Financial Crisis in America: If Only the King Knew!

Signs of Decay

1. Internal corruption
2. Imperial overreach
3. Inability to reform.
   

Harvard Law Review
Incentives and Ideology
By James Kwak
May 20, 2014

“'If only the King knew!', we cried a thousand times from the depths of our abyss.” Cahiers de doléances de Cahors, 1789

In pre-Revolutionary France, common people would often say of their problems, “If only the King knew . . . .” Whatever evils they suffered at the hand of their government must be due to the king’s ministers and officials, for the king himself could not be at fault.

But the king knew exactly what was going on. As Levitin shows, our financial regulators were and remain deeply enmeshed in a complex political environment. At the margin, they have the discretion to do favors for the industry or for specific institutions (such as the OTS backdating a capital infusion by IndyMac to make it seem well capitalized when it actually wasn’t). But major regulatory decisions, such as turning a blind eye to derivatives or bailing out banks, are made by the political system as a whole...

More generally, we can’t blame everything on the bureaucrats. The financial non-regulation that made the 2008 crash possible was the explicit policy of multiple presidential administrations, and some of its most important elements sailed through Congress with bipartisan support. The choice to bail out large banks rather than homeowners was made by the Bush and Obama Administrations.

And Congress passed the Dodd-Frank Act, which largely left in place the regulatory system that had failed so spectacularly, with the Administration lobbying heavily to weaken the most far-reaching reforms. In other words, President Obama knew exactly what was going on — just as President Clinton knew what was going on when he signed the Gramm-Leach-Bliley Act, allowing the consolidation of commercial and investment banking."

Read the entire article in the Harvard Law Review here.

Related:
Credibility Trap: Moyers and Barofsky on Failed Reform and Another Financial Crisis

Banks Manipulating Trades and Rigging Benchmarks in Foreign Exchange Markets

Are there any markets that have not been corrupted by lax regulation, and as a consequence by Banks who have been emboldened in their insatiable greed by the lack of effective enforcement of the rules and equal justice for all?

It is somewhat ironic that this news of routine price rigging comes on the revelation that Obama is replacing Gary Gensler, Chairman of the CFTC, for being too aggressive in seeking to regulate the Swaps markets and angering some foreign banks (read London trading operations of the big multinational banks). 

London has become a favored haven for corrupt financial practices such as 'the London Whale.'

I will suggest to you that this is still just the tip of the iceberg.  And for those who assert that there is no manipulation in the precious metals markets, despite all the odd price action and blatantly predatory selling raids, I would suggest that they are obviously lacking in something, exactly what I cannot say.

There will be no sustainable recovery until the impediments to honest price discovery and the pernicious tax of corruption is eliminated through greater transparency, equal enforcement of existing laws, and serious reform. 

One can seriously wonder how confident they can be that the governments of the US and the UK, and of Europe as well, are seriously committed to performing the basic function of maintaining honest markets for their constituents.  If market confidence breaks, there will be hell to pay.

Even if they hide and tolerate this corruption for the sake of 'confidence, ' markets have a significant role to play in the economy.  That function has become warped and perverted through corrupt practices, with serious real world results, which accumulate and worsen over time, with consequences that we have yet to discover.

Breaking News from Bloomberg:

"Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice.

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said. The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter..."

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....

Simon Johnson: The Wall Street Takeover and the Next Financial Meltdown

Is the crisis over? No

Have we fixed the underlying problems? No

This video is from 2011. The answers remain the same.

TBTF is a government subsidy, a cartel, and a distorting factor on markets.

This is not about economics or the analytics anymore. This is about politics, this is about power, this is about the money.

Simon Johnson is one of the few economists that are making any real sense of what happened, and what therefore is likely to happen next.   I find his thoughts quite persuasive, at least on this particular topic of the roots of the crisis and the nature of the likely solutions with regard to bank regulation.

NAV Premiums of Certain Precious Metal Trusts and Funds - Chasing Madoff, Chasing Metals

"The dissenter is every human being at those moments of his life when he resigns momentarily from the herd and thinks for himself."

Archibald Macleish

I had the opportunity to watch the documentary Chasing Madoff yesterday.

It is largely about how Harry Markopolos and his two associates discovered the likelihood of fraud in the Madoff fund, and their decade long battle to bring that fraud to light.

I do recommend you see it if you can.

What is most important, what everyone seems to be missing, is that Bernie Madoff was not some mad genius acting in secrecy through his cleverness. The dodgy nature of his fund was known by many hundreds of firms on the Street, and most anyone with a decent level of financial sophistication could readily see that something was wrong with his business model and returns.

Indeed, one could not see his scheme for the most part by willfully not looking at it, which is the course that the SEC took.

The scheme 'worked' for so long because Madoff let his enablers, the Street and the feeder funds, take the bulk of the fees from unwitting investors. So quite a few of the people who should have known were caught in a credibility trap. To expose Madoff would involve some risk for themselves, and to say nothing and plead ignorance was lucrative.

As for the media, Markopolos had written and gift-wrapped the story, made a list of witnesses, and mailed it to the Wall Street Journal years before the scheme was exposed. And it was killed from above. It wasn't until Madoff publicly confessed that the media responded, and then it was with spectacle rather than insight.

As for the SEC, although a few people were forced to resign, not one person involved was prosecuted. As has recently come out from a determined whistle-blower little mentioned in the press, it was a top down policy decision not to pursue any corruption in the investment management industry that caused the SEC to ignore this vast criminal conspiracy during the first decade of 2000.

And the irony is that even the work of Harry Markopolos did not lead to Madoff's downfall. The market panic in 2007 caused a run for liquidity, and at that point Madoff's scheme fell apart of its own weight. Madoff himself was able to plan his own confession, and make whatever provisions he wished beforehand as far as records and evidence.

In court he 'copped a plea' and was sentenced to 150 years, but did not speak, did not implicate anyone else.

There is a strong suggestion that very powerful and well connected people were involved in this, and that if he had taken some other course of action, Madoff would have been a dead man.  This occurred before as the documentary shows, including the silencing of witnesses.

The plutocrats would like us to think that Madoff was just a clever rogue trader, some outsider.  That the SEC were just lawyers incompetent in finance.  That the press was too preoccupied with other things to investigate.  And Markopolos was an obsessive oddball who happened to get it right.  What happened was an anomaly.  The system is secure.

This documentary reminded me very much of the precious metals market, although as a global market  it is on a much grander scale. If so, I think that there is a good possibility that things will play out in the same way.   Do I think this is some tortured analogy?  Do you think that prices falling in the face of rising demand, stubborn secrecy, and numbers that never add up over a long period of time make sense?  Good luck with that.

The regulators will keep stonewalling.  The scheme to sell paper gold and silver, essentially the same bullion many times over, will go on until some event forces a run on supply, and then the scheme will collapse.  It is both embarrassing and lucrative.  It is all carrot and little stick.  And so frauds like this can continue on for a long, long time.

