Michael Greenberger: Setting the Stage For the Next Wall Street Crisis

Michael Greenberger has long been one of my favorite commenters on regulation, and in particular on futures price manipulation.

Within the context of the uphill battle against the status quo, Gary Gensler and Bart Chilton may have looked 'good' as regulators, but all in all they looked better only by comparison with some very horrible alternatives.  Chilton, as you may recall, did not waste much time going through the revolving door to put on the feedbag from the HFT crowd.

I think that as Greenberger points out, once we were able to see Obama's early financial appointments, we knew that we had been had, once again.  Despite his soaring rhetoric for change, he was a loyal member of the Wall Street wing.

Obama and the Wall Street wing of the Democratic party, founded by the Clintons, is a brand, cobbled together and groomed for office by the moneyed interests, designed to misdirect and diffuse the angry reaction for reform by the people in the aftermath of the financial crisis.  And it was a job well done.

No matter what she says, no matter what promises she may make, no matter what identity branding they may choose to spin for her, I strongly believe that Hillary has been and still remains a product of Wall Street money, and will continue to follow the money once in office no matter what rhetoric she may wear during any political campaign.  

Further, the only major difference between the parties now is that the Republicans have sold out wholesale to the moneyed interests, whereas the Dems have been doing it one despicable betrayal at a time.  They merely wear different masks.  Money conquers all with this venal brood of vipers.

Financial reform comes with political campaign money reform.  The two are inseparable.

The Reason There Has Been No Sustainable Recovery

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”

John Maynard Keynes  

How can an economy based on printing money and financial repression for a broken financial system achieve self-sustaining organic growth?

Where is the growth in aggregate demand fueled by a growth in employment and an increase in median wages?

Is the great mass of the public thriving, or barely surviving?

Why do we insist on blaming and denigrating the victims of a massive and ongoing financial fraud that after six years is still largely intact?

 

There is only one thesis that needs to be nailed to this door...

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

We Are Still In a Financial Crime Wave

In his recent column The Opposite of Stagflation Paul Krugman says that:

"One of the truly amazing (and disheartening) things about the Great Recession and its aftermath has been the continuing insistence of many economists that it’s somehow a supply-side slump, driven by the evils of Obamacare or something. This tends to come from people who view stagflation in the 1970s as having permanently refuted all things Keynes.

So I guess it’s worth pointing out repeatedly that the recent slump shows all the hallmarks of a demand-side shock; in particular, rising unemployment has been associated with falling inflation — the opposite of stagflation."

So I guess its also worth pointing out that the opposite of stagflation is not economic stagnation with declining inflation, but steady growth with very modest inflation. But given it is Paul K. we'll grant that he is assuming inflation as a reference point in this.   And in focusing in on the model battles, he is saying that we are indeed seeing stagnation, but there is deflation as his form of the Keynes model would predict.  Huzzah!

 

I will put aside for now his assertion that we are seeing declining inflation.  I think it might be said we are seeing little inflation growth overall, but with inflation appearing in certain product segments and assets.  But this is, I believe, an artifact of the way in which the Fed is pursuing very significant, top down monetary stimulus in a system that is still distorted and corrupted by the financial sector and its moneyed interests.  A few at the top are taking the greatest part of the monetary growth, and their demand is not for common goods but for luxuries, and monopolies, and more financial assets.

And so Paul Krugman is triumphant, because he would then go on to say, as he often does, that all we have to do is pour massive stimulation in to the economy from the fiscal side, and the demand side of the economy would recover as consumers could use their wages to purchase more goods.  Problem solved. 

 

And its a good piece of intellectual land to stake out, because no matter what the actual outcome in the real world, Paul will be able to argue that he was right if there is a favorable outcome.  Or if not, then it would have been favorable except that the government did not provide enough stimulus.  I would be inclined to believe that even if stagflation does eventually show up, he will argue that it was some other anomaly that does not affect his model.  A model that is too narrowly focused, and yet with too many degrees of freedom, to be useful.  

 

This works for Paul because his focus is sufficiently narrow and circumscribed, which is the failure of most economic models to provide any actual benefit for the real world, and are unsuited for the purposes of making policy decisions except at the most advisory level.  It allows him to almost completely ignore the facts on the ground, what really happened to cause the financial crisis, and what forces exist to keep it stubbornly at work despite massive top down monetary stimulus by the Fed.  

 

But like the housing bubble, when reality throws an economist a curveball, I have no doubt he will search his many hundreds of columns and find that he mentioned it, once.  And I suppose he may have mentioned reform once or twice as well.

 

His heart may be closer to the solution than the Austerians, but his mind is still carrying water for a system of learning, a method of distributing the benefits of productivity, and a political mindset that is more of an impediment to progress that an aid to it.. This is what happens when a vibrant set of theories from an original mind like John Maynard Keynes suffer from the arteriosclerosis of political dogmatism.  And after all, economics is a disgraced profession.

 

It is the hallmark of what Chris Hedges has called 'the death of the liberal class,' and along with it, the death of its conscience and sacrifice of moral principles to expediency in the service of power.  Few better representatives of this than the Clintons and Obama, and their acolytes in the status quo.  But they are presented as the alternative to an opposing political point of view so base as to almost redefine hypocrisy and greed.

 

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

h/t Yves Smith, et al.

Thomas Frank: Pity the Billionaires, Marxism for the Master Class

“Ayn Rand's 'philosophy' is nearly perfect in its immorality, which makes the size of her audience all the more ominous and symptomatic as we enter a curious new phase in our society....to justify and extol human greed and egotism.”

Gore Vidal


"It is not Man but nature that raises into one class those who are chiefly intellectual, in another those who are marked by muscular strength and temperament, and in a third those who are distinguished in neither one way or the other, but show only mediocrity -- the last-named represents the great majority, and the first two the select. The superior caste -- I call it the fewest -- has, as the most perfect, the privileges of the few...

The order of castes, the order of rank, simply formulates the supreme law of life itself; the separation of the three types is necessary to the maintenance of society, and to the evolution of higher types, and the highest types -- the inequality of rights is essential to the existence of any rights at all. A right is a privilege. Everyone enjoys the privileges that accord with his state of existence.

