Bill Black: Embedded Examiners always married the Natives, but now their Bosses Do Hook Ups

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

Jessica Silver-Greenberg and Ben Protess have written an extraordinarily important column for the New York Times about embedded examiners at JPMorgan.

Embedded examiners’ are federal regulators whose normal work station is a desk at the bank.  We only embed examiners for systemically dangerous institutions (SDIs) – banks so large that they pose a systemic risk to global economy.

Embedded examiners do not work.  They get too close to the bank officers and employees.  In the regulatory ranks we called this “marrying the natives.”  Nothing works with SDIs – they are too big to manage, too big to fail, and too big to regulate.  A conventional bank examination, scaled up to size to fit an SDI the size of JPMorgan would have 500 examiners and take 18 months to “complete.”  (Obviously, when it takes that long to complete an examination it is impossible to “complete” an examination in any meaningful sense – by the time you’ve spent 18 months examining an SDI it can be a radically different bank.)  One cannot conduct an effective conventional bank examination of even a medium-sized bank on a “real time” basis because of the amount of new information pouring in every minute.  Conventional examinations examine a bank’s records and operations “as of” some date (typically the last quarter-end for which reports have been filed).  Embedding examiners is an effort at achieving an “early warning” system.  It has one virtue – it indicates that some senior regulator(s) recognized that they cannot rely on the bank’s own reports to determine whether it is steering toward trouble.

In fairness, twenty-five years ago the proponents of embedding recognize the severity of the “marrying the natives” problem.  They simply viewed embedding as the least bad manner of attempting the impossible – effectively regulating SDIs.  Here is the key passage of the NYT column.

Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded in the nation’s largest bank. They are typically assigned to the departments undertaking the greatest risks, like the structured products trading desk. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in the unit’s offices in London or New York, according to current and former regulators who spoke only on condition of anonymity.

Senior JPMorgan executives assured the bank’s watchdogs after the financial crisis that the chief investment office, with hundreds of billions in investments, was not taking risks that would be a cause for concern, people briefed on the matter said. Just weeks before the trading losses became public, bank officials also dismissed the worry of a senior New York Fed examiner about the mounting size of the bets, according to current Fed officials.

The authors of the article frame the issue as whether Jamie Dimon’s role as Director of the Federal Reserve Bank of New York poses a conflict of interest and could have led to the regulatory failure to place any examiners in the chief investment office (CIO).  The CIO appears to be the largest de facto hedge fund in the world.  (Note: “hedge fund” is a deliberately misleading term.  Entities called hedge funds typically speculate rather than hedge.  When I call the CIO a “hedge fund” I mean that it largely speculates and disingenuously calls its bets “hedges.”)

I have often expressed my view that Congress answered the policy question about such conflicts of interest with the passage of FIRREA in 1989 – which decided that the analogous conflicts of interest in the structure of the Federal Home Loan Bank System were intolerable and mandated that the governmental functions of examination and supervision be conducted by federal officials.  The regional Federal Reserve banks should be stripped of any involvement in examination and supervision.  That conflict, however, is not my focus in this column.  The point I emphasize is that even at the OCC where that conflict of interest did not exist the “marry the natives” syndrome posed an inherent problem.  Embedded examination did not work even in an era a quarter-century ago when examiners were considerably more willing to say “no” to banks.

I also write to explain why the remainder of the NYT article illustrates how embedded examiners come to see bank propaganda as fact.  I focus on the CIO’s propaganda that it “hedges” and does not gamble.  (The examiners and supervisors also come to believe the SDIs’ proprietary models and to pore over the output of those models rather than the perverse incentive structures that cause the models to err so disastrously and the core, false, assumption that there is some exogenous distribution of financial risk that can be modeled using statistical techniques that require an exogenous distribution.  Example, if we create a criminogenic environment encouraging massive amounts of fraudulent “liar’s” loans then the probability of catastrophic failure becomes 1.0.  Models are not my focus here, though I note that models that assume that bets are “hedges” must produce disaster.)

Let us start with one of the essential attributes of successful bank examination and supervision – professional skepticism.  Our job is to kick the tires.  Our job is to figure out when banks and their officers have perverse incentives, typically arising from compensation.  Our most important task is to detect accounting control fraud – the “weapon of choice” in finance.  We have long known that hedge accounting abuses are a fertile area for fraud.  Fannie and Freddie were the most infamous SDIs to have recently abused hedge accounting – causing the SEC to take action against what it explicitly charged was an effort by Fannie’s senior managers to maximize their bonuses by manipulating supposed hedges.  If JPMorgan’s senior officers were using the CIO to gamble instead of hedge, then they were violation the purpose of the Volcker rule and posing a grave threat to the nation.  Phony hedges designed to hide doubling-down on losing bets are such a common problem that skeptical examiners and supervisors would have made examining the CIO a high priority.  When you’ve married the natives, however, skepticism is the first and primary regulatory casualty.

Here’s how the NYT reporters (inconsistently) describe the CIO.

“Regulators are not typically stationed at divisions like JPMorgan’s chief investment office, which are known as Treasury units. The units hedge risk and invest extra money on hand, and tend to make short-term investments. But JPMorgan’s office, with a portfolio of nearly $400 billion, had become a profit center that made large bets and recorded $5 billion in profit over the three years through 2011.”

It is not clear that the reporters understand that the paragraph contradicts itself.  It states, as if it were an indisputable fact, that the CIO is a “Treasury unit” and such “units hedge risk and invest extra money on hand.”  The next sentence contradicts the first.  It admits that the CIO actually made “large bets” and “recorded $5 billion in profit.”  It gambled on derivatives rather than hedged.  It may have won these bets in the first three years.

Skepticism about the “$5 billion in profit” is essential.  It is easy to abuse investments in financial derivatives in a manner that creates fictional income and hides real losses in the early years.  AIG’s sale of credit default swaps (CDS) protection provide a classic example – book the income now, pay the bonuses now, create no reserves to pay for the massive liability taken on by AIG, and make the officers wealthy while destroying AIG.  By selling CDS protection, AIG was agreeing to guarantee other entities against loss for their investments in “green slime,” e.g., the toxic collateralized debt obligations (CDOs) “backed” largely by endemically fraudulent “liar’s” loans.  It is apparent that the OCC and NY Fed have not examined the CIO sufficiently vigorously to draw any conclusion as to whether the CIO actually made $5 billion in “profit” on its “large bets” in the early years.  The fact that the CIO “recorded” $5 billion in “profit” does suffice to show that they were making bets, not hedges.

Unfortunately, the anonymous regulators quoted by the reporters display even weaker analytics on this point.  JPMorgan has followed an aggressive strategy to keep the regulators on their (round) heels.  When the examiners married Jamie Dimon they married a shrill harpy convinced of his innate superiority over the examiners.  He also has trust issues.  Dimon views examiners who are skeptical and kick the tires as disloyal.  The president of the United States, after Dimon got it very badly wrong, sang his praises.  Obama will stand by his man (donor).  Dimon responds badly to anything less than unreserved praise.  He is a traditional type, he wants the regulator he marries to be a submissive help mate.

“Long before the recent trading blunder, JPMorgan had a pattern of pushing back on regulators, according to more than a dozen current and former regulators interviewed for this article. That resistance increased after Mr. Dimon steered JPMorgan through the financial crisis in better shape than virtually all its rivals.

‘JPMorgan has been screaming bloody murder about not needing regulators hovering, especially in their London office,” said a former examiner embedded at the bank, adding, in reference to Mr. Dimon, “But he was trusted because he had done so well through the turmoil.’”

There are two ways an agency leadership can respond to such a prima donna.  They can be professional but skeptical.  Whenever Dimon “screams bloody murder” they can demonstrate their support for the troops asking the tough questions.  Alternatively, they can send the message that they do not want to upset Dimon.  This will undercut the professional examiners who have resisted marrying the natives.  Over time, the best examiners will tend to leave or wangle transfers to other assignments.  The OCC and New York Fed have historically followed the second management approach.  The reporters cite a specific example involving access to JPMorgan’s capital plan that the examiner believed represented a deliberate effort by JPMorgan management to undercut the examiner.