I think we should remember that despite all the histrionics in the Congress, and the fine talk of reform from the new president Obama, little to nothing has changed in the US financial industry. The same environment of compliant conspiracy to gain huge sums of easy money through a pathological criminality exists today.   There are few investigations and even fewer prosecutions.

I think we have had our wake up calls several times, in the collapse of MF Global and what followed, the widespread rigging of the key LIBOR interest rate, and most recently in the odd market divergences between paper and reality. It is hard to believe these things when they happen, unless you understand what lies underneath them. 

Take this for what it is worth.  As the story Chasing Madoff says, because you see figures on a piece of paper, that does not necessarily mean that there is anything behind them.  And when the scheme unravels, events move quickly.  And many people are ruined, and no one seems to care.

Their hypocrisy knows no bounds, their willingness to hide the truth no limit. They do it to protect themselves, and 'the system' that serves them.   One has to wonder how far it can go, and what happens when it can't.

There is a sad story in Chasing Madoff about a smart young man named Abe, whose father-in-law had a huge sum of money with the Madoff fund.  Harry Markopolos handed over the evidence to him, and he showed it to his father-in-law.  After the Madoff scandal became public, Abe called Harry Markopolos' associate and thanked him for what he did.  He lost everything, because despite the evidence, his father-in-law could not believe that there could be a lie so huge for so long, and that Bernie, whom he had known for years, would cheat him.

I do think that the precious metals markets and a good part of the banking system today are such a scheme.  And when something happens to break such a scheme, prices will adjust rather suddenly.  I do expect a profound cover-up and a declaration of force majeure on some pretext. 

There may even be some move to make people do something that they do not wish to do, such as hand over their metal in storage, which is not there anyway, or bail-in their bank deposits, or turn in their dollars for new dollars, at a rate of about 100 to 1.  Or just take a big loss and shut up.  Or something even harder to imagine.  What limits are there to madness?

And then we will see what happens next. But I do not believe for one minute that this is over.  To the contrary, I think we have only just begun.  There will be no sustainable recovery without significant reform.  Whether it is austerity or stimulus makes little difference when you are caught in a Ponzi scheme, and living a lie. There is no other option than increased transparency and reform.

Whatever wealth is provided goes to the top, and to continue to support the scheme.  And the urge from the plutocrats and their enablers will be to silence the dissenters, and lash out at the weak, at the defenseless, and finally at the other.  And if taken, history shows, almost without fail,  that this is a Faustian bargain, a mariage de convenance with evil. And that madness serves only itself.

"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structured need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I'm going to put it very bluntly. I regard the moral environment as pathological. And I'm talking about the human interactions that I have. I've not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people... counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can't find its voice. It's terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I'm afraid to say... both parties are up to their necks in this.

... But what it's led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it's very, very unhealthy.   I have waited for four years... five years now to see one figure on Wall Street speak in a moral language. And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not going to happen any time soon, it seems.

Jeffrey Sachs

Taibbi: Allegedly SEC Policy Not To Pursue Investment Management Fraud Allegations LIke Madoff

It sometimes looks like open season on the small investor and the public at large with some very selective enforcement of the laws.

"All animals are equal, but some are more equal than others."

Why Didn't the SEC Catch Madoff? It Might Have Been Policy Not To
By Matt Taibbi
May 31, 5:20 PM ET

More and more embarrassing stories of keep leaking out the SEC, which is beginning to look somehow worse than corrupt – it's hard to find the right language exactly, but "aggressively clueless" comes pretty close to summing up the atmosphere that seems to be ruling the country's top financial gendarmes.

The most recent contribution to the broadening canvas of dysfunction and incompetence surrounding the SEC is a whistleblower complaint filed by 56-year-old Kathleen Furey, a senior lawyer who worked in the New York Regional Office (NYRO), the agency outpost with direct jurisdiction over Wall Street.

Furey's complaint is full of startling revelations about the SEC, but the most amazing of them is that Furey and the other 20-odd lawyers who worked in her unit at the NYRO were actually barred by a superior from bringing cases under two of the four main securities laws governing Wall Street, the Investment Advisors Act of 1940 and the Investment Company Act of 1940.

According to Furey, her group at the SEC's New York office, from a period stretching for over half a decade through December, 2008, did not as a matter of policy pursue cases against investment managers like Bernie Madoff. Furey says she was told flatly by her boss, Assistant Regional Director George Stepaniuk, that "We do not do IM cases."

Some background is necessary to explain the significance of this tale...

Read the entire news story here.

The History of the Johnstown Flood: Audacious Oligarchy, Reckless Disregard

The history of the Johnstown Flood of 1889, at that time the worst natural disaster in the US as measured by loss of life, is little understood these days, but quite fascinating.

A group of about fifty wealthy 'robber barons' took over an old dam which had been used as a reservoir for a canal system,  and used it to create a lake resort for their private pleasure.  It served as a weekend retreat from the heat and noise of nearby Pittsburgh. 

Prior to selling the dam to them, the owner, a Congressman Reilly who had purchased the abandoned reservoir from the Commonwealth of Pennsylvania, removed the discharge pipes from the dam and sold them for scrap, thereby eliminating any emergency water relief measures, excepting the spillway.

They constructed buildings, and cottages, and formed the Southfork Fishing and Hunting Club.

They screened the spillway in order to preserve the fish with which they stocked the lake.  The screening tended to collect debris, and hamper the function of the spillway to relieve pressure on the dam caused by the occasional heavy rains.

Poorly maintained, the dam gave way, and wiped out the towns located down river. Having received no warning, many of the people who could have retreated to the nearby foothills were lost in the deluge.

The powerful members of the Club were never held to account because the law was interpreted to find no single member had been personally involved.

The Club itself was sold at auction to pay its mortgage to the banks.  The litigants received nothing.

It would have been even worse if the wealthy had bought insurance on the lives and property of the towns below, in order to further profit from the tragedy, and had cut telegraph wires and warning whistles to maximize the damage, loss of life, and their profit. 

And it would have been despicable if they had hired experts and newspapers to falsely lecture the public on the nature of dams, and how their concerns were misplaced and ridiculous. And if they had 'captured' the public officials and inspectors so that they would overlook and excuse the reckless disregard of the Club members for others.

I hope the lessons from this story from history are not lost on you.

When things don't make sense, that is often because there is deception involved.  How can there be widespread destruction and crime, but no one is held accountable? 

It is easy to underestimate the brazenness with which wealthy and powerful people will game the system for their personal profit, and then to cover up their wrongdoing.   That is because most people themselves would not lie and cheat to profit from the misery of others.  They find such behavior to be almost inhuman.

It is natural perhaps to blame the victims. They should have known, one might say. And how often can one be fooled before being blamed for their misfortune as a fool?

But most people, when faced with the uncertainty of conflicting stories, tend to accept the one that is put forward by the mainstream media, and backed by very important people. 

