Michael Hudson and Pierre Rinfret: The Myth of Alan Greenspan

Although he is now passed away, and his internet site has been discontinued, economist Pierre Rinfret published some rather pithy descriptions of the people whom he had known during his long career as an economist in the commercial world, and the halls of power of the US government.    I was reminded of that today by the video from Michael Hudson which is included at the bottom.

Pierre Rinfret was a very good economist with a long and successful career, but made a fairly awful politician to say the least.  That is to say, he was not a politician at all, and why he ever let them talk him into his one fateful run at it is still a bit of a mystery to me.

He was famous for telling the economic truth, even when those in power did not want to hear it.  And he was outspoken, too much so for the pampered princes of politics and the media.   He himself was often naive I think, in believing that the truth would prevail even among those who were determined not to see it because it conflicted with their interests, and that those to whom he had been loyal would repay him in kind.  He was 'set up' to take a loss in his run for governor of NY.   But that was just politics and he had made quite a few enemies, especially amongst the emerging neo-conservatives who took control of his beloved Republican Party. 

I had the opportunity to discuss quite a few things with him before he died, and I found that his information often tracked with things that I knew. We differed greatly on some subjects, especially when it came to certain loyalties he held to faithfully, and on the role of the US dollar as reserve currency going forward. But I welcomed his perspective given the differences in our age and his direct experience with so many of the famous and with the Great Depression. He was an intelligent and often passionate man with a good heart.  I was sorry to see him go, and I remember him in my prayers, as I will remember you.

Here is his stated reason for producing his site.

"I have come to realize that the vast majority of decent, wonderful people, have no idea how they are being hoodwinked day in and day out by the scum of this world. We are lied to, misled, bamboozled, suckered, cheated, misrepresented, conned, manipulated and royally screwed!

They take us to the cleaners day in and day out in every way possible. We, the people, pay the price of their cheating, their folly, their lying and their sheer stupidity."

Although he discussed a wide range of subjects on his website, and had a wonderful section on the Great Depression, what had made it controversial was a set of memoirs called 'People I Knew' that remains only in the internet archives now.  We have to keep in mind that what he says are one man's opinions, and everyone is subjective whether they realize it or not, especially in their opinions of other people.  So I try to concentrate on the facts in what people say, and take the opinions with a grain of salt.

His description of Alan Greenspan was very similar to the description provided here by Michael Hudson in the video interview below.

Here is what Pierre had to say about his impressions of Alan Greenspan:

"I first met Alan Greenspan in 1948 when we both attended the New York University School of Commerce, Accounts and Finance. At that time I was the senior fellow in the Economics Department. The run in was a forerunner of his behavior throughout his entire life. But I am not going to bore you with the gruesome details.I have, therefore, known Dr. Greenspan for more than 50 years and I must say that he has always underwhelmed me! I was in the class of NYU before him and our paths crossed innumerable times in our professional careers.

I debated him on many an occasion, we shared many speaking platforms together, we both worked for Richard Nixon in the 1968 and 1972 campaigns as well as in between , we both graduated from NYU undergraduate school and Graduate School and we both ran our own economic and financial consulting businesses. In addition we played golf together more than once with mutual friends.

One of the absolute lies about him is that he retired from his consulting business a wealthy man. Absolutely and totally untrue. When he closed down his economic consulting business to go on the Board of the Federal Reserve he did so because he had no clients left and the business was going under.We even went so far as to try and hire some of his former employees only to find out he had none for the 6 months prior to his closing. When he closed down he did not have a single client left on a retainer basis. His only source of income was his speech making. As a speaker he had to be the ultimate bore exceeded only by Paul McCracken about who Richard Nixon told me on many an occasion "When he talks MEDGO" meaning "my eyes doth glaze over".

He had a horrible record on forecasting the American economy.  He missed calling, in advance, every single recession in the entire postwar period with only one exception. He neither called recessions nor expansions for the very simple reason that he has never been one to stick his neck out. In American industry they don't pay consultants for Pablum or for saying what everybody else does! And that is what he has always served up:  Pablum...

The driving force that may push Greenspan more than anyone or himself realizes is that he graduated from the "Bronx High School of Science" and that his peers included one Henry Kissinger and other famous (infamous?) politicians of about his age. A classmate of his once said to me that Alan had to prove to them that he was as smart as they were...

I once called him a political hack in a speech before the Chamber of Commerce in Chicago and I did not retract that statement then or now."

The problem is not that Alan Greenspan himself may have been 'a hack' who was willing to say and do whatever power politics required.   There is certainly evidence that he was surrounded by secrecy, and a bit of mythology regarding his infallible judgement that was promoted at the time by the popular press.

The real problem is that being a hack has become fashionable, almost de rigueur, and public policy decisions are being regularly distorted by hacks, economic and otherwise, who are willing to say and do almost anything to curry favor from power, but often dress those political opinions up as science.

 And they are defended by other economists and media people  and talking heads who also seek to curry favor from power, in a pyramid of intellectual corruption.    I have seen this contagion destroy very large companies, and apparently that works for countries as well.

This is of course nothing new.  I have previously written about the book and testimony of A. Newton Plummer, a Wall Street 'public relations man,' who had testified to Congress, most effectively with a suitcase full of cancelled checks in hand, about the widespread payoffs to almost every financial pundit on the Street, that helped to fuel the rampant fraud that led to the Great Crash of 1929.

 

Financial collapses that are not due to natural disasters or war are always founded in fraud.  And if you dig a bit, you will find that there are individuals behind it.  It is not some random madness, but a weakness of character, a perennial gullibility, a feeling that 'everyone is doing it,'  that seems to be exploited periodically by heartless individuals.

Pierre was of the opinion that not everyone is bad, and he was no misanthrope as you can tell from his first quotation above.   But there is always a small number of people who will say or do almost anything to get ahead, and who will obsessively seek money and power. 

In certain periods of history they seem to become more socially acceptable, and less furtive.  And by example and influence they can corrupt the weak, who are many.   I had come to a similar conclusion based on personal observation, and the theory of the white collar sociopath as a foil to the romantic notion of the efficient markets hypothesis and the natural goodness of markets.  To assume that people are perfectly rational and self-effacing actors, like angels, is a dangerous folly.