But here is a vital point – even at their weakest the regulators who marry the natives are better than the natives when it comes to evaluating risk.  The most recent President Bush (in sharp distinction to his father) chose as his regulatory leaders the some of the nation’s leading opponents of regulation.  These regulatory leaders were exceptionally anti-regulatory and pro-industry, but they still were years ahead of most of the industry (and virtually every SDI – including JPMorgan) in warning about liar’s loans, CDOs, and over concentration in commercial real estate.  The NYT authors make the point that the NY Fed examiners want the CIO gamble on a derivative of derivatives unwound “yesterday” while the CIO has continued the gamble.

The tendency of embedded examiners to “marrying the natives” at the SDIs is a serious problem, but the most severe weaknesses in regulation are at the senior levels.  The examiners remain the strongest part of the regulatory chain at the Office of the Comptroller of the Currency (OCC) and the Federal Reserve System.  The reporters provide an excellent example of the this point in their discussion of the OCC’s role at JPMorgan.

“At JPMorgan, when media reports surfaced that the bank was making aggressive bets on credit derivatives, comptroller officials began taking a closer look, people briefed on the matter said. After thumbing through the bank’s own projections for the related risks in early April, the people said, the examiners pushed for more answers but saw no immediate need to change course. The agency notes that it does not bless specific trades.

In a briefing on Capitol Hill last week, two comptroller officials told a room of Congressional staff members that it was ‘common’ and ‘appropriate’ for banks in general to hedge their exposure to various risks, according to people who attended.

‘I know in college they teach you everything is black and white,’ one official said in response to hypothetical questions about creating the perfect hedge.  ‘But it’s not that way in the real world.’”

This brief passage shows why regulators who lack professional skepticism are abject failures.  First, one cannot evaluate adequately a purported hedge by “thumbing through the bank’s own projections for the related risks….”  By the time the OCC was looking, those projections had been shown to have relationship to reality.  Second, of course, the agency does not “bless specific trades.”  No one said it did.  The OCC leaders created a straw man to deflect criticism.  Third, yes it is “common” and “appropriate” to hedge risks, but that is another straw man.  One of the few common elements to the four contradictory major stories that JPMorgan’s press flacks have put out is that their own descriptions of the specifics of the transactions demonstrates that they were bets, not hedges.

Fourth, no, they don’t teach in college that hedging is simple or has no gray areas.  Fifth, the relevant issue has nothing to do with “the perfect hedge.”  A perfect hedge exhibits a negative correlation of -1.0.  JPMorgan engaged in “hedginess” – it made subsequent bets in the same direction as the original bets (positive correlation) – it “doubled down” and lost the gamble.  It delayed informing investors and regulators that it had lost and falsely stated that nothing meaningful had gone wrong.  Dimon then declared his earlier declarations about CIO losses inoperable.

The OCC officials, however, gave Congress the opposite impression that JPMorgan was engaged in “appropriate” “hedging” and should, if anything, be applauded for doing so.  OCC is a bureau within the Treasury Department.  Treasury Secretary Geithner is a virulent opponent of the Volcker rule.  The current draft of the regulation that will eventually implement the Volcker rule was, at the behest of Dimon, crafted by Treasury and the Federal Reserve (another fierce opponent of the Volcker rule) to embrace “hedginess.”  If an SDI claims that a bet on financial derivatives is a hedge (and with portfolios the size of the SDIs one can always claim that “X” is a hedge to “Y”), then Geithner and Bernanke want them to be able to evade the Volcker rule.  This will, of course, destroy the rule.  It was SDIs’ investments in “green slime” financial derivatives that drove much of the ongoing financial crisis and caused eight SDIs to fail.  There is no evidence that the SDIs or their regulators have learned this core lesson.  That is understandable because SDIs inherently have perverse incentives.

As always, I urge that conservatives, libertarians, and progressives join to end the SDIs.  SDIs that are banks receive an explicit federal subsidy through deposit insurance and a far larger implicit subsidy because of the “too big to fail” doctrine.  Congress has never approved this implicit subsidy.  The SDIs are, as they proved during the ongoing crisis, capable of causing global systemic damage.  A nation cannot, therefore, credibly claim that it will not bail out the SDIs’ general creditors.  SDIs are, implicitly, government sponsored enterprises (GSEs) most akin to Fannie and Freddie.

(For those readers who think Fannie and Freddie failed due to government-imposed “affordable housing goals,” please see my articles on their failure.  The short version is that no entity ever required Fannie and Freddie to purchase “liar’s” loans – which did not count towards their affordable housing goals.  Consider why they both, eventually, purchased massive amounts of fraudulent liar’s loans.  The truth is that Fannie and Freddie eventually emulated the (then) investment banks’ massive purchases of liar’s loans and the creation of CDOs for the same reason that the investment banks did – it created guaranteed, massive (albeit fictional) “income” in the near term and made the officers wealthy.  Remember also that Fannie and Freddie did not have any explicit federal guarantee and that their bonds explicitly stated on their face that they were not federally guaranteed.)

The implicit subsidy of FDIC paying the SDIs’ creditors in full even if there is a receivership means that the SDIs can borrow money more cheaply than smaller competitors.  SDIs, therefore, make a mockery of “free markets.”  They are so large that they also make a mockery of democracy.  SDIs are the face of American crony capitalism.

SDIs are not simply dangerous, they are also inefficient.  Shrinking the SDIs to the point where they no longer posed a systemic risk would also increase their efficiency, make them small enough to regulate, and help recover our democracy.

SDIs that function as banks pose intolerable risks to the global economy.  SDIs that function as (thinly disguised) hedge funds should be far beyond the pale.  Conservative and libertarian philosophy rightly condemn providing enormous federal subsidies to a private entity whose senior officers claim any wins and socialize any severe losses.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


    1. Not the In-Crowd

      Gasp. Isn’t that what so many oppressors have said in the past? Are you recommending we act out the worst of human behavior to solve problems?

      I hope you find the snark button on your web device. (Hint: it’s not an actual button. You have to type it.)

      1. scraping_by

        All right. Nationalize them all, and let God sort out the solvent.

        Indite them all, and let an honorable judge sort out the legal.

        Arrest them all, and let the cops sort out the honest.

        And so on…

    2. R Foreman

      Ha Ha! These politicians and bankers are putting our nation in clear and present danger, yet people calling themselves ‘patriots’ are trying to stop all the protests.

      I hear certain people take an oath to defend our nation against all enemies, foreign and DOMESTIC.

      We would deserve to see our financial system crash and burn, and Barack Obama would bear most of the blame. He will be remembered by history, but not in a good way.

  1. sierra

    Mr. Black makes too much (common) sense and can be ignored……(sarcasm!)
    I especially liked your oomment about the GSE’s and politicians insistance that they were “forced” to get into the subprime mess… was a “profit” choice pure and simmple.
    But, what do I know!

  2. F. Beard

    Remove EVERY government privilege for banks and then banking would not pose a risk to the economy.

    Banking is a parasite posing as a symbiot. How many more centuries before we realize that and kill banking for good?

    Nope we don’t have centuries. If we survive this century with our current banking system it will be a Miracle.

    1. Mansoor H. Khan

      F. Beard,

      Please critique the following analysis of our economic situation and possible solutions:

      What we have is runaway productivity due to technology and business process improvements, this leads to:

      1) A small percentage of the population that is able to produce most of the goods and services due to automation.

      2) A small percentage also gets most of the income from this production.

      3) A small percentage that is getting most of the income cannot (or at least does not) consume much of what they produce.

      4) Since Net Private Savings = Net Government Borrowing, the government must borrow and give production away (Public assistance programs, etc.) or at least create gov jobs (so net private savings can be spent).