This is especially true if it seems like something they might do. Who could believe in such deceit? But they forget that they themselves are not heartless sociopaths.  And they are not well-practiced, almost pathologically proficient, con men who will say and do almost anything for money, without a twinge of conscience. Surely they may bend the truth a little, but never about anything so great.

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

Fekete: Who Said the Hydra Would Take It Lying Down - A Failure Not of Knowledge, But Character

"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."

Beaumont and Fletcher, The Honest Man's Fortune


“In the eyes of the empire builders men are not men, but instruments”

Napoleon Bonaparte


"When I despair, I remember that all through history the ways of truth and love have always won. There have been tyrants, and murderers, and for a time they can seem invincible, but in the end they always fall. Think of it-- always...

First they ignore you, then they laugh at you, then they fight you, then you win."

Mohandas K. Gandhi

By way of introduction, Professor Antal Fekete defines the gold basis as the difference between the price of gold in the nearest futures contract and the price of gold for immediate delivery.

In commodity trading contango is the situation where the difference is positive, that is, there is a premium placed on the futures contract. In backwardation, there is a negative difference, that is, one will pay more for gold for immediate delivery than you will for the futures contract, or a promise of delivery.

Contango is the normal condition in most commodities because of the time value of money or inflation. I think most are familiar with that concept. Think of it in terms of Net Present Value. If something will become more valuable in the future because of inflation, it will cost more than the same object if possession is taken today, less any organic growth and dividends.

This is always tied in with the risk free interest rate and the application of a risk factor. If you have not seen the video called Risk then you may wish to see it. Risk is just a calculation that estimates the probability that the underlying value of a thing will deviate from expectations without considering inflation, based on some change in fundamental valuation.

Now for some really good news. You can understand what Professor Fekete is saying without bothering about any of the theoretical.    Academics like to think about this and Fekete is a deep thinker on the subject, and we are glad and grateful for his work.  Theoretical work provides the planks and the plans out of which practical men like me build houses.   But unless you have taken courses in Economics and Finance you probably are not as familiar with the mechanics of this.

But for most people it does not mean all that much because they do not care about the intellectual arguments and fine nuances of the professors because as non-specialists they lack the context to care or understand it.  And academics like to argue the fine points of contention and sometimes with great passion like knights at a joust.

And unfortunately there is another class of academics who like complex and convoluted argument because it allows them to 'prove things,' that would otherwise be considered nonsense by anyone keeping an eye on the big picture, and especially matters of public policy.  And they often bring shame on themselves and to their profession even if they may make quite impressive amounts of money in the process.

Also, and I am going to steer clear of discussing this, there is quite a bit of distortion introduced at the ZIRP event horizon, and one can get sucked into side arguments about this almost endlessly.

Instead you can think of basis as simply the divergence between the paper metal and physical metal markets with regard to price.

If there is a small and steady divergence, things are normal. If there is a large divergence where paper is worth more than physical, the expectations of future inflation are high and increasing. If there is a large divergence where the physical is more expensive than paper, then there is something odd going on.

That oddness can mean one of two things. First, it can be a signal of future deflation, and especially if the price of physical gold is dropping because of an excess of physical supply. Supply is key to watch as well as price, and people who do not study supply don't really know what they are talking about.

If there is a large divergence in which physical is more expensive than paper, and the supply of physical is tightening, then you have that oddest of conditions where the futures market is grossly miscalculating things as they are and may be.  And this is what has just happened.

There are several reasons for this. One primary reason is that some market participants who are predominant in the futures markets are acting on hidden information. This again could be several things, but it almost certainly involves the willful distortion of the markets for personal gain. This may or may not be technically illegal.

Remember the case of the very obvious and willful distortion of the European bond market by Citi some years ago? As you may recall, the FSA got involved and Citi was fined for dumping a huge amount of bonds into a quiet trading period to knock down the price and run the stops, grabbing a quick profit.

The FSA did not charge them with market manipulation which is quite clearly what they did by any common sense judgement, but rather with failing to observe orderly markets, which is what one might think of as a misdemeanor.  What they really did wrong was to grab their profits from the wrong people, other insiders.  It is similar to what even more recently happened in the case of the London Whale.

So when some regulator stand up and says that nothing 'illegal' is being done, they may be saying the same thing as the FSA was saying. That is, of course these jokers are bloody well batting the price around, but since no one of serious power is complaining, we can't do anything about it, since it fails to meet some difficult to prove considerations of intent and conspiracy within the pathological environment of Wall Street.

So be that as it may, watching the divergence between paper and physical is paramount, while bearing in mind the lags. Markets are not quite uniform and instantaneous even in this age of marvels.

But there is little doubt in my mind that the recent antics in the metals markets were a price manipulation or a market operation with the intent to move the markets for some personal objective. It takes a willful effort not to see it that I could not undertake even if it was to my personal advantage.  And I think when people haven't a leg to stand on they resort to name-calling and ridicule, because the facts are not their friends.  And they need to keep their reputations in mind.

So in summary, a pre-meditated market operation used the futures market to knock down the price of gold and silver recently. This has resulted in greater buying of physical bullion across world markets, so this is not some localized event or prejudice by some domestic political group.  To say so is pure jingoism and disgraceful, absurd and unworthy of anyone who wishes to be taken seriously.

The current physical shortage will be resolved  But it will continue to worsen and become systemic if the distortions in the market, ie. an artificially low price, continues. At some point if not relieved there will be a market break and the paper market will lose all credibility and effect except where imposed by force.

I do not believe in naturally efficient markets. But at the same time, I do not believe that an inefficient market equilibrium can be maintained for long periods of time even with force and fraud.  There are always consequences, and sometimes they are unintended.

I am not delving into motives here, although if this continues I think some of Dr. Fekete's suspicions become much more credible.  For example, I do suspect quite strongly that the gold of Germany held in custody has been misappropriated, or hypothecated if you will.  And if this was disclosed it would prove embarrassing to some very self-important people who will use the excuse of national interest to protect themselves as is the custom amongst the self-rationalizing kleptocracy.

And as an aside, I think that where Dr. Fekete says 'Bernanke' he is really citing a broader financerati, the status quo of the Anglo-American financial sector and their attendants.  There is a currency war underway, and like other wars it is based on power and its distribution and abuse.

I don't think it is fruitful to argue too much where the resort to name-calling happens so quickly.  Instead I prefer is to see what happens, and to continue to push for greater transparency which makes control frauds more difficult to execute.   Opaqueness in markets is the servant of fraud,  always and everywhere.

And for those who believe that the price of bullion is what they say it should be, then they should be ready and able to stand and deliver at those prices, in open markets, with greater disclosure of their positions.

A futures contract and an option are forms of derivatives. And as with any derivatives they are more susceptible to fraudulent misuse, and therefore require stricter regulation than markets for real goods. And any regulator who does not comprehend that should go find other work.

