that practically speaking what we’re dealing with here and what we need to recognize is not an interruption to a long process of economic growth, a recession or some shock to aggregate demand. It is an incurable disease at the heart of the system.

Our challenge as Keynesians, now, is to work out the practical implications of this reality and to spell out a course of action. And perhaps the first step that we should take, it seems to me, is clearly to condemn what I’ll call the False Keynesianism that came briefly to power with the new Administration in America in 2009.

In January of that year, as you recall, the new Administration announced the need for stimulus or a recovery program. Without it they calculated unemployment might rise as high as 9% by 2010 before beginning to decline again. With it, they forecast unemployment would be held to 8%, recovery would begin in mid-2009 and by early 2011, that is to say now, unemployment would be down to 7% on its way back to 5% by 2013. It’s 9% in the United States, as we speak.

The forecast was a political and an economic disaster, but in retrospect, it’s most interesting for what it tells us about those who made it. Plainly they did not understand, perhaps they did not wish to understand, what was going on. They adopted the assumption of a glide path back to 5% unemployment, which meant that the natural rate of unemployment — the most un-Keynesian and anti-Keynesian concept ever devised in modern economics was built into the mentality and the computer models that they were using. The only issue was the speed of adjustment and whether a little boost would help us get there a little faster. The stimulus package was not meant to provide a substantive response to the crisis, but just to increase that speed of adjustment by a small amount.

Plainly, in short, there was no real crisis in the minds of those who took office in 2009. There was just an unusually deep recession, a Great Recession it came to be called, and the recession would end. Chairman Bernanke of the Federal Reserve Board said from the beginning, the recession will end, the economy will recover. He did not say how he knew, but when it did he was sure things would return to the normal prosperity of the mid-2000s. It was the mindlessness of output gaps the consensus business cycle forecasting and of Okun’s law. The Minsky moment would surely pass.

This is a bad movie and we have, of course, seen it before. You may recall that in 1960 the Uncle of, as it happens, of Larry Summers, co-invented a concept called the Phillips curve, stipulating on very weak empirical evidence and no clear theory the relationship between the unemployment rate and the rate of inflation. True Keynesians, including my teacher, Nicholas Kaldor, Joan Robinson, Robert Eisner, a great hero of mine, and my father were appalled. The construct was doomed to collapse and when it did, after 1970, the school that most people thought of as Keynesian was swept away in the backwash.

Today, the failure behind the recovery forecast is conflated with the failure of the stimulus itself and the same thing is happening again. Those who failed most miserably to forewarn against the financial crisis have, as a consequence, regained their voices as scourges of deficits and public debt. There is a chorus of doom as those who once thought the new paradigm could go on forever are now inveighed against living beyond our means and foretell federal bankruptcy and the collapse of the dollar and the world monetary system amongst other scary fairy tales. This includes such luminaries as the leadership of the International Monetary Fund and of all things, the analytical division of Standard and Poor’s — an enterprise on which one might hope at least a small amount of modesty might have developed or devolved in the wake of recent events.

It would be pathetic if it were not so dangerous. But the fact is, these forces are moving down a highway which has been cleared of obstacles by the retreat, indeed the destruction of the False Keynesian position.

So it’s our task, it seems to me, against the odds, to build a new line of resistance. And I’ll wind up by saying that I think that line must have at least the following elements in it:

First, an understanding of the money accounting relationships, that pertain within societies and between them, so that we cannot be panicked by mere financial ratios into self-destructive social policies or condemn ourselves to lives of economic stagnation and human waste. And in particular I should add, since it’s important in Denmark at the moment, to the destruction of social welfare systems and pension systems which provided the foundation of a decent life for a large part of the population for decades.

Second, an effective analysis of the ongoing debt deflation, the banking debacle and the inadequate fiscal and illusory monetary policy responses so far. In America and in Europe, this is a crisis primarily of banks not of governments and it’s for us to call attention to this fact.

Third, a full analysis of the criminal activity that destroyed the banking sector, including its technological foundation, so as to quell the illusion that these markets can effectively be restored to anything like their form of 4 or 5 years ago. As part of this, obviously, it would be useful to have a renewed commitment to expose crime, to punish the guilty, and enforce the laws. Post Keynesian Economists for a More Effective FBI, I think is a splinter organization I would be happy to sponsor and solicit your membership in.

Fourth, an understanding of the way in which financial markets interact with the changing geophysics of energy, especially oil, with the commodity markets to choke off economic recovery unless the energy problem is addressed squarely. I think that’s something that we’re seeing happening now.

Fifth, a new strategic direction to redesign and rebuild our societies for the challenges of aging, infrastructure, energy, climate change and shared development which we all face. And to create the institutions required to make this happen. That requires, I think, from an intellectual point of view, a merger of the Keynesian, Post-Keynesian and the Institutionalists traditions which is, in fact, something that is already underway.

Sixth, to achieve these goals by mobilizing human brains and muscles to overcome unemployment and to assure a widely-shared, decent, and reasonably egalitarian society according to the most successful and enduring social models, by which I mean a commitment to the deepest policy principles that Keynes himself held and also an understanding that we should use history as a guide to what has worked and what does not.

And seventh, the reconstruction of the instruments of public power — the power to spend, the power to tax, the money power and the power to regulate — so as to effectively pursue these goals with democratic checks and balances to prevent the capture of new state institutions by predatory forces.

I will not pretend, as Keynes did, that nothing stands in the way but a few old gentlemen in frock coats who require only to be bowled over like nine pins and might enjoy it if they were.

We should take on this challenge simply as a matter of conscience. We are not contestants for power. It is for us a matter of professional responsibility and civic duty.

My friend Bill Black, who has some experience in this area, likes to say, in the words of William of Orange, that it is not necessary to hope in order to persevere.

Thank you very much, for the pleasure and honor of making these remarks.

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  1. williambanzai7

    Tnx for posting this. The system is rotten to the core. Unfortunately there is no quick fix. It will take a true calamity to create the necessary momentum.

    1. illyia

      Echo, WB7:

      Thank you Yves for posting this – and especially the audio edition. This fraud-under-all-the-rugs is enough to make a thinking person have vertigo.


  2. Tao Jonesing

    The stunning part was how utterly unreceptive the panel and the audience were to his observation.

    What? He expected accomplices to admit to their part in the fraudulent scheme?

    I love James Galbraith. I think the institutionalist torch he carries for his father serves him and all of us very well.

    But at some point he has to stop trying to convince himself that his colleagues are stupid and just accept the fact that they’re evil.

    The corruption and collapse of the rule of law, in the financial sphere, is basically irreparable. It’s not just that restoring trust takes a long time. It’s that under the new technological order in this field, it can not be done. The technologies are designed to sow and foster distrust and that is the consequence of using them.

    See? It’s the “technological order” that makes his colleagues do evil things. They can’t help themselves. The technology makes them do it!

    Rationalists have to stop coddling the realist criminals, and then maybe we can do something about the crime. By excusing their behavior, Galbraith enables it. And the realists count on that fact.

    The ironic thing is that Jamie’s technocratic Keynesianism overcomes his father’s institutionalism in the end. His father wouldn’t have suffered from the same confusion. John Kenneth Galbraith would have recognized immediately that it was the institutional values that were themselves corrupt, that the technology was just a mask to hide behind. Indeed, the older Galbraith said as much.

    1. Foppe

      Rationalists have to stop coddling the realist criminals, and then maybe we can do something about the crime. By excusing their behavior, Galbraith enables it. And the realists count on that fact.

      Not sure if you’d seen it last year, but this was an apt column on this topic by Mark Ames.

    2. Troy Ounce

      “But at some point he has to stop trying to convince himself that his colleagues are stupid and just accept the fact that they’re evil.”

      Ha, ha, ha..good one.

      Cattle behaviour in famous and as long as the tummies are full and the mony in the bank, apparently nobody cares. Also, there is no threat, not from politics, not from the MSM and not from the law. Shrug when you meet an angry blogger.

    3. Cheyenne

      “I love James Galbraith.”

      Me too:

      “I want to begin with a comment on this question of [Federal Reserve] independence, which has been touched on repeatedly. Vice Chairman Cohen said, and I think with very carefully chosen words, that the Congress GRANTED a substantial degree of independence to the Federal Reserve.”

      “That independence is of course independence from the Executive Branch. It is and cannot be independence from the Congress itself. The Federal Reserve may be delegated certain functions by the Congress, but the Congress can always choose to hold it accountable and this [House Financial Services Sub-] Committee has the responsibility of oversight precisely.”

      (testimony re H.R. 1207 Audit the Fed, beginning at 0:09)(h/t dailybail).

    4. Mark A. Adams JD/MBA

      Ignorance governs the actions of most Americans. As Thomas Jefferson said, “If a Nation expects to be ignorant and free, it expects what never was and never will be….”

      The fascists understand this. They have consolidated control over the mass media and the educational system in order to make sure that the people are ignorant.

      Instead of teaching how the Framers intended for us to secure liberty and justice, every school day, the children say a prayer to GOTUS, the giver of liberty and justice, and then, they see a multitude of TV shows where heroic government crime fighters always pursue justice. As a result, most people believe that justice is magically secured if we just beg and plead hard enough, much like the feudal reign which the Framers sought to eliminate.

      If you want to know how we were supposed to be able to control the government and prevent tyranny and injustice, see Why Does the Government Ignore Our Wishes? at http://ning.it/arAjdo and don’t miss my short speech at http://markadams.blip.tv/file/2636803/

      If you take a look, you’ll learn why those in government and those who can illegally influence them get away with violating our rights, abusing their power, and committing horrible crimes. My article on torture includes a link to the U.S. Supreme Court case which explains how one of our stolen rights makes the difference between justice and injustice, between freedom and slavery.