      5) If the gov does not do #4 above we will have a greater depression (a deflationary collapse).

      6) So what is the resolution to this issue? Here is some choices:

      a) Allow currency freedom (allow private and state and local gov currencies). This is Beard’s way. I like it. It takes the best of Austrian thinking but leaves the bad part out (gold buggary out). The bad part about is that it does not deal with how to distribute global resources (crude oil etc.) which will be able to be purchased by the most desirable currency (probably the future 100% reserve U.S. Dollar).

      b) The MMT way and don’t allow currency freedom but have 100% reserve currency. The currency then acts like (it even acts like this now for the most part) an equity share in the U.S. economy. Any NET societal savings can then be distributed to citizens via a monthly bank account deposit (i.e., social credit). This will build (even more) our cultural capital and increase societal cooperation. Only ones to lose out of this will be the runners of casino capitalism (i.e., wall street).

      c) Both with a and b above USD is likely to retain its king status and become the currency of choice for net global savings outside the USA. Would that be a problem?

      d) if peak oil starts squeezing us too much then both a and c can deal with it well via conservation and austerity (the current FRB system cannot deal with and must be done away with). We will have to tax high spenders (not high income earners!) and allocate some of the energy resources to other members of society via social credit discussed above.

      For more see:

      here is how the bankers’ game works:

      mansoor h. khan

      1. EconCCX

        >>b) The MMT way and don’t allow currency freedom but have 100% reserve currency. The currency then acts like (it even acts like this now for the most part) an equity share in the U.S. economy. Any NET societal savings can then be distributed to citizens via a monthly bank account deposit (i.e., social credit). (MHKhan)

        A 100% reserve currency is no part of the MMT of Wray, Mosler and Mitchell. I’ve seen MMT call for the dropping of reserve requirements. Private credit creation is considered to be offset by debt, and thus a zero net financial asset. As if your house prices are a function of base money rather than bank debt money and the public’s willingness to take on debt. As if debt didn’t accrue and compound, but somehow remained in balance with the bank money wherewith it was created. And as if the mortgage weren’t ALSO a financial asset to be traded and leveraged for real production and wealth.

        Yes, Michael Hudson supports some elements of MMT, and 100% money. But Hudsonomics should not be invoked as MMT.

        1. F. Beard

          As if your house prices are a function of base money rather than bank debt money and the public’s willingness to take on debt. As if debt didn’t accrue and compound, but somehow remained in balance with the bank money wherewith it was created. And as if the mortgage weren’t ALSO a financial asset to be traded and leveraged for real production and wealth. EconCCX

          Well said!

      2. F. Beard

        What we have is runaway productivity due to technology and business process improvements, Mansoor H. Khan

        Pretty near. And financed with the workers’ and general population’s stolen purchasing power via loans from the counterfeiting cartel, the banking system.

        this leads to:

        1) A small percentage of the population that is able to produce most of the goods and services due to automation. Mansoor H. Khan

        Yes and eventually robots will do all the non-creative work.

        2) A small percentage also gets most of the income from this production. Mansoor H. Khan

        Unjustly unless the creation and use of counterfeit money is just.

        3) A small percentage that is getting most of the income cannot (or at least does not) consume much of what they produce. Mansoor H. Khan

        Eventually, this will distort production so that much more is wasted on extreme luxury goods and status symbols. Overall production will decline, I suppose, to meet reduced demand.

        4) Since Net Private Savings = Net Government Borrowing, the government must borrow Mansoor H. Khan

        According to Bill Mitchell, borrowing by a monetarily sovereign government is “corporate welfare.”

        and give production away (Public assistance programs, etc.) Mansoor H. Khan

        Yep. Or encourage the rich to hire the people they dis-employed as servants. Hitler’s grandmother was a servant girl impregnated by her employer.

        or at least create gov jobs (so net private savings can be spent). Mansoor H. Khan

        Just give people money and let them find their own useful work to do. That’s better than paying people to waste their time – which is often FATALLY demoralizing.

        5) If the gov does not do #4 above we will have a greater depression (a deflationary collapse). Mansoor H. Khan

        Certainly a painful and unjust adjustment will occur which many of the Austrians will cheer till they lose their own jobs.

        [to be continued]

      3. F. Beard

        6) So what is the resolution to this issue? Here is some choices: Mansoor H. Khan

        First, I don’t see resource depletion as a fundamental problem so long as we have sufficient energy and a combination of technologies (thorium and solar, imo) should see to that.

        Second, a universal bailout of the entire population (similar to what Steve Keen proposes) till all debt to the counterfeiting cartel is paid off is just restitution for theft and should be relatively painless even for the banks. That would require that the banks be put on 100% reserve anyway to keep them from leveraging the new reserves.

        1. Mansoor H. Khan

          F. Beard,

          “I don’t see resource depletion as a fundamental problem”.

          I am surprised you think the above. Why are crude oil prices so high then?


          1. F. Beard

            Speculation with borrowed money?

            But in the longer term, oil can be synthesized from Carbon (from the air if necessary) + Hydrogen (from water) + energy.

          2. Mansoor H. Khan

            F. Beard,

            Thank you for your replies.

            Do you think the bankers’ game is up? Too many people know the lies now? So finally, after Jesus kicked the bankers (the money changes out of the temple) 2000 years ago we will finally kick them out of our lives and build a sane financial system (inshallah).

            I do pray everyday that Allah guide us to a more just financial and economic system.

            mansoor h. khan

          3. F. Beard

            Do you think the bankers’ game is up? Mansoor H. Khan

            One hopes. Of course we are pretty dang close to Satan’s “666” system too.

            I do pray everyday Mansoor H. Khan

            That reminds me that I haven’t taken my daily dose of wisdom from the Bible. :)

        2. davidgmills

          I am glad you liked the thorium video. I also am a big fan of greenbacks so I like to read every comment of yours I can.

        3. Leverage

          “First, I don’t see resource depletion as a fundamental problem so long as we have sufficient energy and a combination of technologies (thorium and solar, imo) should see to that.”

          That’ aprioristic and basically ignores the laws of thermodynamics. Resources will be a problem or not depending on the rate of consumption, population (and population growth), waste (very important) and EROI (a function of technology). Neither solar nor thorium reactors have a sufficient EROI right now, this means a transition is going to create inflation problems and reduce consumption in the future, period. If this is to change (I hope yes) in the future (either from these or other energy sources) is an ongoing process).

          BTW the market, manipulation or not, will regress to supply-and-demand, volatility in prices in the intermediate trend is just noise (and more in the short term). And anyway the market can’t discount unknown information, like the real reserves and the rate of depletion of these reserves, that’s why it regress to supply-and-demand equilibrium anyway.

          I don’t think is the fundamental issue right now, but your views are wrong so do more research & revisit them in the future.

          1. davidgmills

            Spoken like someone who never watched the video on thorium and is totally clueless as to its promise.

    2. nonclassical


      like you, those of us who paid off everything by 2003, bought wood stoves, found ways to “retire” with our simplistic lifestyles, know we won’t last another
      20 years with what banksters=fraudsters have fomented…

    3. Woody in Florida

      I feel the same as F. Beard. We need to act soon and eliminate this parasite. It only exist to bleed the the life blood from the economy, and that is when it is behaving. Today we see that the banks do not understand that finding a way to gorge unimpeded on the host eventually leads to no more host.

    4. scraping_by

      Once upon a time, the FDIC was protection for the small depositors, and the bank’s management was liable to the tender mercies of the Federal court system.

      Speaking of regulatory capture, the depositor can no longer walk away with confidence. That stack of money is to keep the bankers’ vile game going.

      Once, it was assumed having more money meant having more knowledge of the ways of finance. On the other hand, we amateurs protected ourselves with government agencies. Now, with the Federal money behind management, we’re just spectators and the ultimate source of funds.

