What follows are a few of the basic premises on which I base my thinking. You might or might not agree with them, but may I suggest that you make a list of your own basic premises. It will help you clarify your thinking. Government is inherently incompetent, and no matter what task it is assigned, it will do it in the most expensive and inefficient way possible.The American government is corrupt from top to bottom.If you rely on the mass media to inform you about your community, state and nation, you will, with rare exceptions, be woefully ignorant of what is really going on.The universal franchise is a bad idea. The notion that the destiny of the nation should be put in the hands of ignoramuses, parasites, boobs, party hacks and idiots is absurd on its face.Public education in America is a failure and is so flawed it cannot be reformed.Not much has changed in the past 5,000 years of human history.
Government is inherently incompetent, and no matter what task it is assigned, it will do it in the most expensive and inefficient way possible.
The American government is corrupt from top to bottom.
If you rely on the mass media to inform you about your community, state and nation, you will, with rare exceptions, be woefully ignorant of what is really going on.
The universal franchise is a bad idea. The notion that the destiny of the nation should be put in the hands of ignoramuses, parasites, boobs, party hacks and idiots is absurd on its face.
Public education in America is a failure and is so flawed it cannot be reformed.
Not much has changed in the past 5,000 years of human history.
All of that might sound cynical, but it really isn’t. True conservatives have argued for years that government, even a benign one, is like a clumsy, retarded giant, and therefore you have to be careful to limit what tasks you assign it.
You can make a career out of just criticizing obvious bloopers committed by the various departments of government, because they all commit them. The Romans built roads that are still around, but states today continue to build roads that will pothole and crack within a year, sometimes sooner. Look at the federal airport-security people. They take nail trimmers away from grandmothers but allow real weapons to get through. And so on and so on.
As for the news media, since most media companies are now controlled by a handful of corporations whose sole interest is in maintaining a high profit margin, you are getting mostly fluff instead of hard news. Hard news is labor-intensive. It is cheaper to go with the fluff.
Thomas Jefferson’s theoretical belief in a free press soon foundered on the reality, and he came to despise it. He advised one young man never to read newspapers, since it was better to be ignorant than misinformed.
As for government corruption, it’s all around us. Sure, there are honest public officials, but the system itself is corrupt. It now requires so much money to run for office that the field is narrowed to bored millionaires and office-seekers willing to take as much money as they can from anywhere they can get it. That’s why Congress pays no attention to the people. It pays attention to the suppliers of campaign funds – not to mention junkets, fancy vacations and off-the-radar business deals.
As for the universal franchise, the problem with that is obvious. People who wish to vote should at least be required to pass the same test given to immigrants who want to become citizens. A lot of voters are not even sure what state they live in – or what century, for that matter. How can people who are ignorant of history, economics and basic science make an intelligent choice for a national leader? They can’t. They will go with the demagogue.
And, of course, it is public education that is mass-producing these ignoramuses. Imagine people completing 16 years of formal education and not knowing how to spell, punctuate or use their native language correctly. Imagine college graduates who know virtually nothing about their country’s history or geography.
As for the final premise, it is simply a reminder to utopians: Human beings are selfish, flawed and fallible animals. They always have been, they are now, and they always will be. Therefore, any human institution, public or private, will reflect those flaws. If you want perfection, plant a rosebush.
May 5, 2005
Charley Reese was a journalist for 49 years, reporting on everything from sports to politics. From 1969–71, he worked as a campaign staffer for gubernatorial, senatorial and congressional races in several states. He was an editor, assistant to the publisher, and columnist for the Orlando Sentinel from 1971 to 2001. He wrote a syndicated column which is carried on LewRockwell.com. Reese served two years active duty in the U.S. Army as a tank gunner.
MY COMMENTS: As was pointed out elsewhere – you don’t assign things to a clumsy retarded giant. You give him massive doses of thorazine and tie him to a chair that is bolted to the floor and then check on him every ten minutes with a big baseball bat at the ready.
