Illinois Governor Arrested on Federal Corruption Charges

The Senate seat that the highly unpopular Democratic Governor was attempting to 'sell' is the one being vacated by President-elect Barack Obama. There is no linkage to Senator Obama, and we are sure that if there was the slightest taint the Justice Department would be putting it forward vigorously. Or pocketing it for a rainy day. Obama must address this quickly.

The first Democrat to be elected governor of Illiniois in 30 years, Blagojevich has been the target of multiple federal investigations. If Blagojevich is found guilty he should be punished severely. We will not jump to any conclusions, but Chicago politicians are often notorious for playing it on the edge, similarly but more crudely than their more sophiticated northeastern and southern cousins.

As the administration, and the Justice Department, turns from Republican to Democratic, looks for an increasing series of indictments for Republican corruption. There will be a pre-emptive series of pardons by the outgoing President Bush.

Such are the ways in times of general corruption. Anyone who thinks this is the domain of either party in particular is greatly mistaken. We are in a cultural crisis of integrity and honesty, overwhelmed by greed.

“I want to make money,” adding later that he [Blagojevich] is interested in making $250,000 to $300,000 a year, the complaint alleges. (Joe the Governor? - Jesse)

Top Five Candidates for Obama's Senate Seat


US Department of Justice
ILLINOIS GOV. ROD R. BLAGOJEVICH AND HIS CHIEF OF STAFF JOHN HARRIS ARRESTED ON FEDERAL CORRUPTION CHARGES
Patrick Fitzgerald, US Attorney
December 9, 2008

Blagojevich and aide allegedly conspired to sell U.S. Senate appointment, engaged in “pay-to-play” schemes and threatened to withhold state assistance to Tribune Company for Wrigley Field to induce purge of newspaper editorial writers

CHICAGO – Illinois Gov. Rod R. Blagojevich and his Chief of Staff, John Harris, were arrested today by FBI agents on federal corruption charges alleging that they and others are engaging in ongoing criminal activity: conspiring to obtain personal financial benefits for Blagojevich by leveraging his sole authority to appoint a United States Senator; threatening to withhold substantial state assistance to the Tribune Company in connection with the sale of Wrigley Field to induce the firing of Chicago Tribune editorial board members sharply critical of Blagojevich; and to obtain campaign contributions in exchange for official actions – both historically and now in a push before a new state ethics law takes effect January 1, 2009.

Blagojevich, 51, and Harris, 46, both of Chicago, were each charged with conspiracy to commit mail and wire fraud and solicitation of bribery. They were charged in a two-count criminal complaint that was sworn out on Sunday and unsealed today following their arrests, which occurred without incident, announced Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois, and Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the Federal Bureau of Investigation. Both men were expected to appear later today before U.S. Magistrate Judge Nan Nolan in U.S. District Court in Chicago.

A 76-page FBI affidavit alleges that Blagojevich was intercepted on court-authorized wiretaps during the last month conspiring to sell or trade Illinois’ U.S. Senate seat vacated by President-elect Barack Obama for financial and other personal benefits for himself and his wife. At various times, in exchange for the Senate appointment, Blagojevich discussed obtaining:

- a substantial salary for himself at a either a non-profit foundation or an organization affiliated with labor unions;

- placing his wife on paid corporate boards where he speculated she might garner as much as $150,000 a year;

- promises of campaign funds – including cash up front; and

- a cabinet post or ambassadorship for himself.

Just last week, on December 4, Blagojevich allegedly told an advisor that he might “get some (money) up front, maybe” from Senate Candidate 5, if he named Senate Candidate 5 to the Senate seat, to insure that Senate Candidate 5 kept a promise about raising money for Blagojevich if he ran for re-election. In a recorded conversation on October 31, Blagojevich claimed he was approached by an associate of Senate Candidate 5 as follows: “We were approached ‘pay to play.’ That, you know, he’d raise 500 grand. An emissary came. Then the other guy would raise a million, if I made him (Senate Candidate 5) a Senator.”

On November 7, while talking on the phone about the Senate seat with Harris and an advisor, Blagojevich said he needed to consider his family and that he is “financially” hurting, the affidavit states. Harris allegedly said that they were considering what would help the “financial security” of the Blagojevich family and what will keep Blagojevich “politically viable.” Blagojevich stated, “I want to make money,” adding later that he is interested in making $250,000 to $300,000 a year, the complaint alleges.