By the way, some in the media were spreading the rumour on Friday that Goldman Sachs was in the bullion market 'buying physical with both hands.'  If and when that sort of thing comes out, it might prove to be their 'bridge too far' because then those they have betrayed (again) may turn on them as well who are yearning for reform in the markets.

If I have any concern at all it is that those who have held bullion legitimately will get mixed up in the repercussions against those who have gamed and looted the system for their own benefit, as Jeff Sachs has described it.   The hypocrisy of the privileged often knows no bound or restraints of conscience.  But when they stop and look at what they have done, some of them are appalled.  And the great crowd of people may help them come to that self-examination.  Then reform may begin.

Here are is the material from Dr. Fekete:

"Bernanke is trying to stop gold backwardation by selling unlimited amount of gold futures contracts through his stooges, the bullion banks. He is underwriting losses they are certain to suffer in due course. We can take it for granted that they haven’t got the gold to make delivery on their contracts. In fact, delivery of gold will be suspended under the force majeure clause. Short positions will have to be settled in cash, to be made available by the Fed’s printing presses. Gold futures trading will be a thing of the past.

Bernanke and columnist Paul Krugman, formerly his subaltern colleague at Princeton don’t understand that the issue is not the price of gold. The issue is backwardation or contango. In trying to wrestle the gold price to the ground the Fed makes “the last contango in Washington”* an accomplished fact.

From the frying pan into the fire

Ostensibly a lower gold price would solve the problem Bernanke has. Demoralized gold bugs would be forced out of their holdings through margin calls. Disillusioned investors would shun gold. This would make physical gold available to rescue the strapped gold futures market.

In fact, however, a lower gold price is making the problem more intractable, not less. The Fed is diving from the frying pan into the fire. This is the point missed by almost all observers and market analysts. They ignore the underlying flight into physical gold that continues unabated, in spite of (or, better still, because of) the panic in the paper gold market. The Fed’s intervention in bankrolling short interest is going to back-fire, for the following simple reason. The Fed’s strategy is inherently contradictory. A lower price for paper gold makes it easier, not harder, to demand delivery on maturing futures contracts. 

(Note: the delivery process at the Comex is not free and efficient.  The exchange can and does set redemption limits and other special situations without having to declare force majeure.  A minor point but will tend to make one look elsewhere for shortages first. And if in fact there is a control fraud in price setting and the futures markets are the locus, then we would anticipate that the data coming from such a private source would be increasingly less reliable.  - Jesse)

The more paper gold Bernanke sells, the lower the cost of acquiring physical gold in exchange for paper gold becomes. The price of the nearby futures contract will drop to hitherto unimaginable depths, relative to the cash price, making backwardation worse, not better. Ultimately this will make backwardation irreversible. Welcome to the world of permanent gold backwardation.

From what hole does the evil deflationary wind blow?

Academia and the financial press have utterly failed to recognize the relevance of gold backwardation as regards deflation. They might fret about hyperinflation as a result of unbridled money-printing (euphemism for the monetization of government debt). Yet the real danger is not on the inflationary but on the deflationary front as realized even by Krugman – while he is perfectly clueless on the question from what hole the evil deflationary wind blows (other than conservative wishful thinking).

Well, I can pinpoint the location of the hole to within yards for the benefit of Krugman. It is on Constitution Avenue, in Washington, D.C. The evil deflationary wind is blowing from the building of Federal Reserve Board.

If Bernanke thought that his attacks on the gold price would stem deflation, well, his efforts were counter-productive, to put it mildly. They have, in fact, made the flight into physical gold accelerate. Permanent backwardation of gold, and its concomitant, the re-invention of barter – the ultimate in deflation – will be the result.

There is no reason to fear that the Fed is pushing the world into hyper-inflation. In fighting the gold price the Fed unwittingly pushes the world into hyper-deflation.

All the same, it is destroying the dollar and the international monetary and payments system."

You may download and read the entire paper here.

Not that it matters but I do diverge a bit from Dr. Fekete's outcome of hyper deflation.  And I do so carefully because of the respect I have for this thinking.

A similar understanding is the basis for my own longstanding forecast of stagflation, which may become severe. I am assuming that the same kind of phenomenon that Dr. Fekete thinks will take place in a rush to gold and away from dollars is being perpetrated now by the Fed in this policy error of bottling up printed money in bank reserves, hoping for a trickle down effect of cheap loans to the real economy based on artificially low interest rates.

Instead what they are doing is subsidizing financial corruption and devastating the middle class, especially amongst those who are not retiring on official government pensions, but on a lifetime of savings.

As an aside, I am not of the Austrian School of economics, but there are several of those who identify with it whom I have read.  And I do consort with the other schools, because  I am of that odd class of people who think for themselves. Schools have loads of baggage and old fights. And people like to think in black and white.  Luckily I think the next financial collapse will discredit most of them again, and something new will come out of it that is a synthesize of the good in all of them.

I don't fear hyper deflation so much but I do think at some point they will have to reset the currency while knocking a few zeroes off in the process, as had occurred with the Russian rouble in the 1990's.  And whether that is called a hyperinflation or a hyperdeflation matters little with regard to the consequences.

Like the financial crisis of 2008, this will not be a failure of knowledge, so much as a failure of character.

Related:  Psy-Ops by Hugo Salinas-Price


 

Elizabeth Warren: How the Regulators Are Protecting the Banks From Disclosure of Fraud

"Fraudus est celare fraudem." 
The concealment of fraud is a fraud.

Take a careful listen to Senator Elizabeth Warren pulling out the truth from Daniel P. Stipano, Deputy Chief Counsel, Comptroller of the Currency, and Richard Ashton, Deputy General Counsel, Federal Reserve.

"You have made a decision to protect the banks but not to help the families who were illegally foreclosed on. Families get pennies on the dollar for being the victims of illegal activities. And you know of cases where the banks broke the laws, but you are not going to tell the homeowners.

People want to know that their regulators are watching out for the American public, not the banks."

Senator Elizabeth Warren

Other people are doing a much better job of covering this than I am, notably Yves Smith at Naked Capitalism, and I regularly include their links on my site.

It is a shame and a scandal that is representative of what is wrong with the current structure of the economy and the markets, the regulatory capture that favors insiders and special financial interests over basic law and justice for the public.

And I think it is a failure of the liberal agenda that calls blindly for stimulus, but at best pays lip service to significant reform.  As for those who call for austerity without reform, they are at best useful for the one percent, and of harm to most everyone else. 

The genuine reformers are found on both the right and the left, and might best be called progressives.  Unfortunately they are a group without a party or a portfolio these days, except for a few shining lights like Warren and Sanders.  From what I hear the situation in the UK and Canada is equally as bleak.  Oligarchies abound elsewhere.  As for Europe, it is just a mess of conflicting interests that one might strain to call a governing body of the most powerful special interests and their outside supporters.