Wrong never lies in unequal rights; it lies in the assertion of equal rights."

Friedrich Wilhelm Nietzsche, Der AntiChrist

In light of the recent outcries by billionaire Tom Perkins for fair and loving treatment, I thought it might be interesting to explore the mindset that pictures the doyens of Wall Street, and those who have taken fortunes out of the dot.com and housing bubbles, as the real victims of the financial collapse and The Recovery™.

I think that part of this comes from the phenomenon that for some people, gratitude is their natural response to good fortune, even if it has come from hard work. Whereas others are possessed by a restlessness, an insatiable spirit, and their response to everything is 'I deserve more!.' 

Tom Perkins not only wishes his wealth, and his banal collection of toys, but he wishes to have public adulation as well, or at least the power to compel people to defer to him.

Mr. Frank thinks that this time around the cultural response to a Great Depression is 'backwards,' as compared to that of the 1930's, and one might tend to agree. There certainly has not been the rising of a national sympathy for victims, or a proper outrage at the arrogance and excesses of the financiers.

But this might overlook the fact that the US was a bit of an outlier back then, as only a few countries turned towards progressive reforms, while other developed nations embraced the hardness of totalitarianism, and even went so far as systematically murdering the weak.

But it is a mistake that the US is some sort of paragon, if one recalls John Steinbeck's The Grapes of Wrath. The allure of selfishness and evil is a natural tendency that we overlook in our economic models, among other things. And we certainly ought not overlook the consecration of the country to the principle that 'greed is good,' or more plainly to Mammon, in the latter part of the last century.

I agree with him that Obama has been a pivotal disappointment, and I was interested to hear the reasons why he thought this was so.  Overall I found his perspective to be interesting, as though he was not an American historian and journalist, but some foreign observer sharing an exterior perspective of wonderment.

I have started the tape beyond the introductory remarks and welcomes at this talk he gave in Seattle.

"Do you think he is so unskillful in his craft, as to ask you openly and plainly to join him in his warfare against the truth? No; he offers you baits to tempt you. He promises you civil liberty; he promises you equality; he promises you trade and wealth; he promises you a remission of taxes; he promises you reform.

This is the way in which he conceals from you the kind of work to which he is putting you; he tempts you to rail against your rulers and superiors; he does so himself, and induces you to imitate him; or he promises you illumination, he offers you knowledge, science, philosophy, enlargement of mind. He scoffs at times gone by; he scoffs at every institution which reveres them.

He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods. Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

J.H.Newman, The Times of Antichrist

Tainted Meat Joins the Stench of Political and Financial Corruption

“Wall Street had been doing business with pieces of paper; and now someone asked for a dollar, and it was discovered that the dollar had been mislaid.  It was an experience for which the captains of industry were not entirely prepared; they had forgotten the public.  It was like some great convulsion of nature, which made mockery of all the powers of men, and left the beholder dazed and terrified.   In Wall Street men stood as if in a valley, and saw far above them the starting of an avalanche; they stood fascinated with horror, and watched it gathering headway; saw the clouds of dust rising up, and heard the roar of it swelling, and realized it was only a matter of time before it swept them to their destruction...

But it is difficult to get a man to understand something when his salary depends upon him not understanding it."

Upton Sinclair, The Moneychangers


"You are a den of vipers and thieves. I intend to rout you out, and by the grace of the eternal God, I will rout you out."

Andrew Jackson

It was discovered that in all that blizzard of corruption, and the paper that covered it up, that the very basis of the value of things had been 'mislaid.' And then the deluge came.

If you listen to the reasoning of 'free market' types, and their paid mouthpieces and demagogues, this kind of thing could not happen, because companies, being rational and focused on the long term, would not allow tainted meat with their name on it to be sold into the markets.

They would not risk the lawsuits, and damage to their reputations. It is a similar argument that holds that financial markets need only light regulations because people will manage their own behaviour for the ultimate good, with almost perfect rational and altruistic self-constraint.

But alas, we know this is not true, as anyone who ever travels on a major highway can tell you. People and their tendencies to greed and careless stupidity require a certain association of people in a society for their common good, to take on not only large tasks with common and broad benefits to the pubic, but also in order for the majority to protect themselves from criminals, cheats, sociopaths, and plain old ignorant selfishness. This is why we establish police and fire departments, and have health laws, for example.

Government is never perfect. But its occasional flaws and corruption are no reason to do away with it. The power of government must be held in balance, but so must the power of private wickedness.

If you bother to look into the history of certain types of laws,  especially those designed to protect the public, and the often long progressive efforts of many dedicated souls to achieve them, from civil rights to basic food safety to voting rights to consumer protections against financial fraud, you can see what they have accomplished, and how their effectiveness must be upheld and occasionally renewed, since the corrupting power of easy money respects few if any boundaries.

Goodness may occasionally falter, but evil never sleeps.  And as many are now discovering, telling the truth becomes a subversive act, in times of general deceit.   Notice the patterns of smears and dehumanization of certain types of people.  This is how it begins.

And so it seems that every other generation forgets the lessons learned by their grandparents, and casts off their protections in fits of foolishness fuelled by the sweet words and slogans of the pampered princes of easy money, and their puppets, who will say and do anything for power and position.

Those who forget history are doomed to repeat it, and this is surely the story of the last thirty years, especially in the area of financial regulation, and the political standards of oaths and stewardship.

Recall of nearly 9 million pounds of meat not fully inspected
By Greg Botelho and Janet DiGiacomo, CNN
February 9, 2014

(CNN) -- Some 8.7 million pounds of meat from a Northern California company have been recalled because they came from "diseased and unsound" animals that weren't properly inspected, a federal agency announced Saturday.

The recall affecting Rancho Feeding Corporation products -- as detailed by the U.S. Department of Agriculture's Food Safety and Inspection Service -- marks a significant expansion of one announced January 13, when just over 40,000 pounds of the company's products were recalled.

