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June 02, 2009

Why Financial Instruments of Mass Destruction Still Walk the Earth

Friedrich von Blowhard writes:

Dear Blowhards,

I don’t know about you, but the Great Recession is forcing me to use most of my limited mental firepower to run my small business under, shall we say, challenging conditions. Nonetheless, out of some perverse habit, I keep reading and stashing items on my hard drive about the continuing closeness between Washington and Wall Street. Or, as Satyajit Das, the risk management consultant who presciently warned against the impending problems associated with unregulated financial derivatives in a 2006 book, calls it, The Finance-Government Complex.

Despite the ubiquity of calls for greater regulatory oversight of this wondrous public-private nexus in which the profits are all private while the losses are passed on to the taxpayer, the American government in its majesty has chosen, at least so far, to implement no changes whatever to its regulation of Wall Street. Derivatives, to take one egregious example, remain almost completely unregulated, despite their central role in the $180 billion taxpayer bailout of AIG (sums that have, in turn, been passed through to its counterparties on Wall Street and around the world.)

Now I suppose asking Congress to both think and act diligently on any topic, whatever the seriousness, is wildly optimistic, but I would note that we’re closing in on the second anniversary of this latest little externality the Street has inflicted on the rest of the world while lining its own pockets.

You’ve got to wonder how even Congress could be so impossible derelict in its duty, right? I mean, the AIG bailout alone is equivalent to the cost of a year or two for the Iraq War, which Congress at least feels required to take an annual vote to prolong.

Well, I think the answer can be found, among many other places, in the June 1 edition of the NY Times. Here we learn that “Even in Crisis, Banks Dig in for Fight Against Rules”:

The nine biggest participants in the derivatives market -- including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America -- created a lobbying organization, the CDS Dealers Consortium, on Nov. 13, a month after five of its members accepted federal bailout money.

To oversee the consortium’s push, lobbying records show, the banks hired a longtime Washington power broker who previously helped fend off derivatives regulation: Edward J. Rosen, a partner at the law firm Cleary Gottlieb Steen & Hamilton. A confidential memo Mr. Rosen drafted and shared with the Treasury Department and leaders on Capitol Hill has, politicians and market participants say, played a pivotal role in shaping the debate over derivatives regulation.

Today, just as the bankers anticipated, a battle over derivatives has been joined, in what promises to be a replay of a confrontation in Washington that Wall Street won a decade ago.
Since then, derivatives trading has become one of the most profitable businesses for the nation’s big banks.

Golly, you wouldn’t think that the recipients of such public largesse would still have much clout after the pain they’ve inflicted on the rest of the country, would you? Well, guess again. The general citizenry is disorganized and fairly clueless about how Washington works. I mean, the rubes actually think that voting (without campaign contributions and without lobbying) means something.

The financial services industry, on the other hand, which does know better, simply keeps writing checks and getting whatever it wants. It’s not even like this is a secret or anything, as this Glenn Greenwald column of April 30, 2009: “Top Senate Democrat: bankers "own" the U.S. Congress” makes painfully clear:

Sen. Dick Durbin, on a local Chicago radio station this week, blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Why are the banks flexing their muscles over this particular issue? Many of their key profit centers have gone up in smoke. Derivatives creation and trading, which accounted for as much as 40% of their profits back in the golden years, are about the only really successful business they have left. And they are terrified that if regulators actually force derivatives to trade openly and transparently on an exchange, as opposed to privately via the “over the counter” (OTC) market, it will cripple their ability to charge their traditional fat fees for cooking up -- in Warren Buffet’s memorable phrase -- these financial weapons of mass destruction.

This is a very big deal indeed to Wall Street, as Christopher Whalen of Institutional Risk Analytics pointed out back on May 19 in a posting on the Big Picture Café, “Kabuki on the Potomac: Reforming Credit Default Swaps and OTC Derivatives”:

Despite bringing the world economy to its knees and costing taxpayers hundreds of billions of dollars in bailouts for events such as Bear Stearns, Lehman Brothers and American International Group (NYSE:AIG), the Masters of the Universe who run the largest Wall Street firms of have learned not a thing when it comes to credit default swaps (”CDS”) and other types of high-risk financial engineering. Indeed, not only are the largest derivative dealers fighting efforts to reform the CDS and other derivative instruments that caused the AIG fiasco, but regulators like the Federal Reserve Board and US Treasury are working with the banks to ensure that a small group of dealers increase their monopoly over the business of over-the-counter (”OTC”) derivatives.