      The choice is up to each of you. Do you want to live in ignorance wondering why the politicians continue to help the rich and powerful take more and more from you, your family and your neighbors, or do you want to learn how we were supposed to be able to hold government accountable and spread the news to help restore our rights?

      Remember, if you are not part of the solution, you are part of the problem and if you make peaceful solutions impossible, you make violence inevitable.

      WARNING: Do not look at this if you cannot deal with reality. It may cause anger, headaches, insomnia, dizziness, difficulty in reciting the pledge of allegiance, a.k.a. the prayer to GOTUS, and result in the awareness that you are not free.

      1. Deb

        Mark, I just watched your video and I love you. Just sayin’. Thank you for what you dare to say.

    5. Anonymous Jones

      I really, really think that Galbraith is a fantastic thinker and advocate and that this was a great speech.

      Just one thing about TJ’s comments and the ones that follow, especially regarding the stupidity or malevolence about those with whom you disagree.

      When someone is advocating something that you find incorrect, there are four possibilities:

      1. Your opponent is stupid.
      2. Your opponent is deliberately saying something incorrect with the goal of malfeasance.
      3. Your opponent is subject to a cognitive bias and/or delusional tendencies that prevents him or her from seeing the “truth”.
      4. Your opponent is correct.

      You are fooling yourself if you think you can reliably determine which of these four is the proper state of the world.

      Generally, when one relies on the first possible explanation, especially with respect to people who have proven again and again on (at least supposedly) objective tests not to be stupid, you look a little stupid yourself.

      And although the second explanation is undoubtedly correct sometimes, it has not been my experience that even many sociopaths recognize that they are sociopaths or that they have come to terms with a conscious malevolence.

      So, with all due respect, when faced with opposition, you should all consider the third and fourth possibilities initially and then when you have conclusively ruled them out, you can move on to the first two possibilities. Just a suggestion that might put a upper bound on the number of times you embarrass yourself.

    6. Just Tired

      “But at some point he has to stop trying to convince himself that his colleagues are stupid and just accept the fact that they’re evil.”

      Stupid, evil…… Economists are like jukeboxes. Whoever puts in the coins, names the tune. Their positions in our universities are merely a front for the operators which provides a cover for their true sources of money and power. Fix that — fix the system.

      1. ECON

        Just Tired…good point. However I suggest that whoever signs your pay cheques for your employment, economists and otherwise, insist that you read from the same hymn book or look for another career. Think of the thousands of bankers and economists on Wall St who consciously understood the triple A rating from S&P on sub-prime mortgage loans were a FRAUD and cared to look the other way and keep the bonuses rolling in. In fact, if the mental midgets who were CEOs did not care, why should the troops put their head on the block.

        1. ambrit

          Dear ECON;
          Re. “should put their head on the chopping block…” Because when things start to get ugly, the CEOs throw the smaller guys to the wolves to save their own hides. Speaking up against fraud is merely good self preservatory strategy. Good for society as a whole too. “No man is an Island..” and all that.

  3. attempter

    Did he listen to his own speech before be gave that lame, more-of-the-same prescription at the end?

    Unlike the “progressive” elites to whom it’s been such a mystery, the people understood 1-4 perfectly well from the start, for example when they overwhelmingly opposed the TARP. (Did Galbraith oppose it?)

    As for 5-7, I think non-technocrats and non-elitists know that the answer to psychopathic technocracy isn’t more technocracy, “better technocracy”, better elites.

    1. HTML Reader

      I do not have a link at the moment, but the answer to your question is that, yes, Galbraith did oppose the TARP, and in fact went to D.C. to advise against it. I am relying on memory of what he has written elsewhere. If I find a link, I will post it.

        1. HTML Reader

          He did not call for the banks to be put into receivership in Sept. 2008. I am guessing that he did not at that time have any evidence of the banks’ fraud. By March of 2009, he was pointing to “loan tapes” that had been reviewed by Fitch, which had shown a high percentage of fraud (in 100% of 20 cases), and called for an audit of the banks’ to establish which ones were committing fraud.


          “If I’m right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn’t participate in the garbage-loan frenzy.

          This will not achieve the stated goal, of bringing on new lending, for reasons already explained at length. It’s all about not-measuring true asset quality at the big banks, permitting them to escape a clean audit, and therefore preserving them as institutions, while forcing the inevitable shrinkage of the financial sector to occur elsewhere. In short, the plan seems to me to be a very bad idea.”


    2. Blissex

      «Unlike the “progressive” elites to whom it’s been such a mystery, the people understood 1-4 perfectly well from the start, for example when they overwhelmingly opposed the TARP.»

      The congresspeople who voted for TARP were thumpingly re-elected by voters.

      Voters also endorsed by re-election of those responsible, including George W. Bush, policies like foreign invasions, widespread torture, wiretapping without review, and creating giant speculative credit bubbles.

      What USA voters want is simple:

      * Large asset price bubbles giving them tax free capital gains.

      * Any illusory or minuscule increase in safety at any cost to someone else.

  4. MyLessThanPrimeBeef

    The UN Anger Watch.

    Which is the angriest country in the world today?

    1. Greece
    2. Spain
    3. Japan
    4. Portugal
    5. Syria
    6. Egypt
    7. China
    8. USA
    9. Ireland

      1. ambrit

        Dear anon;
        There’s always been violence in Tottenham. Now, if you said that there had been rioting on Wimbledon Common…

        1. skippy

          I though at first glance, that an impromptu game of Ball had erupted.

          Skippy…some things never change…eh.

  5. F. Beard

    “A key virtue is that it puts finance at the center of economic analysis, analytically inseparable from what is sometimes called real economic activity, for the simple reason that capitalistic economies are run by banks. James Galbraith [bold added]

    And banks are a government backed and enforced counterfeiting cartel.

    Could it be that an economy based on theft is inherently unstable?

  6. Economics Considered

    Thanks for providing this to us Yves.

    This is one of the best treatises I have seen on the general state of economic theories, albeit that it is necessarily so short that you have to add your own depth to almost every sentence to give it a robustness and substance.

    But even here, the appropriately high level of abstraction of economic theorization nevertheless does tend to obscure some of the most fundamental underpinnings of the workings of economies.

    The most fundamental function of a monetary system and a financial system to support it is the channeling of excess current production into an investment for infrastructure and future additional production.

    For these systems to be fundamentally sound and sustainable, this channeling must be a meticulously careful one where the likelihood of the investment to be ‘repaid’ from future use and production must be a very very high percentage. Otherwise the excess current production is wasted and the effective overall collective ‘wealth’ is diminished rather than increased. So ‘loans’ of current excess production have to have very high probability of repayment – i.e. sound quality.

    A sound, responsible, and effectively functioning financial system must at its heart be demanding and tedious in its attention to the evaluation of the quality of ‘loans’. This fundamental principle is embodied in tales of past decades of flint-hearted bankers whose high requirements for ability to repay were daunting to borrowers – be they potential homeowners or potential business investments. With the admirable restructuring and straight-jacketing of the reformations of the 1930s, this fundamentalism was the strength and backbone of our country for five decades. It served us fabulously.

    The financial system must simply blow up and destroy wealth if too much of the loans made cannot be repaid. Another bane of the system is when the financial transactions of the economy operate in such a way as to create pricing of assets that are in excess of some related systemic value – in more common vernacular, the formation of asset bubbles. Ironically a production environment that is increased in its productivity to the point of creating a lot of excess production can be its own engine of economic instability.

    But far more deadly and destructive is a financial structure that allows for excess borrowing and debt which is used for speculation and the driving of ever more inflated asset values – as I perceive it the heart of the Minsky perspective. And these temptations for the country’s economic controllers to provide this money expansion is a temptation almost impossible to ignore. This is a deadly failure and one which we have just witnessed as Galbraith, Yves, and so many are trying to explain to us and have tried to warn us of for years.

    It is heartening to have someone like Galbraith lay bare in such concise terms the stark perversion and corruption of the financial system and structure and the venal excuses for economic ‘theory’ that support it.

    But how can it be possible to restructure the financial system ?? Despite Galbraith’s rather dry and academic list of the aspects that have to be addressed, the present plutocratic control of the country is never going to allow the slightest reform. As has been documented by Reinhart and Rogoff, reform doesn’t even begin to take place until a plutocracy has literally wrecked its economy. It’s exceedingly distressing to realize that this crisis, bad as it was and continues to be, hasn’t yet reached that point – and to contemplate how bad it is going to have to get to have a chance to reform. And even more disquieting to realize that even then there has to be some strong political leader AND an astute economic leader – anyone see either of those anywhere in sight ? Any analogs of Roosevelt and Pecora ?

    The ride ahead is a daunting one my fellow travelers – and likely a devastating one.

    1. mansoor h. khan

      “The most fundamental function of a monetary system and a financial system to support it is the channeling of excess current production into an investment for infrastructure and future additional production.”

      But production capacity is not the problem. We have tons of unused production capacity (low factory utilization worldwide and tons of idle, willing, experienced labor).

      The real issue in most discussions about money (MMT, debt, high powered money, fractional reserve money, gold standard, etc) is the question that is rarely fully discussed:

      What is the relationship of money to the production process (i.e., production of goods and services)?

      I believe this question needs to be answered fully and clearly and un-ambiguously by economics before “money” can be fully understood.

      I will take a stab at this question here:

      Just imagine in your mind entrepreneurs, factories and labor turning raw materials into finished goods (e.g., production of “loaves of bread”). How does currency relate to this picture. I would suggest to you that there are three primary relationships the production process has to currency.

      They are:

      1. By spending currency consumers generate demand. Demand is basically information (signals) which tells entrepreneurs what to produce and how much to produce (spending generates demand).

