Credibility Trap: Silver and Financial Markets Are Manipulated, But So What?

"The world is now five years on from the outbreak of the financial crisis, yet the global economy is still unbalanced and seemingly becoming more so as interacting weaknesses continue to amplify each other. The goals of balanced growth, balanced economic policies and a safe financial system still elude us.

In advanced economies at the centre of the financial crisis, high debt loads continue to drag down recovery; monetary and fiscal policies still lack a comprehensive solution to short-term needs and long-term dangers; and despite the international progress on regulation, the condition of the financial sector still poses a threat to stability.

From time to time, encouraging signs raise hopes – but they are quickly dashed, delivering another blow to the confidence of consumers and investors."

Bank for International Settlements, Breaking the Vicious Cycle, 82nd Annual Report, 24 June 2012

Someone sent this video show below to me in response to the things I have written earlier today.

I find the whole clip absolutely remarkable when viewed from an objective, or at least a non-American and non-financial industry, point of view. The exceptionalism and denial in this discussion as it unfolds is surprising to watch, and the groups chastises Europe while dismissing the corruption in the Anglo-American banking system that significantly contributed to the crisis.

Normally we do not hear such relatively open talk until the late stages of an unfolding financial collapse when hiding the reality of what is happening becomes pointless.

What really "knocks one's socks off" is the general admission and conclusion beginning around minute 9 of this video that the banks are manipulating the financial and commodity markets, with silver specifically mentioned. And the panel accepts it as 'oh well, that's the banking system.' That's just the way things are and if you don't like it, well then tough luck for you.

I am sure these are all very nice people, but they are so deeply involved with the financial system that they have lost their perspective. And that is a general problem with some of the professions like economics and financial reporting. Perhaps this is why we seem to be getting the best information on this from non-financial sources, with a few notable exceptions.

This is a fine example of the credibility trap. The truth is so damaging to oneself as a member of a particular status quo that it can rarely be admitted, and if admitted, cannot be taken seriously. After all, the game is rigged, and everyone knows. Well at least everyone who counts, but for anyone who says it before its time they are ridiculed, shunned, and dismissed.

As I have said, at least CNBC is willing occasionally to entertain such discussions, as opposed to the extended infomercials and streaming agitprop carried in the guise of reporting on some of the other corporate news channels.

After a long discussion of how the private sector must suffer further, a somewhat eccentric but interesting review of the European postwar economies, and some additional economic babytalk, the group segways to JPM's upcoming earnings report and the London Banking scandal.

I particularly enjoyed Chris Whalen's description of JPM's CIO as a 'rogue hedge fund in London.' He knows better. And the dismissal of the LIBOR scandal as business as usual, which Mervyn King recently described as 'a culture of deceit,' is truly interesting. Does such self-serving hypocrisy have any limits, to not even bother to feign surprise?

I do not wish to pick on Chris, but he is a smart and generally well-educated fellow, a graduate of Villanova, but he is still a creature of the system, a former employee of the NY Fed and Bear Stearns, and captive to a cultural mind set, perhaps without even realizing it, that is apparent to an outsider.

Whalen: None of its [JPM's CIO losses] are acceptable, but see the whole point is Jamie got entangled in the media. (He got caught lying and gambling with customer money - Jesse) If this had just been a reported loss with a lot of other numbers we wouldn't be talking about it. It's a trivial number in the grand scheme of things.

Sorkin: What may be less trivial is this situation, this scandal involving LIBOR.

Whalen: Ah well, welcome to the banking industry. Come on, uh, you know... (wink wink, nod nod)

Sorkin: You hear about these things...

Whalen: Foreign exchange, Libor...

Sorkin: You used to think these were conspiracy theories. Right? You hear this about people manipulating LIBOR, you hear about people manipulating the silver market, and you'd say...

Michelle: And they are!

Sorkin: And they are!

And that, ladies and gentlemen, is the credibility trap in action, during the late stage decline and failure of a thoroughly rotten economic status quo.

