Large and In charge: Banksters and Goverment Planners

The Room For Debate blog at the New York Times website had five contributors provide their views on bank reform. I thought almost writers made worthwhile points.

The exception among them was ex-investor banker and government shill Doug Elliot. According to Elliot, "It’s true that the financial industry is winning some of the fights, but we will still see a substantially safer financial system at the end of the day." According to Elliot, we should all move along and concern ourselves with more important matters like the NFL playoffs or MTV's Jersey Shore, because the honest politicians and brave bankers will wrestle out the weighty issues far beyond the grasp of mere mortal citizens, and will develop winning, if slightly compromised, reform. For some strange reason, the image of of a steaming pile of bovine fecal matter comes to mind.

Yves Smith, author of the popular economics blog Naked Capitalism, quickly reveals Elliot's spin for what it is, flat out wrong. The bankers and politicians, in fact, are not on opposite sides at all, but working hand in hand:

As for Congress, follow the money. Here’s an example: Representative Melissa Bean, a Democrat from Illinois, received more than 92 percent of her campaign contributions from January 2005 through December 2007 from outside her district. She has also received more money from the financial services, real estate and insurance industry than any other member of the House Financial Services Committee.

Ms. Bean last week proposed an amendment that nearly derailed the reform bill, to reduce the ability of states to impose regulations on financial services firms that were tougher than federal rules, which would shift more to bank-friendly regulators like the Office of the Comptroller of the Currency. Illinois’ own Attorney General Lisa Madigan has criticized Ms. Bean’s amendment, pointing out that the Federal government has frequently blocked state reform efforts. Is Representative Bean really serving the interests of her constituents, or those of her donors?

The reform we will see, if left to politicians and bankers, will be simple and easily bypassed window dressing to the house of cards known as our financial system, and Megan McArdle calls attention to the obvious reason why:

Bankers have too much power in the Treasury department and at the Fed. They’ve convinced the government to cut them the sort of “heads-I-win, tails-you-lose” deals usually associated with third world oligarchies.

William K. Black, a former federal financial regulator, and author of the book "The Best Way to Rob a Bank is to Own One," provides the historical context:

Finance C.E.O.s extortion gutted accounting rules to avoid recognizing loan losses so that they could continue to receive tens of billions of dollars in bonuses based on fictional numbers. Frederic Bastiat (“The Law,” 1850) got this aspect right:

When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.

The last six administrations (from Carter on) pushed the financial deregulation that caused recurrent, intensifying crises. The financial sector is a parasite, growing from 2 percent of corporate profits to 40 percent. This massive profit growth exported jobs, maximized income inequality, and caused the Great Recession.

Five bank holding companies control 50 percent of all bank assets. The finance industry is the leading political contributor. When the Supreme Court strikes down limits on corporate campaign contributions, the industry’s power will increase.

Professor James Galbraith’s and Thomas Frank’s books, “The Predator State” and “The Wrecking Crew,” show what happens when “fat cat bankers” and their sycophants run the state. To end the plunder we must break the systemically dangerous institutions’ power and the culture of fraud and impunity that supports it. This is sound economics, criminology, law, political science and ethics — and Americans support this policy.

The financial services industry is riddled with corruption - widespread, institutionalized, blatant, even celebrated corruption. While at one time even the most hardcore free-marketers framed the concept of self-interest in terms of ethical and social behavior, what we see today is better termed unenlightened self interest. Black's use of the term "parasite" to describe the financial industry is wholly appropriate.

Edward Harrison of Global Macro Advisors and Credit Writedowns, however, is the only contributor in the series that gets to the heart of the matter. As parasitic as the financial sector is, it owes its existence to its hosts, the Federal Reserve and government, both of whom have continued to feed and support its growth:

In truth, the events that led up to systemic failure were not unforeseen. Moreover, the financial meltdown was not merely a liquidity crisis. Rather, we have experienced a solvency crisis that should be seen as both predictable and ongoing.

Since this crisis was predicted by so many as a result of reckless lending because of abnormally low interest rates and a lack of regulatory oversight, any reforms must address these two problems. The Federal Reserve’s failings are central here. Had the Federal Reserve exercised its regulatory function, it could have prevented predatory, risky loans made at the height of the housing bubble in both residential and corporate real estate. Moreover, the Federal Reserve held the Fed Funds interest rate at 1 percent for too long and raised rates much too slowly, sowing the seeds of excessive speculation.

The sins of the Federal Reserve are numerous, which is why I support Ron Paul's effort to Audit the Fed, but its greatest harm to the economy has been to create a system-wide dependence on cheap and easy credit. All the bubbles that busted - personal credit, home mortgages, commercial real-estate development, derivatives investments, corporate leveraged buyouts, and so forth - were the result of market forces responding to artificially cheap and expanding money, propping up an illusion of prosperity.

Alan Greenspan, chief architect of cheep money during his time at the helm of the Federal Reserve,admitted on The Daily Show (score one for fake news) that a free market is incompatible with a central authority that arbitrarily sets interest rates:

(starting at 2:23 of the video)

Jon Stewart: Many people are free-market capitalists, and they always talk about free-market capitalism, and that is our economic theory. So why do we have a Fed? Is the free market – wouldn’t the market take care of interest rates and all that? Why do we have someone adjusting the rates if we are a free-market society?

Alan Greenspan: You’re raising a very fundamental question. … You didn’t need central bank when we were on the gold standard, which was back in the nineteenth century. And all of the automatic things occurred because people would buy and sell gold, and the market would do what the Fed does now. But: most everybody in the world by the 1930s decided that the gold standard was strangling the economy. And universally this gold standard was abandoned. But: you need somebody to determine –or some mechanism – how much money is out there, because remember, the amount of money relates to the amount of inflation in the economy. … In any event the more money you have, relative to the amount of goods, the more inflation you have, and that’s not good. So:

Stewart: So we’re not a free market then.

Greenspan: No. No.

Stewart: There’s a visible – there’s a benevolent hand that touches us.

Greenspan: Absolutely. You’re quite correct. To the extent that there is a central bank governing the amount of money in the system, that is not a free market. Most people call it regulation.

Stewart goes on to eviscerate the illusion of a free market, and while Greenspan somewhat defends the Federal Reserve's role of lessening financial uncertainty, even he comes to the inevitable admission of every central planner or centrally planned economy:

(starting at 6:45 of the video)

If I could figure out a way to determine whether or not people are more fearful or changing to more euphoric, and have a third way of figuring out which of the two things are working, I don’t need any of this other stuff. I could forecast the economy better than any way I know... The trouble is that we can’t figure that out. I’ve been in the forecasting business for 50 years. … I’m no better than I ever was, and nobody else is. Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn’t changed. We can’t improve ourselves.

So returning to the subject of reform, the point is that it is important to reform the role of the fed and government while also looking at ways to reduce the parasitic grip of the financial sector. It is a matter of national security to ensure that no bank is deemed "too big to fail," but a greater imperative is to reform the Fed and the Government's ability to artificially expand credit, and as a result, the illusion of prosperity.