Why such a desperate battle for the OTC derivatives markets? For the world’s largest banks, the OTC derivatives markets are the last remaining source of supra-normal profits - and also perhaps the single largest source of systemic risk in the global financial markets. Without OTC derivatives, Bear Stearns, Lehman Brothers and AIG would never have failed, but without the excessive rents earned by JPMorgan Chase (NYSE:JPM) and the remaining legacy OTC dealers, the largest banks cannot survive. No matter how good an operator JPM CEO Jamie Dimon may be, his bank is DOA without its near-monopoly in OTC derivatives — yet that same business may eventually destroy JPM.

The key thing for the public and the Congress to understand is that the “profits” earned from these unregulated derivatives markets are illusory and do not cover the true risk of OTC derivatives. Put another way, on a systemic basis, risk-adjusted profits from OTC derivatives are not positive over time. As with the current crisis, the net loss from the periodic collapse of what is best described as gaming activity gets off-loaded onto the taxpayer, thus OTC derivatives must be seen as any other speculative activity, namely a net loss to the economy and society. But unlike taking a punt on a pony at the racetrack, bank dealings in OTC derivatives vastly increase systemic risk, make all banks unstable and threatens the viability of the real economy.

But what the heck, screw the 'real' economy and systemic risk, we’re talking serious money here. Competition, transparency and systemic safety will erode profits. Hence, we cannot have competition, or transparency, or systemic safety.

Given the fact that a strangely quiescent public continues to take this nonsense lying down, where will the finance-government complex end up taking us?

Mr. Das, in a column titled “The End of U.S. Economic Dominance” suggests that our likely destination will be the cleaners. He bases his prediction on a theory advanced a public-choice economist two-and-a-half decades before this financial tsunami came ashore:

Mancur Olson, the American economist, in his books (The Logic of Collective Action and The Rise and Decline of Nations), speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline.

I can only suggest that anyone who hasn’t begun to question the wisdom of allowing special interests to purchase favorable public policy via campaign contributions and lobbying dollars isn’t, ahem, paying very close attention to the likely outcome and is highly likely to end up on his back in a ditch (taking along the rest of us as well).

This really is one of those situations where if you’re not part of the solution, by which I mean supporting and forking out for the public financing of elections, you’re part of the problem. Supporting the status quo of auctionocracy is quite directly like looking at AIG and saying, "Please, Sir, can I have more?"

Cheers,


Friedrich

posted by Friedrich at June 2, 2009




Comments

I would say that among "distributional coalitions", banks used to be only moderately active. Only now the financial sector is becoming aware of the lobbying life-or-death imperative. We shall welcome your comparative follow-up to be blogged here a year from now.

Posted by: j on June 2, 2009 6:27 AM



You’ve got to wonder how even Congress could be so impossible derelict in its duty, right?

No mystery. That's what happens when the citizenry is hopelessly derelict in its duty. (Oh, do we even have the category of "citizen" anymore? Or are our "civic" roles now limited to lobbyist, group-interest hustler, or chump?) As the disclosure statement on Krazy Karl's Saturday market ticker read: "Disclosure: Short the American people, who appear to be as dumb as a box of rocks for putting up with this crap." (OT, but gee, doesn't watching the video at that link reassure you and make you want to put all your money in FDIC-insured deposits? I know I'm on board with Suze and Sheila! Smile! Shudder...)

Interesting post, though. Thanks.

Posted by: Moira Breen on June 2, 2009 8:29 AM



Wait a second. Are you suggesting that the banking and financial services industry is a "special interest" group? I thought only teachers' unions, environmentalists, gays, people of color and other leftist identity groups got tagged as "special interests". Can you actually be a "special interest" group if you are an intrinsic part of the power structure of the elite? Would that make the insurance industry or defense contractors or big oil "special interests", too? I thought they were the "free market". This could change everything.

Posted by: Chris White on June 2, 2009 8:54 AM



@Chris: silly you, pointing out the obvious.

@Friedrich: So, pray tell: how exactly is it that you intend to get the worthless schlubs to get up off their asses and get campaign finance reform passed when they can't get this situation cleaned up? Do you really think there will ever be a politician who pays more than lip service to any kind of plan?

And, seriously...you all talk against a nanny state, yet have much more respect for the American people than they deserve. The simplest solution is to pass a law that everyone must wear a plastic bag over their heads twice a week...that should wipe out at least 90-95% of the population and make it possible to get such things passed.