On November 10, in a lengthy telephone call with numerous advisors that included discussion about Blagojevich obtaining a lucrative job with a union-affiliated organization in exchange for appointing a particular Senate Candidate whom he believed was favored by the President-elect and which is described in more detail below, Blagojevich and others discussed various ways Blagojevich could “monetize” the relationships he has made as governor to make money after leaving that office.

“The breadth of corruption laid out in these charges is staggering,” Mr. Fitzgerald said. “They allege that Blagojevich put a ‘for sale’ sign on the naming of a United States Senator; involved himself personally in pay-to-play schemes with the urgency of a salesman meeting his annual sales target; and corruptly used his office in an effort to trample editorial voices of criticism. The citizens of Illinois deserve public officials who act solely in the public’s interest, without putting a price tag on government appointments, contracts and decisions,” he added.

Mr. Grant said: “Many, including myself, thought that the recent conviction of a former governor would usher in a new era of honesty and reform in Illinois politics. Clearly, the charges announced today reveal that the office of the Governor has become nothing more than a vehicle for self-enrichment, unrestricted by party affiliation and taking Illinois politics to a new low.”

Mr. Fitzgerald and Mr. Grant thanked the Chicago offices of the Internal Revenue Service Criminal Investigation Division, the U.S. Postal Inspection Service and the U.S. Department of Labor Office of Inspector General for assisting in the ongoing investigation. The probe is part of Operation Board Games, a five-year-old public corruption investigation of pay-to-play schemes, including insider-dealing, influence-peddling and kickbacks involving private interests and public duties...

SP 500 Weekly Chart

There has been some interest expressed in seeing this chart in 'the Babson style'

A top in US Treasuries will mark and confirm a bottom in equities.

This ongoing series of crises will be done when bonds and stocks crash together and the dollar is out of favor. Then the rebuilding will begin.

Too Big to Jail

"Among a people generally corrupt, liberty cannot long exist."
Edmund Burke

Although Nassim Taleb makes some excellent points he is a bit narrow in his analysis because of his superior knowledge and experience in a highly specific area of the crisis, which in some ways is a broader cultural crisis.

There may be enough fraud involved in the US over the past twenty years for multiple prosecutions under the RICO statutes. Or it just may be the end result of a general breakdown in morals, from the top down by example perhaps.

One does find some institutions appearing as enablers at the heart of every crisis, from LTCM to Enron to the Accounting Frauds to the Tech Bubble to the Credit Bubble.

No, this was worse than the silence of the witnesses to the assault of Kitty Genovese that gave the label to the bystander effect.

In this case there were 'bystanders' who financially benefited from the assault and who not only kept quiet but actively intimidated and silenced other bystanders through ridicule and fear of retribution. But there are also many who simply did not care then and will not care once the markets rally once again. This is the sad commentary on a nation corrupted by easy money.

There were many bystanders who did call 911 and were ignored because those in the enforcement chain were either asleep on the job or had other competing interests.

The practical problem is that the institutions involved are probably too big to jail.

That is their strength, but ironically also their weakness.


The Financial Times
Bystanders to this financial crime were many
By Nassim Nicholas Taleb and Pablo Triana
December 7 2008 19:18

...Not surprisingly, the Genovese case earned the interest of social psychologists, who developed the theory of the “bystander effect”. This claimed to show how the apathy of the masses can prevent the salvation of a victim. Psychologists concluded that, for a variety of reasons, the larger the number of observing bystanders, the lower the chances that the crime may be averted.

We have just witnessed a similar phenomenon in the financial markets. A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).

Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks Few people would agree that the illusion of knowledge is a good thing. Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes.

Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article. Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.

So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.”

Appearance versus Reality in the Prism of Economics

"Decency, security and liberty alike demand that government officials shall be subjected to the same rules of conduct that are commands to the citizen.

In a government of laws, existence of the government will be imperiled if it fails to observe the laws scrupulously. Our government is the potent omnipresent teacher. For good or ill, it teaches the whole people by it's example.

Crime is contagious. If the government becomes a law breaker, it breeds contempt for the law; it invites every man to become a law unto himself; it invites anarchy." Supreme Court Justice Louis Brandeis, Olmstead v. United States

"And they healed the pain of my people disgracefully, saying: Peace, prosperity, when there was no peace or prosperity." Jeremiah 6:12

The problem of official US statistics not fully reflecting the actual economic situation is reasonably well-documented and accessible to any literate person. It is remarkably underreported and unremarked upon by the economic and media establishment however.

