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To be read in the voice of Paul Harvey.

And on the eighth day God looked down on his planned paradise and said, “I need someone who can flip this for a quick buck.”

So God made a banker.

God said, “I need someone who doesn’t grow anything or make anything but who will borrow money from the public at 0% interest and then lend it back to the public at 2% or 5% or 10% and pay himself a bonus for doing so.”

So God made a banker.

God said, “I need someone who will take money from the people who work and save, and use that money to create a dotcom bubble and a housing bubble and a stock bubble and an oil bubble and a commodities bubble and a bond bubble and another stock bubble, and then sell it to people in Poughkeepsie and Spokane and Bakersfield, and pay himself another bonus.”

So God made a banker

“The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”

Peter Drucker

I would of course add ‘with self-serving dishonesty’ to Mr. Drucker’s prescription. But I think in a better age that sort of thing was understood.

The manner in which the financial crisis was handled, and is still being managed, is a policy error that will be studied by history, and hopefully the next school of Economics that will rise out of the ashes of their failure to provide meaningful reform for what really went wrong.

The worst of the economists and politicians have been acting as hacks in support of a massive fraud for the usual benefits.   And some of what we might have hoped would be the better ones have been mindlessly applying old remedies, or at least a portion of them without understanding and admitting the underlying problems, caught up in a credibility trap of dull atavism and careerism.

The intellectual and political leadership of this generation has been weighed and found wanting. A great generation often produces one that lapses into crisis, before the next rises to the challenge of the occasion.

So I have some hope that a new school of Economics and policy making will rise out of the abject failure of the old.  Not a school that has better and more intricate tools, broader power, and flashier gimmicks, but one that aspires to wisdom and virtue, especially the value of open honesty.

“The best lack all conviction, while the worst are filled with passionate intensity.”

This crisis has been all about the failure of the best to uphold their oaths, and to let justice be done, at the urging of the worst. And now they compound their errors and dissemble in their embarrassment and shame. Or at least those who are still capable of feeling such emotions.

There will be no real and sustainable recovery without reform.

The Guardian
Wall Street thanks you for your service, Tim Geithner
By Dean Baker
11 January 2013

Treasury Secretary Timothy Geithner’s departure from the Obama administration invites comparisons with Klemens von Metternich. Metternich was the foreign minister of the Austrian empire who engineered the restoration of the old order and the suppression of democracy across Europe after the defeat of Napoleon.

This was an impressive diplomatic feat – given the widespread popular contempt for Europe’s monarchical regimes. In the same vein, protecting Wall Street from the financial and economic havoc they brought upon themselves and the country was an enormous accomplishment.

During his tenure as head of the New York Fed and then as treasury secretary, most, if not all, of the major Wall Street banks would have collapsed if the government had not intervened to save them. This process began with the collapse of Bear Stearns, which was bought up by JP Morgan in a deal involving huge subsidies from the Fed.

The collapse of Lehman Brothers, a second major investment bank, started a run on the three remaining investment banks that would have led to the collapse of Merrill Lynch, Morgan Stanley, and Goldman Sachs if the Fed, FDIC, and treasury had not taken extraordinary measures to save them. Citigroup and Bank of America both needed emergency facilities established by the Fed and treasury explicitly for their support, in addition to all the below market-rate loans they received from the government at the time. Without this massive government support, there can be no doubt that both of them would currently be operating under the supervision of a bankruptcy judge.

Of the six banks that dominate the US banking system, only Wells Fargo and JP Morgan could conceivably have survived without hoards of cash rained down on them by the federal government. Even these two are questionmarks, since both helped themselves to trillions of dollars of below market-rate loans, in addition to indirectly benefiting from the bailout of the other banks that protected many of their assets.

Had it not been for Geithner and his sidekicks, therefore, we would have been permanently rid of an incredibly bloated financial sector that haunts the economy like a horrible albatross…

Read the entire article here.

Mark Carney is no Elliott Ness, brought in from the outside to clean the streets of Chicago. Instead, he’s another Geithner-esque character who will almost certainly prefer a hands-off regulatory approach, and seems to view the power of the government and the central bank as being necessary mainly to help bolster public confidence in the banking system. He’ll likely be another central banker in the mold of Ben Bernanke, who’s used endless rivers of cheap loans and money-printing programs like Quantitative Easing to keep floating corrupt banks all night long, for as long as they want to keep playing the roulette table. Here’s the Guardian’s prediction with regard to Carney:

He and many others in central bank circles know that most of the Britain’s banks are very highly leveraged. That without the support of the Bank of England’s quantitative easing programme, and its very low lending rates – all effectively backed by British taxpayers – Britain’s banks would effectively be insolvent.