According to the U.S. agency, Rancho Feeding "processed diseased and unsound animals and carried out these activities without the benefit or full benefit of federal inspection."

"Thus, the products are adulterated, because they are unsound, unwholesome or otherwise are unfit for human food and must be removed from commerce," the FSIS reported. The Petaluma company made the recall...

The FSIS recall notice indicates a "reasonable probability" that consumption could result in "serious, adverse health consequences or death."

Attempts to contact the Rancho Feeding Corporation for comment were unsuccesful Saturday and Sunday.

A wide range of products are listed in the recall, including beef carcasses and various parts such as heads, cheeks, lips, livers, feet and tongues in boxes of 20 pounds and bigger. Forty-pound boxes of veal bones and 60-pound boxes of veal trim are included as well...

Read the entire news article here.

Matt Taibbi Asks Why Obama's Regulatory Strategy in Reforming the Banks Is Such a Joke

I was glad to see someone talk about this, because for whatever reason I did not see a strong reaction in the media to this arrogant defiance by the board of JPM. In fact, there were several 'stop picking on Jamie' sessions led by the pom pom spokesmodels on financial TV.

It is always hard, and often dangerous and unfair, to judge someone's motives.  But we can assess the effects.

The lack of actual reform led by the Obama Administration, and of course a corporate compliant Congress, is hard to understand except in terms of the corrupting power of campaign funding that is pretty much out of control, and undermining the character of the Republic.  

Yes, Mitt 'would have been worse.'  But that does not make Obama good, or effective. It makes him Brand Y to Mitt's Brand X.  But the hearts of both brands belong to the same Daddies.  And the same can be said of much of the governance of the developed nations, especially the English speaking peoples and their client states.

As outlined in This Town by Mark Leibovich, the primary occupation in Washington DC is now putting on the feedbag during and after your 'public service.'  This has always been a problem, but now it is widely accepted, and even fashionable.

Is Obama driven by ideology, bad advice, amoral ambivalence, or just plain old personal greed, a desire to 'get paid?' With Bush et al. there was no question about it. And pretty much the same goes for the Clintons, who accepted Wall Street's proposal of ongoing partnership.  

But Obama presented himself as something new to Washington, someone different, someone offering big changes from the past.

And then he proceeded to bring in the same old people, and the same old failed policies towards financial regulation, and even continued quite a few Bush Administration policies.   And despite promises of transparency, he doubled down against whistleblowers. 

As a 'socialist' he is a moderate Republican, ideologically driven to bad policy decisions like Herbert Hoover, with a tinge of Nixonian insularity. 

It is funny but in rereading some pieces about Herbert Hoover, a basically decent man of significant personal accomplishments, I came across denunciations of him as a 'socialist' by the extreme neo-liberal Austrio-whacky wing of the economic spectrum.   He did blame the Democrats in the House for distracting him, and impeding his policies of fostering confidence by persuading business and the Banks to do more for the public good.

Hoover was bound by a particular ideology with regard to government that was basically laissez-faire in its character.  He just did not have the heart to actually starve people and throw out the victims of the financial system into the cold when push came to shove.  But some of his advisors certainly did, and their ideological descendants still do, and will.

Too often Obama seems to be a well-positioned corporate brand, promoted like any other product.  And this is what makes him particularly disappointing.  Bush, Carter, and Clinton could not have been tragic, because they had no heights from which to fall.  A manager makes peace with his times and situation, seeking the best he can get; a leader changes them,  including the tone of the conversation and the assumptions and direction of the deal.   

As for Obama, like Herbert Hoover, his presidency verges on the tragic, but the ending has yet to be written. 

Rolling Stone
Jamie Dimon's Raise Proves U.S. Regulatory Strategy is a Joke
By Matt Taibbi
January 30, 2014

If you make a big show of punishing someone, and when you're done they still don't think they have a behavior problem, you probably picked the wrong punishment. Every parent on earth knows this implicitly – but does the Obama White House finally get it, too, now, after Jamie Dimon's raise?

When the board of JP Morgan Chase gave its blowdried, tirelessly self-regarding CEO a whopping 74 percent raise – after a year in which the Justice Department blasted the bank with $20 billion in sanctions – it was one of those rare instances where Main Street and Wall Street were mostly in agreement.

Everyone from the Financial Times to Forbes.com to the Huffington Post decried the move. The Wall Street pundits mostly thought it was a dumb play by the Chase board from a self-interest perspective, one guaranteed to inspire further investigations by the government. Meanwhile, the non-financial press generally denounced the raise as a moral obscenity, yet another example of the serial coddling of Wall Street's habitually overcompensated executive class.

Both groups were right. But to me the biggest news was how brutal an indictment Jamie's raise was of the Obama/Holder Justice Department, which continues to profoundly misunderstand the mindset of the finance villains they claim to be regulating.

Chase's responses to Holder's record penalties have been hilarious. Their first move was to make sure people outside the penthouse boardroom took on all the pain, laying off 7,500 employees and freezing salaries for the non-CEO class of line employees.

Next, Chase's board members sat down, put their misshapen heads together, considered the impact of this disastrous year of settlements, and decided to respond by more than doubling the take-home pay of the executive in charge, giving Dimon about $20 million in salary and equity.

In the end, the fines left the decision-making class of the company not just uninjured but triumphant. Dimon's raise was symbolic of a company-wide boost in compensation following the mass layoffs, as average per-employee expenses rose four percent overall, to $122,653, despite the $20 billion burden imposed upon the firm by the state...

People like Holder still don't understand that the leaders of these rogue firms have no problem blowing up their own companies and/or imperiling the world economy, so long as they continue to personally get paid.

Regulators have been blind to this for years, decades. It's why the Fed, the OCC, the OTS, the Justice Department and a host of other agencies missed incoming icebergs like the AIG and Lehman disasters, once upon a time.

In fact, since the days of Alan Greenspan and his halcyon dreams of a future of pure self-regulation, the notion that corporate leaders will always act in the interest of their own firms – that they'll behave according to the principled corporate egoism that was an article of faith both for Ayn Rand and acolytes like Greenspan – has been a core basis for broad policies of regulatory restraint...