Here’s the Matt Taibbi’s article on Goldman-Sachs, found at Something Awful (via LOLfed). Despite the weapons-grade snark in the first paragraph, which I underlined, it’s a Big Picture post, very analytical, and has a hypothesis of what is to come that we can test for. So I recommend you read the whole thing, even though it is quite long. THE GREAT AMERICAN BUBBLE MACHINE From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they’re about to do it again By MATT TAIBBI The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who’s Who of Goldman Sachs graduates. By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup – which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the rear end in a top hat chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York – which, incidentally, is now in charge of overseeing Goldman – not to mention … But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain – an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy. The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere – high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth – pure profit for rich individuals. They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s – and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet. … IF AMERICA IS NOW CIRCLING THE DRAIN, GOLDMAN SACHS HAS FOUND A WAY TO BE THAT DRAIN. BUBBLE #1 – THE GREAT DEPRESSION Goldman wasn’t always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids – just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan. You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s. This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an “investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game. Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund – which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah – which, of course, was in large part owned by Goldman Trading. The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line …. BUBBLE #2 – TECH STOCKS Fast-Forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor’s assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street. It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “long-term greedy.” One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grownup’ corporate clients who had made bad deals with us,” he says. “Everything we did was legal and fair – but ‘long-term greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.” … But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. … Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliche that whatever Rubin thought was best for the economy – a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline THE COMMITTEE TO SAVE THE WORLD. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. … The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement. It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system – one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control. “Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public,” says one prominent hedge-fund manager. “The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash.” Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there saying Bullshit.com is worth $100 a share.” The problem was, nobody told investors that the rules had changed. “Everyone on the inside knew,” the manager says. “Bob Rubin sure as hell knew what the underwriting standards were. They’d been intact since the 1930s.” … Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent. How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,” which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show” to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price – let’s say Bullshit.com’s starting share price is $15 – in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day-trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit – a six percent fee of a $500 million IPO is serious money. Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nichol as Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television rear end in a top hat Jim Cramer, himself a Goldman alum. … “Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “They totally fueled the bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation – manipulated up – and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed to pay $40 million for its laddering violations – a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.) Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price – ensuring that those “hot” opening price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business – effectively robbing all of Bullshit’s new shareholders by diverting cash that should have gone to the company’s bottom line into the private bank account of the company’s CEO. … Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater. GOLDMAN SCAMMED HOUSING INVESTORS BY BETTING AGAINST ITS OWN CRAPPY MORTGAGES. Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits – an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman’s mantra of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement. The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else’s Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that “I’ve never even heard the term ‘laddering’ before.”) For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent – they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin. BUBBLE #3 – THE HOUSING CRAZE Goldman’s role in the sweeping disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. … None of that would have been possible without investment bankers like Goldman, who created vehicles to package those lovely mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con’s mortgage on its books, knowing how likely it was to fail. You can’t write these mortgages, in other words, unless you can sell them to someone who doesn’t know what they are. Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the lovely ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance – known as credit-default swaps – on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won’t. There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated – and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses. … Clinton’s reigning economic foursome – “especially Rubin,” according to Greenberger – called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 1l,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity. But the story didn’t end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities – a third of which were subprime – much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap. Take one $494 million issue that year, GSAMP Trust 2006-S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation – no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months. Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners – old people, for God’s sake – pretending the whole time that it wasn’t grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions …. However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages. “That’s how audacious these assholes are,” says one hedge-fund manager. “At least with other banks, you could say that they were just dumb – they believed what they were selling, and it blew them up. Goldman knew what it was doing.” I ask the manager how it could be that selling something to customers that you’re actually betting against – particularly when you know more about the weaknesses of those products than the customer – doesn’t amount to securities fraud. “It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.” Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. …. But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million – about what the bank’s CDO division made in a day and a half during the real estate boom. The effects of the housing bubble are well known – it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It hosed the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and hosed the taxpayer by making him payoff those same bets. And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm’s payroll jumped to $16.5 billion – an average of $622,000 per employee. As a Goldman spokesman explained, “We work very hard here.” But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down – and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with. BUBBLE #4 – $4 A GALLON By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn’t leave much to sell that wasn’t tainted. The terms junk bond, IPO, subprime mortgage and other once-hot financial fare were now firmly associated in the public’s mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years – the notion that housing prices never go down – was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling. Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market – stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008. That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be “very helpful in the short term,” while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out. GOLDMAN TURNED A SLEEPY OIL MARKET INTO A GIANT BETTING PARLOR – SPIKING PRICES AT THE PUMP. But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling – which, in classic economic terms, should have brought prices at the pump down. So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help – there were other players in the physical-commodities market – but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures – agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed. As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. … In 1936, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission – the very same body that would later try and fail to regulate credit swaps – to place limits on speculative trades in commodities. As a result of the CFTC’s oversight, peace and harmony reigned in the commodities markets for more than 50 years. All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren’t the only ones who needed to hedge their risk against future price drops – Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too. This was complete and utter crap – the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman’s argument. It issued the bank a free pass, called the “Bona Fide Hedging” exemption, allowing Goldman’s subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies. Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market – driven there by fear of the falling dollar and the housing crash – finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers – and that’s likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump. What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. “I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC,” says Greenberger, “and neither of us knew this letter was out there.” In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions. “1 had been invited to a briefing the commission was holding on energy,” the staffer recounts. “And suddenly in the middle of it, they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Duh, duh.’ So we went back and forth, and finally they said, ‘We have to clear it with Goldman Sachs.’ I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?’” … [I]n a classic example of how complete Goldman’s capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over. Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index – which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil – became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly “long only” bettors, who seldom if ever take short positions – meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it’s terrible for commodities, because it continually forces prices upward. “If index speculators took short positions as well as long ones, you’d see them pushing prices both up and down,” says Michael Masters, a hedge-fund manager who has helped expose the role of investment banks in the manipulation of oil prices. “But they only push prices in one direction: up.” Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an “oracle of oil” by The New York Times, predicted a “super spike” in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities-trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives.” But it wasn’t the consumption of real oil that was driving up prices – it was the trade in paper oil. By the summer of2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices. In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees’ Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn’t just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World. … BUBBLE #5 – RIGGING THE BAILOUT After the oil bubble collapsed last fall, there was no new bubble to keep things humming – this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle. It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers – one of Goldman’s last real competitors – collapse without intervention. (“Goldman’s superhero status was left intact,” says market analyst Eric Salzman, “and an investment-banking competitor, Lehman, goes away.”) The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed. Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bankholding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding – most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs – and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret. Converting to a bank-holding company has other benefits as well: Goldman’s primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict-of-interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank-holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman – New York Fed president William Dudley – is yet another former Goldmanite. The collective message of all this – the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds – is that when it comes to Goldman Sachs, there isn’t a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. “In the past it was an implicit advantage,” says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. “Now it’s more of an explicit advantage.” … And here’s the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008? Fourteen million dollars. That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion – yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year. How is this possible? According to Goldman’s annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely hosed corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all. This should be a pitchfork-level outrage – but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. “With the right hand out begging for bailout money,” he said, “the left is hiding it offshore.” BUBBLE #6 – GLOBAL WARMING Fast-Forward to today. It’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs – its employees paid some $981,000 to his campaign – sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs. AS ENVISIONED BY GOLDMAN, THE FIGHT TO STOP GLOBAL WARMING WILL BECOME A “CARBON MARKET” WORTH $1 TRILLION A YEAR. Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits – a booming trillion-dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade. The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance. Here’s how it works: If the bill passes; there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billions worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount. The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of an electricity suppliers in the U.S. total $320 billion. Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climate-change problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that cap-and-trade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that ‘Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.” The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market? “Oh, it’ll dwarf it,” says a former staffer on the House energy committee. …. “If it’s going to be a tax, I would prefer that Washington set the tax and collect it,” says Michael Masters, the hedge fund director who spoke out against oil-futures speculation. “But we’re saying that Wall Street can set the tax, and Wall Street can collect the tax. That’s the last thing in the world I want. It’s just asinine.” Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees – while the actual victims in this mess, ordinary taxpayers, are the ones paying for it. It’s not always easy to accept the reality of what we now routinely allow these people to get away with; there’s a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can’t really register the fact that you’re no longer a citizen of a thriving first-world democracy, that you’re no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there. But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going. The bubbles don’t come ’til the end of the program… Turn off the bubbles… Turn off the bubble machine!