The FT's Martin Wolf Shoots the 'Naturally Efficient Markets' Hypothesis in the Head

In the absence of effective regulatory oversight and objective restraint, the financial insiders rigged the market, not incidentally, but systemically and flagrantly over a long period of time.

Market manipulation is no obscure theory, not some secular transgression committed on the periphery by rogue traders, but a pervasive feature of the Anglo-American banking system that stubbornly resists reform through the accumulated power of a credibility trap.

A credibilty trap is a situation where the regulatory, political and informational functions of a society have been thoroughly taken in by a corrupting influence and a fraud so that one cannot even begin to discuss the situation honestly without implicating, at least incidentally, a broad swath of the power structure and the status quo who at least tolerated it, if not profited directly from it. Who will reform the reformers?

As I had hoped, the exposure of the LIBOR fixing scandal is proving to be a watershed moment, even though the common person outside the City of London hardly understands the implications of it yet.  It may not gain traction without another collapse, in times such as these, but it is an irrefutable landmark.

I think in time even the true believers in unrestrained markets, and so often the haters of all government, might find their faith in the natural goodness of those modern ubermensch, the financial corporations, to be shaken.

It was always a silly notion, that left to themselves people who are fraught with flaws and foibles and motivated by personal gain would act with perfect altruistic rationality like some sort of benign demi-gods. In prior days when educated people had learned history and philosophy and thereby some practical wisdom, as well as more marketable skills, the purveyors of such nonsense would have been laughed out of the room when proposing such an outlandish theory.

But change is hard to do. And we have several decades of the free-market follies running at a higher tide then normal now, with the utopian notion that we must knock down or cripple all the laws regulating the markets in order to be free. Free of the government, but naked and defenseless against private rapaciousness and the organized plunder of increasingly powerful supra-national corporations.

Their philosophy has been tried and found not only to be wanting, but barking mad. The problem with madness is that it is often unemcumbered by doubts and self-restraint, even as it falls into the abyss.

Martin Wolf's primary contribution to this is not some new and valuable insight, but rather the voice of a respected name, a 'serious person, who notes somewhat drily that the emperor is naked and we need to do something about it before he attacks the women and children in his ravings.

I chafe a bit at Mr. Wolf's somewhat unambitious prescription, that banks should be encouraged to charge higher fees, so they would not be so tempted to steal from their customers and the public, to fund their extravagant lifestyles. It does often appear to be a somewhat one-sided arrangement. Some US Banks Now Require Customers to Pay ALL Legal Fees in Disputes Regardless of Outcome.

I seem to recall a long period of time during which investment and utility banking were separate, and the incomes and lifestyles of the utility bankers were modest, more in keeping with an electric utility worker than a financial potentate.

Perhaps we should look to what went wrong with the banking and financial system, and re-learn the lessons of the past.

But do not expect this obvious thing to come easily. For as Robert F. Kennedy once observed, "About one fifth of the people are against everything, all the time." And the monied interests seem to have about one fifth of the people wrapped around their little fingers and whipped into a self-destructive hysteria these days.

But it seems as though the Allies are about to cross the Rhine, and the kings of Wall Street are huddling in their bunkers and ratholes, planning their final counterattack, moving divisions of hardened mercenaries and true believers to their defense, even as their enablers and sycophants in the Congress and the media start slipping slowly away.

This too shall pass, but not without causing further damage in the process. These are tricky and unscrupulous boys, and they have co-opted quite a bit of the system. But they have reached and surpassed their zenith, and their power begins to wane.  And so now it is time to leave.

It is always the hubris, and overreach, a step too far.

"My interpretation of the Libor scandal is the obvious one: banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.

As my colleague John Kay, has frequently point out, such behaviour, which might seem to be the logical consequence of profit-maximisation, is incompatible with the survival of a sophisticated market economy. Without trust in the probity of those one deals with a host of potentially profitable long-term arrangements will collapse. This is particularly true in banking, Trust is not an optional extra in banking, it is, as the salience of the word “credit” to this industry implies, of the essence.  ('credo, credere,' and all that - Jesse)

It is difficult to know how to restore not just the reality, but the perception, of trustworthiness, to this industry. But part of the answer must be a separation of the self-interested trading culture of today’s investment banking from the service-oriented culture of old-fashioned commercial banking. That has always seemed to me to be a strong argument for the ring-fencing of retail from investment banking that the ICB proposed...