It may often be crap, but it is the crap we use to buy and sell, trade, derive values, and base policy decisions. It does not matter to the buyers and sellers in the short term, but in the longer term it can be seriously misleading, as witnessed by our latest financial crisis.

Peer pressure discourages negativity and outlying opinions amongst many economists, so recognition of trend changes and innovation in ideas become particularly problematic. This is an issue in the leading edge of many sciences, particularly in those that are rapidly evolving such as theoretical physics. Exegesis succumbs more readily to eisigesis in what might be described as a nascent science like economics with so many conflicting opinions and theories influenced by political agendas and ideology.

Nouriel Roubini is hailed as a prophet for predicting a downturn that common sense and an examination of the statistics should have made obvious to a first year economics student in March at the latest. Roubini was a maverick in that as a tenured professor with a reputation he dared to state the obvious before it became painfully obvious to everyone.

There are others who were equally forthcoming, if not as famed, in "telling it like it is." Meredith Whitney and Yves Smith are two outstanding examples of those who are led by the data, who are remarkable in the integrity of their thought processes, even when they might be incorrect as we all are.

Why is there a reluctance to state the probable amongst the economic establishment? It is most likely the fear of appearing foolish, of being wrong, because the methods and measures underlying the work of all the economic schools is simply unreliable. In an atmosphere such as this, playing safe and building 'reputation' and a place in a pecking order becomes a higher priority than innovation and advancement of understanding.

It fosters an ideological balkanization of knowledge, and the tendency to impress and intimidate rather than illumnate, because the economic professional understands that they simply do not know the answer with certainty, but can never admit it or explain it sufficiently to a non-practioner or even worse, a client. Perhaps that is why some of the best information has been coming from those who have less vested interest in the established order. There is a certain freedom conferred by the glass ceiling or a lack of material need and ambition.

Then there are the economists who act as hired opinion slingers or unpaid angry villagers for ideological causes and think tanks, tending to dominate the landscape in the short term because it is easier to declare yourself and work for a group of true believers whose first principles you hold, whether in true love or a paid embrace. And you will be right every so often, and will always find a place to hang your hat and park your shoes.

And on the far end of the spectrum are the used car salesmen of the economic and financial industry, who appear in the news and on television program generally with a 'pretty' interviewer as a set piece to promote a view of reality that favors the pocketbook of their employers, with a shamelessness that is almost comic at times, and would almost certainly not be so tolerated in any other aspect of human endeavor.

Can you imagine the state of the food and drug industries if such blatantly fallacious claims and interpretations of the prognosis and prior results were tolerated? It recalls the early days of traveling medicine show salesmen.

Gratefully there are more independents these days, with a forum provided by the internet for their thoughts, who operate outside of the conventional journals and channels of economic orthodoxy. Independent minds like Mark Thoma's Economist's View, Paul Kedrosky's Infectious Greed, Barry Ritholz's Big Picture, Yves Smith's Naked Capitalism, Eric Janszen's iTulip, and of course the benchmark for all, Calculated Risk, among others listed in the Divertissement Éducatif section on the left side of this blog. Their task is too often thankless but a candle lit in the darkness nonetheless.

Change is coming, and a renewal of thought is in the air. Monetarism has clearly run its course, and Keynesianism needs a significant update if not transformation from a genius equal to the original. It also may be time for a radical change in rethinking old ideas of how an economy can operate efficiently, ironically by often viewing even older ideas and theories in the light of new experience.

Out of the destruction of our current system will arise new ideas, new concepts, new attempts to promote the advancement of knowledge, a difficult marriage of economic science and public policy which don't quite speak the same language or have the same core principles, and at least a new look at the operation of human financial interactions.


Numbers Racket: Why the Economy Is Worse Than We Know - Kevin Phillips 1 May 2008 - Harper's Magazine

Down and Out: Discouraged Workers - Time Magazine, 9 September 1991

NY Times
Grim Job Report Not Showing Full Picture
By DAVID LEONHARDT and CATHERINE RAMPELL
December 6, 2008

As bad as the headline numbers in Friday’s employment report were, they still made the job market look better than it really is.