Take some time to read the entire article by Matt Taibbi here.

India Paying an Equivalent $1,565 Per Ounce For Physical Gold Bullion

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive...

Hitherto no difficulty had been experienced by any class in procuring specie for their wants. But this system could not long be carried on without causing a scarcity. The voice of complaint was heard on every side, and inquiries being instituted, the cause was soon discovered. The council debated long on the remedies to be taken, and [John] Law, being called on for his advice, was of the opinion, that an edict should be published, depreciating the value of coin five per cent below that of paper.

The edict was published accordingly; but, failing of its intended effect, was followed by another, in which the depreciation was increased to ten per cent. The payments of the bank were at the same time restricted to one hundred livres in gold, and ten in silver. All these measures were nugatory [pointless] to restore confidence in the paper, though the restriction of cash payments within limits so extremely narrow kept up the credit of the Bank.

In February 1720 an edict was published, which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution...”

Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds

When the Reserve Bank of India and the government tried to staunch gold imports by increasing duties and limiting supply in order to help their western central bank counterparts, who were deeply embarrassed by their inability to return Germany's gold, the experiment in currency controls had the effect of making the premiums paid for actual gold jump to 21.6% over western paper 'spot' prices.

What good is a 'spot price' for gold if it is just a construct derived from the paper gold price on the increasingly gold deficient Comex, and not from a physically transacting market?  And what good is a price set on a so-called physically transacting market like the LBMA if it is done in secret, with leverages said to be approaching 100 to 1?

Recent revelations about the manipulation of price benchmarks, from LIBOR to derivatives to basic commodities, seem to have knocked the efficient market hypothesis into a cocked hat, which is where it always belonged, if the dustbin was full.   Markets are naturally efficient to the extent that men act naturally like angels. 

Here is an interview that Tekoa da Silva recently conducted with an Indian gold dealer about the future of demand for physical gold in India, which he believes will be strong, and more importantly, why.

Let's see, if one region of the world is willing to pay, for substantial amounts, a 21% premium for a physical commodity that is easily transportable, what might an astute economist predict would happen?

The 'average person' might expect them to predict a substantial flow of that commodity from west to east.   And that does seem to be the case if one looks at the data which is available.  Gold Seen Flowing East As Refiners Recast Bars For Asia.

These days, however, far too many economists, analysts and pundits see what they have been told to see, by whomever is paying them.  Academia, politics, and the media are not naturally efficient, for the same reasons as markets.

Is it any surprise that in a culture that glorifies personal greed and the arrogance of power, virtue is in scarcity and deceit becomes routine?   Bad behaviour can drive out the good, until a system or culture can become a festival of shamelessness, and a feast for predators.

India is not an isolated example.  The situation is simply worse there for the moment because some Indian officials are historically compliant to Anglo-American interests.  But China, Russia, Latin America, and the Mideast are increasingly less complacent to be so ill-used these days.

Change is happening.  And there may be some significant volatility associated with this historic difference of objectives and opinions about what value is, and how and by whom it is set.

Adjusted Monetary Base Is On a Tear Again - Efficient Markets Policy Error

I thought we would drop in at policy central and see what the Fed has been doing with the US money supply using its policy and regulatory powers.

The first chart shows that the Adjusted Monetary Base is growing by leaps and bounds. This is Billions of Dollars in Fed Balance Sheet expansion.

This chart shows the leaps and bounds of monetary base growth a little more clearly, since it is the growth of the base, in Billions of Dollars, but in year over year terms. Those are essentially trillion dollar growth swings.

 

This next chart indexes a number of measures to the economic trough in 2009, for sake of comparison.

It shows the growth in the Fed's monetary base, as well as the excess reserves being held by the Banks.

Below those it shows Wages, Consumer Credit, M2 Money Supply and the Velocity of M2, that is, the rate at which money is being used by the real economy.

We should bear in mind that despite all the hoopla, sturm und drang, and whining by the Wall Street banking elite, the US financial system is still largely unreformed.

This situation brings to mind a quote about economic policy from John Kenneth Galbraith:

“Trickle-down theory represents the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

― John Kenneth Galbraith

There wasn't a Fed database entry for the income of the one percent, but if there had been it would be doing very well indeed.

I did not include this in the already busy chart above, but here is Total Assets of All Commercial Banks, using the same indexing method that was used above.  Looking past the rhetoric, the priorities seem fairly clear if you look at the growth trend in assets starting in 2011, and then look at the same time period in the chart above.

This is when the Fed implemented QE2, from Nov 2010 through June 2011, and then began 'Operation Twist' in September 2011.

QE3 started in September 2012 and continues today.

I think that history may view the co-opting of the urge to reform the banking system, and the outrage at the Wall Street bailouts, into the Tea Party's strong popular backing for financial repression of the victims, and the centering of the political debate on throttling government spending for the public good while propagating a financial system that heavily favors and subsidizes the wealthy financiers, to be one of the great propaganda coups of the 21st century.

Almost as good is running a populist presidential candidate, packaged as a progressive reformer and widely denounced by the opposition as a socialist, who in policy practice is the virtual reincarnation of Herbert Hoover, but without his many prior logistical accomplishments.

The Wall Street Code

“The complaints of the privileged are too often confused with the voice of the masses...The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced.”

John Kenneth Galbraith


"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

Upton Sinclair

This is not quite as complex as it seems, at least in my thinking with regard to the principles of the fraudulent aspects of it. The complexity comes in the implementation of the trading code, not in the design of the system. I have been in groups that have taken on much hairier network and computing problems, and I know what self-induced complexity looks like, and understand its true purpose. 

I thought the example of line jumping for concert tickets in the video was a fairly good metaphor from which to start thinking. 

It is all about a lack of transparency, asymmetry of information, and special rules for certain people who are 'connected' in the traditional sense. 

So you establish top down market principles of transparency and equal protection. You place an order and it has a fixed life of one second.  Everyone has the same privileges of trading in the same priorities and monetary units, that is, everyone can trade to the whole cent, or the tenth of a cent with equivalent fill priority.  And everyone knows what the other players can know when they know it.

