Thursday, June 2, 2011

The Second Warning. Preventing Economic Armageddon

[From Doug McDonald - The proprietor of this Blog does not necessarily agree with the opinions expressed in this Topic]

I don't know how many of you are aware of the great triumvirate [Rubin, Greenspan, and Summers, left to right, pictured here] steamrolling over Brooksley Born to keep her from regulating derivatives back in the late 1990's. Ms. Born, at the time, was the head of the "Commodity Futures Trading Commission" (CFTC). She was a lawyer who had worked with derivatives for 20 years and knew how dangerous they were in the hands of greedy Wall Street risk managers with no oversight. These three self ordained members of the economic intelligentcia, all of whom are still running around free amazingly enough, along with another know-it-all, Senator Phil (nation of whiners) Gramm of Texas, convinced Pres. Clinton to sign the bill removing the regulation of derivatives from the CFTC. Born had no recourse but to resign. The rest is history and Summers is now teaching his ideas to young impressionable lawyer/politician types at Harvard. God bless America!

Try to control your temper as you watch this PBS FRONTLINE documentary aptly named “The Warning”.

Well the great triumvirate is gone but now there are others who are trying to do it again to another brilliant and knowledgeable women, Elizabeth Warren [photo to left]. Please look into this and convince yourself as I have that we need to rein in the greedy narcissists on Wall Street and their buddies in congress.

We can't think Republican or Democrat here. There is too much money flying around to both parties. Google "Elizabeth Warren" and please do a little homework and look into the background of Elizabeth Warren, the “Congressional Oversight Panel” and the "Consumer Financial Protection Bureau (CFPB)". If you come up with a reason not to have Warren as head of the CFPB please let the rest of know what it is.

Here is a dialogue between David Gregory and Mitch McConnell on “Meet the Press” Sunday May 29, 2011.

David Gregory: Elizabeth Warren, would you back her or would you join Republicans to block her nomination?

McConnell: Well we’re pretty unenthusiastic about the possibility of Elizabeth Warren … uh … we’re pretty unenthusiastic frankly about this new agency and we’ve sent a letter to the President saying some changes need to be made in the CFPB, the Consumer Financial Protection Board, because as it’s currently constituted it answers to no one and I think could be a serious threat to our financial system.

Here are a couple of links illustrating her knowledge and brilliance. Even the pundits are overwhelmed.

She is obviously so much more knowledgeable than the other people on the panel. This nation needs Elizabeth Warren.

Listen to her put these two pundits in their place and talk their language about how ridiculous the current regulating agencies are.

Here’s an indication that she won’t be pushed around but she needs help. She has to become known to everyone in the U.S. The electorate has to understand how brilliant and knowledgeable she is. She could be the savior of this country’s economy if given the power to EFFICIENTLY and CONSTRUCTIVELY regulate Wall Street as only she can.

Here are some things you can do thanks to the Coffee Party Annabel and Eric <>:

1) Write to President Obama, and demand that he not be bullied. He must nominate Elizabeth Warren to the Consumer Financial Protection Bureau. He knows that she is the most qualified for the job. In two days, we have already sent over 1,000 letters.

2) Write to Congress, and let them know that we want strong consumer protection. An independent agency with Elizabeth Warren as the director can be the start of a firewall protecting us from abusive banking practices that led to the financial crisis of 2008. In two weeks, we've already sent 14,000 letters.

3) Join the thousands of Americans who have commented on Patrick McHenry's Facebook page to let him know how we feel about bullying and corruption.

4 Join the Coffee Party Elizabeth Warren Facebook page, or, volunteer for this initiative

I have two issues that I intend to spend the rest of my life promoting:

1. Political Transparency

2. Electorate Education

I believe that the solution to these two issues, by definition, solves all the other problems in our government.

I may need some help.


Howard Pattee said...

Elizabeth Warren knows her history and a lot more besides. Boom and Bust has been the consequence of laissez-faire capitalism since George Washington. In the US throughout most of its history laissez-faire capitalism was not a “policy” of government, it was just the default state of affairs. There were simply no rules.

Conservatives appear to be ignorant of even recent history. The Panic of 1893 would have been a total disaster if J. P. Morgan had not had the knowledge, power, and money to shore up the Federal Treasury that would have run out of gold. President Grover Cleveland simply “arranged” for Morgan to create a private syndicate on Wall Street to supply the U.S. Treasury with $65 million in gold, half of which came from Europe, to float a bond issue that restored the treasury surplus of $100 million. The episode saved the Treasury and the country.