      2. Currency allows efficient trading of raw materials, labor and finished goods and services between businesses and between businesses and consumers (this is trading).

      3. Entrepreneurs and labor can and do work and produce real goods and services just for acquiring currency itself with the expectation of purchasing real goods and services later (this is savings).

      Item number one above (generation of demand) and two above (efficient trading) are not hard to understand. The last statement (savings) is where the confusion lies. Let us go back to the image of entrepreneurs, factories and labor turning raw materials into finished goods. Now with this image of production in mind what is savings?

      Savings is that portion of production (excess “loaves of bread” produced) which is not consumed or traded for other real goods and services immediately. Notice, when it comes to savings the acquirer of currency (the saver) does not care whether it is freshly printed by the government or whether someone who previously saved it is giving it to them in exchange for real goods and services.

      If these savings are not “used up” then we will have deflation. In this case deflation is a signal to producers to produce less (and thereby causing the economy to run below capacity).

      This is where the philosophical divide exists. Should the government step in and spend money (borrowed or printed) to “use up” the excess productive capacity of the economy for social good?

      The reverse is also true. If the economy heats up and private spending causes inflation should the government tax and destroy money and reign in inflation?

      It seems to me that we as a society which cherishes private management of economic resources have not settled on the above two questions.


      1. snthaoeu309h90

        “But production capacity is not the problem. We have tons of unused production capacity (low factory utilization worldwide and tons of idle, willing, experienced labor).”

        You are missing the point. Part of the fault lies with the lack of qualification in the expression to which you were responding on the part of the poster (Economics Considered), with respect to the precise nature of the production indicated. by the by, economics suffers from an impoverished terminological scheme relative to the phenomena under review and discussion.

        Amazingly gifted commentary in this thread btw, starting with Galbraith on down.
        I’d never been exposed to ‘Institutionalism’, but liking what I’ve read this afternoon in ebooks.

        Anyways, the point, by way of an example: Suppose I have ten factories sitting idle, each of which is capable of producing 1000 Ford Fiestas of the 1987 year model. There is no demand, but excess production capacity? No, of course not, it’s much more complex than that. Production, its nature and qualities, is one of the great unsolved problems of 21st century economics; in fact it may be one of the great *unposed* problems of 21st century economics. Eg, so much of what what went into US GDP expansion in the last decade turned out to be nothing of particular value–it would seem some production is better than other. How to qualify and quantify it? It would seem that understanding Production is of the gravest strategic importance, since it is the sine qua non of a collective entity’s relative power on the global stage. For policy makers, the misapprehension of the true conditions and contigent potentialities in the productive capacities of entities either foreign or domestic could prevent intelligent and informed policy. but i digress.

        Anyways, when speaking crudely of ‘increasing production’, or even more crudely, of ‘growth’, what we have in mind actually is a much more comprehensive and holistically engaging dynamic on the part of the given socio-economy. Germane expression: ‘retooling’. Minds are retooled by education, entire cultures are retooled by intellectual development disseminated through artistic mediums, factories are retooled with more advanced algorithms and machine tools, robots &c. Necessary elements here often fall under the rubric of ‘public good’, those resources and products whose value and profit are too difusely enjoyed for easy yoking to traditional financial instruments, (though a better breed of anarcho-capitalists are hopefully working on this). What Economics Considered asserted, among other things, is that the State (barring its dissolution under an ascendent anarcho-capitalist order) is responsible for acquiring and deploying capital in order to render the sufficient underlying healthful conditions for the private finance sector, equipped with more prosaic and traditional finance instruments, to be able to handle the capital allocation going to the private enterprise all of us good capitalists so know and love. This set of underlying conditions is huge importance; all of its elements could be grouped under the heading of a sufficiently expansive (not to say ‘totalising’) definition of ‘infrastructure’, encompassing physical networks of all scales and modes (railroads to parks), communications, legal, research, educational, etc…

        But yeah, everything I’ve written is academic in the worst way. We’re so fucked. I agree with so many I’ve read in the past couple of weeks here and on other sites. to the effect that the US is in late stages of being eaten from the inside by some kind of parasite/worm/alien kinda thing. It’s got the CNS took over and it’s just kinda eating it from the inside. If I was pre or post disposed to alchoholism I’d be in deep. It’s not fun to watch, especially when the eventual conflageration will continue to impose upon and maybe engulf people we care about.

        Late stage extractive process by an oligarchy/plutocracy. With the demotic element pretty heavy too, a masses weaned by cable television and monster trucking, Jerry and USAToday. Not pretty.

        However, I really like the quote ”it’s not necessary to hope in order to persevere.”

        Says a lot: there is always the project of regrouping and redeploying our forces, towards whatever ends we have in mind.

        How the hell can I write so much and I only set out to write down one tiny little point?

        1. mansoor h. khan


          Let me clarify. Even with all this massive fraud and waste and malinvestments (banker or otherwise). We have tremendous unused production capacity worldwide right now.

          Right now we need a massive jobs program and greatly expanded public assistance/unemployment insurance compensations/social security payouts to deal with the immediate social chaos. Then we can work on how to re-organize our financial system and possibly punish abusers without crashing the system that produces (still) so much stuff and has so much unused production capacity.


          1. skippy

            I agree with Economics Considered, especially with the archaic language and its roots. More importantly, as he denotes, economics does not exist with in a vacuum, first the planet must offer its self up to our activity’s. Seemingly one would consider the base before building upon it, especially as new empirical evidence is tabled and with out it being profit biased.

            Economists keep avoiding physics, why, this world is a dynamic system which has taken eons to stabilize, allow life. Production is a form of energy transfer, the need for jobs (non core survival) exacerbate this transfer exponentially, we are ill-informed to-date and flying blind. Yet all I hear are terms like underutilized capacity, innovation, wealth creation, GDP (war metric), financialization, privatization, as if they were incantations to fill humanity’s sails to a better place.

            Skippy…toxicity as Larry so aptly put it, should be shared, sounds like a great place, too me.

          2. mansoor h. khan

            Cheer-up a little bit and have hope. We probably have not yet reached “peak” creativity. We need to focus our creative energies on these issues.


          3. Susan the other

            I like your thinking Mansoor. And I loved Galbraith-the-younger’s essay. Thank you Yves. I feel like I just ate my spinach. Really, this essay made me feel stronger. Regarding the way forward: I believe we have reached (more or less) peak population and peak devastation of resources. We have clearly reached peak capitalism because that engine for growth is sputtering. What we have not reached is peak well-being. (I don’t mean frivolous, greedy lifestyle stuff – I mean the stuff we all need to be happy, healthy, well educated, and cooperative in a world so in need of clean-up and social adjustment.) We could probably produce massive amounts of well-being for the next century and not exceed demand. And even as the population falls back to a more sustainable level, we can make the production of well-being the new engine for a different kind of growth. It is all in the definition of growth. And yes, we do need to establish our rightful institutions.

          4. mansoor h. khan


            The biggest peak issue at hand is most likely “peak oil” and “Return On Energy Invested”. If so we need a JFK style “alternative energy fundamental research program” equivalent of the “space program” (just as massive) in order to direct our creative energies to find the right alternative energy source with an acceptable “Return On Energy Invested” in it.


          5. Susan the other

            We shouldn’t be discouraged by any of these peaks. Peak oil dictates that we must change. And we will. Even our noblest causes like agriculture, distribution, medical research, sustainable development, environmental cleanup, all require energy. I mean, if all else fails, even if we resort to primitive ideas we can go forward. We could always build a lot of giant squirrel wheels and produce electricity. Seriously. I don’t want us to get lost in a sea of defeat and woe.

          6. JTFaraday

            “Right now we need a massive jobs program and greatly expanded public assistance/unemployment insurance compensations/social security payouts to deal with the immediate social chaos.”

            Really? That’s all we need? I thought they had a good point about production being the unposed question of the 21st century.

            This comment, on the other hand, is more of the same substantiveless post-industrial financial Keynesian mantra we’ve been hearing since the stimulus bill was first proposed in 2008, and which a substantial part of the US public rejects out of hand as a “waste of money.”

            The truth is that Keynesianism is as failed an ideology as any of the economic schools at which its proponents typically take aim. It is failed because in all these years it failed to think through the implications of deindustrialization for its own policy prescriptions.

            Here is someone who is gesturing toward the missing piece, the piece that 99.5% of academic economists will never get regardless of their ideological proclivities, and you’re hitting us over the head with the rhetorical equivalent of Bam firing Van Jones, the “green jobs guy” from his electoral PR campaign, the second he got into office.

            “Even with all this massive fraud and waste and malinvestments (banker or otherwise). We have tremendous unused production capacity worldwide right now.”

            And heaven forfend someone should want the US to invest in the future with your “tremendous unused capacity” rather than using it to build more houses that someone else will just raze in 10 years.

            Sure, the involvement of the bloated and criminal finance sector was the really toxic part, but are you really going to try to tell me that the real estate and construction bubble was not Bush Keynesianism in a post-industrial context?

            I can hear Robert Reich right now–“We need infrastructure jobs, we just have all this ‘unused productive capacity’ to put to work!–Dig a hole and fill it back up again.”

            I’m tired of this. This needs to be probed and its advocates need to put up or shut up.

          7. Alex

            JTFaraday, you really ought to read the post before responding. Galbraith was very explicit about the departure from Keynesian principles over the past decade. If you really don’t have time to read his speech, search for “false keynesianism.”

          8. Maju

            Faraday: either you put people to dig and fill holes or you pay them for doing nothing. One way or another society (and than means the state for whatever it is still worth) must address the problem of unemployment.