Yes the exchange can make money by selling certain key information to the highest bidder, but in doing so it has just undermined the integrity of the exchange, so too bad.  Exchanges are utilities operating under license like other utilities, and not spying agencies or extortionists who happen to run an exchange.  And if you don't want to be a utility operating within certain constraints, find some other business.

Transparency and equality. Wow, what arcane concepts.

And a very nominal fixed transaction tax of five cents per every order placed, like a toll, to fund the costs of regulation of the exchange, would be quite effective, in addition to some fundamental hysteresis on every order as described above.

Most of the complexity is unnecessary and designed for asymmetric advantage for insiders, and not for liquidity which is the great bogeyman of the Street. HFT is predatory in nature and provides no liquidity. Liquidity is not volume, it is the money that stands in the market in the locus of genuine price discovery, and stands its ground on that, and not on the next price tick.

You have to ask, what is the purpose of this system? And if the answer is fairness and soundness of price discovery, and not making the most money for powerful insiders, the answers start to clarify from first principles. These used to be called moral values.

Some fairly simple changes would fix all this, based on fundamental concepts like transparency and equal protection. The problem is that politicians and private firms make enormous sums by taking some 'vig' or vigorish from each and every trade by the 'dumb' or outsider money.

Most frauds have a lot of flash and dazzle for misdirection, but deep down they are always shockingly simple, and most often based on time honored cheats.

Eliot Spitzer and Bill Black certainly 'get this.' Lots of good people do. But the Banks use their friendly politicians and the power of money to isolate them. Just denying access to key careers or events is often enough to obtain most people's silence. This is how the status quo perpetuates itself, with money and the credibility trap. It is not dissimilar to organized crime.

The regulators should be ashamed, but they can point to the politicians, and the politicians can take the 'CEO defense' of not understanding what is going on. And the band plays on. There is some hope that the institutions might start using their leverage more effectively in their fiduciary roles, because without them the game ends. They are the 'marks' and their naivete is the criminal's incentive.

Taibbi: JPM Chase Is Not the Only Bank In Trouble - Credibility Trap - Pigmen Agonistes

If you want to take the unadjusted temperature of the ongoing financial crisis, you don't go to the financial talking heads and spokesmodels at CNBC or Bloomberg TV, but rather to the sportswriter at Rolling Stone magazine.

I particularly liked this piece because it is a nice vignette of the credibility trap in action.

I am not optimistic.  The powers that be have far too much of their own skin in the game to engage in meaningful reform.    Both parties are in the tank for the monied interests.  It will not be easy, but change will come.

And Taibbi does not even touch on the developing gold bullion scandal, which will shake the Western central banks to their foundations when their perfidious collusion with the bullion banks to steal the wealth of nations is finally revealed.

Enjoy.

Chase Isn't the Only Bank in Trouble
By Matt Taibbi
November 5, 12:55 PM ET

"There are multiple scandals blowing up right now, including a whole set of ominous legal cases that could result in punishments so extreme that they might significantly alter the long-term future of the financial services sector.

As one friend of mine put it, 'Whatever those morons put aside for settlements, they'd better double it...'

Firstly, there's a huge mess involving possible manipulation of the world currency markets. This scandal is already drawing comparisons to the last biggest-financial-scandal-in-history (the Financial Times wondered about a "repeat Libor scandal"), the manipulation of interest rates via the gaming of the London Interbank Offered Rate, or Libor. The foreign exchange or FX market is the largest financial market in the world, with a daily trading volume of nearly $5 trillion...

The Forex story broke at a time when the industry was already coping with price-fixing messes involving oil (the European commission is investigating manipulation of yet another Libor-like price-setting process here) and manipulation cases involving benchmark rates for precious metals and interest rate swaps. As Quartz put it after the FX story broke:

For those keeping score: That means the world's key price benchmarks for interest rates, energy and currencies may now all be compromised.

Perhaps most importantly, however, there's a major drama brewing over legal case in London tied to the Libor scandal.

Guardian Care Homes, a British "residential home care operator," is suing the British bank Barclays for over $100 million for allegedly selling the company interest rate swaps based on Libor, which numerous companies have now admitted to manipulating, in a series of high-profile settlements. The theory of the case is that if Libor was not a real number, and was being manipulated for years as numerous companies have admitted, then the Libor-based swaps banks sold to companies like Guardian Care are inherently unenforceable.

A ruling against the banks in this case, which goes to trial in April of next year in England, could have serious international ramifications...

And virtually simultaneous to that, JP Morgan Chase disclosed that it is currently the target of no fewer than eight federal investigations, for activities ranging from possible bribery of foreign officials in Asia to allegations of improper mortgage-bond sales to . . . the Libor mess. "The scope and breadth of risky practices at JPMorgan are mind-boggling," Mark Williams, a former Federal Reserve bank examiner, told Bloomberg.

The point of all of this is that any thought that the potential Chase settlement might begin a period of regulatory healing for it and other Wall Street banks appears to be wildly mistaken. If anything, the scope of potential liability for all the major banks, particularly in these market-rigging furors, appears to be growing in all directions...

One gets the feeling that governments in all the major Western democracies would like to sweep these manipulation scandals under the rug. The only problem is that the scale of the misdeeds in these various markets is so enormous that even the most half-assed attempt at regulation will cause a million-car pileup. (This is the credibility trap in action, and how it impedes the reforms necessary to achieve sustainability. A lot of those cars are limos filled with politicians taking a free ride. - Jesse)

There's simply no way to do a damage calculation that won't wipe out the entire finance sector when you're talking about pervasive, ongoing manipulation of $5-trillion-a-day markets. That's the problem – there's no way to do a slap on the wrist in these cases. If they're guilty, they're done."

Read the entire article here.

US Healthcare Costs a Global Outlier and Monument to Crony Capitalism

I think the Big Pharma/Health and Big Finance sectors have similar cartel like structures where a few large companies dominate the field, exercising considering political power and the ability to obtain subsidies and protections from the system while fending off regulation and price restraints.