People are corruptible, some more readily than others, and there are those who are a bad sort, a bad seed if you will, who will corrupt them if the system and the people do not actively oppose it.  It seems fairly simple and common sense when said that way, but if you apply it to certain financial systems and their underlying assumptions, you see their weaknesses exposed.  

 

Corruption hides, and so you look for those who operate in the dark.  When things seem to come mysteriously rushed out of nowhere with little factual basis behind them, and don't make sense, then they probably don't.  This holds true for the Iraq war, and the bank bailouts, MF Global, and the financial and commodity market scandals that are yet to be revealed. 

These are dangerous times of course, because when a people, a nation, have bought into a lie, occasionally they decide that they have gone too far to return, and follow their deceits, straight into a living hell. This is how even an educated and civilized people can, on the whole, gradually become torturers and monsters, often without even realizing it.

"Those who can make you believe absurdities, can make you commit atrocities."

Voltaire

So we see times when corruption seems more prevalent than others.  I think we are in such a time now, as a legacy of the embracing of the 'greed is good' mentality in the 1980's.  Where it will take us, who can say.   But it seems fairly clear that the economic system can only be restored to some working order through reform, transparency, and accountability.

Michael Hudson: Firing Alan Greenspan

By the way, before you write me about it, I do not agree with Michael Hudson on Social Security, and his aversion to taking out money as 'pre-savings.' I think the fact that it is pre-paid insurance, rather than a pure social spending program, without means testing, is one of its enduring strengths. Its greatest single problem is that the deduction cap has not kept pace with inflation. And I think Obama is willfully undermining it with these payroll tax cuts, but that is a matter for another day. But I do find those who promote canards about those bonds in the Trust that seek to justify a 'selective default' in Social Security to be contemptible. If those bonds are no good, then no US bonds are good, and it is time to restructure, revalue, and reissue the currency. And issue plenty of indictments. Therein lies the credibility trap.

ETFs Part 2: The Next MF Global or Trigger For a Broader Collapse - But Timing Is Everything

It is the introduction of synthetic derivatives in place of actual holdings, and the abuse of counterparty exposure with one's own organization thereby concentrating risk, that start to make these financial creatures look even more deadly, and more like control frauds, than one might have previously imagined.

I think that when one of these constructions fails, as one must almost surely do, we will then have either an MF Global moment, wherein one institution goes down and quite a few customers find that they are holding worthless paper instead of assets, or even worse, an enmeshed counterparty risk triggers another Lehman-like freeze in the credit markets and, as the dominos fall, a new financial crisis even worse than the last.

The nastier version would almost certainly occur if the failure and subsequent disclosure of fraud occurs in some commodity ETF. Why?

In that instance it is more difficult and much more noticeable, although not impossible, for the Congress and the Fed to throw loads public money, and subvert justice, to make the problem and full disclosure of fraud to go away.

Stocks and bonds are relatively easy to counterfeit; physical commodities take a little more energy, boldness, and imagination, the challenge of the shell game rather than the relatively mechanical process of inflating the world's reserve currency on behalf of financial friends with benefits.

So before you short stocks in your trading account, with abandon and quite possibly into insolvency, keep in mind that the Fed is perfectly capable of fomenting another bubble to save the status quo, as they did in 2002-2007. To underestimate the corruptibility of the Fed and the government in partnership with the banks and their corporations can be a costly lesson indeed.

ETFs – Part 2

By Golem XIV on May 4, 2012

So far so vanilla. Now lets look at how, as the ETF market has grown, the clever boys and girls of finance have found ‘innovative’ ways of pumping those ETFs up a bit, just like they did to Securities.
Use of Derivatives in ‘Synthetic’ ETFs

The main innovation in ETFs has been the creation of what are called ‘synthetic’ ETFs which instead of actually buying or even borrowing a basket of shares, use derivatives to track the value of the underlying market without the need to match its composition. Instead the Synthetic ETF enters into an asset swap agreement with a counterparty using an over-the-counter (OTC) Derivative. Before explaining what the heck that means let’s just look at how quickly the Synthetic market has grown.
Synthetic ETFs have grown very rapidly in Europe and in Asia. In Europe Synthetic ETFs are now 45% of the over all ETF market. Synthetics doubled their market share between 08 and 09.

The key to Synthetics is the Counterparty.

What happens is the ETF Sponsor designs the deal, the AP (Apporved Participant. Usually one of the big banks or brokers) buys the basket of assets to make it, but then swaps that basket with the Counterparty for a different basket of assets in a derivative swap deal. However it turns out that rather too often for comfort, not only will the Sponsor and the AP be the same bank, but more often than not it will be the Asset Management branch of the same bank who will be the Swap Counter-party as well. It is quite common for the same bank to play all three roles. So a single bank creates the ETF, appoints itself as AP so it can fund it and then its Asset Management desk becomes the derivative counterparty in order to mutate the whole thing into a synthetic ETF. Think about what this does to the risk. What was market risk, where the risk was spread out across all the different shares, is now a single counterparty risk. The bank has effectively put all the ETF’s risk in one basket – itself.

But even if it is a different bank acting as the derivative counterparty the situation is only very slightly less incestuous because it is nearly always the case that the Sponsor, AP and Counter-party will all be from the same small group of big banks, brokers and Asset Managers. And it is also a statistical fact that all of them will be counterparties with each other many, many times over, via the over $1.2 Quadrillion of other repo, rehypothecation and derivative deals. This, as the Financial Stability Board’s report on instabilities in the ETF market rather laconically puts it,

…may also generate new types of risks, linked to the complexity and relative opacity of the newest breed of ETFs. The impact of such innovations on market liquidity and on financial institutions servicing the management of the fund is not yet fully understood by market participants, especially during episodes of acute market stress.

Not fully understood? I think we may not have understood what such entanglements of reciprocal risk meant before the first period of ‘acute market stress’, but I think now it is nutty to imagine the banks don’t know how risky such risk incest really is. The FSB report itself concludes,

Since the swap counterparty is typically the bank also acting as ETF provider, investors may be exposed if the bank defaults. Therefore, problems at those banks that are most active in swap-based ETFs may constitute a powerful source of contagion and systemic risk.(P.4)

Please step forward Deutsche Bank and Soc Gen!