            All the economy (except surely for the top tier speculators) is about working in something with social utility of some sort (production of use value) and getting ‘shinies’ (painted notes or whatever) for it in recognition (which you can exchange for some of that use value that society as a whole produces). When unemployment grows, people is deprived of social worth (job) and also of its ability to survive (and consume the production).

            So you either let them starve at the sidelines (but they won’t stay at the sidelines in most cases: they’ll become criminals or revolutionaries or both), or you give them useless jobs (digging holes) and the corresponding shinies or you just give them the shinies for nothing right away. People need to eat one way or another and Society must devise methods to make sure that happens at least in the vast majority of cases. Also, by doing it, it generates domestic demand that helps to keep the economy going.

            Alternatively you can divide jobs, reduce working hours, force the planned distribution of all tasks and salaries more or less equally etc. But that implies total socialism and not just Keynesian social-democracy.

          9. Skippy


            *Romanticism*, unsubstantiated *Belief* and *Fear* are the tools of ideologues. I see Prof Galbraith views as tool to rip off their cover, expose the problem for what it empirically is, the subversion of “””Rule of Law”””. None of what has occurred (fraud) was done in the name of sovereign or humanity, it was done in self interest writ large.

            Skippy…5 ish% of this planets population enjoys the currant system of which .001 ish% dictate course, with an eye to self interest (social distinction thingy), every thing is a potential resource (living or other wise), including the other 95% of humanity. Given past history, pray tell, how it will all end, minds on the money is my bet. As long as killing stuff is more profitable than preservation…there is only one out come…extinction as a sport.

          10. mansoor h. khan

            Skippy says:

            “Economists keep avoiding physics, why, this world is a dynamic system which has taken eons to stabilize, allow life.”

            That is because physics (i.e., science) has provided tremendous amount of new knowledge in the past 100 years which has caused human productivity to skyrocket. Most people (including myself)expect this trend to continue (god willing).


            Finite resources X Knowledge X Management Skill = Effective Utility of those finite resources


          11. Skippy

            Mr.Mansoor a late, but never the less, a welcome reply.

            Lets see if I can respond cogently with in the restraints this medium incurs.

            Firstly, observations have been made by humans far beyond the time line you suggest, human activity that supersedes the areas carrying capacity, these observations go back into our dim history (it is recognized in your religious teachings). Hence the need to wander (nomadic) or effect conquests of new lands, be under threat of conquest, for resources by some kind of force, unless they were geologically trapped (see easter island, deserts, or affected by seasonal weather in bad times). So saying that a hundred years of rapid consolidation, of observations, with an eye to modern empirical status, is a bit of a side step in my book.

            Secondly, as Yves points out in her book and I would like to expand, that economics started out as a metaphysical debate, centered around ownership and property (too include humans), with a heavy accent on ancestral power divined by beneficial deities, self accredited IMO.

            Thirdly, “Finite resources X Knowledge X Management Skill = Effective Utility of those finite resources”

            1. *Finite resources* is a misnomer in economics parlance as it does not delineate what other life may require it or the long term effects of its usage P/L down the road, increasing generational constraint (future options), unforeseen knock on effects.

            2. *Knowledge* is ambivalent, for one thing we learn, how much do we forget, throw away as it is no longer profitable any more (still figuring out if aliens / deity’s built the pyramids or not). Personally in my life time I’ve seen a degradation of hard won knowledge for cheep substitution (master craftsmen are a dying breed…sigh…functional artistry, hard fought for knowledge, all thrown into the dust bin for profits convenience[?]).

            3. * Management Skill* in more cases than not, it is a narcissistic exercise, brute force over actual team building, rise above the average person mental pedophilia, distinction by advancing oneself in spite their own humanity, see Yves old posts on this subject. Case in point, in the old days the factory floor was run by the one that one the fight, buck against buck thingy, company’s run like gladiatorial enterprises and not true leadership quality’s like sharing the pain, setting an example of self sacrifice without personal reward, working for the benefit of all involved, not looking down on those in your charge etc, etc…

            In ending, until economics can address the totality of everything we do, the after effects within say hundred years time line, with out short sighted profit denoted in electrons of price and not societal value (all life, we need each other to survive), most will only move forward bickering over old constructs of entitlement, until the universe applies its metrics….see fossil record.

            Skippy…your efforts are only restricted by ideology, see the physical universe and consider your thoughts…eh.

      2. mansoor h. khan

        Ok. That is where we differ.

        One vs. two. You believe (in a sense) that universe is “god”. Its laws are god (i.e., what is implied by the fossil record). I believe in two. Universe (the two) was created by the one god.

        The one (god) is mercy (infinite mercy). Which is better than justice. If he was just justice we would get what we deserve. Mercy means we can get much much more than what we deserve.

        All laws of the universe are enslaved to this one god and he can guide us to solve our problems.

        May the creator guide us through this upheaval.


        1. Maju

          It does not matter what you believe for outside this life. In this box, we have to abide by the rules of the box. Whatever comes after death, we will deal with then.

          1. mansoor h. khan

            don’t be silly…

            of course it matters. it guides human behavior right now in this box.

            therefore, knowledge of what is in the next box CAN impact what happens in this box..

          2. Maju

            Only if you believe in it. The same that someone who believes on, say, Friday 13 superstition, allows him/herself to be affected by it in real life. Sure: we cannot always control just by wishing the power of such ‘implanted’ beliefs but we can influence their power for sure with our reason and willpower.

            The problem anyhow is that, for you, what is imagined (proclaimed by some dead prophet or living priest) to happen outside REALITY affects you in the REAL THING: you allow the imaginary to influence you in REALITY. Instead I say, I’ll deal with the imaginary when I can perceive it. Even if there’s something akin to a “creator god”, it gave me my senses and mind for a reason: to live based on such information and processing power, and not on what is not found anywhere by my senses nor considered much probable by my reason.

            Earth calling Mansoor…! ;)

        2. mansoor h. khan

          skippy said,

          “true leadership quality’s like sharing the pain, setting an example of self sacrifice without personal reward, working for the benefit of all involved, not looking down on those in your charge etc, etc…”

          If an expectation of reward in heaven helps me to behave like you describe above (which you want people to do) why are you so ticked off with these beliefs so much?


          1. Skippy

            “If an expectation of reward in heaven helps me to behave like you describe above (which you want people to do) why are you so ticked off with these beliefs so much?”

            Once you start down the *Belief Road* you give your cognitive ability away, too someone else.

            Have a peek at: http://www.apologeticsindex.org/

            Now: http://www.wfial.org/index.cfm?fuseaction=archives.index

            Shezz when will it stop: http://www.godandscience.org/cults/

            Finally see: Mind control http://en.wikipedia.org/wiki/Cult

            Studies performed by those who believe that some religious groups do practice mind control have identified a number of key steps in coercive persuasion:[31][32]

            People are put in physical or emotionally distressing situations;
            Their problems are reduced to one simple explanation, which is repeatedly emphasized;
            They receive what seems to be unconditional love, acceptance, and attention from a charismatic leader or group;
            They get a new identity based on the group;
            They are subject to entrapment (isolation from friends, relatives and the mainstream culture) and their access to information is severely controlled

            Skippy…mansoor, I grew up in it and when old enough started asking questions of the inherent contradictions and hypocrisy. The answers were always the same, its how the devil works / gets into you or your lacking in faith, go pray for forgiveness. In all my worldly travels I have seen this process repeated, regardless the religion. Monotheism being the worst offender, as it puts man above everything else in the universe. Poor mental positioning, always contending with new observations, kinda like free markets ideology et al.

            My fight is with metaphysical ideology, as they have zero foundational equation, nothing that can be expressed out side their founders encounters. Strange that so many are controlled by those, that are the only observer, unrepeatable observations would seem to be a poor foundation to any thing. Let alone a construct by which to control populations…sigh.

          2. Skippy

            BTW the Dutch are at it again!


            It is part of the mainstream Protestant Church in the Netherlands (PKN), and the service is conventional enough, with hymns, readings from the Bible, and the Lord’s Prayer. But the message from Mr Hendrikse’s sermon seems bleak – “Make the most of life on earth, because it will probably be the only one you get”.

            “Personally I have no talent for believing in life after death,” Mr Hendrikse says. “No, for me our life, our task, is before death.”

            Nor does Klaas Hendrikse believe that God exists at all as a supernatural thing.
            Continue reading the main story
            “Start Quote

            God is not a being at all… it’s a word for experience, or human experience”

            Rev Klaas Hendrikse

            “When it happens, it happens down to earth, between you and me, between people, that’s where it can happen. God is not a being at all… it’s a word for experience, or human experience.”

            Mr Hendrikse describes the Bible’s account of Jesus’s life as a mythological story about a man who may never have existed, even if it is a valuable source of wisdom about how to lead a good life.

            Skippy….Final reformation[????], bad equations do work them self out in the end…eh.

          3. mansoor h. khan


            You are so upset because you can conceive of heaven on earth if people lived by good values you mentioned above. Yet people don’t. specially those in power.

            Keep searching. Keep thinking why would the creator (if he exists — in your case) would have set this place up this way? (Read Siddhartha by Herman Hesse).


          4. skippy

            “You are so upset because you can conceive of heaven on earth if people lived by good values”

            Projection is the ideologists main tool, it seeks to frame the equation in their favor.

            Skippy…If your beliefs are so important, you should be challenging them at every opportunity, believing because you were born into it, because most around you do, in spite of others that do not, to get though the day (desires lament), the longevity of a belief, etc, etc are not in any way a substantiation of it. Historically from the devices used to beguile the uninformed, too heavy handed decree (observers conflict with beliefs opines), another picture emerges.

            Go live with out every thing you know for 6 months, total isolation (no books, no hint of before, live off the land), then I would see whom you are, stripped of convenience.