MY COMMENTS: The above is a reading test. No paragraphs. I passed. I don’t need no stinking paragraphs.
Editor’s Note: This urban survival technique essay by GT actually applies to everyone, everywhere. Government is not your friend; it is your enemy. Whatever you try to do protect yourself — whether it be arming yourself, storing food, using real money (gold and silver) instead of their funny money fiat currency, tokens, or credit instruments, trying to secede or asserting your sovereignty — the government will object to. Their actions against you will range from merely thwarting you, to punishing you, to imprisoning you, to killing you.
DB
Here’s what GT has to say about protecting yourself from governments.
This is after about 10 days. This is a Princess LaRatte fingerling from soil that was about medium/dry. In other words, if I were to apply a scale of moisture where 1 is the dryest part of the 1 acre and 10 is where the soil has the most moisture, this seed was from an area where I would give it a 4.
We were out there setting gopher traps last night. I have been out there every evening since planting; setting traps and retrieving gopher carcasses. So far we’ve caught about 23 of the little beggars. I am getting a good idea of where the moist and dry areas are located. Some of the gopher holes are deep. The seed is down about 8 inches or so. This seed shows vigorous growth by my estimation and I expect to see green emerging soon.
Can’t tell you how happy I am to have seen this seed coming from a fairly dry part of the patch. Hot diggity Blankity Blank Potatoes!
A week ago 550 lbs of seed potatoes were put into a little over 1 acre with an old partially restored Iron Age potato planter and two six year old Percherons. It was a whirlwind and dusty day. Only a few people showed up to see the circus.
Capt. Phil got it on video and did an interview with Stu and me. We might have a nice edited version of it on DVD someday.
It took us three hours to do it and then I came back the next day and put in about 75 lbs by hand and shovel. It took me the better part of the entire day to get those 75 lbs in the ground. I am very fond of that planter and those huge draft horses.
Now I am waiting for them to show some green above the dusty-dry-farm potato patch. The only person who seems confident that we have enough moisture in the dirt is Tom. Tom’s family has been doing this since 1853. I will be asking him to come back and take a look in a day or so after he gets done moving. If I need to get some water on them, I can do it with an unfunded version of plan B since we have a new well with no pump nearby. I am thinking sprinklers. Not ideal, but better than a failed crop. Water equals weeds.
Since last Saturday evening we’ve trapped 23 gophers with black box traps and I just ordered 5 cinch traps which should be here this Saturday.
I ended up with way more seed than what was needed and sold some of the extra on craigslist and then 200 lbs to a neighboring real farm. Is that like funding my competition or is my competition offsetting my losses?
I played with the idea of doing the local Farmer’s Market, but they want costly government paper stating what is already obvious so I think I will pass. Leave the Nazi’s to their own stupidity. Plus it is too time consuming to do retail right with a 9 to 5. It would be fun, but I just don’t have the time.
I sent an email on the subject with my random thoughts to a few close and key people and got zero replies (I realize that these folks are just as busy or even more busy than me) so as far as I am concerned the secret is still a secret and the potato patch remains between me, God and the gophers.
My co-worker tells me, “We are lucky that our company is insulated from the economic downturn.” Sales are doing well as we drive by vacant commercial buildings to get to work. Mmmm … Wonder what he thinks will happen.
What is our paycheck going to do for us when the other shoe drops?
I feel a little reticent these days telling people about how our company will probably have an average year in sales. That is really good news in the grand scheme of things. But I hear rumblings about our reps not doing so well and they perhaps would not like to know that one of their small and insignificant lines is treading water with its nose well above the waterline. We are in a niche when it comes to technology, need and government spending. I am inclined to cite government spending or some trickle down version of it when it comes to causes for our amazing success. We are also being supplemented by foreign sales where I imagine that some of those foreigners are thinking the best use of their currently held FRN’s is to dump them on projects that by the by include our products. We’ve done about ½ mil in US funny money so far this year in China alone. Not bad, eh?