The Panic of 1907 was a financial crisis that also crippled the American economy. Major New York banks were on the verge of bankruptcy and there was no government mechanism to rescue them. Again, Morgan personally took charge resolving the crisis. This crisis was the primary motivation for creating the Federal Reserve System.

Hayek himself by the 1970s agreed that laissez-faire capitalism does not work! He said the government needs to exert monetary control like the Federal Reserve, labor laws like FLSA, and control financial information like the SEC.

Since 1893, 10 out of the 12 most severe stock market crashes (> 40% drop) happened before 1980, which suggests that the Federal Reserve's economic management worked. Our latest crashes occurred because controls were weakened. The fact that Republicans want to eliminate these controls only shows their ignorance of history (and Hayek).


Ira Glickstein said...

Welcome Doug, as our newest Authorized Author on the Blog. THANKS for what I hope will be merely the first of many new Topics and Comments you will write for us to consider.

As your sister Deardra probably told you, you and I may not always see eye-to-eye, but I do welcome diverse views here.

Your first posting is well crafted, and I watched the PBS Frontline video you linked to. However, IMHO, I am not convinced the government can effectively regulate anything. Indeed, as the old joke goes, if the government was in charge of regulating the Sahara Desert, within six years there would be a shortage of sand :^)

I think the idea that the government is regulating the economy is a moral hazard, made worse by the whole idea the government needs to step in to rescue fat capitalists who have steered their "too big to fail" corporations onto the rocks of financial insolvency.

There are many to blame for the crash of 2008. The banks should never have given large home loans to people who they knew, or should have known, would not be able to pay them back in case of a bump in the road. So, why did they lend? Because they knew they could pass the risk over to Fannie Mae and Freddie Mac, quasi-governmental institutions. More than anything else, the government (both Republicans and Democrats) set the scene for the disaster.

1) People bought the houses they could not afford because of a false belief that "real estate never goes down" so they could always sell it for more and make a profit, and faith that the banks who lent them the money knew what they were doing and, after all, were regulated by the government.

2) Banks made the loans because they were greedy for profits, and knew they could pass the risk on to the derivatives market, ultimately backed up by Fannie and Freddie, that were basically guaranteed by the government.

3) Fannie, Freddie, and other large financial institutions in the derivatives market knew they could insure the risk at AIG.

4) When it all came tumbling down, and Fannie and Freddie and AIG and GM Capital and others "too big to fail" did fail, the government bailed them out, further enriching the fat capitalists who caused the mess, and further increasing the moral hazard by making it true that the government would indeed bail out all those who made stupid investments.

Would Madoff's Ponzi scheme have been possible in an unregulated environment? Of course not, The only reason so many rich and otherwise intelligent people invested their life savings with him was because they believed the SEC was regulating all financial activities, including his firm, so they did not have to do their own due dilligence. As we saw on 60 minutes (see my Madoff's scheme was first reported to the SEC during the Clinton admin, and then during Bush, and the SEC did nothing.

So, now you ask for MORE regulation and oversight? The government could not find a financial fraud if it was in plain sight. Witness the Social Security Ponzi scheme that has a box full of IOUs from the government to the government itself, instead of any real investments. Witness Medicare that has way over-promised what it can deliver. It will suck up the entire GDP within a few decades at the rate medical costs are growing.

Let private markets protect themselves and individual investors do their own due diligence or depend upon private watchdogs (like Underwriters Labs that assures the safety of electrical appliances).

If the government got out of the way, and removed the moral hazard of (false) dependence upon their (non-existent) competence, private markets would step in and fill the bill.

Ayn Rand was right!

Ira Glickstein

Doug MacDonald said...

Ira, the fact of the matter is that were this 1990 or earlier I would totally agree with everything you say. Things have happened since 1990 that has completely flipped the financial world on its head in this country. The other fact that may be separating our ideas is the fact that I have read many more books on the economic meltdown than you have (10 or so at this writing). I had no clue about the things that had transpired after 1990 between Wall Street and our federal government before I decided to invest in 2007.