And so Carney will continue with quantitative easing – which has provided British banks with the liquidity needed to indulge in speculative activity both at home and abroad, speculative activity that bears a scary resemblance to that undertaken before the crisis.

What the banking system really needs is a guy who will step in and force bankers to go back to being boring, risk-averse drips who lend businesses money to buy new equipment or fleets of trucks or whatever. What we have instead are coked-up wannabe big shots straight out of Boiler Room who are washing Mexican drug money and laundering Middle Eastern cash and playing around with wild price-fixing schemes – pretty much everything you can think of that isn’t quietly counting beans and helping grow the economy.

The British have a tough job ahead trying to clean that mess up, but appointing another Goldman vet to a crucial government job – the latest in a long line of such appointments, stretching from Bob Rubin to Hank Paulson to Neel Kashkari to former Ex-Im Bank chief Kenneth Brody, former Bush chief of staff Josh Bolten, and former Fannie Mae president James Johnson – doesn’t sound like a good start.

Have we heeded Simon Johnson’s warning? Has he proven to be prescient? Is crony capitalism and the kleptocracy becoming bolder, more aggressive, ever more demanding?

“I think I’m signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we’ve seen many times in other places.

But they’re places we don’t like to think of ourselves as being similar to. They’re emerging markets. It’s Russia or Indonesia or a Thailand type situation, or Korea. That’s not comfortable. America is different. America is special. America is rich. And, yet, we’ve somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs…

But, exactly what you said, it’s a small group with a lot of power. A lot of wealth. They don’t necessarily – they’re not necessarily always the names, the household names that spring to mind, in this kind of context. But they are the people who could pull the strings. Who have the influence. Who call the shots…

…the signs that I see this week, the body language, the words, the op-eds, the testimony, the way they’re treated by certain Congressional committees, it makes me feel very worried.

I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there’s a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can’t. You’re stuck….

The powerful people are the insiders. They’re the CEOs of these banks. They’re the people who run these banks. They’re the people who pay themselves the massive bonuses at the end of the last year. Now, those bonuses are not the essence of the problem, but they are a symptom of an arrogance, and a feeling of invincibility, that tells you a lot about the culture of those organizations, and the attitudes of the people who lead them…

But it really shows you the arrogance, and I think these people think that they’ve won. They think it’s over. They think it’s won. They think that we’re going to pay out ten or 20 percent of GDP to basically make them whole. It’s astonishing….

…these people are throughout the system of government. They are very much at the forefront of the Treasury. The Treasury is apparently calling the shots on their economic policies.

This is a decisive moment. Either you break the power or we’re stuck for a long time with this arrangement.”

Bill Moyer’s Journal – Interview with Simon Johnson, February, 2009.

Johnson also wrote a piece in the Atlantic Magazine titled The Quiet Coup. It may be worth re-reading.
Here is the introduction to this in The Fall of the American Republic: The Quiet Coup d’Etat in August 2010.

“The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true.

It really happened. These suspicions are valid.”

Neil Barofsky, TARP Inspector General

The Fed is not the solution; the Fed is a creature of the biggest banks, and very much a part of the problem.

Once again we hear a lone voice of common sense, and reason for reform, in this case Sarah Bloom Raskin, speak out forcefully for reform.

You may recall ‘The Warning’ which featured Brooksley Born, who sounded the alarm about the growing dangers of the unregulated derivatives market during the Clinton Administration. And who was thwarted and bullied by team Greenspan-Summers-Geithner.

And you might remember how the Wall Street Banks used the NY Fed and the Treasury’s Tim Geithner to block the reforms proposed by the FDIC’s Sheila Bair.

I do not think that these men who block reform and serious change are evil. Rather, I think they are just dead wood, who know nothing more than the system of privilege that has elevated them, and rewarded them, and which they are loathe to see change.

But the times are getting difficult, and so it is time for a change, which is necessary for there to be a sustainable economic recovery.

And in the election of the President this year the people are being given a choice, as someone so aptly put it, between an ineffective and compromised gamekeeper and one of the worst and greediest of the poachers. Obama was marketed as an independent outsider, but he is not. They are both owned by the system, each in their own way.

And that means change is not going to come from the top. But it will come nonethless.