A “powerful source of contagion and systemic risk”. Sounds really good for you and me. So why are the banks doing it anyway? The official answer is that using Derivatives means the ETF can track the value of the market more closely. Though few have complained that Vanilla ETFs don’t track closely enough. And as the BIS report points out,

…the lower tracking error risk comes at the cost of increased counterparty risk to the swap provider. (P.8)

But this doesn’t answer why a bank would enter into a swap with itself as the counterparty. The whole idea of counterparties, once upon a time, was to hedge some of the risk in the original deal by passing it off to someone else. Using yourself as counterparty keeps the risk in-house. So once again why?
The answer is, according to the BIS report on ETFs,

…that this structure exploits synergies between banks’ collateral management practices and the funding of their warehoused securities. (P.5)

‘Synergies’ sounds like it should be good. Sadly it may not be. As the BIS goes on to explain,

…synergies arise from the market-making activities of investment banking, which usually require maintaining a large inventory of stocks and bonds …. When these stocks and bonds are less liquid, they will have to be funded either in the unsecured markets or in repo markets with deep haircuts. (P.8)

In essence it costs the banks money to have illiquid assets on their books. The repo markets won’t accept them as collateral unless they come with a deep haircut. So the banks can do little with them except sit on them. Basically it costs the bank to have the illiquid, hard to sell or Repo, stocks on its books. But.. .if they happen to have created a handy synthetic ETF, then everything changes because,

For example, there could be incentives to post illiquid securities as collateral assets [in the ETF Swap]…. By posting them as collateral assets to the ETF sponsor in a swap transaction, the investment bank division can effectively fund these assets at zero cost….

Handy isn’t it? Assets they can’t repo without hefty haircuts can be posted as collateral to their own ETF with the approval of the ETF Sponsor of course – who will just happen to be… the same bank – without those pesky, hurtful haircuts. In fact,

The cost savings accruing to the investment banking activities can be directly linked to the quality of the collateral assets transferred to the ETF sponsor.

The worse they are, the more illiquid, the more the bank saves/makes by choosing to put them in an ETF rather than having them loiter on its books.

…the synthetic ETF creation process may be driven by the possibility for the bank to raise funding against an illiquid portfolio that cannot otherwise be financed in the repo market. (FSB report P.4)

This is surely financial innovation at its shining best.

Now of course the banks will say they would never consider slipping some old tat into their ETF under cover of opacity. Except that they did, every one of them, do exactly that when they systematically and grossly lied about every single aspect of hundreds of billions worth of shabby mortgages which they intentionally stuffed into CDOs in order to shaft and rob those they sold them to. This is a matter of public record...."

Read the rest here.

See also Part 1 - ETFs and Derivatives Will Be the Trigger Event For the Next Financial Crisis



"The World Is Deaf" (ou peut-être, 'fou furieux à nouveau' - Jess)

Ritholtz: An Uncompromised View of Contemporary American Politics and Economics

The excerpts from this interview are to the point, and it is a rather sharp point at that.

I somehow missed them the first time around, probably due to a family illness, but someone sent this extended set of excerpts from the two interviews that Jonathan Miller did with Barry Ritholtz.

To say that Barry Ritholtz 'pulls no punches' is like saying that Joe Louis had a nice right cross.

Its a good read for a Non-Farm Payrolls Friday. Forgive me if you have already seen it.

Enjoy.

"I have libertarian friends who are always bitching about government. I always say to them, when a dog bites you in the ass... that's what dogs do - don't blame the dog. Look up the leash and see who is holding the handle. When you look at Congress - Congress is the snapping dog.

But they are somebody's bitch. You have to see who is holding the leash. Very often it is banks and Wall Street and the financial sector having Congress do its bidding. Most of the things that got us into trouble have been done at the bequest of the banks...

I don't want to say Congress are whores, that go to these corporate executives with knee pads and lip-gloss. Congress is corrupt. Politicians in both parties are worthless...They don't even hide how corrupt they are anymore. It just came out that one of the new guys had sent out a note to CFO's asking them what legislation they would like to see changed. They will do anything for any kind of campaign contribution... (Not coincidentally most politicians are also lawyers - Jesse)

To me, if you give up your virtue for money, you are a prostitute. Credit rating agencies are prostitutes...

There is no such thing as rogue traders. There are only rogue banks. If you are that grossly negligent that you have to be rescued by the government, then I guarantee you they are doing lots of other things wrong. If you have an entity that messed up so badly that it can't survive... how are you going to go out and run a marathon? Jamie Dimon is the next CEO who needs a humbling...

Putting Rubin, Summers and Geithner in power was the tragedy of the Obama administration. Obama and Bush were both given an opportunity to be transformational - a Churchill, a Roosevelt. Obama's problem was that he sought out the biggest asshole in America - Robert Rubin... (Note, he later recants and nominates Larry Summers - Jesse)

Greenspan has to go down in history as the worst Fed Chairman... (He has my vote - Jesse)

I look at bankers like 5 year olds - if you give a 5 year old a bowl of chocolate bars and say they can have one... As soon as you leave the room they will eat until they are sick. Bankers are no different. As soon as you say, 'You're a big boy... we trust you not to blow up the economy and send the world to the precipice...' They are so short-term focused, they will do whatever is necessary to get that bonus, and then will let the world go to hell and let it be someone else's problem. (History of the World, Part 3 - Jesse)

The whole run-up from 2003-2007 was make-believe, (Ponzi scheme, control fraud, take your pick - Jesse) based on risk not mattering. If risk doesn't matter, you mash your foot to the carpet and let the speedometer go up to 250. When the driver hits the wall he kills himself. The difference is the driver kills himself, but the bankers take everyone with them."

Jonathan Miller, Interview with Barry Ritholtz

The first decade of this century is founded on official corruption, control frauds, the madness of a people incited by the propaganda of fear and ideology, leverage, and the conscious mispricing of risk.  Everything else is commentary.

PBS Frontline: Money, Power, and Wall Street

As promised, this has just become available.  You can watch the first two hours here:

PBS Frontline: Money, Power, and Wall Street

Episode One: Derivatives Spark a Credit Boom and the Mispricing of Risk

                      The Attempted Whitewash - "We never saw it coming."
                      Understates the extent of the fraud and Greenspan and others involvement in promoting a bubble.

Watch Money, Power and Wall Street: Part One on PBS. See more from FRONTLINE.