Posted by: Upstate Guy on June 2, 2009 9:24 AM



Chris: Would that make the insurance industry or defense contractors or big oil "special interests", too? I thought they were the "free market". This could change everything.

Uh, Chris, whom are you addressing? I can't say I recall any instances of FvB in the posture of corporate shill. Or is it just that, being essentially a party hack yourself, you are simply incapable of understanding the discussions of those who are not? Nobody with half a brain gives a dram of goat spit about these cretinous Two-Party Talking Points you seem to find so devastatingly telling of...something. Go in the corner if you can't control your infantile impulse to smear your red-v.-blue feces all over the walls.

Anyhoo, haven't talked to you in a while. How's tricks?

Posted by: Moira Breen on June 2, 2009 10:13 AM



Not sure if FvB has written about it in the past, but many commenters certainly have railed against regulation of any kind being a possible solution or at least a stop-gap to the financial industry's reign of terror. Pretty sure that's what CW is referring to.

Not sure what people here think of Paul Krugman, but he's got an interesting, and to my mind, completely obvious, piece about the little deregulation bill that started the snowball a'rollin':

LINK

For my (increasingly worthless) money, deregulation has been a primary cause of more than a few recent crises; for instance, the S&L and California energy ones. And of course, the massive clusterfuck we're in now.

Posted by: JV on June 2, 2009 1:00 PM



Moira,
That's Chris for you. He never misses a chance to make an ass of himself. He's nothing if not consistent!

Posted by: anonymous on June 2, 2009 1:12 PM



Moira's comment is such a classic example of the phenomena that gets me so frustrated around here. I take a gentle jab at the way "special interest" gets used in political discourse as code for "the other guys" and get personally slammed. I certainly was not targeting FvB in any way. His postings, especially about the financial meltdown, have been excellent and often reflect some (if not all) of my own views and concerns. If I might be addressing anyone in particular - which I wasn't - it would be those whose comments regularly echo the sort of Fox News(sic) attacks on all things liberal while acting as apologists for the worst excesses of the elite ... well, the right elite.

Since (a) I have never belonged to a political party and (b) have voted for Dems, Pubs, Greens, and various Indie candidates over the years, I fail to see where my comment is "smearing red-blue feces on the wall." Even a cursory look at my views about our Duopoly shows I merely grant the Dems their slightly less adversarial position as the Good Cops rather than the Pub Bad Cops, never forgetting or denying that both are serving the interests of the elite.

Tricks are fine ... Trix are for kids.

Posted by: Chris White on June 2, 2009 2:09 PM



Everyone, ease up on the personal attacks on Chris, por favor. I know most of it's done in a spirit of rough-housing and often witty good humor, and I think Chris knows that too. But enough can also get to be a little too much at a certain point.

Whether you agree with Chris or not, he's smart, he's polite, and he brings a lot of arts experience to bear on his comments. Chris' visits are valued by the blog-hosts for many reasons. One major one: Think how much duller life around this blog would be if it weren't for Chris showing up, and offering objections and challenges. He's always showing a lot of interest, good humor, tolerance, mischief and forbearance. Let's recall that.

Shouting Thomas I make an exception for, 1) because he can't be controlled (nor would we want to try), and 2) because Chris and ST are our very own old bickering married couple, and I'm too smart to come between old bickering married couples. When those two have at it I encourage everyone else to join me in stepping back and enjoying the fisticuffs.

But for everyone else: Seriously, a show of appreciation for Chris. As always, vigorous discussion is encouraged, cultivated and enjoyed, and name-calling is to some extent tolerated too. The blood does get up, and one wouldn't want it not to. But it's not going to do any of us any harm to recall the civilities from time to time.

Posted by: Michael Blowhard on June 2, 2009 2:34 PM



So I can't call him J. Christ Payback? Damn, I was looking forward to that.

Posted by: PatrickH on June 2, 2009 3:31 PM



MB: Everyone, ease up on the personal attacks on Chris, por favor.

Well, there goes my lovingly-crafted reply. (You would have been honored, Chris, honored, by the personal care and dedication I put into giving you hell. All that devotion cruelly wasted, now, alas. I can save it and email it to anyone who's not down with Old Man Blowhard's bourgeois repression and fascist double standards, though.) Fine. Be that way, Blowhard. If you're gonna play favorites and let little teacher's pet Shouting Thomas play in the invective but make everybody else (i.e. me) behave, I'll just take my vituperation and go vituperate on another playground.