This brings me to the next secret that is not so well kept by yours truly.
I had a vision of a foot worn exodus from parts of the populated south of which part spills onto our country road and a few of those discover a partly harvested potato patch. They are hungry and some of the more astute show the others that a free meal is there for the taking. I am either there, watching from a distance, or long dead from the efforts of better armed looters. Some of His sheep are eating and gaining energy to continue their trek to safer areas and away from the hard boot heel of the state. My ghost or my still living face has a smile. I put something back for Liberty and for Christ’s precious creations.
Yeah, the potato patch should be between me, the gophers and God. No one else needs to know about it. But like most faltering humans, I am taking some pride in this latest project. And I am mentioning it here and there and getting some nice feed-back. If things progress more slowly, as I hope they will, I will have an opportunity to sell some of these secret potatoes and recoup my investment. Maybe even my labor, but I suspect this will have a balance sheet that looks more like an old car restoration. No big, I am doing it for love. I am doing it because my life is short and precious. If someone figures this out after I am gone then that will be nice, but I will do it anyway.
“In the long run, we are all dead but our children will be left to pick up the tab.” ~ Thomas Hoenig
Thomas Hoenig is the president of the Federal Reserve Bank of Kansas City. In a recent speech, he laid out a scenario for what the Federal Reserve ought to do and what the U.S. government ought to do, and what will happen if they refuse. You can read it here.
They will refuse. He did not say this, but it is clear to me that they will refuse, at least for the near term.
I hope they won’t refuse.
Hoenig surveyed what he called “challenges.” He said that we – a crucial word in the speech – must “begin now to address them genuinely and systematically or we risk repeating past mistakes and creating an environment that leads to our next set of crises.
Who are “we”? How will “we” accomplish this?
Herbert Hoover could have said as much in 1932. So could Bush 1 in 1991 or Bush 2 in 2001. So could Barack Obama today. They never say anything like this. Neither do Federal Reserve Chairmen, except when they are about to implement past mistakes.
He thinks the recession will abate in the second half of this year or in 2010. He did mention housing price declines as a drag on the economy. He did not mention foreclosures.
He said that the cause of this new economic growth will be the result of “the significant degree of monetary and fiscal stimulus” that has taken place.
He said that “Monetary policy has been enormously accommodative, with the fed funds rate being near zero.” This correctly identifies the cause of the fed funds rate at zero: monetary inflation. The FED cannot simply announce a lower fedfunds rate. It has to back this up with fiat money.
He identified the main subsidized sectors. The FED has thrown money at housing and the financial markets. It is now buying longer-term assets, including T-bonds. If we count all of the Federal Reserve Banks’ balance sheets, the increase has been from $1 trillion to $3 trillion in less than two years (p. 2).
Fiscal policy – the code words for “Federal deficits” – has matched the FED’s expansion of money. There was $700 billion for TARP during the past 8 months. The recent spending package will add another $800 billion in tax cuts, grants to state governments, and jobless benefits. There will be more highways.
NO FREE LUNCHES
He is a Keynesian. They all are. So, he did not mention that every dime that the Federal government spends in excess of revenues must be borrowed. That is what a deficit means. The only question is: From whom?
If from foreign central banks, the dependence of the U.S. government and the economy on foreign central bankers increases.
If from the domestic economy, every dime lent to the Federal government must come out of savings that would otherwise have gone into the private sector or local government. Every dime transferred from the private capital markets to the Federal government reduces economic productivity. The private sector jobs that would have been created become government jobs.
If from the Federal Reserve System, fiat money will spread into the economy.
If from commercial banks, this will come at the expense of either private producers or consumers, or through moving funds presently kept at the FED as excess reserves. The fractional reserve process will then take over: more money through the money multiplier, which will at last go positive.
Hoenig mentioned none of this.
There are no free lunches. There are no free loans. There are always costs attached.
He is cautiously optimistic. He thinks the recovery will be modest. This is becoming the standard opinion. He added this word of warning:
Our financial institutions remain fragile and will require significant additional amounts of capital to regain their stability.