Banking On Fear: Why the Policy of Stuffing the Banks With Money Does Not Help the Real Economy

"The big banks are buying up what they call fixed income instruments (bonds and other debt backed paper) and at the same time offering CDS insurance on the same. Just like they bought and sold protection on mortgages..."

This is a fairly good description of why the policies of Bush and Obama have failed to effect an economic recovery.

The policy of 'saving the banks' first and foremost, and of stuffing them with cheap money in the hopes that they will stimulate the real economy with loans, is a cruel hoax.

Cheap money is hot money and it seeks high beta returns. It does not seek investment with returns over long periods of time. And in an environment of lax regulation and little deterrence for abusive financial practices, one sets up a scenario ripe for fraud and another, more chilling, financial collapse.

And the problem is not in the US alone. Europe and the UK are following similar practices, of serving the financial elites first, and the people very little or not at all.

There will be no sustainable recovery until the banking system is reformed, and balance is restored to the economy. Growth, not austerity, is the way out of the wilderness.  But that growth is only achievable if the corruption that brought down the system in the first place is corrected and the real economy restored to some sort of natural order and sensible priority.

The hot money seeks out speculative returns, and when it cannot find them, it creates them.  And that is the well spring of fraud, and of many of the corrosive economic problems facing our world today.

The problem is complicated because most of the western political leaders are complicit, by action or acquiescence, in the financial corruption that holds their nations by the throat, and allows the very few to prosper enormously at the expense of the people in general.  The leadership is caught in a credibility trap.  They are unable and unwilling to reform the system, and promote a renewal and  change might bring them down with it as well as the corruption that feeds them with money and power.

"...The problem (one of them at least) is that while our leaders are banking on growth to save us, the banks are not. They are banking instead, on fear. Our leaders keep thinking if they ‘save’ the banks then the banks will help save us by investing in growth. They fail to understand that ‘invest’ is really not something high up on the global bank’s ‘to do’ list. I spoke at length recently to bankers in The City who deal in investing in raising money for Small and Medium businesses. They were unequivocal – it is getting harder not easier to raise money for such investment. The big banks and big funds are looking for short term speculative returns not slow investment returns.

When you have large and growing losses from bad debts you cannot and will not recoup and recover on the basis of wise but slow investment returns. The worse your previous debt mountain is, the greater the pressure to pursue exactly the sort of high-risk speculation that got you in trouble in the first place. If it is a choice between investing in Spanish factories or buying Spanish debt or selling CDS on that debt, the ‘smart’ bonus seeking money goes for the latter every time.

The brokerage Carmel whose study I have quoted is a good example. On page 9 of their study they say,

We began buying Spain CDS in Q4 2011…[with a coupon of] 3.5% of notional per annum –effectively an option premium on the default of Spain.

Should the Spanish crisis flare up in 2012 as we expect, we can generate a 300% return on the annual premium.

300%!   Investing in small and medium businesses or a potential 300% speculating on Spanish default. You choose.

Banks are banking on fear and the volatility fear causes. They are not banking on or helping to support growth. They will do the politically necessary minimum and no more. The big banks are buying up what they call fixed income instruments (bonds and other debt backed paper) and at the same time offering CDS insurance on the same. Just like they bought and sold protection on mortgages..."

Read the rest of this blog from 'Golem XIV' in the UK here.

Also see his essay "We Are All In This Together."

This may also be a good time to read or re-read this essay of mine, Currency Wars: The Anglo-American Century. What is happening in the western world is no accident, anymore that the rise of tyrants and the destruction of freedom are accidental.

Frontline: Money, Power, and Wall Street

Coming April 24 and May 1, four hours in two parts.

There has been no genuine and effective reform, and no real recovery. And there is clear and present danger of another financial market collapse.

The truth of what really happened was led down a blind alley, and strangled. And no one saw or heard anything.

When it becomes available I will put up a link for those who would access it via the internet.

Watch Money, Power and Wall Street on PBS. See more from FRONTLINE.

Biderman: Real Time Economic Data Shows No Recovery, US Dollar Is a 'Phantom.'

"Gold is not a phantom currency as many say, it is the US currency that is the phantom."

Charles Biderman, February 27, 2012

Charles Biderman gives a step by step analysis of the key data that some say shows an 'economic recovery.'

Accounting tricks, statistical smoke and mirrors, and a stock rally fueled by Fed printing do not reflect the real state of the US economy.

There is evidence that the situation has stabilized.  The problem is that the stimulus which the Fed is providing is not directed towards productive activity sufficient to spark a genuine recovery with a rising median wage. Rather, it is being used to prop up a dysfunctional economy that is still rife with corruption, malinvestment, and insider dealings designed to transfer even more wealth to the top one percent.   And the prescription being offered by the perpetrators, for the maladies of their crisis, is to take more from the poor and the weak, and pay for an excess of fraud with their pains.

And those who know better, with the exception of a notable few, either stand aside and are silent, or sell their integrity to a partisan cause, self-interest, or the highest bidder.

The financial crisis has provided the excuse for what has the appearance of institutionalized looting by a powerful elite through a dual standard of justice and the steady debasement of the national currency. Neither austerity or stimulus will work until the economy is restructured and reformed.   But stagnation is achievable, as long as the dollar lasts.  Or until the great reckoning comes, and the grapes of wrath are pressed.

The Great Crash of 1929 - Bonfire of the Vanities

"There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound. This is a circumstance of first-rate importance. Many things were wrong, but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:

(1) The bad distribution of income...
(2) The bad corporate structure...
(3) The bad banking structure...
(4) The dubious state of the foreign balance...
(5) The poor state of economic intelligence."

"The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them."

John Kenneth Galbraith, The Great Crash of 1929

Galbraith gives a nice description of the credibility trap in the second paragraph. No one speaks out against the fraud or injustice, because their livelihoods may depend on it, and they themselves compromised, if not by action, then by omission.

This documentary from The American Experience is also available on Netflix streaming for those who have access to it. I particularly like this piece because it does not use economic theories and phony rhetoric to obscure and gloss over the financial and banking fraud that was pervasive in the 1920's. The system had been corrupted and compromised, and the economy had been largely hollowed out, like a shell that simply collapsed. 

And the liquidationist, or in more modern terms austerity, policies that followed nearly destroyed the country in the manner of the unfolding tragedy that the world did not yet recognize in Europe.