  3. Enraged

    We’ve been saying that since 2008. So far, no one has gone to jail, let alone keeled over! Makes it pretty damn hard to believe in right and wrong. Every day that goes by with more scandals and no action gets the line gets blurrier…
    Might God want us to simply… revolt and take to arms? Might God be waiting for us to take action?

      1. F. Beard


        Never take your own revenge, beloved, but leave room for the wrath of God, for it is written, “ Vengeance is Mine, I will repay,” says the Lord. Romans 12:19 New American Standard Bible (NASB)

        Cue skippy to complain?

        1. skippy

          Pointing out factual mistatements is not complaning, its setting the record straight. Like what religion has not finnished, freemarket ideology will. Humanity and all life in the crosshairs of profit only solutions, what a handbreak to human potencial…sigh.

          What if the soultion is an anathema to profit, what then? Would you take off the table, a possablity, just because theres no profit in it? Does reactor used rod pool #4 languish as its an out flow and not in flow of profit?

          When you and moonsure do one of your gigs here (see up thread), it reminds me of this little butie….

          Skippy… Hell beardo, your mob should get Sarah Palin on board, her sthick is par for course and it would bring in the tent pole votes from the humper – thumper crowd!

          PS. is that you Larry Love?

          PSS. hard sales tactics are for targeting the insecure and uninformed by people that would take advantage of information asymmetry… cough… praying on the weak thingy.

          PIIV. If life is art, what the hell did the dinos paint, what was their medium?

          1. skippy

            I will free you from slavery, force march your ass across the desert – till I’m (gawd) satisfied *you know* who the boss IS… and…. then….. help you enslave others[???!!!], too include your own*… *if for only a breif time.

            Skippy… yet its all a mistery (oops mystery) as too how we – all – got here. Why does the thought “don’t be on the wrong side of the coin” ring in my head?

          2. F. Beard

            I will free you from slavery, force march your ass across the desert … skippy

            Well, according to the Bible, we did start out in a garden with the light (and enjoyable?) task of naming the animals.

            And deserts aren’t so bad so long as one has adequate water.

          3. F. Beard

            If life is art, what the hell did the dinos paint, what was their medium? skippy

            Their lives.

          4. F. Beard

            Would you take off the table, a possablity, just because theres no profit in it? skippy

            Profit is good according to the Bible but profit taking isn’t. That’s why I advocate common stock as a private money form – all the profits accrue in the value of the stock so long as the company is not in debt and pays no dividends.

          5. skippy


            Like Leverage points out above, your mob is completly delusional, completly unattached to the physical reality out there.

            Whilst you and yours endlessly masticate on antiquitys hollow fruits of lies, ignorance, factual misrepresentations, stitched togeather – patchwork quilt – freely adapded – cul de sac of thoughts. Life and… the potencial for Life is extinguished….

            Yet you and your mobs main concern in life… is death… and its preparations, as in how to live before it… too please a creator (foundation myths of dubious origins evolution issuing forth from one[s head all whilst throned upon an armchair).

            The historical record is quite clear on how this always ends, yet we repete, talk about your false positives and failing upward. Always consulting the tombs of idiocy in search for devine remedy, prescribing more mental balms and salvs, too soothe, the psychological anguish this deadend exercise ultimately produces.

            Hint beardo… this world bares little to the one thousands of years ago. The seperation between the physical similarities, between the two, advances at an exponential rate and is brought on – by – what – we – do… too every square inch beneath our feet and the atmosphere that surrounds us.

            This is an exercise of compound intrest, the intrest our activiys accrue, the planet will come, too legally enforce… that claim of debt. It has done this for eons as a factory of life, constantly recycling the ‘finite base’ of materials into new forms via its mechanisms of chemisty, physics, evolution, laws of the universe et al. There is no mystery about it, just facts uncovered and yet discerned.

            Skippy… Beardo… there was a world before yesterday, before industrialization, before the age of metal and stone, before your books first page or the others that proceeded it… in writ or in thought, and long before we stood up. That is reality… art is how you personally view it… and not indicitive of its…. true nature, its the one you / they / we… award it.

            Skippy… The problem being… is… that some lay claim… too… handing out the awards… for the *best art*… regadless of the facts. This is what power is about… handing out awards… valadating thoughts… as if they were…. reality… cough…. FACTS.

            So when you – figure out – whom – hands out the awards and their criteria for it… I’ll give you a little star for being a bright and clever boy.

            PS… The fruit shown in this comment is indicative of taste only…. and not real *fruity* ingredients.


          6. skippy

            “And deserts aren’t so bad so long as one has adequate water.”… beardo.

            Skip here… are you speaking from experiance or some reading? Such gross generalizations about enviroments one has not experianced is just off the cuff opinion. It does nothing to countace my assertions… missery, which are recorded (if factual in toto) in your cannons. Slippery to the end beardo, it was the journey of woe, was it not?

            “Their lives”… beardo.

            Skip here… as you view them, as art is a perspecitve of philosophy, as an act, of creativity, imagination, and not fact see.

            There are also two more general constraints on definitions of art. First, given that accepting that something is inexplicable is generally a philosophical last resort, and granting the importance of extensional adequacy, list-like or enumerative definitions are if possible to be avoided. Enumerative definitions, lacking principles that explain why what is on the list is on the list, don’t, notoriously, apply to definienda that evolve, and provide no clue to the next or general case (Tarski’s definition of truth, for example, is standardly criticized as unenlightening because it rests on a list-like definition of primitive denotation). (Devitt, 2001; Davidson, 2005).) Second, given that most classes outside of mathematics are vague, and that the existence of borderline cases is characteristic of vague classes, definitions that take the class of artworks to have borderline cases are preferable to definitions that don’t. (Davies 1991 and 2006, Stecker 2005)

            A common family of arguments, inspired by Wittgenstein’s famous remarks about games (Wittgenstein, 1953), has it that the phenomena of art are, by their nature, too diverse to admit of the unification that a satisfactory definition strives for, or that a definition of art, were there to be such a thing, would exert a stifling influence on artistic creativity.


            1 [mass noun] the expression or application of human creative skill and imagination, typically in a visual form such as painting or sculpture, producing works to be appreciated primarily for their beauty or emotional power:

            The art of the Renaissance great art is concerned with moral imperfections.

            Works produced by human creative skill and imagination.


            Maybe you should get a dictionary.

            “Profit is good according to the Bible but profit taking isn’t.”… beardo.

            Skip here… That’s a totaly incoherent statment. Ummm… more artistry methinks. Is it… my lack of creativity… cough… imagination thats holding me back[?] or is it my cognitive ablity, telling me, someone is attempting *too sell me* a load mental crap… dressed up as fertalizer.

            Skippy… Heres some art for you…



            PS. as you enjoy a bit of south park do you remember the starvin marvin episode?


            Jesus = Food! So many lies… sigh…

          7. Mansoor H. Khan


            If you like Wittgenstein you might like stories of Mahayana Buddhism. Like Wittgenstein buddha in general and Mahayana Buddhism in particular are very much into the limitations of language.

            mansoor h. khan

          8. skippy


            No, Im not a fan. It was only used as an exsample to highlight the poor usage of the term art, by you and beardo. Im very dubious about both of your actions. They stink to no end of a manufactured product offered with a 2nd rate sales pitch.

            The limitations of language? Colour me post modren in that regard, as you either know a thing – or – its just speculation.

            Skippy… I find this, as a belife, more rational with regard to all life.



            Caveate. Not in agreement with all the ethnic taboos.

        2. Warren Celli

          And there was one who was kind of short and impish.

          And he carried a trident.

          And he wore a red body suit and had small horns and a spade beard with a thin mustache and a long pointed tail.

          And he was blessed for he did not have to borrow money from the money changers in the temple to spend for a costume for Halloween when he was a child.

          And he said unto the Lord, If thou be the Son of God, cue Skippy to complain.

          And Jesus answered him, saying, It is written, That man shall not live by demeaning sarcasm alone, but by every word of God.