Gold Daily and Silver Weekly Charts - The US Dollar: Keeping Up Appearances

Ron Paul: "I had a Federal Reserve Board Chairman testify before the committee that the gold standard had some merits but it was unnecessary because central bankers have now learned how to manage a Fiat currency in a manner in which it would mimic the gold standard. Would anybody care to comment about where the flaw is in that thinking?"

Mr. Lehrman: "I am anxious to comment on that, Dr. Paul. Under--and I must say Mr. Greenspan made the same insipid remark. Mr. Greenspan and Mr. Bernanke will have to then explain why it was that two of the greatest booms in American history, and two of the greatest panics and busts in American financial history, occurred under their 25-year watch..."

Mr. Grant: "The failure of AIG is so instructive in this respect. AIG, this immense insurance company with this ever so brilliant financial products group, didn't do one thing. It didn't mark its positions to market. Finally came the day of judgment and it argued with Goldman Sachs about what these things were worth, AIG said 100 cents on the dollar, Goldman Sachs said not close, Goldman Sachs won that debate and AIG failed.

As with AIG and Goldman Sachs, so it is today with the United States and its Asian trading partners. We never clear our trades. Our dollars go there, and they come right back here. We run twenty five consecutive years of debts on a current account and there will be for us, as there was for AIG, a moment in truth in which we must settle."

U.S. House of Representatives, Committee on Financial Services, Testimony of March 17, 2011

The US will settle, in paper dollars.  And if the payment is insufficient, they can always create more.

That is the long and short of it, and the sophistry of modern money.  Because the value of the money is self-referential, it is in essence a literal confidence game.  The dollar is worth what we say it is, and it is worth it because we say it, without regard to other opinions and considerations to the contrary. And as long as people believe this, or even pretend to believe this even if they don't but are afraid of the consequences of their disbelief, the dollar hegemony is secure.

Money is a matter of force and confidence; and when confidence wavers, force must provide. Force can take many forms, from persuasion to deception and even compulsion.

So the appearance of solidity and confidence must be maintained no matter what.   It must, as apparently Messrs. Greenspan and Bernanke have said, must 'mimic the gold standard.'  And they are right.  Caesar's wife must be above reproach, and the fiat dollar is the dowager queen of empire.

That is why the chat board gimmickry of the platinum coin was such a remarkably dangerous folly. Even given that money is a somewhat specialized area of study, it was shocking that a distinguished economist like Paul Krugman did not seem to understand it.  I could attribute that to a moment of political weakness. 

But the rest of the world did understand exactly what was happening, and held its breath.  Would the US dare to cynically impugn the basis of its debt, even by implication? 

Perhaps the greater question, such silliness as trillion dollar platinum coins aside, is how far the Anglo-American financial system is willing to go to keep up the appearance and dignity of a stable global reserve currency in the dollar, even while the dollar is being used and abused by the financiers like a 12th Avenue hooker?

I think you know that I believe that the paper metals markets are an accident waiting to happen, particularly with regard to silver.

It appears that the exchange and the regulators are managing the markets with reckless disregard for their soundness.

So let's see what happens.

Four Largest Banks Are Now Almost As Big As US GDP: Accounting Hides Risks - Taleb on Fragility

This is what happens when one allows the Banks to write their own reform rules in the aftermath of a financial crisis that was spiced with ideology, campaign contributions, and fraud.

JP Morgan, Wells Fargo, Citigroup, and Bank of America, and massively interlocked derivatives positions that are 'netted out' for accounting purposes, but which collapse in chain reaction effect when they encounter counter-party failure, frame this unhappy picture. That is the heart of 'too big to fail.'

And this does not include foreign based banks doing substantial business in the States, that also had to be supported by the Fed during the financial crisis. Or related firms like brokerages, faux banks like Goldman, and camp followers such as AIG and other non-bank financial sector corporations.

To Big To Fail still represents a serious risk to the financial system, and the failure to reform is clear policy error that is owned by the Fed, the Congress, and the Administration.

There will be no sustainable recovery until the Banks are restrained, the financial system is reformed, and balance is restored to the economy.

Bloomberg
U.S. Banks Bigger Than GDP as Accounting Rift Masks Risk
By Yalman Onaran
Feb 19, 2013 7:01 PM ET

Warning: Banks in the U.S. are bigger than they appear.

That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are -- or about the size of the U.S. economy -- according to data compiled by Bloomberg.

“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show. Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.

U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.

Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles. The government had to rescue American International Group Inc. with a bailout that ballooned to $182 billion after the insurer couldn’t pay banks on derivatives tied to those bonds....

Read the rest here.

The Payoff: Why Wall Street Always Wins - Capture, Careerism, and Corruption

The reason why no major Wall Street executives are being investigated and indicted, and why the manipulation of markets continues on, is part credibility trap and the rest capture, careerism, and corruption.

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




Jeff Connaughton was Senator Ted Kaufman's chief of staff in January 2009.  After Ted's Senate term ended on November 14, 2010, he retired from politics, and now lives and writes in Savannah, GA, and speaks out about the failures to address the financial crisis.

In 2000 he had co-founded a lobbying firm specializing in university research for The Science Foundation, Quinn Gillespie & Associates LLC.  This helped to broaden his understanding of the political process as it had been evolving.

Prior to that he served in the White House as Special Assistant to the Counsel to the President in 1994-95, where he worked on a variety of legislative, regulatory and constitutional issues.

He previously served from 1988 to 1991 on the staff of then Chairman Joseph R. Biden, Jr., of the Senate Judiciary Committee.

PBS Frontline: The Untouchables

I can hardly wait for the specials about the silver market when that time comes.

The corruption will continue until the people of the Western world hold their politicians accountable, and are not so easily distracted by The Big Show, and emotional bread and circuses.

Watch The Untouchables on PBS. See more from FRONTLINE.

SP 500 Futures Daily Chart at Year End - Pigmen Rampant on a Field of Monetary Inflation

There is a an obvious ramping in the US equity markets into the year end that is running into fairly long term resistance.

I think 1455 is the highest this market will go without a deal on the fiscal cliff. Perhaps not even that high without an extraordinary effort.

If needed, Wall Street stands ready to pressure the Congress and the Administration in January by dumping the financial asset markets, hard, in the manner of the TARP negotiations.  We'll make them an offer they can't refuse.

Conversely, the SP 500 is in a fairly obvious inverse head and shoulders formation that has not yet activated by breaking out from its neckline, which is around 1455. If something does happen that permits such a breakout, it can run quite a bit.

There is a similar potential Inverse H&S on the NDX 100 big cap tech chart.

I suggest as always you ask the question cui bono, 'who benefits?'   Although they do happen, there are few accidents these days.

From a certain perspective the US and UK financial systems are being dominated by a set of loosely organized criminal enterprises that have captured, or at the least nullified, the regulatory functions of the markets.  This adds a significant element of uncertainty to what in theory is a discounting and price discovery mechanism.