Poopy-head.

JV: Not sure if FvB has written about it in the past, but many commenters certainly have railed against regulation of any kind being a possible solution or at least a stop-gap to the financial industry's reign of terror. Pretty sure that's what CW is referring to.

See above.

Oh wait. That reply doesn't make sense any more - since Miss Grundy insisted I cut the very heart out of, nay, emasculate my original reply. But trust me, it was absolutely hilarious and profoundly profound in context. It involved annelids, if you want to have some notion of what you're missing.

Thanks for the Krugman link. Krugman has some interesting stuff to say, to the extent that your standard professional economist has enough of a purchase on reality to be interesting. But he has a party-hack mode, and can be as moronic as any party hack, when he wanders off-tech. I don't think it's hackery to write a quickie op-ed arguing that it wuz Reagan wot done it, though. But in reality, both parties, and every administration since Reagan (or before, really), have been complicit, nay enthusiastic, in pushing the b.s. that ended in this mess. (And the bastards still just won't quit!)

Posted by: Moira Breen on June 2, 2009 4:13 PM



Thank you Michael.

It isn't so much that I mind being called poopyhead as it is that even the slightest innocuous dig toward the right can set it off. I mean, let me at least build up a head of steam over a half dozen comments and slip in a zinger after I've been pummeled by ST before getting all het up.

FWIW One of those points on which I agree 110% with Moira is "But in reality, both parties, and every administration since Reagan (or before, really), have been complicit, nay enthusiastic, in pushing the b.s. that ended in this mess. (And the bastards still just won't quit!)"

Moira - If you spend a lot of time crafting your reply and it would cause you regret to not see it in the thread, have at me. Not that I understand quite what you're finding such fault with.

Posted by: Chris White on June 2, 2009 5:08 PM



Hmm, PatrickH and Moira are both brilliant and entertaining invective-slingers. I do love the show they put on. I'm voting that each of them consider kicking off their responses to Chris with "Chris, I appreciate your presence here. That said ..." And then launch into the blistering stuff.

Chris -- I suspect that I'm the poopyhead.

As for deregulation ... I'm old enough to remember "deregulation" being much discussed (and even somewhat implemented) back in the '70s. And according to Wikipedia, my memory isn't off. Those of us who love hating both parties can enjoy the fact that Repubs and Dems both were deregulation fans -- Nixon seems to have kicked it off, but Carter put the first big deregulations in place.

Posted by: Michael Blowhard on June 2, 2009 5:16 PM



Moira: "All that devotion cruelly wasted, now, alas."

Not at all, now I get to use the phrase "I don't give a dram of goat spit". It's the little things that count.

Posted by: Todd Fletcher on June 2, 2009 6:20 PM



Thanks Michael! Here;s our latest FYI:

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Be well.

RC Whalen

Posted by: rcwhalen on June 2, 2009 6:30 PM



I have not pummeled Chris Whiter-Than-Thou in ages... although, Lord knows, I've wanted to. The very tone of his writing makes me want to throw a handful of shit in his direction.

As for the "married couple" crap... well, I stopped dating that kind of white girl decades ago. The problem is that they can never make a living. This seems to go hand in hand with their sainthood.

I didn't realize that I am the teacher's pet, Michael. I am unaccustomed to this honor. What did I ever do to deserve it?

Posted by: Shouting Thomas on June 2, 2009 6:39 PM



Ad hominem arguments are a sign of weakness. Debaters who stick to the issues usually fare better. Any lawyer who takes ad hominem arguments into court will likely lose the case for his client. It is amazing how the well-reasoned argument in the thoughtful blog posting by FvB was derailed by the commenters. Few of the above comments are even germane.

Posted by: Richard S. Wheeler on June 2, 2009 7:12 PM



Regulation is not the issue here people! Stupid rules are just as bad as no rules. Good government puts out good rules, it's as simple as that. The problem here is, why is public governance so bad?

Wall St should be regulated, but not by the likes of Dick Fuld or Chris White; both being malign in their regulation.

If your government sucks, it's because you as a nation suck. I'm not being anti-American here, my country seems to be run by just an ever so slightly better class of moron than yours, but I'm sure, given enough effort, my country could outdo yours in stupidity. In a democratic society the government is a reflection of the will of the people.

The reason why Wall St gets away with what it does is because the American public do not elect people who will stop it. It's as simple as that. Good men are not in politics because good men are unelectable, they are foreign to the national psyche.