          Deception is the strongest political force on the planet.

          1. Mansoor H. Khan

            Warren Celli,

            “Deception is the strongest political force on the planet.”

            Do you think this was always true? Do you think it is possible to overcome it? or Are we just forever screwed?

            mansoor h. khan

        3. JohnP

          Exodus 21:23-25

          But if there is further injury, the punishment must match the injury: a life for a life, an eye for an eye, a tooth for a tooth, a hand for a hand, a foot for a foot, a burn for a burn, a wound for a wound, a bruise for a bruise.

          1. Nathanael

            Paraphrased from the Code of Hammurabi.

            This standard of justice was actually intended to be merciful.

            The alternative standard which has been used in other societies is “the punishment for all crimes is death — at a minimum”, which was Vlad the Impaler’s procedure. (He was actually loved by his people because he enforced the laws against nobles as well as commoners.)

            An even worse standard is found elsewhere in the Bible — “visit the sins of the father onto the son, onto the tenth generation”.

            Our society is nowhere near ready for the “turn the other cheek” standard.

          2. F. Beard

            An even worse standard is found elsewhere in the Bible — “visit the sins of the father onto the son, onto the tenth generation”. Nathanael

            Then the word of the Lord came to me, saying, “What do you mean by using this proverb concerning the land of Israel, saying,

            ‘The fathers eat the sour grapes,
            But the children’s teeth are set on edge’?

            As I live,” declares the Lord God, “you are surely not going to use this proverb in Israel anymore. Behold, all souls are Mine; the soul of the father as well as the soul of the son is Mine. The soul who sins will die.” Ezekiel 18:1-4 New American Standard Bible (NASB) [emphasis added]

            “Now behold, he has a son who has observed all his father’s sins which he committed, and observing does not do likewise. He does not eat at the mountain shrines or lift up his eyes to the idols of the house of Israel, or defile his neighbor’s wife, or oppress anyone, or retain a pledge, or commit robbery, but he gives his bread to the hungry and covers the naked with clothing, he keeps his hand from the poor, does not take interest or increase, but executes My ordinances, and walks in My statutes; he will not die for his father’s iniquity, he will surely live. As for his father, because he practiced extortion, robbed his brother and did what was not good among his people, behold, he will die for his iniquity.” Ezekiel 18:14-18 New American Standard Bible (NASB)

  4. a crude interest

    Sheesh….always carping on the job creators.

    Wanted: pool boys, caddies, lawncare technicians, deck swabbers

  5. Conscience of a Conservative

    I have a problem with this piece re on-site examineres. It ignores the the fact that JP Morgan had the operation in question off-site, in London. We see time and time again that when financial firms seek to avoid regulation they go across the Atlantic and set up shop in London. AIG did it, MF Global did it and now we see that JP Morgan did it. How can regulators look at books or talk to people that are not there? The question about capture regulators is a good one, unfortunately it’s not the right question the author should be asking, but rather how we allow risk to be moved over-seas for American institutions only to see tax-payers and Customers on the hook in ways the system did not intend.

    1. LeonovaBalletRusse

      There should be a law (yeah rite) that when “banks” escape consequence of dirty deeds via co-conspirators in London or otherwise off-shore, to conceal, launder, trick, defraud, steal, etc. they become *ipso facto* NOT TBTF. “Just say no” to the bail-out, nationalize the “banks” and asset-strip them to the bone. Then, throw the carcass to such as Bain & Co. so that private equity can “create wealth” out of it. Or, as suggested above, just “kill them all and let God sort it out,” as was done with the Cathars.

      1. Ms G

        I like that — sic Bain Capital on JP Morgan and other de facto carcasses (BoFA, Citi, and others with fake balance sheets). Inter-Oligarch Jackal Feeding Frenzy.

    2. nonclassical

      note: documented over $680 Trillion in “derivatives”, 95% owned by 6 U.S. “investment banks”, 80% of which sits in London…

  6. Enraged

    We’re past anger. Now is time for reinvention of our species and out future. Starting with worldwide debt forgiveness, followed by worldwide clean up of the planet. So much work to do, so little time to do it and no justification whatsoever for unemployment anywhere on the planet. But it would take one thing still terribly missing: humility and cooperation.

    1. Not the In-Crowd

      It’s so true that some of us are past anger. But most of us are just coming to an inkling of what’s been going on for so long. Therefore they are lower down the list of feelings to heal. Many are just coming to anger now.

      Interesting that although you say we are past anger, both your screen name and your link imply a lot of anger. I am mostly past the anger stage, so I really am not seeking to click a link that encourages it.

      But I agree with you that we have to get to the other side of anger to solve these problems.

      1. Nathanael

        The next step beyond anger is not humility and cooperation.

        The next step beyond anger is calm, cold-blooded, happy execution of your enemies.

        It is a very, very bad sign for the criminal elites that people are starting to get “beyond anger”.

  7. Chauncey Gardiner

    Thank you for highlighting the NYT article and for your enlightening observations on some of the practical limitations and difficulties faced by banking regulators.

    What needs to be done systemically has been clear for some time. Deep capture is our stark reality. But the barriers to effectuating such changes – while very high for ordinary citizens regarding legislators, the executive branch, regulatory agencies, the judiciary and the FRBNY/Fed – are not insurmountable.

  8. Enraged

    ‘We want civil war’ Anarchist group vows to spread mayhem throughout UK

    Posted on May 28, 2012 by The Extinction Protocol
    May 28, 2012 – LONDON –

    The Informal Anarchist Federation has already claimed to be responsible for damaging railway signal systems which led to travel being disrupted around Bristol earlier this week. They said their representatives had deliberately lifted concrete slabs beside the tracks to burn out signalling cables, on a route chosen to target Ministry of Defence employees. The group, known as FAI, have now threatened to continue their “guerrilla attack” on the country, “disturbing the social peace” in a protest against the establishment. Posting on anarchist website 325.nostate, the group said: “In the United Kingdom of clockwork control and domestication, we’re some of the ‘unpatriotic ones’ who find the 2012 Olympics, with the ensuing spectacle of wealth (when so many here struggle to feed themselves and their families), harmful developments and escalating police state, frankly offensive. “But no union or movement calls our shots, and we have no inhibition to use guerrilla activity to hurt the national image and paralyze the economy however we can. Because simply, we don’t want rich tourists – we want civil war.” A spokesman for British Transport Police have confirmed a signal system was sabotaged at two places on the rail network in Bristol last Tuesday. The same anarchist group has previously claimed responsibility for a drive-by gun attack in Italy in which the chief executive of a nuclear power firm was shot in the kneecaps. The group now say they are deliberately targeting the Ministry of Defence and defence firms in Britain. They added: “The purpose of guerrilla attack is to spread the struggle into different territories and facets of life. “Finance, judicial, communications, military and transport infrastructure will continue to be targets of the new generation of urban low-intensity warfare.” –The Telegraph

    1. F. Beard

      False flags to justify more police, military spending? Or a genuine movement?

      Call it off, UK PTB! Either way, you are responsible!

      1. Not the In-Crowd

        Why do I bother…

        Violence is not the answer. Those who choice violence as a solution cause more harm than good.

        1. F. Beard

          I’m not advocating violence. I’m pointing at who is causing it and calling for them to stop!

          One cannot deliberately allow an economy to deteriorate and then claim innocence of the inevitable results. The UK is monetarily sovereign. It has no excuse for pleasing the bond pygmies over the welfare of its population!

        2. Robespierre

          (IMHO) You are very much mistaken. I’m yet to find any significant change on a system that refuses to change in its own that has not cause that change through violence. Not advocating it just pointing out that historically big changes without violence do not happen.

          1. Mark P.

            Generally true. Though exceptions exist.

            For example, the moment of the Soviet Union’s collapse was amazing violence-free, relatively speaking, given the potential for cataclysm.

