Posts belonging to Category Unintended Consequences
Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency. This means the dollar became an article of faith in the continued stability and might of the U.S. government.
In essence, we declared our insolvency in 1971. Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.
Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it– not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC in the 1970s to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.
In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.
In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers. The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S. dollars. These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world’s reserve currency, a threat which partially explains our ongoing hostility toward Tehran.
While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar’s status in the Middle East, an even larger threat resides in the Far East. Our greatest benefactors for the last twenty years– Asian central banks– have lost their appetite for holding U.S. dollars. China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever. Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.
If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies. If not, the rest of the world will abandon the dollar as the global reserve currency.
Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.
Furzy mouse highly recommended this Discovery documentary. I’ve only looked at the beginning, but the comments about it at YouTube (as opposed to the ones arguing related historical issues) are very positive. And sadly, as the world moves in a more authoritarian direction, it becomes more and more necessary to study history if we are to have any hope of preventing extremists from putting a new social order in place.
I think you all know how I feel about all these things. Without serious reform, no amount of stimulus will correct the problems that are plaguing America. The parasites of Wall Street will pounce on any additional liquidity supplied by the Fed.
But I think there is a legitimate case to be made that the Fed has done everything it can for the Banks, but is relatively indifferent to the plight of the real economy. As a regulator the Fed is a colossal hypocrite and failure.
The trillions that have been spent bailing out the wealthy and subsidizing their greed are a scandal of the first order. And yet all they can say is ‘more.’
The callous ugliness of many in this nation is of concern. They are encouraged to say outrageous things, and feel justified in taking outageously harsh, anti-human positions. And they are proud of it, having given themselves over completely to greed and hate and pride.
And they will be called to account. God will not be tolerant of such arrogance.
“And those who are rich should boast that God has humbled them. They will fade away like a little flower in the field.
The hot sun rises and the grass withers; the flower droops and falls, and its beauty fades away. In the same way, the rich will fade away with all of their worldly things.” James 1:10-11
“We can believe what we choose. We are answerable for what we choose to believe.”
John Henry Newman
“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.
Fed Governor Speaks Out For Stronger Rules
By Simon Johnson
July 28, 2012
Here in the early stages of the Libor scandal — and, yes, this thing is far from over — there are two big surprises.
In 2007, as the financial crisis was gathering steam, banks also began submitting false Libor rates for a different reason. Libor, you may recall, was a measure that gave the outside world a sense of how much trouble the banks were in; the higher the rate required to borrow, the worse shape they were assumed to be in. So Barclays — with what appears to be the complicity of British bank regulators — started submitting rates that were lower than the reality. Its executives said the purpose was to keep Barclays from “sticking its head above the parapet.”
Even now, Barclays justifies the latter rationale as being a kind of emergency measure brought on by the financial crisis. But the bank is wrong about this. Submitting false data, for whatever reason, is a violation of the law — not to mention a fundamental abuse of trust. Once again, it leads one to believe that bankers feel neither the constraints of the law nor of morality.
Which brings me to the second big surprise. Britain and America have reacted to the Libor scandal in completely different ways. Britain is in an utter frenzy over it, with wall-to-wall coverage, and the most respectable, pro-business publications expressing outrage. Yes, Barclays is a British bank, and the first word in Libor is “London.” But still: The Economist ran a headline about the scandal that read, in its entirety, “Banksters.”
Yet, on these shores, the reaction has been mainly a shrug. Perhaps we’re suffering from bank-scandal fatigue, having lived through Bank of America’s various travails, and the Goldman Sachs revelations, and, most recently, the big JPMorgan Chase trading loss. Or maybe Libor is just hard to gets one’s head around.
But the Brits have this one right. They may not understand the intricacies of Libor any better than we do, but they sense, powerfully, that banks have once again made a mockery of the role that society entrusts to them.
“Why has the scandal created outrage in Britain? Because it truly is outrageous,” said Karen Petrou, the managing partner of Federal Financial Analytics. “They weren’t supposed to be fixing that rate — no matter what the reason.”
She continued: “If I give you my money, I need to be able to trust you with it. If you can only be trusted via regulation, then you might as well be a utility. And if banks can’t be trusted to manage their trading desks, then we need to rethink our whole model of banking.” Petrou is not an advocate of returning to the days of Glass-Steagall, the Depression-era law that separated investment banking and commercial banking. But with the Libor scandal, she said, she could certainly understand the growing calls for it.
Barclays, of course, is hardly the only big bank that manipulated Libor for fun and profit. It is simply the first to admit its wrongdoing and settle with the government. The word is that just about every big bank is under investigation for playing games with Libor, including JPMorgan Chase, Citigroup and other American-based financial giants.
Which means there is going to be a lot more opportunities for Americans to become outraged over this scandal. And, maybe, to finally summon the will to change banking once and for all.
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.
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.