He did not say how this capital is going to be raised.
THE OLIGARCHY OF INTERESTS
He said that the U.S. financial system very nearly collapsed in 2008. Then he did what they all do. He announced that we “need a better set of incentives within the industry and better oversight by the regulatory institutions if we are to avoid a repeat of these events in the future.”
This raises a few questions.
Why were the regulators blind before? For how long? Why are they better able to see now? What kind of incentives motivate them? Who applies these incentives? What about disincentives? Who applies these?
He understands this. “Unfortunately, I’m afraid we are witnessing some regulatory malpractice now” (p. 4). That is exactly what we are seeing. We are seeing the financial regulatory structure being handed over to the Federal Reserve System. This was the source of the bubble in the first place. Greenspan denied that anyone can identify a bubble in the making.
What if we do not get the reforms we need? His answer is amazing for its candidness: “. . . we will perpetuate an oligarchy of interests that will fail to serve the best interests of business, the consumer and the U.S. economy.”
Notice the key word: “perpetuate.” It is an admission of the existence of such an oligarchy.
It has been with us ever since the Civil War. It has consolidated its hold on the economy ever since the Federal Reserve began operations in 1914.
Why will this change now? He never said.
Today, the FED has created the legal basis of massive monetary inflation – unprecedented. How will it police the financial system?
He said that before “we” spend time reforming the system, “we should first determine which rules of conduct should be reintroduced and enforced to provide for better outcomes.”
How inspiring! But who are “we,” and how will “we” make these assessments? How will “we” get the existing oligarchy to consent to its suicide?
We have heard all this before, but never from a sitting president of a regional Federal Reserve Bank.
TOO BIG TO FAIL
He called for policy-makers to abandon this doctrine (p. 5). The policy is anti-capitalistic, he said. Indeed, it is. That is the reason why the Federal Reserve System was created by the big bank oligarchy in 1913.
He said the bailouts create moral hazard. Senior managers take extreme risks, looking for easy profits from high leverage, knowing that if their companies get in trouble, the government or the FED will bail them out.
To warn against “moral hazard” at this late date is naïve. The concept was first named and discussed in the 1870’s. It is well enough known by now that a Nashville financial planner has created a country music alter ego named Merle Hazard. He sings more sense than the Board of Governors of the Federal Reserve has yet to announce. If you doubt me, listen for yourself.
Hoenig did not outline exactly what this new, improved “let ‘em die” system should look like. He did not say how Congress will implement it. He did not say why, at this late date, the oligarchy will consent to it.
This is standard fare. Nobody in authority says what needs to be done or how it will ever come to pass. Economists tell us that incentives are everything. Then, when they call for financial reform, they refuse to discuss incentives. How does the fractional reserve banking process not create booms and busts? How can regulators overcome the booms that fiat money produces, or the busts that monetary stabilization later produces?
ECONOMIC IMBALANCES
He identified several. One is the balance of payments problem. We borrow hundreds of billions of dollars from abroad.
But who are “we”? He did not identify the major lenders: Asian central banks. He did not mention why they do this: to increase their exports of goods to the United States. How? By lowering the dollar-denominated value of their currencies. These central banks buy dollars with their own recently created fiat money.
The balance of payments deficit is mainly a product of mercantilist economics in Asia and Keynesian economics in the United States. Mercantilism and Keynesianism are the mutually dependent twins of modern trade. Asian central banks buy mainly Treasury debt and Federal agency debt. The imbalance problem stems from governments on both sides of the transactions.
Until very recently, the personal savings rate has fallen, he said (p. 6). Quite true. Now that it is rising again, the Federal government is running a $1.8 trillion deficit to get Americans to spend, spend, spend. The Federal Reserve has lowered the fedfunds rate to zero. Lend, lend, lend! The joint policies of the government and the FED are designed to increase spending. The lower capital gains rate will expire in 2010. That will reduce thrift.
Then there are the unfunded liabilities of the Federal government: Social Security and Medicare (p. 7). These are permanent imbalances. They have grown up over decades. Why would Hoenig imagine that Congress will reverse itself and start funding these sinkholes? With what? Congress will not invest in the private markets. It buys Treasury debt and spends the money. It always has.