There are others of course, like the energy field from exploration to distribution, often known as Big Oil, but which now includes natural gas and electric energy production and distribution.

The recurring myths of the efficient market and 'free trade' are exacting a heavy toll on the general public and the real economy.  They provide ideological cover to a favored elite that is acting in the manner of a privileged and extractive aristocracy while beguiling many with the allure of easy money.

The concentration of ownership in the media has become an inhibiting and directing influence in public discourse that is hard to miss.

The current recovery fueled corporate perks and ZIRP for the financial sector, a fine example of 'trickle down' economics, will be remembered as one of the great policy errors of modern economic history. They pretend ignorance, they feign helplessness, and they know.  But they are getting paid not to act effectively, and even not to see, but to spin some fantasy.

They 'feel your pain.'  They just do not do anything substantial about it.  Even a second term president can still talk as though he is a recently arrived outsider, critiquing the actions of some predecessor and a corrupt system in which is he barely involved.

These are not leaders.  They are like modern CEO's, professional organizers and managers, who talk a great game about their accomplishments but, when the truth comes out, posture that they stand outside the very system for which they have long held the ultimate responsibility.  

But even worse are those who make little pretense to justice and goodness and moral principle, preferring to appeal to the darkest impulses, the fears and hatreds of a society.  Their actions betray their words.

The lack of serious reform, in large part because of the partnership between Big Money and Washington's new political class, and the dormancy of the progressive impulse, will eventually stress the fabric of society to the limit.  And then change will come.

Read the entire story here.

Obama Quietly Firing the CFTC's Gary Gensler For Pressuring Banks on Swaps

It appears that President Obama is bidding adieu to CFTC Chairman Gary Gensler, purportedly for being 'too aggressive' with the Banks over their antics in the markets, with special emphasis on swaps and derivatives activity offshore.

I wonder who put the word in President Barry's ear?  It is best to tread lightly around those treasured havens for financial piracy.

I discount any speculation that this is in reaction to a major breaking scandal on the metals exchanges. That would be too good.

The replacement is reported to be a Amanda Renteria, the former chief of staff to Senate Agriculture Committee Chairwoman Debbie Stabenow, Democrat of Michigan. Renteria was the first Latina chief of staff in the Senate.

She is the daughter of Mexican immigrant workers, studied at Harvard Business School, and spent most of her career in public service. However, after graduating she worked briefly at Goldman Sachs & Co.

She might turn out to be a highly effective regulator despite her lack of practical experience in financial regulation.  That would be a nice change of pace for a generally docile and Big Finance compliant administration.  Let's see what she has to say.  But I am not hopeful given the Obama crew's abysmal track record in financial reform and 'change you can believe in.'

Here is a link to Renteria's bio.

Here is the story as it was carried by The Huffington Post.

Common Dreams
Obama Cans Regulator Who Crossed Wall Street

Ouster is a gain for big bankers advocating lax oversight

Sarah Lazare, staff writer

The Obama Administration is quietly firing Commodity Futures Trading Commission head Gary Gensler, who ran afoul of big banks by pushing for greater government oversight.

The ouster comes in the midst of controversy over a proposed CFTF rule, strongly supported by Gensler, that would extend U.S. regulation to swaps--a kind of derivative exhange--involving firms founded or doing business in the United States. This means that foreign banks and hedge funds would face the same regulations as U.S. ones when trading in swaps with U.S. parties....

Mark Blyth - Austerity: The History of a Dangerous Idea

Adjust to the accent and speed of delivery if you must, what he has to say is worth hearing and he is quite informative in an entertaining and lively way.

I think it is fair to say that the purpose of his talk is to demonstrate why austerity is a corrosive policy choice. And he does this quite well. In doing so he tends to ignore the roots of the financial crisis, emanating as they did from New York and London in this talk, the distortions caused by regulatory policy changes in the financial system, and the systemic frauds that followed. He does touch on this at the very end in the Q&A which is heartening.

It is not equivalent to say that because austerity is bad, therefore stimulus must be good. If only the world were so linear and simple.

The corruption of the regulatory and political process by Big Money is the bigger long term issue. Therefore he appears to take a more mechanically optimistic, model based view of a US recovery, which I think is unfortunately not correct.

I hate to say on such thin evidence but the talk sounds conventionally Keynesian. He also gives unnecessarily short shrift to the regulation of the growth and quality of credit expansion, but that is probably unfair based only on this talk. I intend to read his book after I listen to this a few more times.

I think we will see a repeat bubble and collapse in the US as we did in the tech stock and housing bubble cycles unless reform occurs. Or the long run trend of inequality will become so severe that the political system will evolve. He speaks of Germany's role in Europe quite a bit, but barely touches on China.

He used Germany's growth out of the depression as a positive model of state activism to cure unemployment. But he ignores the school of thought that this growth never became organic, and was much like a Ponzi scheme. To keep growing it had to expropriate wealth, much of it from the Jews, and engaged in wars of aggression to obtain even more resources that it could not otherwise procure. So National Socialism never really became self-sustaining. I suppose it cold have done so by engaging in the export of goods rather than of bombs and bullets, but that never quite seems to work out either. Think the industrial policies of Germany and China today.

This example has to do with government sponsored stimulus and economic management without reform, and an unhealthy concentration of power, and the the two seem to go together.

He also does not address the currency wars, and imbalances in world trade flows because of governmental policies, which are one of the greatest economic macro changes in our generation. In the past they often have been resolved by military war and the rise of empires. So we will have to see what comes next in this particular iteration of conflicts of interests.

I am not saying Mark Blyth is wrong. I am merely saying that he does not address these things because they lay a bit outside his chosen topic which is the short term dilemma being faced in Europe and the UK. I find his style refreshing and his thought process and ability to tie things together fascinating. I have listened to any number of lectures on the history of economics, and his is one that informs while not making one's eyes glaze over. And for me that is high praise. I wish I knew Mark Blyth well enough to discuss these things over a few beers. He seems like a great guy.