If this continues the capitalists will eventually destroy themselves, because none of them will want to be the first that calls a stop. And that will be a tragedy.

Baseline Scenario
Fed Governor Speaks Out For Stronger Rules
By Simon Johnson
July 28, 2012

From Glenn Greenwald:
“These executives knew that they could take these huge risks and even break laws and pay no real price, and that’s what happened. It’s not just a travesty of justice that we haven’t punished them for past transgressions. The real danger is that we’re continuing to send the signal to the world’s most powerful financial actors that they don’t have any fear of criminal accountability when they commit these obvious crimes.”

On What Has To Happen:  We have to stop the dynamic that produces recurrent intensifying crises. This one devastated the nation. The next one will probably be equivalent to the Great Depression. Part of that is to hold folks accountable, especially the most elite. They did it through fraud – via the “C” Suites – as in the CEO’s and the CFO’s.  The absolute top.

On Fraud: Fraud is using deceit to steal something from someone. So the essence of fraud is I get you to trust me and then I betray that trust, for gain. As a result, there is no more effective acid for destroying trust, than fraud – particularly at the elite levels. And when you destroy trust, you destroy economies, families, democracies.

On The Legacy of Deregulation and The Savings and Loan Experience: It begins in the Carter administration. By the Reagan administration they supported deregulating everything, at the worst possible circumstances… when you had no one looking. The result was a disaster. It was the Savings and Loan Crisis. If it had not been contained, it would have been at least a trillion dollar crisis. It was contained despite the Reagan administration and despite a lot of prominent democrats as well.  So we acted against the president, against a majority of Congress, the Keating 5, and most of the media, what the political scientists considered the third most powerful trade association in America. And by the way, that’s why I have a message of hope. If we could succeed in those circumstances, it’s far easier to succeed now.

On Why There Have Been No Meaningful Criminal Prosecutions: It all starts with the regulators, which is why it never started here – because we have Bush’s wrecking crew, (what Tom Frank called them), in charge. And they stopped making criminal referrals. Our agency, during the Savings and Loan Crisis, made over 10,000 criminal referrals to the FBI. That same agency, in this crisis, made zero criminal referrals. If you don’t get people pointing the way and pointing to the top of the organization, you don’t get effective prosecutions. At the peak of the savings and loan crisis, we had a thousand FBI agents. This crisis has losses 70 times larger than the Savings and Loan Crisis. And the Savings and Loan Crisis, when it happened, was considered the largest financial scandal in U.S. history. So we’re now 70 times worse. And as recently as 2007, we had 120 FBI agents—one-eighth as many FBI agents for a crisis 70 times larger. And they looked not at the big folks, but almost exclusively at the little folks.

On Obama’s Record, How It Was Done in the 1990′s, the FBI’s 2004 Warning, and the Lunacy of Alan Greenspans Setting the Stage for Collapse and then Blaming Government: And we’ve been living for some years in the time of President Obama, and he has done absolutely nothing to reestablish the criminal referral process. And as a result, there are virtually no prosecutions of any elites. When people tell you this crisis couldn’t have been stopped… I will say two things about that: First, these liars’ loans that caused this crisis—and it is overwhelmingly lenders that put the lie in liars’ loans—they were big in 1990 and 1991. We killed them by regular regulatory means and stopped a crisis for a decade. Our successors—I mean, how hard is it to figure out that something called a “liar’s loan” shouldn’t be allowed? This was not tough. The second thing is that the FBI warned, in open testimony in the House of Representatives, picked up by the national media, in September 2004, that there was an epidemic of mortgage fraud and predicted it would cause a financial crisis—their exact words. And the regulators did nothing, because you had the Alan Greenspans of the world and the Harvey Pitts of the world, who were selected because they were the leading opponents of effective regulation in America. Well, you know, you create a self-fulfilling prophecy of regulatory failure, and then turn around and say, “Well, you can’t trust the government. It fails.”

On Occupy Wall Street: They don’t have official spokespersons with clear plans. They think of that as one of the great strengths of democracy now, right? That things bubble up, and they have different ideas. However, if you look, not just nationwide, but worldwide, you will see some pretty consistent themes developing. And those themes include: we have to deal with the systemically dangerous institutions, the 20 biggest banks that the administration is saying are ticking time bombs, that as soon as one of them fails, we go back into a global crisis. Well, we should fix that. Right? There’s no reason to have institutions that large. That’s a theme. That accountability is a theme, that we should keep—put these felons in prison, and there’s no action on that. That we should get jobs now, and that we should deal with the foreclosure crisis. So those are four very common themes that you can see in virtually any of these protest sites. And they have asked me, for example, to come to New York to talk about some of these things. So, I think, over time, you won’t necessarily have some grand written agenda, but you’ll have, as I say, increasing consensus. And it’s a very broad consensus. It’s not left, it’s not right; it’s not Republican, it’s not Democrat.