            That said, in that instance, one could argue there was still violence — it was just that it took place afterwards, during the looting and “oligarchization” of Russia during the 1990s.

          2. nonclassical

   early U.S. economics-“Wall $treet-A History”;

            find when ALL are economically destroyed-banks, et al, when there is nothing
            remaining, people start from beginning. Of course during 30’s, manufacturing still existed-we are about to find out how “humanistic” americans really are…

        3. JohnP

          I do not advocate violence, but it definitely works. It’s a tried and true method with a long pedigree of success. Taking violence off the table is what “they” want, because they fear violence above all else. There are only a few thousand of them at any one time, after all.

          Also, I should point out that violence and anarchy are two very different things.

      2. Lambert Strether Post author

        Nah, they would never do that. I mean, piss off a whole train of commuters as some kinda blow against the empire? Puh-leeze. Screams false flag.

  9. Susan the other

    Today 2 articles: the NYT on Weinstein’s hedge fund in concert with other Hedge Funds bringing down JPM’s bet against CDS (for Greece?) ever going up in value – essentially shorting the whole bunch (?), perhaps to buy back in June; and a FT article on the EU reforms which will be published in June which shift the burden of rescuing failing banks (all of them duh) from taxpayers to bondholders!! The EU regulators will be able to (but will they) write down non-guaranteed “deposits” (i.e. bets) and unsecured bondholders. Does this mean that no one will bond to lend anymore, but only to made “secured bets?”

    The new EU reforms kinda explain JPM’s reported short sale of CDS but not Weinsteins buy. Confused there. Makes sme wonder if Weinstein was just helping JPM out. And the EU reforms mean banks will have to have higher reserves from somewhere, nobody knows where. And EU countries will have to establish “resolution funds” which means the ultimate bag holder is the EU taxpayer. Short term debt (bank to bank) debt is protected along with guaranteed deposits. And: “Regulators are given some leeway in sparing derivative counterparties should closing out positions during a debt writedown threaten financial stability or put a clearing house in danger.”

    Hey but nevermind that last part because the Fed already backstops all derivative markets with taxpayer dollars. maybe 100 trillion or so.

    JPM is the largest hedge fund in the world.

  10. Not the In-Crowd

    Another great article from Bill Black. Thanks for bringing our attention to the details.

  11. Xelcho

    Per usual, Mr. Black does a wonderful job of dissecting the jargon used by the Banks and the captured regulators to bring us the real story. The only piece he did not mention, perhaps goes unstated, is the embedded regulators provide an excuse for all those who receive their opinions/reports as plausible deniability.

    Having consulted/contracted to federal agencies, state agencies and local municipalities I can say that these type of situations are far from abnormal.

    Please keep up the good fight!

  12. Min

    I can’t argue against breaking up TBTF institutions. :)

    However, shouldn’t a significant proportion of embedded regulators be undercover?

    1. F. Beard

      Good point about undercover agents!

      And let’s put a bounty on discovering bank misbehavior.

  13. Up the Ante

    “These regulatory leaders [Bush II’s] were exceptionally anti-regulatory and pro-industry, but they still were years ahead of most of the industry (and virtually every SDI – including JPMorgan) in warning about liar’s loans, CDOs, and over concentration in commercial real estate. ”

    Were they ‘co-opting dissent’, marrying their warning efforts as a ‘perfect hedge’ ?

    Their ‘perfect hedge’ against the Justice Dept. coincided rather well with the European bubble, and that occurred after the final signal of the Iraqi War. Green light for European bubble with no fear of American Justice Dept. backlash.

    And with Williams as the de facto OCC head carrying the Official Green Light torch, what worries were to be found ?

    [both parties protected]

  14. wilwon3


    The following article:

    is interesting in that the author and all those who commented on that article apparently believed Pres Obama’s declaration regarding the deficit. It appears as if none are aware of modern money concepts (e.g. MMT, MME, etc.); thus, they (like the majority of American citizens) are unaware of how the Federal Reserve operates. It is clear that the MMT advocates are simply not communicating with a very large portion of the American public.

    It is fortunate for readers of NC that a significant portion of the articles published here are written by authors (not all of whom are economists) who do understand that the financial/ economic constraints/affairs conducted by a sovereign currency issuer (USA, UK, Japan, to mention a few) which employs a floating exchange rate should not be compared with those which are appropriate (apply) for individual citizens or for states within the USA. European ‘nations’ are under constraints somewhat similar to those of states within the USA in that those ‘nations’ have agreed to use the euro; thus, they are not allowed to print the currency they use for business/commercial purposes. The European ‘nations’ which agreed to use the euro are at a further disadvantage in that there is no ‘federal’ governing body for the EU which might influence the ECB to assume responsibility for appropriate control of the European ‘nations’/states (formerly, functioning nations which had control of their sovereign currencies).

    Furthermore, anyone who understands modern/fiat money operations would understand that ‘deficit hawk’ arguments are irrelevant for the USA dollar/debt/economy. On the other hand, those arguments are frequently used by ‘main-stream economists’ and so-called financial experts to misinform our President (who is surrounded by ‘main-stream economics experts’). A condition for the employment of MMT, MMR (or variants thereof) is that government actually govern/regulate the financial and military sectors; until that happens in the USA, this country’s elected leaders will continue to do irrational things which only benefit the wealthy/powerful plutocrats and their minions/puppet expediters.

    I applaud Dr Black’s efforts involving publishing articles (such as this one) as he continues trying to expose the rottenness of this country’s financial decisions which are made by expediters at the behest of the wealthy, un-elected (private financier) decision makers.

    1. EconCCX

      Wilwon3, is it just a coincidence that so many of our neighbors, our institutions and our state and local governments are ALSO so deeply in debt to financial institutions? Proponents of CMT (clueful monetary theory) believe it’s because we’ve surrendered the money creation power to private financial institutions. While MMT argues that USG’s debt is the sum total of everybody else’s financial wealth, and so that a 15T debt isn’t nearly large enough.

      It’s one thing to argue, as Hudson does, that we *could* operate as a monetary sovereign. Quite another to maintain, with MMT, that we already do. Don’t be the last to get it. MMT would see all of us quickly subsumed to the financial industry. It isn’t about the national balance sheet. It’s about the engineering of money…and, ultimately, about our very liberty.

      1. Carla

        @EconCCX: “MMT would see all of us quickly subsumed to the financial industry.”

        I don’t see any “would” about it. MMT simply describes the reality of our current situation.

        Agreed, “It’s about the engineering of money” but also WHO engineers it, and to WHOM those engineers are accountable.

        And Yes, it is “ultimately, about our very liberty.”

        1. EconCCX

          >>I don’t see any “would” about it. MMT simply describes the reality of our current situation. <<

          Not Wray's, not Mitchell's, not Mosler's MMT. These folks believe that public debt is private wealth, that more debt and more greenbacks would stimulate and rebuild the economy. They believe that private money creation is neutral because it takes place in conjunction with debt creation. They imagine the Treasury creates all "net" financial assets. In short, they're unmoored from reality; and I say this as one who disdains austerity and supports public works with equal fervor.

      2. Leverage

        The claim that the total federal debt is net savings for the private sector is true. But that does not say how that money is distributted.

        Nothing MMT says goes against this. The description is right, then you have policy prescription based on that reality, that why you don’t ask for tax cuts for the 1%, but for the middle class, for example. Or why you ask for fiscal programs by the government towards the poor, for example.

        MMT is not a theory, is how the system operates RIGHT NOW, and with these facts, then you can use some policies or not. Off course there is a fallacy of division as well as there is a fallacy of composition.

        Increasing government deficits by itself is not going to fix anything if that money goes to financiers and bankers. MMT’ers are well aware of that. In fact USA has been using MMT the last decade for corporate welfare of the military contractors, finance and oil industries.