It is fitting that we review this page of history at this time, having now overturned most of the protections that had been put in place during the 1930's by our fathers to protect the people from financial predators.

It is good for the Banks and the monied interests that the people are so foolish and easily led, that they willingly bare their childrens' throats for them, giving all for the sake of a profane ideology of sneering arrogance and self-destructive greed. 

Cruel gods make for cruel people, people who justify their rites of cruelty as expediency, practicality, and frankness, but which are in reality little more than rationales for emotional deformity, narcissism and selfishness.

Watch The Crash of 1929 on PBS. See more from American Experience.

Describing the Fraud Underlying the Financial Crisis So Even an Economist Can Understand It

William K. Black is one of the US' leading experts on financial fraud in general, and on banking fraud in particular.

This is why you will rarely see him interviewed or even quoted in the mainstream media. And why he gains so little traction with the Congress and this Administration. He is an informed and honest voice, at a time when the status quo just does not want to hear it. They are caught in a credibility trap in which they can admit nothing, investigate nothing, without risking themselves and their 'good thing.'

He has done an impressive but somewhat lengthy interview with Russ Roberts of EconTalk. It is very informative, but would have benefited tremendously from some judicious editing.

I have to caution you in advance that it is somewhat lengthy, so it is best listened to when you have an extended quiet moment. Russ Roberts is a bright fellow, but in the first half he tends to interject himself quite a bit into the narrative, sometimes it seems not really listening well to what Wm. Black is saying. Perhaps he was having an ideaphoric day as do we all. I found it to be a little annoying at times. But he seems to calm down after a while.

But the interview is really a gem, because it explodes so many economic myths and urban legends about the financial crisis.   Efficient markets hypothesis and the virtues of self-regulation are a joke.  I think most of us who are not wedded to some ideological belief already know that, but Mr. Black puts a stake in that theory's vampiric heart. 

Professional economists tend to make lousy public policy, because they have learned to think in theoretical models that only touch reality at statistical intervals. And those models often suppress and crush the significance out of crucial variables of problems that resist adequate measurement for the sake of mathematical expediency, whether it is the propensity of market participants to cheat and do foolish things, or in gravely underestimating fully priced risk and its dynamic consequences. 

So we too often see economists in the media saying foolish things with a straight face, sometimes alas for pay in the manner of what they unfortunately are, but sometimes because, although they may be highly regarded and even esteemed, when it comes to the rough world of hard ball business and greed, they really are, as the kids are often wont to say, 'pwned noobs.'

Economics is a profession currently gasping in autoerotic asphyxiation, choking on intricately useless models and obfuscating jargon. I do not wish to dwell on their problems and challenges facing the hard-working and honest economists in reforming their profession because it plays a more supportive than primary role in the problems facing the world today. The economists, politicians, spokesmodels, and strategic analysts are merely the hired help, the servants, collaborators; the root of the problem is with the money masters themselves. If you wish to know who they are, then follow the money, if you can.

I think it is important to hear the clear voice of experience and reason in this matter, whether you like it or not, whether it suits your self-interest or political biases or not.

Why is this important? Because there is another financial crisis coming, and the monied interests and their banks will be serving up the same set of propaganda and demands, writ larger.   So it now be a good time to unplug yourself from whatever media bubble machine you follow, so you may have at a least a slim chance of coming out of this intact.

You may listen or download the interview here.

"So, it's, I think, really naive to believe that any lender made loans because they thought it made politicians happy. Lenders made loans because it made individual lenders--I don't mean companies, I mean people--much, much wealthier. And they created those incentive structures not because they could care less about people...

...we think this actually is a story, driven overwhelmingly by what we call accounting control fraud; and we think no one much doubts that about the Enron era. And we think there is pretty good consensus on the Savings and Loan crisis as well, because of all the factual record. We had to go up against the best criminal defense lawyers in the world, and we got a 90% conviction rate.

Plus, we satisfied the economists that looked. I quoted from the National Commission, which was run by economists, that concluded that at the typical large failure, fraud was invariably present.

But if you go and read the economic literature on this crisis, you will find that Akerlof and Romer are cited for example in maybe, generously, 1 out of 100 articles that purport to discuss the causes of the crisis.

And you will see that fraud is virtually never discussed as even a potential major contributor. And that is poor; and that is really the tribal taboo that still exists in economics against any serious consideration of the word fraud."

Wm. K. Black

 Daniel 5:25 מנא ,מנא, תקל, ופרסין Mene, Mene, Tekel u'Pharsin

"...A baited banker thus desponds,
From his own hand foresees his fall,
They have his soul, who have his bonds;
'Tis like the writing on the wall.

How will the caitiff wretch be scared,
When first he finds himself awake
At the last trumpet, unprepared,
And all his grand account to make!

For in that universal call,
Few bankers will to heaven be mounters;
They'll cry, 'Ye shops, upon us fall!
Conceal and cover us, ye counters!'

When other hands the scales shall hold,
And they, in men's and angels' sight
Produced with all their bills and gold,
'Weigh'd in the balance and found light!'"

Jonathan Swift, The Run Upon the Bankers

Reprise: The Causes of the Financial Crisis and the Obsessive Folly of Greed

"There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight."

Joseph Stiglitz, Capitalist Fools, January 2009

What I find to be of primary concern is that the prescriptions now being circulated for a cure to the economic malaise is more of the same things that caused the financial crisis in the first place, with the addition of more pain for the middle class and the relatively innocent victims of calculated fraud.

The elite are attempting to rewrite history, and promote a field of servile stooges as candidates in the next election for their selfish benefits. And sadly for the nation, for what I believe will prove to be a tearing of the social fabric.

“People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

John Kenneth Galbraith

Read the original posting from December 2008 about this essay here.

Here is a summation of the Five Major Causes of our financial crisis. As Joe so correctly observes:

1. Reagan's nomination of Alan Greenspan to replace Paul Volcker as Fed Chairman
2. The Repeal of Glass-Steagall and the Cult of Self-Regulation
3. Bush Tax Cuts for Upper Income Individuals, Corporations, and Speculation
4. Failure to Address Rampant Accounting Fraud Driven by Excessive and Flawed Compensation Models
5. Providing Enormous Bailouts to the Banks without Engaging Systemic Reform for the Underlying Causes of the Failure

There are other points that might be added, some that are not strictly financial in nature.