The unemployment rate reached its highest point since 1993, and overall employment fell by more than a half million jobs. Yet that was just the beginning. Thanks to the vagaries of the way that the government’s best-known jobs statistics are calculated, they have overlooked many workers who have been deeply affected by the current recession.

The number of people out of the labor force — meaning that they were neither working nor looking for work and that the government did not consider them unemployed — jumped by 637,000 last month, the Labor Department said. The number of part-time workers who said they wanted full-time work — all counted as fully employed — rose by an additional 621,000.

Take these people into account, and the job market may be in its worst condition since the early 1980s. It is still deteriorating rapidly, too.

Already, the share of men older than 20 with jobs was at its lowest point last month since 1983, and very close to the low point of the last 60 years. The share of women with jobs is lower than it was eight years ago, which never happened in previous decades.

Liz Perkins, 24 and the mother of four young children in Colorado Springs, began looking for work in October after she learned that her husband, James, was about to lose his job at a bed-making factory.

But the jobs she found either did not pay enough to cover child care or required her to work overnight. “I can’t do overnight work with four children,” she said. She has since stopped looking for work.

The family has paid its bills by dipping into its savings and borrowing money from relatives. But Ms. Perkins said that unless her husband found a job in the next three months, she feared the family would become homeless.

Even Wall Street economists, whose analysis usually comes shaded in rose, seemed taken aback by the report. Goldman Sachs called the new numbers “horrendous.” Others said “dreadful” and “almost indescribably terrible.” In a note to clients, Morgan Stanley economists wrote, “Quite simply, there was nothing good in this report.” HSBC forecasters said they now expected the Federal Reserve to reduce its benchmark interest rate all the way to zero.

Such language may sound out of step with a jobless rate that, despite its recent rise, remains at 6.7 percent; the rate exceeded 10 percent in the early 1980s. But over the last few decades, the jobless rate has become a significantly less useful measure of the country’s economic health.

That is because far more people than in the past fall into the gray area of the labor market — not having a job and not looking for one, but interested in working. This group includes many former factory workers who have been unable to find new work that pays nearly as well and are unwilling to accept a job that pays much less. Some get by with help from disability payments, while others rely on their spouses’ paychecks.

For much of the last year, the ranks of these labor force dropouts were not changing rapidly, said Thomas Nardone, a Labor Department economist who oversees the collection of the unemployment data. People who had lost their jobs generally began looking for new work. But that changed in November.

Much as many stock market investors threw in the towel in early October, and consumers quickly followed suit by cutting their spending, job seekers seemed to turn darkly pessimistic about the American economy in November. Unless the numbers turn out to have been a one-month blip, large numbers of people seem to have decided that a job search is, for now, futile.

“It’s not only that there’s nothing out there,” said Lorena Garcia, an organizer in Denver for 9to5, National Association of Working Women, a group that helps low-wage women and women who are looking for work. “But it also costs money to job hunt.”

Just how bad is the labor market? Coming up with a measure that is comparable across decades is not easy.

The unemployment rate has been made less meaningful by the long-term rise in dropouts from the labor force. The simple percentage of people without jobs — including retirees, stay-at-home parents and discouraged would-be job seekers — can also be misleading, though. It has dropped in recent decades mainly because of the influx of women into the work force, not because the job market is fundamentally healthier than it used to be.

The Labor Department does publish an alternate measure of unemployment, which counts part-time workers who want full-time work, as well as anyone who has looked for work in the last year. (The official rate includes only people who told a government surveyor that they had looked in the last four weeks.)

This alternate measure rose to 12.5 percent in November. That is the highest level since the government began calculating the measure in 1994.

Perhaps the best historical measure of the job market, however, is the one set by the market itself: pay.

During the economic expansion that lasted from 2001 until December 2007, when the recession began, incomes for most households barely outpaced inflation. It was the weakest income growth in any expansion since World War II.

The one bit of good news in Friday’s jobs report, economists said, was that pay had not yet begun to fall sharply. Average weekly wages for rank-and-file workers, who make up about four-fifths of the work force, rose 2.8 percent over the last year, only slightly below inflation.

But economists said those pay gains would begin to shrink next year, if not in the next few weeks, given the rapid drop in demand for workers. “Wage increases of this magnitude will be history very soon,” said Joshua Shapiro, an economist at MFR Incorporated, a research firm in New York.