There are rumours of a 'deal' on the fiscal cliff, in which the Republicans accept tax increases of a sort on those with incomes over $400,000 per year, and Democrats accept cuts on pensions of the elderly and veterans by using 'chained CPI' to calculate inflation rather than the current, significantly weakened, version of CPI-W.  The major feature of chained CPI is to make substitutions to cheaper products as prices increase.  As meat prices increase, for example, one can switch from beef to pork, pork to chicken, and chicken to dry cat food.

This change does so little to really 'fix' the budget problems of the next ten years, but visits such pain on the weak, that one has to wonder if there is a streak of sadism in the monied interests controlling the Beltway.   Although they will deny it, I think there is.

The plutocrats intend to resolve their debt problems generated by a corrupt financial system by inflating the currency. The benefit is that a switch to an even more distorting method of calculating price inflation will provide additional cover to their debasement of the currency.  I am not ruling out another asset bubble, this time probably in the financial asset markets.

The story for the year end seems to be inflating financial risk assets like stocks while capping precious metals and other key commodities.

As for the promised raising of taxes on the uber-wealthy, don't you believe it.  Their tax avoidance schemes are well-researched, well-funded, and intricate in ways that the average person can hardly understand.   And those educated enough to understand it won't say a word, through a mixed bag of careerism, self-interest, willful ideological blindness, and personal greed.   Its a feast of fools.

Why admit complicity in a fraud and accept the consequences when you  can double down and attempt to take it all, and write the history afterwards.

Its a win-win for the pigmen, shifting the pain to the elderly and veterans, and achieving even greater opacity to their wealth transfer schemes through monetary inflation.  If you know how to play it, asset inflation through official monetary magic, which is just another facet of that age old fraud of seigniorage,  is a wonderful way to steal from the hoi polloi without them feeling it until collapse comes, in the manner of a Ponzi scheme.

Let's see what happens.

Bart Chilton On Silver Manipulation - Gold and Silver Coiling For a Major Move - The Next Disaster

In discussing the government's lack of reaction in reforming the high frequency trading developments in the market, the CFTC's Bart Chilton remarks in the video below about the unfortunate tendency of regulators not to act until something unfortunate happens as being a:

"...tombstone mentality, when you wait for a disaster before you put something in place."

The CFTC is hampered and opposed at every step of the way by the financial powers and their exchanges, who unfortunately wield a powerful and well-funded lobbying effort that tends to lead the political element in Washington by the nose, or their wallets, as you prefer.

I have come to believe that the US government will do nothing effective to reform the gold and silver markets and the equity exchanges until there is a MAJOR dislocation in the markets, and a virtual 'run on the exchange.'

Change will come after the US financial system is threatened by a major solvency or liquidity event.

Whether it originates from a failure to deliver in gold and silver markets that exposes them as a highly artificial and overleveraged house of cards, or another 'flash crash' that brings down a major exchange or trading house through counter party failures, I now believe that this sort of failure and scandal is what it will take to bring meaningful reform to this highly unstable Anglo-American financial system.

Change will be not voluntary with these greedy, self-destructive jackals, especially after the moral hazard that was introduced by the unfortunate policy error of 'no-strings' bailouts from the last financial crisis.   And the lack of regulation and accountability that has ensued is corrosive.

Reform will be accomplished, but only under the duress of the next financial disaster.  

Credibility Trap: Moyers And Barofsky on Failed Reform and Another Financial Crisis

The Bullet or the Bribe

This is the second part of the Moyers interview with Neil Barofsky.

BILL MOYERS: I thought, at the time, this was an incestuous orgy going on there, between inside players at Washington and inside players at Wall Street. Is that too strong?

NEIL BAROFSKY: It's probably not too strong. It's the fact that their ideology matches up. And look, one of the reasons why their ideology matches up is they all come from the same small handful of institutions. And the people I was dealing with on a daily basis came from the same financial institutions that helped cause the financial crisis and were the most generous recipients of bailouts, Goldman Sachs, Bear Sterns, which, of course, had been adopted by J.P. Morgan Chase. Goldman Sachs, Goldman Sachs, it seemed like every time I turned around, I bumped into someone from Goldman Sachs.

Which is not to single them out. But they all bring that ideology with them, when they come to Washington. It's not like somebody hits them in the head with a magic wand and they give back everything that they've learned and believed in their years of Wall Street. And they bring that ideology with them. And even those who don't come from a specific bank, when you surround yourself, create an echo chamber of likeminded people, it's not terribly surprising that the government policy looks a lot like what the Wall Street institutions themselves would have most desired.

And I think the other side effect of that is that people who are outside of that bubble, people who don't have that background, people like myself as a federal prosecutor or Elizabeth Warren, who was the chair of the Congressional Oversight Panel and before that a Harvard professor, that our views, our criticisms, our contrary positions were discounted, mocked, ridiculed, insulted, cursed at, at times. Because there was no-- we didn't have the pedigree in their world to have a meaningful contribution. So what happens is that there's no new ideas that creep in. And you get this very uniform, very non-diverse approach to the problems of finance.

BILL MOYERS: It was puzzling to outsiders like me that you had TARP money being used to concentrate further the size of these banks.

NEIL BAROFSKY: And the granddaddy of all those transactions, Bank of America acquiring Merrill Lynch. And the important thing to remember here is this is not banks gone wild, banks taking the money and saying, "Party time, we're going to consolidate." They did this with the encouragement of the government. And in Bank of America, a little bit with a gun to the head to complete that transaction.

This was the government policy created by the architects, Ben Bernanke who is chair of Federal Reserve, Tim Geithner, who was then the president of the New York Fed before becoming Treasury Secretary, and Hank Paulson. Their solution originally was to further concentrate the industry, to make the too big to fail banks bigger.

The theory was you take a healthier bank and mix it up with a failing bank and you get something somewhere in between, which is better overall for the system. Which may have had some validity in the very, very short term, but has put us on a path, I believe, to being even more dangerous. Because you have institutions now that are just monstrous in size, over $2 trillion in assets by certain measures, close to $4 trillion by other measures. Terrifying. The idea that any of these institutions could ever be allowed to fail is pure fantasy, at this point.

BILL MOYERS: Are you suggesting that we could have another crash?

NEIL BAROFSKY: I think it's inevitable. I mean, I don't think how you can look at all the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion.

BILL MOYERS: What do you mean incentives in place?

NEIL BAROFSKY: So in a normal functioning capitalist utopia, where, you know, most markets are that don't have this too big to fail, this presumption of government bailout if a firm like a Citigroup amasses massive amounts of risk. And in so doing, they keep razor-thin capital to absorb potential losses, which basically means they're just borrowing tons and tons of money.