An international monetary exchange system that facilitates manipulation to create de facto barriers and subsidies in support of industrial trade policies. This creates destabilizing surpluses and deficits which may be the source of the next stage of the financial crisis.

The concentration of the ownership of the mainstream media in a handful of corporations has had a chilling effect on the newsrooms and commentators.

The lack of Congressional courage in exercising its obligations with regard to the extra-Constitutional excesses of the Executive Office. Certain mechanisms and instruments that facilitate the unilateral exercise of presidential power are tipping the balance of powers.

The existing system of funding inordinately expensive political campaigns is a breeding ground for favors and corruption.

The undue influence on prices, particularly global commodity prices, that is exercised by a handful of US banks operating far outside of traditional banking charters. This is a dangerously destabilizing influence on the real world economy and industrial growth and investment.

A significant step forward would be the imposition of position limits, greater and more timely transparency for those with more than 10% of any market's open interest, and an uptick rule with stronger enforcement against naked shorting and other forms of short term price manipulation.

Vanity Fair
The Economic Crisis:
Capitalist Fools
by Joseph E. Stiglitz
January 2009

Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.

There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.

What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road—we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.

No. 1: Firing the Chairman

In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown—as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation—or “liar”—loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them.

Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen—for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk—but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else—or even of one’s own position. Not surprisingly, the credit markets froze.

Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn’t put it as memorably as Warren Buffett—who saw derivatives as “financial weapons of mass destruction”—but we took his point. And yet, for all the risk, the deregulators in charge of the financial system—at the Fed, at the Securities and Exchange Commission, and elsewhere—decided to do nothing, worried that any action might interfere with “innovation” in the financial system. But innovation, like “change,” has no inherent value. It can be bad (the “liar” loans are a good example) as well as good.

No. 2: Tearing Down the Walls

The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act—the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest—toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks—the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.

As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation—a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant—and successful—in their opposition. Nothing was done.

No. 3: Applying the Leeches

Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease—the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil—money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.

The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly—and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending—not that American consumers needed any more encouragement.

No. 4: Faking the Numbers

Meanwhile, on July 30, 2002, in the wake of a series of major scandals—notably the collapse of WorldCom and Enron—Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.

The incentive structure of the rating agencies also proved perverse. Agencies such as Moody’s and Standard & Poor’s are paid by the very people they are supposed to grade. As a result, they’ve had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy—that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.

No. 5: Letting It Bleed

The final turning point came with the passage of a bailout package on October 3, 2008—that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues—they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely—which they hadn’t—the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.

The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems—the flawed incentive structures and the inadequate regulatory system.

Was there any single decision which, had it been reversed, would have changed the course of history? Every decision—including decisions not to do something, as many of our bad economic decisions have been—is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You’ll hear some on the right point to certain actions by the government itself—such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

It's the Unfunded Wars and the Financial Fraud, and the Unwillingness to Reform

Yes, the US has some very real long term issues with Social Security and Medicare.

Social Security is being strangled by the refusal to raise the income limit on the Social Security withholding tax in response to the gradual creep of inflation. If this limit was raised periodically the Social Security 'problem' would be resolved.

Medicare and in particular the drug portions of the program added by the Bush II administration are driving costs much higher. And this is more of a problem because of the structural cost problems in US healthcare system. Big Pharma in the US is a powerful lobbying force, and Americans pay MUCH higher costs per benefit for their health care services.  This is inhibiting the steps that are needed to restructure the US healthcare system.

But Social Security and Medicare, without the drug program, have not substantially changed since the 1990's, when the US was running a budget surplus, and then Fed Chairman Greenspan was reassuring the public that the Fed had a plan to deal with the lack of debt.

So what changed?

The repeal of Glass-Steagall and the growth of unregulated financial products, the co-opting of the regulatory agencies, the growth of corporate influence in Washington, and two unfunded and very costly wars of long duration, founded largely on lies and distortions following a despicable terror attack by a small group of people, coupled with tax cuts for the wealthy.

There is relatively little discussion, much less investigation, indictments and convictions, from one of the largest financial frauds in history.

And within twelve months of the crisis breaking, Wall Street bonuses were back to record levels, even as the rest of the country began its long downward spiral into debt, downgrade, and despair.

That is the long and short of it. And it bodes ill that these issues are so infrequently mentioned in the political and economic discussions circling Washington and New York today.

Rational discussion and factual analysis has been overwhelmed by a well funded program of propaganda and sloganeering, and bought and paid for politicians and media which serve to direct the discussions according to the program of the monied interests.

And this is why the outlook for the US is so negative. Governance has failed, the system has been thoroughly corrupted or co-opted, and the planning and discussions cannot gain traction. Some have recently referred to Obama's clarity gap because it is so unclear what he stands for, what principles he is willing to fight for.

The politicians of both parties, the media, and the business leadership are caught in a credibility trap in which the root causes cannot even be discussed, must less addressed, because they have all been involved in or benefited from a massive injustice in the financial frauds. They are complicit, and cannot act openly and honestly for fear of losing control of the debate, and of subsequent discovery.

"Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity."

Lord Acton

And who do we see on American television this morning, providing economic advice and promoting the Wall Street prescription for a cure through a return to more bank deregulation? The angel of economic death, Alan Greenspan, a man without shame or honor as one of the great authors of the misrepresentations and mismanagement that led US into the financial crisis which rewarded the few at the expense of the many.

"The liberties of a people never were, nor ever will be, secure, when the transactions of their rulers may be concealed from them."

Patrick Henry

The real issue at the end of the day is reform. The US has been led down a dark alley and strangled in what history may recognize as a financial coup d'etat, and a campaign of economic war against the common people.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery.

The US 'Debt Crisis' in One Picture

And the O-Man can be Aunty.

“Great occasions do not make heroes or cowards; they simply unveil them to the eyes of men. Silently and imperceptibly, as we wake or sleep, we grow strong or weak; and at last some crisis shows what we have become."

Brooke Foss Westcott

What's Going On In The Silver Market: Audio Interview with Harvey Organ

First a bit of housekeeping. There will be no chart updates tonight.