        1. EconCCX

          >>MMT is not a theory,

          1) What does the T stand for then? (Theology would be my guess, but that’s snark rather than substance.)
          2) Does MMT consider Treasury Bills, which match the face value of USG debt, a form and subset of savings?
          3) Doesn’t it appear that both public and private sector go more deeply into debt to the financial system with each turn of the wheel?
          4) Doesn’t the interest on debt compound and accrue according to the terms of the contract, while money remains flat until it is extinguished by principal repayment?

          Service Backed Money, founded on reciprocity rather than privilege, is described at . Digital bridge tolls, transit tokens and Forever Stamps bartered into circulation and exchanged as money.

          1. F. Beard

            SBDM is a money system based on reciprocity, rather than privilege and predation. EconCCX

            Reciprocity is a big reason why I like common stock as a private money form. In exchange for accepting the CSM (Common Stock Money) one receives a “share” in the issuing company.

          2. EconCCX

            You’re an intellectual ally, Mr. Beard. But I think service has the advantage of weighing each transaction as a barter against something people need each day. Whereas the value of a stock depends on finding the greater fool. Stock also dilutes, whereas a Forever Stamp is worth the same first class ounce no matter how many are sold.

            I think we’d both support allowing either form to circulate on equal tax terms; but I’m guessing that SBDM would gain greater acceptance. There are a lot of us already going around with a MetroCard, an EZPass, some self-sticks, and some phone minutes. To develop these as currency is to end Usury’s free ride.

          3. F. Beard

            Whereas the value of a stock depends on finding the greater fool. EconCCX

            Common stock money (CSM) could be spent on the goods and services of the issuing company.

            Stock also dilutes, EconCCX

            Temporarily till the new assets purchased increase consumer demand for the CSM.

            To develop these as currency is to end Usury’s free ride. EconCCX

            Yes. I am for allowing ANY and ALL private money forms (for private debts only).

          4. Leverage

            I’m all for private currencies, or local public currencies, or competing alternative currencies in general to these issued by the state. The problem is getting them accepted, so while they may be a part of the solution, unfortunately they are not going to be the whole solution because of vested interests or immobility of the population to work outside the established system. A shame but things are how they are.

            Your questions:
            1) I suggest a read on Wikipedia on the meaning of the word ‘theory’, layman usually have an erroneous conception of what this word means. A ‘theory’ deals with facts, it’s an explanation of empirical phenomena, what I meant is that is not a ‘theory’ compared to what most people thinks a theory is, is not an unproven hypothesis, it’s based on empirical facts. Also a lot of people keeps confusing the descriptive MMT, with the prescriptive part of MMT (based on logical conclusions from the descriptive part).
            2) Yes it does. T-Bills is a form of savings, that’s exactly what it is, ‘money with built in interests payments’. Because the government is who prints dollars, t-bills redemption for their nominal value + interest payments can only be paid by the government paying more dollars.
            3) The system is built by design on leverage (see my name), the finance sector is the biggest debtor in the whole economy, it’s net worth is 1/30 of their liabilities. If you account for derivatives quagmire, impossible to liquidate in case of ‘catastrophic event’ it maybe is leveraged 1:200 times. Central banks have amongst the highest leverage in the world (with ratios above 1:200 their capital). Banks have their own debt too btw. Is how things are built, through re-hypothecation, leverage and credit.
            4) Linking with what I said above, off course the only way the system can stabilize itself is by the currency issuers to… plug the hole, so yes, the government goes into debt (this is just a requirement by law anyway, you could change the law to stop inflationary issuing of debt and just deficit spend) to sustain not only the financial system, but allow savings to grow for the private sector AND allow interest payment, if the issuer didn’t print more it would be mathematically impossible to met interest payments.

          5. Leverage

            BTW guys, I think you don’t realize you are ADDING complexity to the system, not removing it (which is what we maybe should be doing).

            While I support alternative currencies, you will need price discovery and exchange between competing currencies which means more financial services and ‘paper shuffling and shifting’ services and more people trying to exhort rents through this.

            Be careful with what you wish, no matter how you try to change things the same idiots still will be around. And this has been demonstrated as a resilient fact through history lol (that’s how the private sector has managed always to ‘leverage’ money in good times creating all sort of ‘shadow money’ btw).

          6. F. Beard

            BTW guys, I think you don’t realize you are ADDING complexity to the system, … Leverage

            Partially. Government money creation would be simplified to simply spending it into existence and taxing some of it out of existence if necessary to control price inflation. And the government would no longer be concerned with the health of the banking system since without government privilege the banking system would probably shrink to insignificance – especially if credit creation was banned.

            Private money could be complicated but then no one has to use it for private debts unless they want to. Of course private money would only be good for private debts.

            Taxation should not be too hard since every private money of consequence would have a free market exchange rate with fiat. Less significant monies could be allowed to slide.

      3. F. Beard

        While MMT argues that USG’s debt is the sum total of everybody else’s financial wealth, and so that a 15T debt isn’t nearly large enough. EconCCX

        That logic ignores the wealth transfer (in the form of interest) from taxpayers (everyone since taxes are a cost of doing business that is passed on to consumers) to those who own government debt – typically from the poor to the rich.

        Why not simply spend new government money into circulation without borrowing to finance Federal deficits?

        1. Leverage

          That’s not what MMT says anyway. It says that the current deficit is not large enough, which is a very different thing.

          I think most mmt’ers support stop issuing long term maturity bonds and only issue short term paper (unfortunately you can’t stop issuing paper without a total collapse of the system given how it’s structured, that would have to be done gradually and changing other things). A lot of them advocate stop using the term ‘debt’ when talking about government ‘debt’ and amongst other things.

          Those who frame the language of the debate, are those who win the debate. And we still are using the words invented by the status quo…

          1. F. Beard

            A lot of them advocate stop using the term ‘debt’ when talking about government ‘debt’ and amongst other things. Leverage

            Bill Mitchell calls the debt of a monetarily sovereign government “corporate welfare”. Alexander Hamilton candidly admitted that the purpose of National Debt was to bind the interests of the rich to the US government.

  15. Murky

    I detour here from the topic of regulatory oversight, to make comment about comments.

    There seem to be two groups of people here:
    1) Those quite knowledgable about the financial services industry, and
    2) Those who are furious at ‘banks’ but don’t have financial expertise.
    I’m probably somewhere in the middle. And though I’ve stuffed my mind with literature from Bill Black, Simon Johnson, Joseph Stiglitz, Gretchen Morgenson and others, I am still kind of stuck. I am struggling to understand how the financial services industry can possibly be ‘fixed’. Of course, most of us who read here already know that derivatives should be regulated, that regulatory agencies need teeth, that incentive structures for Wall Street need to be fixed, and so forth. Making it happen is what’s so impossibly difficult. I certainly don’t have the answers, so I’m glad for informed opinion from others here when I can get it. It’s really up to the experts, like Bill Black and some others here, to guide the broad public anger against the financial services industry in the right directions.

    I want to respond to several posts in the current thread which suggest that violence is some kind of solution to the problem of banksters and corrupt financial oligarchs. “Kill ’em all” was once such comment. Unfortunately, any attempt to take violent action against ‘banksters’ would more than likely just lead to a strengthening of the police apparatus of the state. You’d never get all of the banksters anyway, no matter how systematic the attempt. Radical political groups like the Weather Underground from the 60’s & 70’s likewise embraced violence as a form of social justice, but their efforts led to failure and changed nothing. They ended up getting blown up by their own bombs or serving long prison sentences.

    A better perspective for fixing corrupt banking practices is to look back to the Great Depresssion, and see how the abuse of that time got fixed. It took a decade for new banking rules and public benefits to be put into place, and only after a lot of social upheaval. I hope the current public outrage is enough to push the US government into real reform, but the whole system from lobbying to elections is so thoroughly corrupt. I’m not sure real change can take place without more serious collapse first. People can lose their homes and their jobs, but that is not enough. I think banking interests and financial oligarchs have to blow themselves up without possiblity of rescue, before the system gets a real fix. Southern European banks appear to be on the verge of collapse right now, and the social upheaval that results may be just enough to rethink the entire economic system. Have I got this right that things need to get worse before they get better? Just trying to get educated; informed opinions welcome.