And not have a lot of their own money at stake, but it's mostly borrowed money. And it is very opaque. It's not very transparent about how they're running their business. You would expect that creditors, people lending them money, counterparties, those on the other sides of their transactions would either stay away or really exact a premium. But the presumption of bailout changes that on its head and actually makes it go in the other direction. So it removes the incentive of the other market participants to impose what's known as market discipline. Because that's ideally in a capitalist society what happens is that the lenders and creditors and counterparties say, "Hey, we're not going to do business with you unless you clean house, slim down, be more transparent."

But when there's a presumption of bailout, that disappears. Because all those other market players can feel safe in the presumption that if anything goes bad at Citigroup, Uncle Sam is going to come in and make their bets whole.

Then you have the very real incentive for the executives at that institution to then pile on risk. Because they know that if the bets go well in the short term, they get paid. And they get paid very richly. But if it blows up and the risks go bad, no worry, the taxpayer's going to be on the other side of that bill.

That's what happened to Fannie Mae and Freddie Mac, before they collapsed. That's what happened to our biggest banks and global banks before they collapsed. And if you maintain that system, it is foolhardy to think that those incentives and pressures are not once again going to carry the day.

BILL MOYERS: At a conference a week or so ago, here in New York, you said playing ball for Wall Street has become a normal way of life, despite the panic of 2008. What does it mean, "playing ball for Wall Street"?

NEIL BAROFSKY: Well, what I saw when I was in Washington was this real pressure on myself, on other regulators to essentially keep their tone down. And I was told point blank by Assistant Secretary of the Treasury that, this is about in 2010.

And he said to me, he said, "Neil, you're a smart guy. You're a young guy. You're a talented guy. You got your whole future in front of you. You've got a young family that's starting out. But you're doing yourself real harm.” And the reason why you're doing yourself real harm is the harsh tone that I had towards the government as well as to Wall Street, based on what I was seeing down in Washington. And he told me that if I wanted to get a job out on the Street afterwards, it was going to really be hard for me.

BILL MOYERS: You mean on Wall Street?

NEIL BAROFSKY: Yes. And I explained to him that I wasn't really interested in that. And he said, "Well, maybe a judgeship. Maybe an appointment from the Obama administration for a federal judgeship." And I said, "Well, again, that would be great. But I don't really think that's going to happen with my criticisms." And he said it didn't have to be that way. "If all you do is soften your tone, be a little bit more upbeat, all this stuff can happen for you."

And that's what I meant by playing ball. I was essentially told, play ball, soften your tone, and all of these good things can happen to you. But if you stay harsh that was going to cause me real harm in those words.

BILL MOYERS: What made you able to say no to the temptation?

NEIL BAROFSKY: Well, I think part of it is the only job I ever wanted was to be a federal prosecutor.

BILL MOYERS: Send bad guys to jail?

NEIL BAROFSKY: It doesn't get much better than that. Really interesting, complicated work, and wear the white hat. So I didn't have those incentives that I think that were presented. And I think, look, you know, being trained in the U.S. Attorney’s Office for the Southern District of New York, I was trained to be a government employee and to take my oath of office very seriously.

But I wasn't really interested in their reindeer games. And I felt a real obligation and sense of duty to fulfill the oath that I took in Secretary Paulson's office on December 15th, 2008 to do the job that I was sent down there to do. But I wasn't really tempted with a big job on Wall Street. And frankly, if it meant getting a judgeship, compromising the job that I needed to do and was supposed to do, it just wasn't interesting to me.

But look, let me be very clear. I also have the fallback of I was a trial lawyer. I prosecuted a lot of big cases. And I knew that whatever happened, I could always go back and get a good job in New York, working at a law firm or doing legal work. So it gave me a degree of financial freedom even though I basically spent most of my career as a government employee and I didn’t have money. I didn't necessarily need to please anyone to be able to go back and still be able to feed my family.

BILL MOYERS: What happens to a political society, to a democracy, when we stifle or bribe or shoot the sheriff?

NEIL BAROFSKY: When I had my incident with the assistant secretary that my deputy, who had come down from-- who's another former federal prosecutor, who did narcotics work, said to me, Kevin Puvalowski. And he said to me, "Neil, you were just offered the bullet or the bribe, the gold or the lead."

And what he was referring to was a society just like that, which was Colombia, back in the day when Pablo Escobar and the drug kingpins really controlled society. And what he was referring to is that basically to corrupt society Escobar would go to a magistrate or a police officer, police chief, a politician, and say, "You have two choices. You can either take this giant pile of money and do my bidding. Or you can get the lead, a bullet in your head."

And Kevin was joking that I just received the Washington white collar equivalent of the gold or the lead. And it was funny, at the time, but that's kind of what happens in a society where the rewards and incentives are, again, nobody's getting shot in the head thank goodness. But it's a breakdown of the system.

And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone else.

BILL MOYERS: You make it clear in the book that the Obama administration fought against cutting down the size of these banks. And yet, in the second debate with Mitt Romney the president said, "We passed the toughest Wall Street reform since the Great Depression." As I hear you, it wasn't all that tough.

NEIL BAROFSKY: Well, that's a literally true statement. Because when you think of-- but it's a very low bar to clear. I mean, all of the regulatory reform since the Great Depression has been peeling back on those regulations. With really the big death knell happening in the end of the Clinton administration with, you know, a couple of bills, one that removed the last vestiges of the separation between commercial and investment banks.

BILL MOYERS: Glass-Steagall Act?

NEIL BAROFSKY: Glass-Steagall.

BILL MOYERS: It took down the wall between those two?

NEIL BAROFSKY: The last part of it. And then the second part by passing a bill that made it, essentially made derivatives out of bounds for regulation. So saying that it's the toughest is literally true. The problem is it hasn't been tough enough in where it most matters.

And again, you don't really have to take my word for it. You just look what the market has done. Based on the presumption of bailout, the banks get higher ratings from the credit rating agencies which means they can borrow money for less, because their debt is viewed by the credit rating agencies as being less risky. And they get these higher ratings on explicit presumption that the government will bail them out and make good on their debt.

So it didn't deliver the goods where it matters the most. Again, not saying that it doesn't have some good positive things for our system and for people. But it didn't deliver the most important thing that we need if we want to address the causes of the last crisis and help prevent the next one.

BILL MOYERS: What will it take to prevent the next one?

NEIL BAROFSKY: Got to break them up. I mean, it is not a simple thing to accomplish, necessarily. But it's a very simple solution. And what you see, I think, kind of amazingly, is how many more people have come to this view over the last year or so. It used to be a lonely perch that we sat on. Former special inspector generals, a couple of academics.

But now you have people like Sandy Weill, the architect of Citigroup. And sure, too little too late, after he made all of his money off creating these Frankenstein monsters. But even he now recognizes that we have to break up the banks. You have senior officials at the Federal Reserve recently coming out in favor of this. The vice chair of the FDIC, a very strong advocate for breaking up the banks. And you hear it a lot more in members of Congress-- that are supporting this notion. So to me, on the one hand, it's absolutely essential. If we really want to get to the point where we don't have to bailout a bank, we have to make it so that no bank is so systemically significant and large that its failure could bring down the system.