Here is an interview that may be a little overdone in some parts, and with the opening codenames, but is very interesting, containing an abundance of informative content nonetheless. This is an interview from December of 2010. I thought it would be interesting to reprise it now, because so many of the things which they say are unfolding even three months later. The gold/silver ratio has dropped to 41, and silver has rocketed higher in price. I missed it initially because of an illness in the family.

Harvey Organ is a wealth of knowledge and detail.  I am not sure what is happening obviously because of the opaque nature of the situation and the apparent dissembling and obfuscation regarding the facts, especially in a period in which fraud has been revealed to be rampant in a variety of financial transactions.  I mean, really. How can one be certain of anything when dealing with this brood of vipers running the financial system?

And yet trust and confidence is at the very heart of a well functioning free market system for the allocation of capital and the pricing of goods.  And so it seems that crony capitalism could write its own epitaph in its mindless pursuit of greed. It is this abject and otherwise inexplicable failure to reform the financial system and break up the Wall Street Banks that undermines the economic recovery. I can think of no more obvious reason than a credibility trap.

The shorts appear to be trapped, and are playing for time, in what seems to be an increasingly untenable situation. I mean, unless you are completely naive or a book-talking dolt, having one or two institutions short about 25% of the world supply does seem a bit much, especially with all the secrecy surrounding it, and the inability to demonstrate that this is due to legitimate hedging by producers, information which should be disclosed since it absolutely impacts the valuations of publicly traded companies.

And it's a serious issue for the powers that be, because the trapped fish are some very big fish indeed, and may be connected to other things in other markets, and much bigger fish, perhaps the biggest in their ponds.

Before that happens, and after a protracted period of trading antics in which Blythe is given some leeway to try to wiggle out of the problem, I think that they will be told to 'throw in the towel,' and let silver run to roughly 16:1, from the existing ratio of about 41:1, with whatever price they can tolerate for gold given their limitations, on the basis that this is the historical and natural balance.

Without admitting any wrongdoing of course. The Fed can print enough paper to cover their losses. I suspect this would be done in concert with some other crisis. So I would not be looking for JPM to 'crash' per se. Rather, I would look for the next bagman patsy for a stealth bailout of the banks such as the role that AIG played for the Street in the 2008 financial crisis.

This gives me rough targets of $2000 gold and $125 silver. If you prefer $400 silver, then you should be looking for gold around $4000. And I think gold will at least reach a ratio of 2:1 with the Dow Jones Industrial Average, and maybe 1:1, so take it from there.

But first they have to dampen any talk of placing silver in the SDR basket if it is given international reserve status in lieu of the dollar. And then they have to persuade the world to move on, and not take any inconvenient notice of this particular fraud, as it may lead to questions about all those other frauds and deceptions being played, well-intentioned as they think they may be, or at least as they represent them, as in the case of the Wall Street bank bailouts, the insider trading, naked short selling, fraudulent financial instruments, campaign payoffs, and revolving door sinecures.





Harvey Organ's Gold and Silver Report

"As for the gold-silver ratio? It currently stands at about 41. Deutsche Bank, in a not particularly daring forecast, says it should fall below 40 in 2011 and 2012. We’re nearly there.

They run through some history that hints that the ratio could drop even further. Among their tidbits:

* From the 12th to the 17th century, the ratio held at about 12.
* Isaac Newton set a ratio of 15.5 early in the 18th century.
* The earth’s crust: silver exceeds gold by a ratio of about 18.75.

Lastly, China and Hong Kong were the last places to abandon the silver standard, in 1935. The China word for bank: Silver House.

'Trading activity from China has increased considerably over the past several years; we believe that much of this is a function of increased investor demand within the country as inflation threats build.'

So, like any good bull story these days, China plays a role."

Deutsche Bank: Silver Will Keep Streaking

Additionally, here is something a little more controversial. I am not quite sure what I think about it yet. In this interview Harvey is discussing what he perceives to be the musical chairs nature of GLD and SLV, Part 1 and Part 2. They work well in what might be called 'normal market conditions.' I would not use the word fraud, as it appears that it could be more in the nature of undisclosed counter party risk. And of course, I have little to no background in securities law. It is my very lack of knowledge that made this discussion interesting.  I do think their comparison between PSLV and SLV is unfounded and incorrect, because one is a closed end fund and the other is an ETF. 

I have felt for some time that Brown's Bottom in gold, the sales of England's bullion near the bottom of the market, were stealth bailouts of a bullion bank or two caught short in deals such as those discussed in the above interview.

No matter, these markets do appear on the surface to resemble a house of cards.  And this is cause for me at least to view them with concern, especially with the rank failures of regulation which the financial crisis recently disclosed.

American Monster: Excerpts from The Madoff Tapes

“It’s unbelievable. Goldman … no one has any criminal convictions—the whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”

Here are some brief excerpts from a story in New York Magazine called The Madoff Tapes. The story runs to nine pages, so consider this just a taste and read the whole thing when you have the time. I thought Steve Fishman did a terrific job of letting Bernie talk and of presenting his thoughts in a orderly manner without a lot of interpretation and editorial intrusion. He has real talent as an interviewer, and seems a natural reporter.

But while you read this bear in mind that you are seeing reality interpreted through the eyes of Madoff, a master manipulator and pathological liar, an individual perhaps in deep denial, but the question is, to whom.

His psychiatrist in prison tells him he is not a sociopath because he has remorse. I think his major remorse is that he was caught. The article implies that he is a narcissist. I think he is all of the above, and much, much, more.  

Always full of self-pity and the quick deflections of a classic con man, he seems to blame his corruption on the failure of his father's business, and a personal vow never to let it happen to him, a resolve that became an obsessive compulsion.   Besides, everyone was doing it.  He just did more of it, more quickly and with an automated efficiency that turned into raw fraud when the easy gains evaporated.   It is a microcosm of the US financial sector today.

Sometime in the future someone is going to do a thorough analysis on what was common in the background of these fellows who were drawn to Wall Street in the 1980's and beyond, and what made them the way they are. But we can discover what set them free to do their worst, and that was the undermining of regulation, of the government, and the 'regulation is bad and greed is good' meme that has brought an entire society to its collective knees in a number of countries. Once the monied interests have traction with the government the corruption gets rolling and the feeding frenzy begins.

“Our government teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.” Judge Louis D. Brandeis

At times Bernie Madoff sounds like a less articulate version of a former Fed Chairman, that is, less able to rationalize his way, with a prideful sneer, out of nearly anything and everything, with a practiced verbal acuity and evasiveness.