On Corporations as People (Citizens United): I’m a lawyer. It’s bad law.  One of the best ways to change this is simply to appoint better justices to the Supreme Court. And this is a five-four decision, so one justice could make an enormous amount of difference.

On the History of Corporations as People: It goes all the way back to the civil right era, civil rights amendments after the Civil War. Those amendments were supposed to protect the freed men and women. They were quickly perverted by the Supreme Court, which is a really ultra-right-wing, pro-slavery group for most of our history, into saying we’re not going to protect the slaves—freed slaves very much, but we are going to protect corporations. And so they interpreted the 14th Amendment and 15th Amendment, in particular, as giving due process rights to corporations as persons. Over time, they extended that under First Amendment cases that said they have not the same rights, but substantial rights that need to be protected in the First Amendment. And now they’ve gone whole hog in Citizens United and produced an atrocity. In a country that was already overwhelmed with corporate influence, they said all the restraints, essentially, are off, and you have almost complete constitutional protection to do anything. And so, the domination by corporations, and in particular by finance, which is now the biggest funder of both parties, is going to grow very substantially, unless we fight back.

On Current Public Policy: It just broke yesterday that affiliates of Bank of America—this is Merrill Lynch—with really bad derivatives, has been allowed by the Federal Reserve to transfer perhaps many billions, or perhaps even trillions—we don’t know—of these derivatives to Bank of America, which is where we come in as a federal guarantee, and it puts us on the hook as the government. This is obscene public policy, the kind that would have never been permitted in our era. And now, under a Democratic president that rails about excess influence and not putting the taxpayers at risk, that’s exactly what they’re doing. So, the story on the regulatory side, we had the leading failed regulator in a Federal Reserve Bank, Geithner, and they promoted him to Treasury secretary. We had the leading failed regulator in America, Bernanke, and he was reappointed. So that—and most of the wrecking crew was left on as temporary folks, so most of the wrecking crew is still in place. We have almost no effective regulation, and it’s showing up. They hid the losses by changing the accounting rules through congressional extortion of the Financial Accounting Standards Board. And these problems don’t go away. They just fester, and they pop up three years later. And they’re going to keep popping up until we start telling the truth. In terms of the student debt, this is a grand disaster in America. The one thing that you want for—almost everybody agrees with—for an international competitiveness, for simply just for our kids, is simply to have free public education, and that anybody with a talent, where it makes sense for them to go to university, should go to university and not be a debt slave for the rest of their lives. So this is insane public policy that is crushing the nation. We can change it at any time. It’s a perfect win-win in a Great Recession, because you want to spend to get out of the recession, anyway. So that’s one of the things we should spend on. And the fact that we’re doing it shows just how insane the policy paralysis has become.

On Geithner, Holder, and Bernanke: Well, Geithner should be fired, because you can fire him. Holder, who is the Attorney General, should be fired. They need to be replaced. The other folks running the banking regulatory agencies can be replaced by effective actings. You don’t have to go through the confirmation process to jumpstart that. Bernanke, you can’t fire, but you can ask for his resignation, and it’s long since time to ask for his resignation. And, you know, you can give him a nice ceremony and have him go.

More on Obama: But that is not where we’re headed, and that is a grave disappointment to folks who thought that—well, someone campaigned saying, “Yes, we can.” And now it’s become, “Well, actually we’re not even going to try,” on the prosecutorial side. Right? So, if he continues this way, it’s conceivable the Republicans will nominate someone so bad that he will be reelected, but he will destroy the effectiveness of his administration and do tremendous damage to the nation.

Bill Black: Fire Geithner, Fire Holder, Ask Bernanke to Resign, and Prosecute CEO’s and CFO’s

21st Century Economics: 1. Rampant fraud and reckless mismanagement in the financial sector, 2. Public bailouts of the worst actors in the financial sector, 3. Private debt and liability imposed on taxpayers, 4. Monetary policy aimed at recapitalizing insolvent and recidivist banks, 5. Promotion of business leaders and policy-makers who are chronically compromised, 6. Conglomeration of Systemically Dangerous Institutions into a more empowered menace.