          5. mansoor h. khan


            “Go live with out every thing you know for 6 months, total isolation (no books, no hint of before, live off the land), then I would see whom you are, stripped of convenience. ”

            No. No. I would never do that. I am much too weak for anything like that and I don’t want a test too harsh. That is why I am so scared of a possible coming “collapse” but I have not lost hope (and I pray) that things can change enough so we don’t turn mad max and that is why I blog (do my part the best I can!).


          6. skippy

            Mr. Khan,

            Regardless of our feelings, at the end, we judge our selves. Seemingly, to myself, others wish to obscure that choice. The why and what of that is something we yet have the wisdom to define, maybe its a case of the past, crashing like a wave on to the future, dragging the sands back IDK.

            Skippy…you pray and inform…I inform, give my back, my time, my humanity and with the caveat that with new information will change my position. All I would like is trust, if not that law, and if not that your back to mine.

    2. gizzard

      Ya know, I keep thinking the same thing.

      “The ride ahead is a daunting one my fellow travelers – and likely a devastating one.”

      And I keep wondering where the collapse moment is going to happen, when will it all blow up? Can anything stop it?

      We have sort of become inured to bad news it seems, everyone seems to be shrugging their shoulders and soldiering on. Life is too busy for it all to stop.

      I’m not sure these guys will be able to take it all down ( and I believe that is the goal of many of them) because they are prisoners within this rube goldberg machine they have contributed to.

      I heard a Faux News lady telling everyone to get into cash yesterday, that cash was the only safe play. Now obviously if people follow her advice, hardly anyone would get near all the cash they thought they had, banks would close and mayhem would soon follow. I dont see enough people following her advice, which is admittedly terrible advice if you value the markets for any commodity.

      Sports. They may in a strange perverse way end up being our savior. What do you think would happen if the first Saturday in Sept there were NO college football games because the athletic depts had run out of money?
      How about the first NFL Sunday? I’m sure soccer is in a similar position in much of Europe. If you keep those things going, those of us which watch, attend and rely on those things must be kept going too. Is it a sort of sports version of “Military Keynesianism”?

      I just have this odd feeling that as I watch this, what looks like impending train wreck that everyone is convinced is going to happen, that we are ALL just not at the right angle to see it clearly. And so we will miss the mark (thankfully). Yes lives have already been altered needlessly and more certainly will but the big moment that many are betting on (literally in many cases) is going to be very disappointing. Not because of some extend and pretend stuff or ponzi scheme machinations but simply because there is too much going on here and even those who are actively trying to rig the game…………. CANT.

      I could be wrong, but I HOPE I’m right.

      1. Praedor

        There is some interesting work by a cosmologist/physicist at the U of Colorado, Dr Andrew Hamilton, (see some cool videos and explanations at http://casa.colorado.edu/~ajsh/home.html) who focuses on the physics of black holes, particularly the physics INSIDE black holes (a place where very few physicists dare tread). One of the interesting points that for truly massive black holes, like the one at the center of the Milky Way, a hapless space traveler could approach the black hole and pass through the event horizon, the point of no return because escape velocity exceeds the speed of light, without actually noticing. One moment you are “fine” and fully able to escape but then suddenly you are hopelessly lost. Trapped. No escape. There was no signal, no sign that this happened, but happen it did.

        This is what I think of in relation to your concern. We are drifting into a black hole thinking the whole time that we can still do something, we can change course and escape doom, but…we have already passed through the event horizon and didn’t know it. Too late, the end is inevitable and will come no matter what we try to do now. One step too far…

  7. Maju

    I think that the core of the speech is this sentence:

    “Absolute distrust, leading to absolute liquidity preference is the incurable consequence, it seems to me, of financial fraud”.

    By the end of the speech Galbraith Jr. appeals for police and justice intervention, for the restoration of strong ethic governance. But I have the feeling that, while theoretically right, all such appeal is futile, like a moralist appealing against sin and hoping that Inquisition will solve it, instead of just being corrupted and become itself part of the problem.

    The problem is intrinsic to Capitalism: if money is all what matters and greed is the only “virtue”, then we are totally lost. And there’s no way to change these parameters within the “free market” paradigm, Keynes or not Keynes.

    In order to restore ethic government we have to put the whole economy under the rule of the people and not just “moralist economists”. This means an entirely new socio-political system that, nevertheless has an old, even wasted, name: Communism. Communism understood as originally intended, that is: as full control of the economy by a decentralized but coordinated true democracy (and not the total control of residual centralized ‘democracy’ by the private masters of the economy, banksters primarily).

    It is clearly a growingly obvious ethical dichotomy: the People of the Banskter Mafia? And it’s crystal clear which is the ethical, the good choice. Yet our authorities are adamant of choosing the immoral and socially destructive one: the interests of those mafia boys with an usury pretext.

    1. Cahal

      I have to say I find myself more and more sympathetic to views like yours. As the crisis goes on I can’t but feel it’s simply a crisis of Capitalism; not any particular paradigm. Keynesian may work in theory but it seems it will always be lobotomised then overthrown by profit seekers, as happened post WW2.

    2. jwbeene

      “The problem is intrinsic to Capitalism: if money is all what matters and greed is the only “virtue”, then we are totally lost. And there’s no way to change these parameters within the “free market” paradigm, Keynes or not Keynes.”

      It’s the two party systems and believes that one is better when it’s all about electing a moral representative.

      “The framers, therefore, in drafting our Constitution, always viewed government as an evil made necessary by the weakness and defects of human nature, and never extended it beyond that necessity.” George Howard Earle,Jr.

      1. Maju

        The two party system is or has become, like every other institution (justice courts, media, police, military, etc.), in part of the problem. Because they are corrupted: Capitalism is King Midas and everything it touches becomes gold-like and therefore not anymore human or otherwise practical.

        Both parties (in the USA or elsewhere) are corrupt: they serve the bribes and the (highly concentrated) media, which also serves the money. As result very few people by video-conference or maybe at some exclusive golf club, rule the world without being too apparent – the politicians being nothing but their middlemen.

    1. attempter

      What garbage. Yet another hack scribbling out the Obama-means-well-but-is-weak Big Lie.

      And unless the author is a complete idiot, then this

      Like most Americans, at this point, I have no idea what Barack Obama — and by extension the party he leads — believes on virtually any issue.

      is a flat out lie.

      Nothing could possibly be more clear than that Obama and the Democrats are corrupt and are corporatist ideologues who believe the purpose of civilization is to serve as an extraction mine and a waste dump for the ruch and big corporations. That explains 100% of the facts, no more, no less.

      1. Valissa

        Poor Drew Westen. He fell in love with his idealized Obama projection and now he’s confused. That’s is pretty pathetic for Mr PhD in psychology!

        When he says he has no idea what Obama believes, what he’s really saying is “I can’t let go of my projections and face reality.” This is the psychological dilemma all the remaining Obama supporters/excusers suffer from… denial combined with naivete.

        It is very clear what Obama stands for to anyone who is not caught up in either their love or hate for him.

  8. psychohistorian


    Woman, you are on fire! What a brilliant piece.

    My simplification of your detail on what is a commodity is that it has become “faith based” just like free markets, fiat currencies and the game is on.

    Another point about how Galbraith was treated harks back to the Aljazeera vid about where I think it Ryan told the interviewer that she was being RUDE.

    It gets more and more oxymoronic, doesn’t it?

    1. psychohistorian

      It is ALL about sharing and you should not be able to graduate from grade school without being one with the concept.


  9. Cahal

    Oh and on fraud: spot on. Here’s me arguing with Sumner (who else!?)

    Me: “You think no laws against fraud were not a reason there was massive fraud?”

    Sumner: ‘Wrong on both counts. There was no massive fraud behind the crisis, and there were was against fraud.’

    Me: “What? There is email/phone call evidence of Goldman Sachs
    talking about how they are ‘dumping shit’ (paraphrasing) on investors and then betting against them. That is fraud:

    1. Wrongful or criminal deception intended to result in financial or personal gain.”

    Economists – particularly freshwater ones – are simply blind to reality.

  10. John Merryman

    The system is rotten to the core.

    The first requirement is to understand why we are here. Three hundred years ago it made sense to base money on debt, because there were no other metrics to measure how much money the economy needed to grow. This creates a feedback loop, as more growth is needed to pay off the debt and more debt is needed to finance the growth. Now we need a system to encourage sustainability and not just growth.

    The reality is that money is a contract, not a commodity. Since the private banking system treats it as a commodity, they are encouraged to create as much demand, ie, debt, as possible. I think we not only need to go to a public banking system, with various local, state and federal levels of control, but accept that money itself is a form of public commons, a multiparty contract.

    This isn’t communism, where everything is public property. It’s understand that in the divide between public and private property, money does belong on the public side of the equation.

    Politics used to be private enterprise. In the entrepreneurial stage it was warlords, which stabilized into feudalism and then gentrified into monarchy. So long as these systems did more to preserve the societies they governed, than predated on them, they survived and still do in some places of the world. Eventually though, they proved to be inefficient and politics evolved into a public system. Today it is our financial circulatory system which has become more predatory than functional.

    The political central nervous system of society and the financial circulatory system can both be public, without being completely identical, as it has been in times past. In plants, they are the same system, but in higher order fauna, they are distinct.

    Another point is that a global economy needs strong local root structure, not this financial vacuum sucking all value out of everything. That means strong local public banks that take deposits and lend back into communities and use the profits to support those communities, thus making the regulatory burden as organic as possible.

    Also the Federal government doesn’t budget. Budgeting is to set priorities and spend for what is most necessary. Instead the system creates these enormous bills and adds on enough extras to bribe sufficient votes and the president can only pass or veto it in whole.