Probably the biggest change on Wall Street that I didn't know about was that sometime during the late 1980s and early 1990's all the big investment banks changed from partnerships to public corporations. As partnerships they were risking their own money, as corporations they get to risk a lot more of other peoples money. At about the same time they all changed basically from utilities to manufacturers of products. Their utilities involved things like loans to corporations and small business to expand their businesses, IPO's and Mergers and Acquisitions. They would lend the money and then sell bonds covering the loans. In the 1990s or so they got into the securities business. Out of this business came things like Collateral Debt Obligations(CDO), synthetic CDO's, hybrid CDO's, Credit Default Swaps (CDS), Structured Investment Vehicles (SIV - make believe companies), something called shadow banking and more. The neat thing about these products is that they can be created with insider information and other fraudulent activities without any oversight whatsoever.

All this went on while the SEC was manned by ex high level Wall Street managers and young economics graduates were joining government regulators as a portal to high paid Wall Street jobs.

This is just the beginning. If this thread continues I will go back though my reading and provide much more evidence of mischief between Wall Street and government regulators.

Greenspan has admitted the "flaw" in his Ayn Rand thinking. The greedy, narcissistic, egomaniacs on Wall Street cannot regulate themselves. There is a happy medium to be achievd and I believe Elizabeth Warren brings that efficient and constructive regulation to the government.

Ira Glickstein said...

Thanks Doug for your measured and very constructive reply. Please go ahead and share the information you gleaned from all those books as well as your prescription for better protecting the average investor and -especially- the taxpayer from the folly of Wall Street and the frauds there and in politics, the media, and government.

Ira Glickstein

Doug MacDonald said...

From “Chasing Goldman Sachs” © 2010 by Suzanne McGee

In 2007 Goldman Sachs made a profit of $11.6 Billion and paid out a bonus pool of $12.1 Billion. Only about 1/3 of the earnings were from serving Main Street the rest came from investing and trading for its own account. During this time other investment banks tried to compete with Goldman. However, Goldman managed to steer clear of some of the subprime mess and those trying to compete did not have the tools or the people to properly manage the risk. The thinking on Wall Street from 1999 to 2007 was that if you did not add more risk you were wrong. If the other banks stopped adding risk their short term profits would decrease, the analysts would downgrade them, the investors would be unhappy and the bonuses would be lower than Goldman’s.

That kind of thinking is still alive and well on Wall Street. The quest is already underway for the next new product that will help Goldman and its rivals earn massive profits in the short run. Left unchecked every firm will again overlook risk in hopes of gaining a dominant market share in that new product.

Ira Glickstein said...

Doug, you are right "That kind of [high risk chasing] thinking is still alive and well on Wall Street."

And, what is the cause of that thinking?

IMHO, it is the moral hazard of knowing that the government will step in and provide a safety net to catch, and reward, the losers. Much like the safety net used under high wire balancing acts in the circus, the players take more and more audacious risks. But, unlike the circus where a fall into the net causes no harm, when the government is the net, we taxpayers are victimized twice: 1) By the original manipulation by the malefactors, and 2) When the guilty parties are bailed out.

And, as an added detriment, the general public thinks that the government is really regulating all these shanagans and they buy into the manipulated markets in questionable and mostly worthless assets and they are the ones who suffer when they lose their life savings and their homes.

So you want to add more government regulation and oversight, which has proven to be not only horrendously expensive to taxpayers but also totally ineffective, to enhance this moral hazard?

It is time to bust Fannie and Freddie up into a dozen pieces that will compete with each other without the benefit of being quasi-governmental and too big to fail. And, as I suggested here the fat cats running corporations and the ratings agencies should be paid in stock that cannot be sold for five years:

CHANGE ITEM #1: Any salary or bonus or "golden parachute" in excess of 40 times the lowest pay of any employee in the corporation shall be paid in STOCK OF THE COMPANY that cannot be sold for FIVE YEARS. That will prevent executives from profiting from flim-flams that yield quick returns but are losers in the long run.

Rating Agencies

I listened to the Congressional hearings on Standard & Poors, Moody's, and Fitch, the agencies that do some 90% of the ratings on financial instruments. One of them rated AIG as AA two days before it imploded!

It turns out these agencies are paid for their ratings by the very corporations that issue the financial instruments. The corporations shop around for the agency that will give them the best ratings and, naturally, the agencies adjust their rating formulas to gain the most business. How can we make the rating agencies more accountable without imposing some unwieldy bureaucracy on them?