I think he is emblematic of an empire in decline, a decline that found a voice and became respectable with Thatcherism and Reagonomics, and into full flower with the repeal of Glass-Steagall and the undermining of the regulators, in a campaign led by a few New York bankers using plenty of lobbying money and sophisticated public relations campaigns, with the resulting institutionalization of fraud and mass plunder by the financial interests that continues today.  No one wants to be the one eyed man in a land of those blinded by greed, especially when the greedy are holding most of the carrots and the sticks.  So even the seeing pretend to be conveniently blind.  Go along to get along.

The only difference between Madoff and many of the others like him on the Street is that Bernie ran out of rope, and was caught. The others seem to be hanging on and are trying to bluff their ways out of similar predicaments by keeping the game going, at any cost to the country, unto the destruction of the dollar and bond, the misery of families, and the pure corruption of all that has made America great.   It is almost never the money; it's the will to power, and pride.

The rationale will be like the one offered by Madoff: a cheap apology, a spreading of blame to everyone and therefore to no one, the enablers and beneficiaries knew something was wrong, and they took the deals anyway.   There will be other lower level financial men offered up to the the law as a diversion for the crowd, and if is gets worse some of the oldest scapegoat cards in history may yet be played, an unforgivable act.  And it will be a shame, because the men behind the scenes will live on to roll out their frauds once again on a new generation of the unsuspecting.

New York Magazine
The Madoff Tapes
By Steve Fishman

“How could I have done this?” he asks. “I was making a lot of money. I didn’t need the money. [Am I] a flawed character?”

“Everybody on the outside kept claiming I was a sociopath,” Madoff told her [his prison therapist] one day. “I asked her, ‘Am I a sociopath?’ ” He waited expectantly, his eyelids squeezing open and shut, that famous tic. “She said, ‘You’re absolutely not a sociopath. You have morals. You have remorse.’ ” Madoff paused as he related this. His voice settled. He said to me, “I am a good person.”

As he [Andrew Madoff] tells friends, his rage at his father, far from dissipating, has metastasized. To friends, he’d described his father as a bully and a gifted manipulator. Madoff was a family man, yes, but to Andrew,  that was yet another manifestation of his narcissism. The family served the needs of Bernard L. Madoff.

I had more than enough money to support my lifestyle and my family’s lifestyle. I allowed myself to be talked into something, and that’s my fault. I thought I could extricate myself after a short period of time. But I just couldn’t.

From the beginning, Madoff, who’d moved to Queens at age 7, had a chip on his shoulder, along with a certain contempt for the industry [securities] he’d chosen. “It was always a business where you had to have an edge, and the little guy never got a break. The institutions controlled everything,” he said in a voice surprisingly thick with emotion. “I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market.”

By 2000, as spreads and profits were squeezed in the market-making business, Madoff had a chance to sell for $1 billion or more. But he refused. “As far as my sons and brother and my wife were concerned, they thought I was nuts for not selling out,” he told me. His family was “livid,” and he didn’t dare explain it to them. “I couldn’t at that time, because it would have uncovered this other problem [the fraudulent nature of his business] I had.” (Nice illustration of the credibility trap that now hampers the entire US economy from the top down - Jesse)

The boys had their separate spheres, but Bernie didn’t hesitate to get involved. “He didn’t have a filter,” as one observer put it. He’d say things to his sons that other employees thought shocking, even abusive. His version of an explanation was, “Because I said so.” More than once, the boys thought, 'He’s a bully.'

Later, they wondered what fraction of that love was sincere.  They’d always known their father was a master manipulator, one quality that had helped him succeed on Wall Street.

Madoff says that he waved red flags, issued caveats that should have been obvious to even an unsophisticated investor. “They were all told by me, ‘Don’t invest any more money than you could afford to lose. This is the stock market. There’s always stuff that can happen. Brokerage firms can fail. I could go crazy and do something stupid. If you want a [safe thing], put your money in government bonds. So everybody understood this. “Everyone was greedy,” he continues. “I just went along. It’s not an excuse.” In his mind, the hedge funds and the banks were little more than marketers, skimming their 1 to 2 percent off the top, a fee for their supposed “due diligence,” though they exercised little oversight. “Look, there was complicity, in my view,” Madoff told me.

Through the nineties, Madoff dreamed of climbing out of the hole he’d dug. “I kept telling myself that some miracle was going to happen or that I was going to be able to work my way out of it. I just didn’t know when that was.” By around 2002, he realized this was a fantasy. “By then, the number was so astronomical I didn’t know what I was hoping for, quite frankly.” So he continued. The scheme demanded endless funds. Money flowed out almost as quickly as it came in, at points.  (A certain global reserve currency comes to mind - Jesse) 

And then the family that had for so long been a source of pleasure and support was gone. The boys had cut off their mother—a situation for which Madoff blames the lawyers but which was also the boys’ preference.

He sees himself at this stage as a kind of truth-teller. He has disdain not only for the industry but for the regulators. “The SEC,” he says, “looks terrible in this thing.” And he doesn’t see himself as the only guilty party on Wall Street. “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”   (Name some names Bernie if you have true remorse, and wish to be remembered as anything except a fraud and cheap con man - Jesse)

Prospects for US Banks and the Economic Recovery

The reason for the bailouts and the debasement of the currency is not to promote an economic recovery in the US. Far from it.

The objective is the same as it is in other countries around the world dominated by monied interests, such as Ireland.

The purpose is to save the banks and their bondholders, and the financial status quo. To this end the peoples' interests will be sacrificed if they allow it.

The US government is caught in a credibility trap. They cannot inspire confidence and re-establish the soundness of their economy, because they are not able to make the necessary reforms that would actually justify such a renewed confidence, to make it credible and real.

They cannot make these reforms because to do so would shatter the facade of the status quo which is corrupted and complicit, and includes far too many of them both directly and indirectly. This they fear more than anything else.

So they try to bluff their way out of it, hoping for a break, engaging in even more fraud and deception and debasement. And the financial looting continues while the real economy declines and the ordinary person suffers.

And it is working, because some vocal portion of the public shows itself to be easily led by slogans, faux news, financial carnies, and the manipulation of their lowest emotions, even to their own destruction. And the rest seem too often dulled by apathy and diversion.