    If they really wanted to budget, they could break these bills into their various “line items” and have every legislator assign a percentage value to each item. Then put the bill back in order of preference and have the president draw the line at what could be afforded. This would still divide responsibility, with the legislature prioritizing and the president having final authority over total spending. There would be limited inclination to overspend, because the few items on the line would have less constituency than those asked to fund them.

  11. sleeper

    Finally, someone is willing to say that fraud plays an important part in economics.

    So is this the first sighting ?

    Or will this be an outlier which nwver received metion in the MSM ?

    Or perhaps it would be interesting if our government would prosecute tax fraud and/or accounting fraud designed to avoid taxes – I mean what effect would that have on the deficit ?

    And no mention of the role of “givebacks” (which are essentially money laundering}in the economy.

    1. K Ackermann

      This is the second time I’ve read this, and bravo again.

      Talk about an uphill climb, though; when you can’t even get a fellow economist on board for civil talk on the problem of fraud…

      Can you believe a person with so much power… the head of the Fed, Alan Greenspan… held a view that fraud was not important…

      The same could be said about DOJ, but that’s a reactive agency. The Fed is in a position to actively cultivate fraud.

  12. Tom Key

    The administration set up a Consumer Protection Agency empowered to prosecute criminal predators in the financial industry. The financial industry lobby blocked the appointment of a strong prosecutor, Elizabeth Warren (who is also, by the way, an accomplished academic economist). Hence, the important work of prosecuting the criminals has been delayed.

    We need to NAME the elected officials who blocked her nomination, and who continue to obstacle the criminal prosecution of the predators.

    1. aet

      Agreed – crimes alleged, but no perps?
      Who are the actual suspects?

      Mortgages are an equitable obligation: securitization is a legal process.
      Equity and law differ ; those who ‘oked” securitization of the equitable obligations contained in any mortgage were illiterate as to the nature of obligations and their species under our laws.
      fraud? maybe – but incompetence, certainly.

    2. Housing Wired

      There wasn’t a vote, Obama didn’t want Warren. Besides, actions that benefit consumers need to be taken by the FBI – see excellent piece above.
      (Shelby, Cantor, McConnell , Boner, et al, Obama – same team)

  13. financial matters

    Excellent treatise! No real sugar coating here. Strong emphasis on the pervasive fraud and criminogenic behavior that got us here. Nice emphasis on how the computer age and technology added new levels of complexity to further muddy the waters in favor of the financial sector. I especially like his suggestion “”Post Keynesian Economists for a More Effective FBI, I think is a splinter organization I would be happy to sponsor and solicit your membership in.””

    Also I think these remarks are strong statements for a complete rethinking of the status quo…

    “”we are at the end of the illusion of a market place in the financial sphere.”” “”It would be pathetic if it were not so dangerous”” “”Third, a full analysis of the criminal activity that destroyed the banking sector, including its technological foundation, so as to quell the illusion that these markets can effectively be restored to anything like their form of 4 or 5 years ago.””

  14. Robert Asher

    35 years ago George Lichty published a wonderful cartoon, which I pasted on my office door for 30 years.(A violation of University rules). It showed two rotund men conversing. One said to the other: “What’s the use of the law of supply and demand if its never enforced.” Historians of feudalism tell us that the most important privilege of the nobility was their immunity to most taxes and to judicial process. Today we have a recrudescence of that kind of feudalism. Not a single indictment of anyone involved in the fraud of collateralized debt and subprime mortgages.

    1. grayslady

      Thank you for introducing me to the word “recrudescence”:

      a return of something after a period of abatement

      It’s a highly descriptive word for what we see happening in so many areas.

  15. pj

    “Why not? Why is this one of the great taboo topics of our modern economic history? Well, personal complicity, frankly, plays a role among present and former government officials, regulators, consultants and the academics who advised them and those who either played the markets or took fees from those who did.”

    Let me repeat this once again until it gets through the head: you don’t get to the top without a willingness to skirt the “law”, whatever the law may be.

    It should not surprise anyone that our so-called “leadership” are, in fact, criminals. They simply are. I’m sick to death of hearing people say, “Oh, but they got lucky” or “Oh, but they worked hard and had a great idea!”, IT IS ALL BULL. COMPLETE BULL.

    The way to #winning is by stooping as low as you can go.

    And that, my friends, is the root of the real problem. We actually idolize our most successful criminals – and imprison our least successful criminals.

    Fight or die. Roman entertainment writ large.

    1. Maju

      Sadly enough this tendency is more and more widespread everywhere: are you willing to be my accomplice?, you are promoted; are you honest and incorruptible? you are kicked out or at best tolerated in the lower ranks. Nothing is so explicit of course but explicit enough to notice sooner or later, if you happen to walk by such halls of power accidentally.

  16. The lives of others

    I am not surprised that nobody listens to James Galbraith about fraud. Nobody listens to anybody anymore. JG may put it eloquently, but my relatives in Greece make the same points every time I call them. They are talking about having to pay for the fraud and corruption of the banks and their accomplishes, and I tell them it is the same here in US.
    We conclude that there is nowhere to escape. Fraud, corruption and greed rule worldwide.
    It is elementary, my dear.

  17. Mike C.

    Being able to balance a checkbook is all that is required of gvmt.

    Neo Keynsian economics is simply a bunch of smart ass ivy leaguers trying to usurp the basic laws of accounting and common sense.

    Ie “we can always live beyond our means and print and inflate blah blah blah”

    The saddest part is that will all have to deal with the gold nutters now that this system is collapsing.

    I’d rther see the the firemen in the Nextel ad run the damned budget than the likes of summers and geithner.

    You can burn those macro books for a source of heat when TSHTF though so there’s that…

    1. skippy

      “Being able to balance a checkbook is all that is required of gvmt” Mike C.

      Your government check book was used to pay off gambling debts, those that played with your monies are made hole, you got a cheep promotional hat and T-shirt for your troubles and the bill.

      Skippy…living the dream…eh…

  18. dearieme

    Diagnosis – vigourous and acute; fascinating stuff.
    Prescription – feeble.

    P.S. Who says that Americans don’t do dry humour –
    “…the dominant mortgage originator in the United States, Ameriquest, the office chiefs fed their sales staff crystal methamphetamine to keep them going…. the founder of Ameriquest ended his career as the United States Ambassador to the Netherlands.”

  19. Philip Pilkington

    Eh… wow. I think Galbraith just summed up the moment better than perhaps anyone else has.

    You’ve got to also love his restrained optimism.

    But above all — to plug a key point — Galbraith shows that while he recognises clearly the pure criminality that was undoubtedly at work in the present crisis people need to set their scopes beyond that.

    Understanding sectoral balances and financial instability is not a case of fiddling with intellectual nonsense while Rome burns. Instead its absolutely imperative that such ideas are disseminated among the political and opinion forming classes. They’re just as important as having people recognise the new respectable criminals that govern large portions of our modern economies — which, I think, most people already do.

  20. Paul Tioxon

    Black and Galbraith are providing a program of leadership that can be implemented provided the political battles are won. While I have had some small problems comprehending the fine nuances of what Galbraith laid out as a conceptual action plan, it needs to be expressed in a digestable format for state legislatures, municipal and other governments, as well as the Federal Government. A political action plan of bills that can be understood in their costs and consequences and separately or together, can be passed to erect a whole system of working economic policy.

    I would urge the readers here, at the very least to write, on a continuing basis, letters to the local editor of newspapers and other local media outlets, to debunk the austerity panic and support the ideas Galbraith presents here. There are a lot of people who get what he is saying due to the flood of books coming out about the on going banking crisis. It is clear to people that things have not been addressed, and power grabs on going on, with issues that have nothing to do with their lives and the problems that they see. No body is complaining about SSI, Medicare etc, but that seems the fetish of the right wing out of DC. No one is worried that union bosses have run amok like gangster crime bosses, but that is what right wing republican governors in Wisconsin and NJ seem to most fearful of.

    Galbraith hopes to operate without hope, which is quite pragmatic, because we have to act as if there is a purpose to our choices, or remain cynical, paralyzed and get into a pissing contest about who is the most wretched, Obama or Boehner, which party is the most in bed with wall st, etc. The post Obama period has to be planned for and discussed, because after his second term, he will leave office, and the true test will, as always, be getting the right policies executed, not the right personalities correctly described to our personal satisfaction. I would use politicians as far as they can carry out even a crumb of what Galbraith is proposing, as part of process of getting the right policies in place. It is clear the crisis is deepening and bigger blowups are ahead. More discussion of action plans needs to go on and be spread, to counter the right wing think tanks of the Mercatus Center, AEI, Cato and others, who lead the reactionary destruction of the New Deal, the Great Society and what little is left of the left in America.

    1. Mike C.

      I see no talk of reigning in austerity here. The power to spend is dependent upon the power to tax which is dependent upon real economic growth. You want to spend money we don’t have, and may never have.

      This is precisely why we re in this predicament and galbraith characterizes this clearly. The only place purchasing power can be had is from the top. But we won’t get much from them. We missed our chance unless we wasn’t to go so far as to retroactively tax them.

      1. Maju

        The power to spend is dependent, at least to a large extent, on the power to print money, and the power to print and manage money is dependent on the power to create and enforce laws. Political power is the source of all power, including economic one. The only thing above political power is the social consensus on which it lays and that is why democracy has such a high standing.

        The relative value of that money is indeed dependent on the real economy but the state does not even need to tax at all, as long as it can administer and print money. However it is good to tax heavily the rich (notably when they do not reinvest) in order to keep their power at bay and to create “black holes” where the life of money ends (buy gold and pay 300% tax, for example, that’s a good way to create a final sink for the imperfect money cycle, which begins in the state and ends in the state always). It is also good to tax those activities that are harmful for society or nature (yet legal) in order to make them less attractive. But it’s bad to tax the normal activities of the people like buying basic food, because that harms the economy without any benefit.