If one is comparing the US to Europe I would grant that it certainly looks better because their system is inherently unstable and not sustainable. And the theme or purpose of his book and talk are that austerity is doomed to failure. And I agree. But I also think that stimulus is also going to fail, unless the system that caused the problems is changed through meaningful reform.



h/t Yves

Silver Rally Hit By Ruthless Selling

Bernanke's QE remarks sparked a flight to the metals and short covering as the silver shorts temporarily lost control of the trade.  There will be QE of many sorts, as far as the eye can see.

This was quickly met by renewed waves of ruthless selling by the Anglo-American financial cartel.

Silver has since returned to its pre-rally price of 22.75.

The suppression of gold was even more brutal with a plunge on selling, and a gap lower, even on the one minute chart.

The premiums for real metals continue to be high compared to the paper prices set in London and New York.

Gold and silver are flowing from West to East.  With each purchase, the Banks are being stripped of their bullion.

They can keep this up, until the people, in their increasing confusion and misery, finally realize that the emperor has no clothes.   And then comes change, and one would hope, reform. A generation forgets, and the next remembers and relearns the lessons from the past.

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

This is what happens when an artificial tyranny finally falls. First it is the actions of individuals, then a movement, and finally a swiftly moving avalanche.

Freedom is not an objective or a prize to be won and kept at last; freedom is a way of life, a continuing commitment to truth, and to equal justice for all.

Revolutions decay into tyrannies, and over slow time are renewed again. The human spirit is resilient, as long as at least one person can stand for the truth and with peaceful but determined resolve say, 'You may own the world, but you don't own me.'

“Stand up for what you believe, even if you are standing alone.”

Sophie Scholl

The Irresponsibles: The Bubble In Financial Assets Paper and Bernanke's Policy Errors

Here is the failure of the Fed as monetary policy and regulator with greatly expanded portfolio in one picture assuming that one remembers that stocks have risen back to all time highs.

The Fed has been stuffing its expanding Balance Sheet into the reserves of the Too Big To Fail Banks, where they and their Wall Street cronies use the funds to game the markets for financial paper and real goods.

If your goal is to support the one percent at all costs, then creating new bubbles in financial paper that they own makes perfect sense.    And as regulator the Fed promotes a lack of transparency, of financial secretiveness, of cronyism, and laissez-faire corruption that is deadly to healthy markets.

Reform is the only viable response.   And that is best measured by the levels of transparency and accountability.

But the public is no longer heard in the halls of a Congress and a White House dominated by special interest money. And so things become increasingly unsustainable.

"Based on the above data, how is the stock market fundamentally sound when earnings are collapsing? I guess the Federal Reserve is going to print profits for the S&P 500 companies.

Actually earnings are irrelevant when central banks all over the world including the Federal Reserve are juicing the markets with a sea of liquidity and where multiple expansion trumps real earnings or value."

Read the entire story at Minyanville here.

And from the RealNews:

S&P Says Its Claims to Honest Objectivity and Independence Were 'Puffery'

"There was a young man who had an aged father and mother who owned considerable property. The young man, being an only son, and believing that the old people had outlived their usefulness, killed them both. He was accused, tried and convicted of murder.

When the judge came to pass sentence upon him, he called on him to give any reason why the severest sentence should not be passed.  The young man promptly replied that he hoped the court would be lenient because he was an orphan."

Abraham Lincoln

Puffery, for those unacquainted with the technical term, is a euphemism concocted by the legal profession.  It means untruth in advertising.

"Puffery as a legal term refers to promotional statements and claims that express subjective rather than objective views, which no "reasonable person" would take literally. Puffery serves to "puff up" an exaggerated image of what is being described and is especially featured in testimonials."

It is one thing to apply it to some advert on television, that it is puffery to say that this person thinks our detergent cleans best. It may be quite another thing to state that when a firm claims to offer objective and honest advice, which is why the customer is buying it in the first place, that is mere 'puffery.'

When the truth becomes tortured enough, the rationalizations for failure and even deception become increasingly bizarre.

There is the CEO defense: I wasn't really involved in the things for which I received huge sums of money.

There is the bureaucratic defense: We didn't know because we didn't see it.

And now we have the ratings agency defense: It can't be fraud, because everyone knows we are not objective and independent, even though we say we are and sell our services based on that claim.

This isn't all that far from that venerable Wall Street defenses so often trotted out after a stock bubble and fraud collapses:  Well, no one made them give us their money and  Everyone was doing it and Everyone knows the game is rigged.

These are tales from the schoolyard.  This is the credibility trap.

WSJ
S&P Has Unusual Defense
By Jeanette Neumann
April 22, 2013, 3:00 p.m. ET

Standard & Poor's Ratings Services has long declared that its letter-grade ratings are independent and objective, part of a bid to allay concerns over its business model...

Now, lawyers defending the company against the Justice Department's recent civil lawsuit say that statements about independence and objectivity are "puffery" and were never meant to be taken at face value by investors...

The federal government says that the rating firm committed fraud when it allegedly misrepresented its ratings as independent and objective.

"Even if it's a viable legal argument, it's a pretty unattractive argument for S&P to be putting forward since they're basically in the business of charging clients for their reputation," said Samuel Buell, a law professor at Duke University and a former federal prosecutor. "What they're saying here is, 'When we're talking to investors about our own reputation, we're engaging in meaningless puffery.' "

Read the remarkable story here.

What Does the Recent Fall in the Price of Gold 'Prove?'

"And this means that it is deeply, deeply wrong to think of rising gold prices when bond yields are low as some kind of symptom of monetary excess."

Paul Krugman, 10 September 2011

So don't think of gold as an indicator of monetary excess when it is going up,  but when it is going down it can be used to prove your hypothesis of a lack of excess, as PK does in the new article cited below. 

But there is some wiggle room between excess and hyperinflation, and degrees of excess, and I would agree if the argument he presented was well reasoned and well tempered, which is it not.  It is just over the top, playing to the crowd. Well, that's show biz, and perception management.