Where are the new incentives that will change Congress? Who will impose them?
Hoenig’s whole exercise is utterly utopian. It is an economists’ fantasy: a world devoid of political incentives to correct the imbalances. Government created these imbalances for political purposes: buying votes, expanding power, deferring a day of reckoning. It has been successful. Why change now?
Someday, he said, “investment will slow and cause lower productivity.” What does he mean, someday? We are there.
The whole Western world is there. Every government and central bank has pursued the same policies. Every government is now trapped. Every central bank has lowered the overnight interest rate. Every central bank has inflated.
INTEREST RATES WILL RISE
He finally gets down to the real world (p. 8). He said that interest rates will rise.
He actually predicted monetary deflation. “As the economy recovers, even at a modest pace, resource demands will begin to increase. At that point, the current level of monetary accommodation will need to be withdrawn to avoid introducing inflationary impulses.” This is true. But if this is done, unemployment levels will remain high, he said.
If this happens, he predicted, “there will be considerable pressure on the central bank to ‘help out’ in easing the adjustment process by keeping interest rates low for an extended period” He’s got that right! This would lead to “high inflation and an actual worsening of an economy’s long-term performance.” Correct again!
Conclusion: “We face difficult adjustments that must be made. The process will not be free of pain.”
The FED has more than doubled its balance sheet over the past two years (p. 9). The FED must now remove this stimulus “carefully.” What does he mean, “carefully”? The FED either removes it or else it doesn’t.
He refused to say the obvious: to maintain today’s rate of price inflation, the FED will have to sell all of the toxic assets, all of the Fannie Mae and Freddie Mac debt, and all of the T-bonds that it has bought.
In short, it will have to collapse the already fragile financial system.
How likely is this scenario?
The monetary base has more than doubled. This allows a doubling of bank loans. This will double the money supply. If the FED does nothing, we will see 100% price inflation when the banks finally lend all of the money they legally can lend today.
So, at some point, he is right. The FED must sell those assets, or else raise bank reserve requirements to sterilize the assets it has bought. I think the latter is more likely.
If the FED does not sell assets or raise reserve requirements, then mass inflation is guaranteed.
This is not just America’s problem. This is the whole world’s problem,
MORE OF THE SAME
It has finally become acceptable to blame Alan Greenspan for his policy of lowering short-term rates. The problem today is this: the central banks have inflated at a rate that makes Greenspan look like a hard-money man. They have lowered short-term rates to unprecedented levels. They have out-Greenspanned Greenspan.
Now what? The supposed green shoots of recovery will persuade solvent banks to lend again. The M1 money supply will rise without being offset by a negative money multiplier, as has happened so far.
If banks refuse to lend, then interest rates will go up. This will cut short the recovery.
Imagine what the real estate market would look like if the FED ever unloaded its Fannie Mae and Freddie Mac bonds, and mortgages went to 7% or 8%. If you think the Case-Shiller index of urban housing prices in 20 cities looks like Niagara Falls today, just wait.
I think the FED will continue to buy T-bonds. It will not unload its assets until the political repercussions of 30% price inflation finally force it to stop buying. Then rates will soar.
CONCLUSION
The FED is on the back of the tiger. Hoenig sees this. He knows the financial system remains fragile. I presume that he knows that the only way to keep it solvent is for the FED to refuse to sell its assets to the general investment community. Bernanke knows this, too.
No matter how carefully the FED sells off debt, this policy will reverse the recovery. I mean the hoped-for recovery. It is nowhere in sight yet.
The FED will continue to support the T-bond market. It will not allow T-bond rates to rise dramatically.
It will ignore corporate bond rates. Get ready for a bumpy ride.
MY COMMENTS: So I tell my family, “Our cousin is probably growing the largest vegetable garden he has ever grown and it has two 30 ft rows of pole beans.” That is enough beans to cover your average driveway in a 10″ thick layer of Kentucky Wonders! Or more! They ask, “Why?” And I say, “Because, in some way, he thinks the same thing that I think and that is we may have some big surprises this summer. He is making sure that his family, kids, grand kids and all, will not go hungry.” Their eyes bug out. They think it is incredible that one of the stalwart and conservative members of the old-guard fold of the family could actually think the same thing as doom and gloom Denny. All I can do is shake my head.