CHANGE ITEM #2: Fifty percent of the fee to a rating agency for rating any financial instrument (stock, bond, derivative, etc.) shall be paid in the FINANCIAL INSTRUMENT THAT HAS BEEN RATED that cannot be sold for FIVE YEARS.

Ira Glickstein

Doug MacDonald said...

Ira, I can see that Ayn Rand objectivism is firmly entrenched in your governmental system mindset. I think the problem I have with letting people be responsible and maybe even accountable for their actions is that they are human beings. This is getting a little philosophical but to my mind if people were inclined that way casinos, horse racing, office pools, state lotteries, marriages, children, and God know what else would no longer exist. Responsibility and accountability are not values and behavior patterns readily observed in our current society. People simply are not willing or not able to take the time to make good decisions when it comes to selecting their politicians and deciding whether the goons on Wall Street are taking them to the cleaners. Just look at who they vote into Congress over and over again expecting a different result (Thank you Albert Einstein).

So, I disagree with your assessment of the Wall Street/ governmental regulation ideas. But, I would like to meet you half way, the regulations should be minimized and done a lot more efficiently, constructively and effectively than is currently the case. Once again here is where I bring up Elizabeth Warren. This woman is my Ayn Rand. She talked about regulation vs no regulation in one of the videos I indicated above. I don’t know if you listened to it but I did transcribe that part because it made so much sense to me.

I put the transcription in the next post because I went over 4096 characters.

Doug MacDonald said...

Here is the transcription of Elizabeth Warren talking about regulation vs no regulation:
Elizabeth Warren:
George Washington is in his first term and what did we have? We had a credit crisis. In fact if you read the local papers it was described as a credit freeze. And every ten to fifteen years we have boom and bust, boom and bust, boom and bust. Right. We wipe out… we call them panics. The banks all shut down and have a complete financial system collapse. People lose their little farms small businesses. Until we have the great depression.

And we hit the great depression and we say you know we can do better than that. We can write a set of rules that’s going to make it work better than that. And so what did we do? We came up with:
1. The first one, Make it safe to put your money in a bank, FDIC insurance.
2. The second one was Glass-Steagle. Banks are going to be run like public utilities, they are going to be run boring, modest profit margins, risk taking will be where we can let it fail.
3. The third one we get these new rules in for the SEC.
Those three rules bought us 50 years of security and prosperity. And our response to that was to say, you know, regulation’s just a pain, let’s get rid of it, who needs it, it costs us too much. So start pulling the threads out of the regulatory fabric. And we do it multiple ways.
1. We change the laws, Glass-Steagle
2. We just don’t appoint new regulators for whole new areas
3. We let the thing burgeon and we keep the same number of tiny cops on the beat

Carl or Joe:
Or we let Goldman appoint the regulators.

Elizabeth Warren:
So we deregulate and we have information about this.
1. Remember, the first thing was the Savings and Loan crisis right. We deregulate the S & L and there is a big warning. Seven hundred of them collapse because they don’t run this right.
2. The next one Long Term Capital Management (ed. A huge hedge fund). We’re suppose to learn the lesson that when you sneeze in one part of the world it’s heard some where else.
3. Then we hit the third one that for me is Enron that told us the books are dirty. Right? It told us in a big public way that these institutions that are getting all these certifications from the outside in fact have dirty books.

What were the lessons we learned from that, we just continued on our path and we collapsed the system.
I will discuss your Fannie/Freddie, Change item #1 and change item #2 in the next blog entry. Something along those lines makes sense to me. And of course transparency in government and Wall Street is what I’m really all about

Howard Pattee said...

Ira: "Ayn Rand was right."
My opinion: Ayn Rand was a brilliant huckster.

In the National Review, conservative author Whittaker Chambers called Atlas Shrugged "sophomoric" and "remarkably silly" and "shrillness without reprieve."

Example: Rand held in particular disdain was Immanuel Kant, whom she referred to as a "monster" and "the most evil man in history"

Immanuel Kant: “The universal law of right may then be expressed thus: Act externally in such a manner that the free exercise of thy will may be able to coexist with the freedom of all others.”

Ayn Rand: “Reason is every human being's highest virtue, and one's own happiness is the highest purpose of one's life.”

Alexander Hamilton: “Why has government been instituted at all? Because the passions of men will not conform to the dictates of reason and justice, without constraint.”