Imagine if we had a politician who said that people who took on mortgages have to pay them back, business which have made bad business decisions should be allowed to fail even if it meant people loosing their savings, that there would be no debasing of the currency, and that bums that don't work will not be the recipients of public welfare. Do you think such a man could be elected now? One hundred years ago such a man would have had a good shot at government, not now. The virtue of Regulus is alien to our common culture now. Instead we have a culture of hedonism and avoidance of responsibility for our actions.

The founding fathers of the U.S. were mighty concerned about the moral character of the nation. Good shopkeepers, farmers and business men made good candidates for office. They conspired to give the vote only to men whom they had thought had shown an aptitude for self government. Washington or Adams would have been horrified at the thought of giving some welfare recipient the vote. Those who do not the capacity to govern themselves should not have a say in the governance of others.

Bad people elect bad governments. It's not rocket science. In a democracy a corrupt society will elect corrupt politicians and conspire against the good ones. If you don't believe me, look about you. The Dead White Men were right.

Posted by: slumlord on June 2, 2009 8:17 PM



Chris: Are you suggesting that the banking and financial services industry is a "special interest" group? I thought only teachers' unions, environmentalists, gays, people of color and other leftist identity groups got tagged as "special interests".

Congratulations. You have reduced that strawman to a fine powder.

Maybe you never noticed it, but but people discussing this issue have identified a very long list of rent-seeking special interests - including unions, agribusiness, the plaintiff bar, builders and developers, doctors, defense contractors, colleges, broadcasters, "community organizers", state and local governments, the RIAA and MPAA, telecom, pro sports, biotech, and last but not least the arts.

As long as people are free to petition their legislatures there will be organized effort to win the favor complete with lobbyists,

I notice that draconian restrictions on campaign finance have been made in recent years, but if anything special interest lobbying has increased.

One could argue that legislators should be isolated from all outside influence, but it would be catastrophic for the people. Legislators do enough damage already. See the Consumer Product Safety Improvement Act of 2008, which resulted in billions of dollars of unnecessary damage to entire industries, and ruination to the most sympathetic and harmless businesses, all with the best intentions and without the slightest trace of corruption.

Posted by: Rich Rostrom on June 3, 2009 2:37 AM



slums: If your government sucks, it's because you as a nation suck. I'm not being anti-American here...

No hard feelings, point well-taken.

...my country seems to be run by just an ever so slightly better class of moron than yours, but I'm sure, given enough effort, my country could outdo yours in stupidity. In a democratic society the government is a reflection of the will of the people.

The reason why Wall St gets away with what it does is because the American public do not elect people who will stop it.

Yup. A functioning republic requires republican virtues. I look around and see a lot of angry people who yet have no real idea what they're angry about, beyond their perceiving how the prevailing corruption and treason is reflected in their paychecks (or lack thereof). They will rant and rave and then turn right around and re-elect the grifters and traitors. That the "legitimate" press has failed in its duty to inform is even less of an excuse for this behavior in this age than it was in earlier ones.

Todd - thanks. Glad you liked it.

Richard S. Wheeler: Ad hominem arguments are a sign of weakness. Debaters who stick to the issues usually fare better. Any lawyer who takes ad hominem arguments into court will likely lose the case for his client. It is amazing how the well-reasoned argument in the thoughtful blog posting by FvB was derailed by the commenters. Few of the above comments are even germane.

I wish people would take the trouble to understand the distinction between an ad hominem argument and insults or jibes. They are not the same, and the latter two may be interjected into perfectly sound arguments - as is common even in formal debating fora with proud histories of robust invective. You are welcome to deplore the tone of the comments, Richard, but please stop confusing a logical fallacy, which has a specific meaning, with behavior you happen to find personally distasteful. And neither is a blog comments-section a court of law.

Posted by: Moira Breen on June 3, 2009 8:23 AM



MB: I'm voting that each of them consider kicking off their responses to Chris with "Chris, I appreciate your presence here. That said ..." And then launch into the blistering stuff.

Ain't gonna happen, Oprah. If I have something nice to say, I say it. But I soap unto others as I would have them to soap unto me - that is, not at all. As I am honor-bound by the Code of the Guest to follow your rules and refrain from pounding Chris, I suppose I must perforce refrain from engaging Chris.