It HAS NOTHING TO DO WITH DOOM AND GLOOM kids! It is about reality! Shake it off, step up! Gary North gives a pretty darn good accurate account of what is going on. At least here you do not need to read between the lines. My vegetable growing cousin does not read this blog – I can pretty much gaurantee that – and he IS reading between the lines. He watches TV for his news. Kudos to him for his ability to step back and get a sober look at the big picture. I have a feeling he is not alone and I know he is in a minority when one looks at the general population. Very few of us are prepared for what is coming.
Written by Thomas R. Eddlem Monday, 08 June 2009 00:00
The Federal Reserve caused the current economic crisis by suppressing interest rates and creating the housing bubble, Texas Congressman Ron Paul, Euro Pacific Capital president Peter Schiff, and others have charged. And now there’s finally been enough political push-back for the damage the Federal Reserve has wreaked that the Fed will be hiring a lobbyist. The Federal Reserve’s choice of lobbyist is Johns Hopkins University Vice President Linda Robertson, who serves in a public relations role at the medical school. Robertson served as an aide on Capitol Hill in the House of Representatives. She served throughout the Clinton administration as a senior advisor to three treasury secretaries, and won the Treasury Department’s highest award, the Alexander Hamilton award. Her partisan service in the Clinton administration could be a sign that the Fed will tie its future to the Democratic Party, which is currently in charge of both legislative chambers of Congress and the White House. Robertson has experience lobbying for another Ponzi scheme besides the Federal Reserve, but it is not something she’d likely want to boast about. Bloomberg.com reveals that she “headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal.” Not surprisingly, Robertson’s Johns Hopkins biography omits her lobbying efforts on behalf of Enron. Could the Fed be anticipating an Enron-style collapse? The political tides seem to favor a political debacle for the Fed, and even some former Fed officials are realizing it. “Some members of Congress think there are votes in attacking the Fed” after it “unnecessarily and unwisely entangled monetary policy with fiscal policy,” former St. Louis Fed President William Poole told Bloomberg.com. A big part of that political tide is the Ron Paul revolution, which put the Fed into a deservedly unfavorable spotlight. The Texas congressman and former presidential candidate accurately anticipated the current economic mess and laid the blame on the Fed. And in a year that saw Republicans rejected coast to coast, Dr. Paul easily won reelection in 2008 from his suburban Houston district. Author Tom Woods, in his recent book Meltdown, heavily focused on the role the Fed played in the current economic recession, and his book shot up the New York Times bestseller list. Meanwhile, the Ron Paul movement may be spreading politically. His son, Dr. Rand Paul, and his presidential campaign’s economic advisor, Peter Schiff, have formed U.S. Senate exploratory campaigns in Kentucky and Connecticut, respectively. Analysis in major television and Internet media by Rep. Paul’s adviser Peter Schiff in particular have put the Fed in a poor light, and the incredibly accurate analysis by Schiff led to more media exposure after the economic crisis began. He’s expected to appear on Comedy Central’s Daily Show this week (Tuesday, June 9). That’s bad news for the Fed, but it may not be the end of the bad news for the recession-causing body. Rep. Ron Paul’s upcoming book End the Fed (due out in September) is likely to become a New York Times bestseller, just like his The Revolution: A Manifesto last year. The real issue about the Federal Reserve Bank hiring a lobbyist is corruption. A federally chartered agency should not be using money to hire lobbyists to influence Congress. By federal law (and by the Federal Reserve’s own account), all profits from the Federal Reserve are supposed to return to the U.S. Treasury (i.e., the taxpayers). Hiring a lobbyist robs the taxpayers of those dollars and corruptly uses taxpayer dollars to lobby directly against taxpayer interests. Congress should investigate the propriety of this action.
(Hat tip for this story: LewRockwell.com’s invaluable blog)