        Some of the tax policies we have are actually archaisms from a time when gold and silver were money. Today it’s absurd to establish so many taxes – but it may be seen as a devious stratagem to rob from the commoners to give to the powerful and that way reinforce the pyramid of power, which has been and is still being eroded by the dare of those below in the social scale, of those who claim exactly the same power as the Rockefellers and Murdochs of Earth.

        That is how taxing really works. The state does not need to tax but keeps doing it in order to redistribute upwards, against the working class.

        1. mansoor h. khan


          You do not need to tax the rich. You need to inspire them to not spend most of what they create. They can leave their money in the banking system (yes a full reserve state owned and operated banking system). Their bank accounts will act as “score keeping” which will motivate them and others to create more.

          And the state can then spend for social good without creating inflation.


          1. Deus-DJ

            Agha Mansoor,

            Keeping score without spending their money is a bit of a contradiction. The fact of the matter is that the money needs to be taxed so they have incentive to reinvest that money to make more money…but it should be clear from the outset to everyone in society that the reason they are taxed in a country sovereign in their own currency is not for raising revenue, but for regulating aggregate demand and to prevent instability from arising from stability(minsky). In this fashion it would be acceptable to everyone in society that their money is not for purposes of redistribution(though actually it is, because it prevents the rich from making the economy unstable).

        2. hermanas

          I quit cig’s in 1960 when they went from 20 cents to 25 a pack, so taxing gold like tobacco sounds good to me;
          “buy gold and pay 300% tax, for example,…It is also good to tax those activities that are harmful for society or nature (yet legal…”
          Maybe tax gold proportional to tobacco.

          1. mansoor h. khan


            We don’t need to worry about Minsky instability in a full reserve banking system (i.e.,no leverage) model. Only thing we need to worry about is deflation and inflation. Which can be dealt via fiscal stimuluses / taxation / reduction of gov spending.


  21. Jim E.

    Like petty criminals that smash the window of a car to steal a stereo and sell it for $15, leaving behind a $2,500 in damages to the car..Can’t we just give the crooks their $15 and get them to skip the crime?

  22. Namazu

    Of course, much of what Galbraith says is wrong is provably wrong, and his crooks are guilty–legally, morally, and intellectually. The problem is that Galbraith, Krugman and the other hyper-neo-Keynesians have set up a counter-factual in which they can only be wrong only once, but since they’ll be wrong last, they get a free pass in the meantime. When the nation can no longer service its debt and has to inflate its way out on the backs of the poor and the middle class, they’ll be comfortably retired with a good slug of inflation protection in their 403-B’s. Only Krugman has tried to torture the numbers to paint a rosy growth scenario, but his assumptions have already proven to be rubbish, and now he just waves his hands like everyone else. There’s always a new fraud around the corner.

  23. Valissa

    Great post, and many great comments… thanks to all for an enjoying brunch time read!

    It’s good to see more & more acknowledgment of looting and fraud as key aspects of the current economic system. Like some other commenters I don’t think anything is going to change institutionally until this trend has run it’s course… by that I mean crashed and burned so badly that something new must be built on it’s ashes. Power does not give up it’s hold without a fight.

    On a whim I searched this page for the word ‘kleptocracy’ and also the word ‘lobbyist’ and found neither. The lobbyist influence on the politicians and their spending via complex, long and virtually unreadable bills is a huge deal and needs to be addressed somehow in economic theory, even if indirectly.

  24. Cedric Regula

    Personally, I don’t think anything is gonna happen until Obama contacts and gets word back from our Overlords in their command center buried deep below Roswell, New Mexico.

    If they announce “We will eat the humans now!”, then it is all over and we will all be transported to that Great Big Alien BBQ Pit Somewhere in the Sky.

    If they say “You are doing an adequate job, Mr. Subservient. Preserve the status quo and grow the humans. Use huge amounts of fiscal stimulus. That works and what grandchildren? Forget the monetary policy stuff. That’s the most idiotic idea we have ever seen on any of our feed planets. Live for now and prosper. We will have some other planet for lunch today.”, then we can go back to our daily routine of watching one crisis unfold after another.

  25. Ben Abbott

    Is it that financial markets aren’t rational or is it that rational financial markets aren’t to be trusted?

    1. Praedor

      The former. More to the point, NO market is “rational”. That is nonsensical conceit of “economists”, a field made up of nonsense, personal preference, and “math” worked backwards from the desired answer so as to make it all seem rigorous.

      Markets are not rational. Ever.

  26. Schofield

    mansoor h. khan. Your questions are good ones best answered by comparing what happens in a society without currency (money) to one that has. In the former tasks get done by command, mostly mutual sometimes coercive. In the latter commands are embedded in the currency (money). In a recession the number of commands issued are reduced because the volume of currency (money) in circulation is reduced. We have only two sources for currency (money) creation in our economies government and private banks. Who do you need to turn to increase currency (money) for the number of tasks required when the private banks are too scared to invest?

    1. mansoor h. khan


      As I explained above once we agree on and understand how money (currency) relates to the production process we can then use it better.

      Yes, you are correct currency when spent directs resources.


  27. Hugh

    It’s not just fraud. It is systemic fraud, that is kleptocracy. And it has consequences that go far beyond the housing bubble and meltdown. It is about massive wealth inequality and the death of the middle class. It is about the subversion and corruption of our political institutions, and our public institutions generally through class war.

    I am stunned at how unreceptive Galbraith and other liberal economists are to these ideas, how they continue to fail to incorporate them into theories, and how they mention them only sporadically or not at all.

    1. So Cal 7


      I do believe you have hit on a key theme and one that like Galbraith, I find interesting that few seem to weigh appropriately.

      That is yes, the framers knew that human defect, weakness necessitated a republic government and many knew it because they themselves rightly assesed their own condition. The hope or wager was – and still should be – that an individual’s “wealth” was not denominated in gold or dollars, but that those were outward growths of a man or woman dedicated to certain principles that would support freedom rooted in – I durst not say – Christian and Judeo ethics.

      They were saying, as I read them, that if enough of the public would govern themselves with a certain minimum degree of virtue, then America had a shot to make a run at being great in many ways, not just economically, although that is a major factor, obviously.

      In my view, the ‘minimum virtue’ has fallen out of balance precipitously. In law, in business/economics, in government and we are paying the price for it. It’s really a simple equation.

      What was wrong, has become right and what was right has become wrong in too many key areas of our society. Wealth itself is been turned on its head. Who here would regard Angelo Mozilo as a truly wealthy man? I don’t. He may have physical comfort and security, but he also leaves himself (and heirs) a travesty as a legacy. This is just one example and there are unfortunately far too many more to enumerate.

      With law and lawyers, it is rarely any more about an equitible result. Its all about the “Win.” Same for financial operations, same for a lot of corporations. What would have been abhorrent and unethical 30, 50 years ago, not passes for the standard.

      In my view, this country will not radically change unless the people do and demand that their leaders do as well. Its never going to be nirvana, but it can get back to a better, more equitable place and Government (particularly as currently constituted) cannot take us there.

  28. Schofield

    jwbeene says:

    “The framers, therefore, in drafting our Constitution, always viewed government as an evil made necessary by the weakness and defects of human nature, and never extended it beyond that necessity.” George Howard Earle,Jr.

    And that really was the problem. They never saw fit to extend democratic human goverance into the private enterprise because the majority of the framers were doing just fine exploiting their workers or slaves. So why take heed of the weakness and defects of human nature at home. Just carry on with the fine old Brit tradition of feudalism wherever you could.

    1. jwbeene

      Is it not greed that causes or exposes human failings; for which we need that evil government to act.

  29. JEHR

    Thank you so much for this post. It makes things so much clearer. Now I wonder what will happen when the steps are not taken. It will be “darkness at noon.”

  30. Aaron Krowne

    Galbraith is certainly right about fraud but the way he gives Keynesianism a pass (instead of rightfully condemning it as an active participant in the free-for-all) is laughable.

    The only ones warning of the catastrophe were Austrians, and they were (of course) completely marginalized.

    What WAS the economic management regime that existed prior to the collapse (and still exists today)? It was an opportunistic blend of Keynesianism and Chicago-school monetarism, consisting of the most advantageous selections from each philosophy — from the perspective of those in government (coincidentally the LEAST advantageous for the people).

    Both were structurally blind and deaf to fraud, as putting the brakes on the growing epidemic of financial fraud would interrupt the flow of campaign funding and other benefits to those in positions of regulatory power, and even worse (to the Keynesians), slow down (if not halt) the expansion of macroeconomic aggregates. What was called “free market policies”, in the parlance of the day, was actually basic regulatory neglect, if not capture — certainly not “free” for those faced with competing with entrenched financial or industrial institutions, or consumers who became their predatory “marks”.

    Only Austrianism, with its focus on the concept of malinvestment, recognition of credit bubbles, and doubt in the utility of econometrics, provided a critical lense through which to understand and diagnose the growing bubble and looming collapse.

    Incidentally, Minsky shares more in common with this analytical framework than Keynes, essentially codifying credit bubble & financial panic dynamics explained earlier by von Mises in more general terms.

    1. Foppe

      Oh please. Neither the Austrians, nor Minsky was ‘first’ in realizing that capitalism and fraud and malinvestment go hand in hand.. have you heard of this thing called “the internal contradictions of capital accumulation”?

    2. F. Beard

      Many (most?) of the Austrians believe in a government enforced gold standard. They thus manage to be fascist and primitive at the same time.