I really would have preferred not to reference this article below, but I am afraid I must because it establishes one important point. It does not have much else to recommend it.  And I have decided to avoid most other articles like this that deal in 'goldbuggery.'  You know where I tend to place my focus, and name calling is what one does when their arguments are insubstantial.  And then it becomes de rigueur on both sides, and thought fails. No need to add to the hysteria.

In taking his victory lap for his economic theory in this manner, Mr. Krugman endorses the ability of gold to predict monetary dislocation and policy error. I would also add that it is a strong indicator of real interest rates.  When they are negative they are good for gold, and when they offer a fair return, they are not.  This is without regard to the nominal level of inflation, Paul.  But you knew that, or ought to have known that.  But the key takeaway is that Krugman admits that gold does matter, and he watches it.  And will use it in his data when it serves his purposes.

I think that is important. He would likely dodge this and say that it does not matter, but merely shows that some people believe that it does and therefore they buy it. When one deals in otherworldly economic models, they can make them do almost anything. The thing that economics does best is rationalizing as you wish after the fact.  There is a paper, by the way, about Gibson's Paradox by Larry Summers that PK can read if he wishes to see a more 'wonkish' linkage.  Oh that's right, he caught up with that in 2011.

But I guess it is ok to use it as an indicator that all is well on the monetary front when it is going down, as he does today.

I will take an aside, and say that the claims that monetization are not yet causing inflation proves nothing. All that proves is that one can give wheelbarrows of money to their friends to prop up their bad debts, as long as the friends keep the money in their own bank and trading accounts.  The first result will be bubbles in financial assets, and the accumulation of wealth in a narrow segment of the target population. 

But I do think that we have passed from the phase where gold is irrelevant and can be ignored, to the point where even 'very serious people' must take it seriously, and deal with it in some manner,  with fear and ridicule.

Open interest generally does not RISE when prices are falling, and people are fleeing away from a particular investment vehicle, especially a commodity. When a 'long' position sells, it closes, and open interest, or the number of contracts, goes down. Open interest increases on falling prices when short selling is pressing a market lower against a steady demand from legitimate investment. But that is a detail, and not in his models.

As you know I only became interested in gold because of my study of currencies back in the 1990s.  And I do not favor a return to a gold standard, although it is painfully obvious that the existing monetary arrangement for trade based on the dollar is as unstable as is the euro in Europe, and for many of the same reasons.  The dollar regime has simply lasted longer, for some of its own scale and reasons. 

And I do not favor austerity as a policy, and believe in the efficacy of stimulus when applied effectively and directly to a demand/employment condition of deadlock or stagnation brought on by a credit bubble collapse as we are in now.   I am what would be called a 'progressive.' 

But all the stimulus one can muster will not repair a system that is still broken and corrupt.  It is like sending aid to some third world nation where it is diverted by the ruling warlords from ever reaching the people, save for some crumbs.  And Paul Krugman, in his zeal for his cause, seems to miss this. 

That is the FDR model, applying stimulus directly to creating jobs and increasing the median wage while reforming the system. And that is most certainly not what we have today.  We are bailing out the banks while allowing their abuses to go unpunished, and the system to be substantially unreformed, for the sake of  'the system,' or more properly the status quo.  And the status quo is quite happy with things as they are, because they are gettin' paid as they say in the vernacular.

I have said for quite some time that the outcome I see from this mistaken policy is stagflation, or as some may choose to call it, the new normal.  It is the price that the public must pay to sustain a system of corporatism, historic inequality, and injustice.

Repressing dissent like the Occupy Movement, limiting people's investment options, and managing perceptions will only go so far.  One needs an exit strategy from a period of sustained and pervasive policy error and corruption.  And that must include real reform and change.  The new normal is not self-sustaining, but is an unnatural equilibrium that must be maintained by force, economic and otherwise. 

Once again, a plea for civility. The future will be what it will be. And all the name calling and repression, financial or otherwise, all the violent language on both sides will only make things worse. 

Chris Hedges is right on some critical things.  This is tied in with the death of the liberal class as an effective bulwark against the rapaciousness and lawlessness of corporation and those who serve their interests, the rise of extremism, and the decline of the individual overshadowed by the rise of the state.   In the parlance of the 1960's,  the liberal class has 'sold out.'  The price varies.

When the tide goes out you not only see who is naked, you see who they are naked with.

Willfulness can take many forms, whether it be a personal desire for riches, or power, or just to be 'right' at any cost, even through control frauds.   It is when those desires override conscience and justice that things begin to go horribly wrong.  It teaches by example, it is contagious, and it breeds.

So the only thing that this recent episode in the metals markets proves is that if you give the Banks enough money and regulatory latitude they can bend the markets to their will. And we already knew that. What is going on in the precious metals markets is apparent to those who look at the trading patterns, the volumes, and the open interest.

The only thing that is lacking is the exact reason, the motive for this, the disaster that has been averted, or the corruption and decay that is being concealed.

Markets are based to a large part on confidence. And when confidence breaks it is hard to get it back. And these jokers on Wall Street are stretching it to the limit, whether they realize it or not.

Gold Does Not Glitter
By Paul Krugman
April 15, 2013

So, the slide in gold has turned into a rout. As Joe Weisenthal says, this should be seen as really good news, because it offers strong evidence that the goldbug/inflationista view of the world — which says that we need to stop all efforts at monetary and fiscal stimulus lest we turn into Weimar — is, in fact, all wrong.

But Joe is, I think, deluding himself if he imagines that this will make any difference. After all, the inflationista view of the world has been repeatedly, devastatingly wrong on many fronts — interest rates, inflation, the effects of austerity. Has anyone other than Narayana Kocherlakota (who deserves big props for intellectual flexibility) actually changed his or her mind in response?

In fact, by and large the goldbug response to each failed prediction has been to claim that evil government officials are hiding the truth. Interest rates are low? That’s because the Fed is suppressing them. How can it do that, year after year, without causing runaway inflation? Oh, actually we have runaway inflation, but the BLS is faking the numbers (and independent measures, like the Billion Prices Index, are part of the plot).

Read the entire article here.