    1. psychohistorian

      The problems with the fixes put in after the depression of the 30’s is that they have gone away because the underlying structure and ownership of finance did not change. The global inherited rich that were in control of all banking and money supplies still are and even more so now than pre depression.

      Have you read the Shock Doctrine? Doing so would give you a glimpse into the financial imperialism that has occurred in the past 50 or so years.

      Shhh, don’t tell anyone but we live in a class based society in which the global inherited rich have been at the top for centuries. This arrangement continues to be supported by the folks with blinders on like F Beard, a prolific commenter and defender of his blindness on this web site.

      1. Murky

        Appreciate the reply. To be honest, I cringe upon hearing your recommendation of Naomi Klein’s The Shock Doctrine. A friend sent me a copy of the book months ago, but I rejected it after a quick examination, and after I read several reviews. It looked thick with ideology and journalistic sensationalism. To me it’s a bit like reading Marx, and having his notion of history and class warfare shoved down my throat. Some obvious points of Klein’s I agree with, such as rejection Milton Friedman’s free market fundamentalism. But I will give the book another look, and thank you for the recommendation. Academic quality literature is my preference, but if there is some content of merit in Klein’s writing, I will find it.

        My own academic background is in Russian and East European area studies. I have read so much literature heavily laden with ideology, that I have come to a firm conclusion. Ideology warps clear thinking and can justify anything, including murder. So I generally steer clear of writers who’ve got some ideological agenda. Democrats and Republicans have also gone overboard with their ideologies, to the point where there is gridlock, animosity, and no common ground to settle ongoing business.

        An ideologically free world would be my preference, but that’s not reality. Getting hammered with ideology is part of modern life. O well, I’ll try to make the best of Klein’s book.

        1. Nathanael

          Naomi Klein’s writing is extensively footnoted.

          You are taking a bad attitude towards your reading — and dare I say it, an intellectually lazy attitude. Ideology may be right, it may be wrong, but what matters to an intellectual is whether it is supported by *evidence*.

          Naomi Klein’s work is *heavily* supported by evidence. If you don’t like her style, just go through and read every single reference with an open mind, and you’ll come to the same conclusions she does. Of course, that’s a lot of work.

          1. Murky

            Hi Nathanael. You write that I have a “bad attitude”, and that I am “lazy”. That’s ‘ad hominem’, meaning that you attack me rather than the my arguments. I’d really like to hear your views about Klein, without getting slammed with more personal attacks.

        2. Nathanael

          I will caveat this by saying that I am judging the footnoting by Klein’s earlier work, not having actually read _The Shock Doctrine_. For all I know she left the footnotes out this time.

        3. Carla

          Murky, may I suggest that you try reading Bill Still’s book, “No More National Debt” ?

          It is not particularly intellectual, and I don’t think it’s ideological, but you may find it informative.

          Right now, I’m reading “The End of Growth–Adapting to Our New Economic Reality” by Richard Heinberg — which my daughter sent me for Mother’s Day (she knows her Mom).

          1. Murky

            Hi Carla. We can trade book recommendations! Currently I am reading White House Burning by Simon Johnson and James Kwaak. It’s on the very same subject, the national debt, and it’s a good read.

        4. Lambert Strether Post author

          I too would classify Klein as a journalist (and not as a stenographer) and clearly, footnotes do not a scholar make.

          However, if you can suspend demands for academic rigor, I believe you will find Klein compelling, and that her views, at the 30,000 foot level (where Shock Doctrine, as an idea, resides) persuasive. The book is sensational, but only because we live in sensational times.

        5. financial matters

          I find Shock Doctrine (2005) to be a modern continuation of Michael Hudson’s ‘Super Imperialism’ which was originally written in the early 70s. Both I would say are very well researched and documented. I found Hudson’s book to be a tougher read while Klein’s reads somewhat easier more like a detective story.

      2. davidgmills

        So I guess you think that we should continue to let the banks print our money (even though you see that the same banking dynasties have been around for centuries) rather than do what the constitution requires — having our government print it.

        1. Carla

          Well, David, perhaps you agree with me that our government should spend debt-free money into the economy to build the physical and social (health & education) infrastructure our country so desperately needs.

          But first, apparently, we have to get our government out of the clutches of the centuries-old banking cartel and working for US, the way they’re supposed to do.

          1. davidgmills

            Absolutely. But I don’t think we will ever be able to do that unless we resort to the guillotine solution. These people who don’t think violence is necessary to overthrow this kind of immense power are dreaming. And unfortunately, heads need to roll all over the world at the same time to beat this monster. Beating the financial powers here but leaving them able to survive elsewhere will only mean they will come back here sooner or later.

    2. JTFaraday

      “Regulation” is not going to work in this case. End of story. Don’t even let the liberal weasel word pass your lips again.

      These systemically dangerous institutions and other weapons of mass financial destruction need to be eliminated entirely.

      That was the reference to “kill ’em all” to which you took such umbrage (so as to afford an excuse to name drop the dread Weathermen–ooga booga!).

      No regulation. Just kill ’em all. I happen to like “Kill ’em all.” That would be my opening position.

      1. Nathanael

        To me, “regulation” means arresting and imprisoning the people currently running the megabanks, for their myriad criminal activities. When a few thousand of them are in jail and barred for life from the financial industrial, that will be “regulation”.

        Admittedly, even that sort of “regulation” doesn’t always work, but it does have a chance of working.

        1. JTFaraday

          No, that’s not (weaseling) that’s criminal prosecution. The only thing regulation about that is the jumpsuit.

      2. Murky


        “These systematically dangerous institutions and other weapons of mass financial destruction need to be eliminated entirely”

        Well, duh! Agree completely. Now, exactly what is your plan to get rid of them? You do have a plan right?

        Glad that you have interest in the Weather Underground. Me too! Fascinating history. I even admire several of these people. But I can’t endorse their use of violence. I just don’t think their bombing and other violent actions against the state was effective. It’s a great expression of open hatred, sure. But the Weather Underground didn’t change the system at all. That’s my problem with their radicalism.

        1. Lambert Strether Post author

          See Mark Rudd’s site for an atypical treatment of the Weather Underground. It’s been pretty amazing to see lethal, self-indulgent buffoons like Ayers and Dorhn popping up again and even being lionized in some circles. Doubling down on #FAIL isn’t a behavior exclusively confined to the Beltway elite, it seems.

      3. Lambert Strether Post author

        Re “Kill ’em all” — You can keep pulling up weeds, or you can spray your garden with petrochemical poison. Or you can mulch and encourage a polyculture where the plants you want can outcompete the weeds. I know which alternative I prefer.

        1. F. Beard

          Or you can mulch and encourage a polyculture where the plants you want can outcompete the weeds. Lambert Strether

          I prefer that too. Of course we need to stop government from fertilizing the weeds and punishing the other plants.

    3. emptyfull

      Yes, I think we’ll need a bigger, badder collapse before real reform becomes possible. With Europe about to go down, I’d say that the next opportunity will come soon. BUT the bankers won the first crisis and they may well win the second. I think it’s going to be at least 2016 before anybody

      As to violence, I make it a policy to assume that anyone encouraging it is a government agent (some of the most radical 60s voices were). It’s silly to think that anyone in power would be afraid of protester violence. They have Blackwater and drones, and violence just scares away decent people. Non-violence is the only effective tactic. But it takes a long time. Our nation still has a basic moral core that can be appealed to; the God of justice has risen before in our history and can be called on again.

  16. p78

    “Entities called hedge funds typically speculate rather than hedge. When I call the CIO a “hedge fund” I mean that it largely speculates and disingenuously calls its bets “hedges.””

    I’ve always wondered about English language’s honesty: in other languages, “speculative fund” is the translation for “hedge fund”.

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