      1. Maju

        Great comment! Made me laugh, though I first thought of Hitler, Kissinger and Schwarzenegger, who happen to share the biographic detail of being born in Austria (and being somewhat fascist and primitive at the same time). Only then I realized you meant the economist school. XD

        “Government enforced gold standard” sounds a bit oxymoronic (with emphasis in “moronic”) anyhow, right? If it’s gold standard it’s generally believed to be “natural”, not “government enforced”.

        The people who extract gold in places like Africa anyhow know of no “gold standard”: they are usually paid ‘peanuts’ for their hard-earned gold, which is not any better resource than growing real peanuts or coffee. So what’s all the fuzz about that shiny thing if people cannot even get a decent price for it?

        1. F. Beard

          If it’s gold standard it’s generally believed to be “natural”, not “government enforced”. Maju

          But that is mistaken thinking. In modern societies, it has been government acceptance of gold for taxes that has made gold money. But that same mechanism, acceptance for taxes, would work for anything including dog poop. :)

          1. Maju

            Not exactly, at least it’d have to be nicely decorated and stamped ‘dog poop’: there is powerful magic (marketing might) in the value of money: making everybody believe and agree that something is valuable requires a proper vessel, able to inspire some emotions or at the very least not to directly inspire disgust.

            But otherwise I think we agree: the source of the power of money is the state and society. But society is the true source of the power of the state, so in the end it all emanates from mere social consensus. Another thing is how this consensus is manipulated (and we all do that, but most do without control, intent or focus). It is in any case in the collective mind, in society, where all begins and ends: money, state and everything but what we call Nature, which is a higher power.

    3. Cahal

      Again: Austrians predict crashes in the same way a broken clock is right twice a day. This has been the case forever, dating back to Mises in 1929:

      “From 1924, every Wednesday afternoon as [Mises and I] walked through the passage for pedestrians he said: ‘That will be a big smash.’”

      I believe there was 1 Austrian ‘Dr. Doom’, who predicted it with any sort of accuracy. On the other hand, plenty of Minskyish Keynesians predicted it with a large degree of accuracy:


      Unfortunately for Austrians, fiat currency and Central Banks actually have a far, far better record than Gold Standards and no Central Banks. 50% of the 19th century, for instance, was spent in recession or depression, with slumps lasting 1-5 years. Your school also fails to explain many individual recessions, like the Melbourne Land Crisis of 1871.

      Austrianism is marginalised because it was obliterated in the 1930s by Keynes & his followers. It holds that people can predict the future, it holds that there is a ‘natural’ rate of interest (something even Bob Murphy has recently conceded isn’t true), and it holds money is neutral or that ‘Say’s Law holds’, a concept which was abandoned by the man who bears its name in 1829s.

      Basically: you’re cranks, not geniuses:




      Happy reading!

  31. Francois T

    Systemic fraud kills confidence, drive the real economy underground, subvert the rule of law and destroys the social fabric.

    It also undermine the legitimacy of institutions; without said legitimacy, institutions crumble. If there is ONE lesson the Theory of Complexity teaches us is that the crumbling is sudden, violent and impossible to anticipate with any precision.

    As far as I can tell, our politicians are either fine with that, or blithely ignoring the problem altogether.

    I am starting the think that we missed the historic opportunity to remedy the most egregious problems. As Prof. Drew Westen so eloquently wrote:

    When Barack Obama stepped into the Oval Office, he stepped into a cycle of American history, best exemplified by F.D.R. and his distant cousin, Teddy. After a great technological revolution or a major economic transition, as when America changed from a nation of farmers to an urban industrial one, there is often a period of great concentration of wealth, and with it, a concentration of power in the wealthy. That’s what we saw in 1928, and that’s what we see today. At some point that power is exercised so injudiciously, and the lives of so many become so unbearable, that a period of reform ensues — and a charismatic reformer emerges to lead that renewal. In that sense, Teddy Roosevelt started the cycle of reform his cousin picked up 30 years later, as he began efforts to bust the trusts and regulate the railroads, exercise federal power over the banks and the nation’s food supply, and protect America’s land and wildlife, creating the modern environmental movement.

    Those were the shoes — that was the historic role — that Americans elected Barack Obama to fill. The president is fond of referring to “the arc of history,” paraphrasing the Rev. Dr. Martin Luther King Jr.’s famous statement that “the arc of the moral universe is long, but it bends toward justice.” But with his deep-seated aversion to conflict and his profound failure to understand bully dynamics — in which conciliation is always the wrong course of action, because bullies perceive it as weakness and just punch harder the next time — he has broken that arc and has likely bent it backward for at least a generation.

    When Dr. King spoke of the great arc bending toward justice, he did not mean that we should wait for it to bend. He exhorted others to put their full weight behind it, and he gave his life speaking with a voice that cut through the blistering force of water cannons and the gnashing teeth of police dogs. He preached the gospel of nonviolence, but he knew that whether a bully hid behind a club or a poll tax, the only effective response was to face the bully down, and to make the bully show his true and repugnant face in public.

    IN contrast, when faced with the greatest economic crisis, the greatest levels of economic inequality, and the greatest levels of corporate influence on politics since the Depression, Barack Obama stared into the eyes of history and chose to avert his gaze. Instead of indicting the people whose recklessness wrecked the economy, he put them in charge of it. He never explained that decision to the public — a failure in storytelling as extraordinary as the failure in judgment behind it.

    An extraordinary failure we shall pay for a long time to come, unless events start to force the hand of the masses…and that would mean hell on earth is here.

    1. Doug Terpstra

      Perhaps one day we’ll know whether Obama is really a weak-kneed eunuch, Wall Street’s useful idiot, and the MIC’s fool, or in fact a fully complicit war criminal, great deceiver, poison ivy league liar and thief.

      Being slow to anger and slow to judgment is a virtue, to a point, but I can’t imagine how anyone at this date, including Galbraith, can possibly discount willful and deliberate malice and venality. If through internal collapse or revolt, the PTB ever lose their total grip on power, I expect terrible retribution. I personally hope to live long enough to see Obama and Bush at the Hague and behind bars one day for their crimes. That would be a more merciful outcome than they deserve.

      1. Aquifer

        reminds me of a saying one of my HS teachers had pasted above a blackboard – “Patience is a virtue, but it never helped a rooster lay an egg” …..

  32. barrisj

    Two years ago the Seattle Times ran a series of articles documenting how Kerry Killinger and his henchman ran a profitable bank, WAMU, into bankruptcy by utterly reckless if not criminal behaviour. On Friday, Obama’s DOJ announced that all criminal investigations of WAMU executives’ conduct leading up to its collapse would be terminated, since “… the evidence does not meet the exacting standards for criminal charges in connection with the bank’s failure…”. Which elegantly sums up the entire failure of the so-called “justice” system to bring malefactors to the dock: financial crimes simply don’t exist on a systemic level. Sure, bring the hammer down on “Fabulous” Fabrice Tourre, and let the rest of the predatory and felonious Goldman crowd off scot-free. Such is how “the system” operates today, and good luck in changing this culture.

  33. rps

    A pleasure to read the article and comments. As we dissect economic cause and effect, I believe the primary trigger to economic disasters are unrestrained human behaviors. Laws are the intervention of anti-societal behaviors that impact the well-being of the collective (societies), and the continuity of the species.

    I once read, “the most important lesson you can teach your child is the word “No”. Through example and instruction, the child learns about cognitive choices and consequences. Parents that use No appropriately with a prescribed set of disciplinary actions and/or recompense of actions, have given their child one of the most important tools of life; self discipline and courage to stand by their actions and words. Of course, Sharing as a learned response is another vital tool to ensure equitably distribution of resources to promote survival and evolution of the collective versus societal extinction.

    In pondering the anti-social behaviors of the Jamie Dimon’s, Lloyd Blankfein’s, and Boehner’s of the world, the question is; are they societal failures due an unregulated, uninstructed, selfish, and self-absorbed childhood? Or is it a genetic defect?

  34. Mille

    Thanks for posting Galbraith piece.

    Elizabeth Warren for President may not be too off an idea.

    1. Sufferin' Succotash

      On the contrary, it might be just what the doctor ordered; if the national debate over economic policy is to be nudged leftwards a start has to be made somewhere. The only question is: should Warren primary Obama or launch an independent campaign? I tend to agree with Yves that Warren for Senate is not a hot idea; she needs to get to a national audience.

  35. ECON

    To Susan who initiated a good point, America neither has the military to rule the world nor the understanding that they cannot with approx 5 % of world population continue to use more than 30% of world natural resources. The emerging nations who claim for same standard of depletion will only be satisfied if there are 9 Earth planets ! There is only one! And science is not the answer. Humans are ravaging the planet for resources.

  36. Deja-Vu

    Prof. Galbraith wrote:

    “Just because you can call a set of such contracts by a name, “collateralized debt obligation” or “credit default swap”, and just because you can create something — you may even be able to create something called an exchange to trade them on — does not make them into commodities with a meaningful market price.”

    This is quite interesting and preceptive. I remember in 1985 walking through Citibank to an IT interview and seeing a large sign that read, “Capital Markets” over a big double door, that led, I guess to a trading floor. And I thought at the time, ‘this is crazy, you can’t have markets’ for that purpose. Markets are for commodities as Galbraith says, not for exotic derivatives. It’s what I think is called a ‘category mistake’ in philosophy.
    Anyway, very interesting.

  37. Oscar Omaro

    Politicians interfering with the justice system make it all the worse. In Florida, the Attorney General inexplicably fired two prosecutors who were collecting evidence of legal malpractice in the state’s foreclosure mills.

    This of course illuminates only part of the problem (specifically the tail-end of the mortgage meltdown).

    The larger fraud was committed years earlier. In most cases, the loans themselves were never actually transferred to the pools. A single barrel of oil thus became more valuable than a half $ million mortgage.

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