BILL MOYERS: Are they up to their old tricks?

NEIL BAROFSKY: The banks? Sure. I mean, you know, so we had this regulatory reform of Dodd-Frank in 2010, which, you know, left them intact and inside. But it had all of these rules and all of these regulations that needed to follow. And right now it is hand to hand, trench warfare, combat with those lobbyists spending all that money on campaign contributions, on, you know, flooding the decision makers and the regulators with comment letters and endless meetings.

And pressuring members of Congress to put pressure on the regulators, to water down the rules, to basically get as much back to the good old days where they would have free reign to print money, take advantage of their too big to fail status, bully and push out the little guys, take advantage of consumers. And that's what all of these efforts area about are to preserve these very, very core profit streams that they had before.

And that's right now is where the battle is being waged. Not on TV, you know, not necessarily out in front, but behind the scenes where the next set of rules are being forged on what they're going to be able to do and how they're going to be able to do it...

Matt Taibbi and Eliot Spitzer Discuss Eric Holder's (and Obama's) Failure: Credibility Trap

The failure of Obama's Justice Department to engage in any systemic investigations and indictments of a thoroughly rotten and corrupt financial system that has laid waste to the real economy is an almost perfect example of the credibility trap.

A credibility trap is when the regulatory, political and/or informational functions of a society have been compromised by a corrupting influence and a fraud, so that they cannot address the situation without implicating, at least incidentally, a broad swath of the power structure. The status quo has at least tolerated the corruption and the fraud, if not profited directly from it, and most likely continues to do so. The power brokers have become susceptible to various forms of blackmail. And so a failed policy can become almost self-sustaining long after it is seen to have failed, and even become counterproductive, because admitting failure is not an option for those in power.

Another example is the blatant fraud, and principles not of productivity but of prey, that prevail on the financial asset exchanges and the monetary system, the stealing of customer funds, and the manipulation of commodity markets such as silver. And it expresses itself in the frivilous coarseness of spectacle, and careless brutality of decline.

"Happy Hunger Games. And may the odds be ever in your favor."

Normally a two party system or a balance of powers would correct such a situation, but if the fraud is pervasive and enduring enough, those remedies can lose their effectiveness since the fraud binds even seemingly diverse elements in its grasp. And therein lies the trap.

There is a general loss of honor, a disparagement of moral principles, the common welfare, and a sense of 'service.' People in power are creatures of the system, 'getting their ticket punched' in Washington, as resume builder on their way to an even more lucrative position back in the corrupt system where they can leverage their connections and knowledge of the system to further undermine the rule of law. Their guiding principles are self-referential greed and power.

After one of the most outrageous periods of widespread fraud in a major developed country, prosecutions for fraud are at twenty year lows.  Who expected this outcome from an election in which the theme was change and reform?

Here is a recent article, Why Can't Obama Bring Wall St to Justice, asking the broader question inferred by this video interview. Why?  And the answer is not to be found in making excuses and allowing him to hide behind the incompetency or disengagement defense so popular in American management circles.

And if you think that voting for the other guy in this case, the emotinally engaging but fatally flawed red v. blue paradigm, is going to provide a cure you are sadly mistaken. The other guy in this case is the poster child for most of the problems that face a nation under siege by a financial elite engaged in an economic, ideological, and political coup d'etat.

As Glenn Greenwald recently put it:

"You can often, and I would say more often than not, in leading opinion-making elite circles, find an expressed renouncement or repudiation of that principle [of the rule of law]...All of these acts entail very aggressive and explicit arguments that the most powerful political and financial elites in our society should not be, and are not, subject to the rule of law because it is too disruptive, it is too divisive, it is more important that we should look forward, that we find ways to avoid repeating the problem...the rule of law is not that important of a value any longer...

The law is no respecter of persons, but the law is also a respecter of reality, meaning if it is too disruptive or divisive that it is actually in our common good, not the elite criminals, but in our common good, to exempt the most powerful from the consequences of their criminal acts, and that has become the template used in each of these instances."

And thanks to the apathy of the people and the gullibility of the badly used, self-proclaimed 'patriots' they are winning.

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least to neglect, persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.”

Adam Smith

Such unsustainable social arrangements are backed by force and fraud. And as the fraud loses its power over time, force must increase, until there is an end in genuine reform, or evenutal self-destruction.

Bill Black On Wall Street Control Frauds and Moral Hazard

Lack of Justice Department and regulatory prosecutions for Wall Street fraud creates incentives for more control frauds and climate of lawlessness.

Neil Barofsky: Ongoing Bailout of Wall Street

Neil Barofsky on the Fed and Treasury Anger over Standard Chartered

This is the credibility trap.

Some of it is professional not-initiated-hereism, but quite a bit more is a culture of privilege and practical exemptions for the few who run the system. And professional courtesy with London for both our banks and theirs.

Cronyism and complicity, active or passive, take your pick.

"If you want to understand exactly what's going on here, reread the four or five pages in chapter 1 of my book about my battles with Washington over the FARC case. Exactly the same thing happening here.

They'd rather trash a potentially legitimate case than admit that they were asleep at the switch, especially now after the recent revelations about their failures with LIBOR and HSBC."

Neil Barofsky, speaking about the Standard Chartered affair.

Read the entire story at Business Insider here.

They didn't "fail" to regulate LIBOR. They did not even bother, for whatever motives that you care to impute or infer. They knew what was going on and turned a blind eye to it, just as they are doing with the rigging of the commodity and equity markets.

The incompetence and non-involvement defense is getting a little worn out in this financial scandal.

Casual corruption of the markets is now being accepted as a necessary system overhead, as a tax on the public to support the failed financial system, which is being kept alive to support a kleptocracy of politicians and the monied interests. It is sustained through fraud and force, but has little to do with the real economy anymore.

It is important to get this to understand what is going on.

As Glenn Greenwald describes it so well, the kleptocracy based on class position has become fully rationalized and institutionalized.

"What is radically different about today is not that the rule of law suddenly is not always being applied faithfully, because that has always been true. What is different about today, radically, is that we no longer bother to affirm that principle...

You can often, and I would say more often than not, in leading opinion-making elite circles, find an expressed renouncement or repudiation of that principle...All of these acts entail very aggressive and explicit arguments that the most powerful political and financial elites in our society should not be, and are not, subject to the rule of law because it is too disruptive, it is too divisive, it is more important that we should look forward, that we find ways to avoid repeating the problem...the rule of law is not that important of a value any longer...

The law is no respecter of persons, but the law is also a respecter of reality, meaning if it is too disruptive or divisive that it is actually in our common good, not the elite criminals, but in our common good, to exempt the most powerful from the consequences of their criminal acts, and that has become the template used in each of these instances."

Glenn Greenwald