The banking industry performs a set of vital public functions – the provision of credit and the management of money. But its culture is not that of service-oriented utilities, but rather of huge entities acting solely for their own purposes.

A full retail ring-fence, which separates the investment banking from the retail banking, (colloquially known as Glass-Steagall - Jesse)  plus much higher capital requirements, would be a good start. This combination would, I believe, see the disappearance of much unnecessary trading activity. Good riddance, I would say. But the UK would also have to accept that the present charging model for retail banking – free, if in credit – is also one of the reasons for the endless series of scandals. The model is broken, in the current low-interest rate environment. Banks must be encouraged to charge open fees for service, rather than make money by covert means...

Read the rest here.

That Most Dangerous Time in the History of a Great Nation

Someone reminded me of this passage from an old history book today. It was a memory of days gone by for me, when I studied Roman history for a whimsical second major in Classics as a bright eyed undergraduate.

People have been comparing the US to the Roman Empire in decline since at least the 1950's. It was a favorite meme of my mother, child as she was of the Great Depression and the Second World War.  And yet we sometimes look back now to that early postwar period as 'the good old days.'

Unstable times bring great risks. A.H. Beesley wrote this history shortly after the First World War, when the flower of Europe had been lost in the trenches and the British Empire was staggered.  Most people are not aware of the foundation of the Roman Republic with the overthrow of the monarchy around 500 BC, and the four hundred year period of the popular consuls, with their own decline, the third servile revolt of Spartacus, and the rise of the princeps, clever politicians and powerful generals, epitomized finally by the dictator, Julius Caesar.

Beesley asks the rhetorical question in 1921 that a Roman citizen might have asked in 70 BC, 'The hour for reform was surely come. Who was to be the man?'

And so, seemingly, here we are again.

Universal degeneracy of the Government, and decay of the nation

Everywhere Rome was failing in her duties as mistress of the
civilised world. Her own internal degeneracy was faithfully reflected
in the abnegation of her imperial duties. When in any country the
small-farmer class is being squeezed off the land; when its labourers
are slaves or serfs; when huge tracts are kept waste to minister to
pleasure; when the shibboleth of art is on every man's lips, but ideas
of true beauty in very few men's souls; when the business-sharper is
the greatest man in the city, and lords it even in the law courts;
when class-magistrates, bidding for high office, deal out justice
according to the rank of the criminal; when exchanges are turned into
great gambling-houses, and senators and men of title are the chief
gamblers; when, in short, 'corruption is universal, when there is
increasing audacity, increasing greed, increasing fraud, increasing
impurity, and these are fed by increasing indulgence and ostentation;
when a considerable number of trials in the courts of law bring out
the fact that the country in general is now regarded as a prey, upon
which any number of vultures, scenting it from afar, may safely
light and securely gorge themselves; when the foul tribe is amply
replenished by its congeners at home, and foreign invaders find any
number of men, bearing good names, ready to assist them in
robberies far more cruel and sweeping than those of the footpad or
burglar'--when such is the tone of society, and such the idols before
which it bends, a nation must be fast going down hill.

A more repulsive picture can hardly be imagined. A mob, a moneyed
class, and an aristocracy almost equally worthless, hating each other,
and hated by the rest of the world; Italians bitterly jealous of
Romans, and only in better plight than the provinces beyond the sea;
more miserable than either, swarms of slaves beginning to brood
over revenge as a solace to their sufferings; the land going out of
cultivation; native industry swamped by slave-grown imports; the
population decreasing; the army degenerating; wars waged as a
speculation, but only against the weak; provinces subjected to
organized pillage; in the metropolis childish superstition, whole sale
luxury, and monstrous vice.

The hour for reform was surely come. Who was to be the man?

A.H. Beesley, The Gracchi Marius and Sulla, 1921