Posted by: Moira Breen on June 3, 2009 8:57 AM



Am I reading the Australian slumlord correctly? First, I am confused as to what similarities beyond age, gender and nationality are supposed to exist between the banker Dick Fuld and me. But even more confusing is what seems to be slumlord's suggestion that the answer to America's financial crisis, brought about in large part through the creative and largely unregulated gambling vehicles known as derivatives, is to roll back two centuries of steadily expanding enfranchisement of voters. Is the answer to problems brought about by the revolving door through which the elite move so freely between the public to private sectors to limit voting rights to them as well?

How would disenfranchising "welfare recipients" in favor of a bold and blatant move toward overt oligarchy serve to make us stronger, richer, or more free? In the area of discussion here the consensus, even between various factions that disagree mightily about the course we should follow to correct the problems, is that regulation of the financial sector was given over to the "smartest guys in the room", the Masters of the Universe down on Wall Street, who knew so much more than the little guys on Main Street about these complex wealth generators ... with disastrous results. How would rolling back the clock to a time when only white male landowners could vote fix anything?

Posted by: Chris White on June 3, 2009 9:46 AM



Hissy fits only undermine the persuasiveness of the commenter. They suggest that the commenter cannot come to grips with the subject at hand, which is the power of financial institutions to continue their destructive behavior.

Posted by: Richard S. Wheeler on June 3, 2009 9:58 AM



"Ad hominem arguments are a sign of weakness. Debaters who stick to the issues usually fare better. Any lawyer who takes ad hominem arguments into court will likely lose the case for his client. It is amazing how the well-reasoned argument in the thoughtful blog posting by FvB was derailed by the commenters. Few of the above comments are even germane."

Go whine somewhere else.

Posted by: Anonymous on June 3, 2009 10:16 AM



Chris, I appreciate your presence here...

Posted by: PatrickH on June 3, 2009 10:45 AM



Ad hominem arguments are a sign of weakness. Debaters who stick to the issues usually fare better. Any lawyer who takes ad hominem arguments into court will likely lose the case for his client. It is amazing how the well-reasoned argument in the thoughtful blog posting by FvB was derailed by the commenters. Few of the above comments are even germane.

Attacking the morality of other comments is a sign of weakness. Debaters who respond directly to the points made in the comments usually fare better. Any novelist who takes ad commenter arguments into a blog will likely fail to have the effect he intends. It is amazing how the well-reasoned argument in the thoughtful (and very funny) comment by Moira B was derailed by one commenter thinking he should be insulated from the back-and-forth that goes on here. As for the comment quoted above, it was not even germane.

Posted by: PatrickH on June 3, 2009 10:52 AM



@slumlord: I think you're trying to echo my mantra: the fundamental problem with a representative democracy is that you a government that is representative of the democracy. If your populace is uneducated and unwilling to learn, how are they supposed to decide who should run their country?

But, I take issue with one point: please, and this is an honest question, what do you think is the percentage of people who are on "the public dole" that are there simply because they WANT to be? How many "lazy bums" collect welfare, unemployment, student loans, food stamps and/or medicare simply to avoid going to work every day? What is the percentage of those who CHOOSE to live on a sub-sub-poverty level of income so they don't have to get a job?

As I see it, there's one of two answers: you believe there's a large percentage in which case you have never spent any significant time in areas where folks like that live and really should get out and about more. Or, you believe it's a small number, in which case: who cares? "Welfare" programs are a small percentage of where tax monies go. NASA has always had a higher budget than what's allocated to such programs at a Federal level. If it's a small percentage of people taking a very small percentage of a very small percentage...is it really worth talking about? Do you think those people are going to go back to work if you take it away, or do you grok that the more likely outcome is they will turn to crime to survive?

Posted by: Upstate Guy on June 3, 2009 11:20 AM



I fear that regulation (or lack thereof) is neither to blame, nor necessarily the answer. Rather, I suspect that the cultural background that has made the USA the #1 economic power has also brought it to this crisis.

When the crisis first hit, I, as a Canadian, was felt slightly smug - our more highly regulatory culture had turned out to be the best after all. Sadly, I was wrong. In pretty much all of the areas where the crisis hit, there was no effective difference in regulation.

What was different was culture. The Canadian bankers didn't innovate, and they almost become has-beens because of it. Internationally, America is almost defined by innovation. America invents products where no product has ever been, it's never content to simply sell what it has always been selling, but is ever searching out new ways to make money.

This culture of innovation has propelled America to it's premier spot in the economic world.

However, innovation is not without risk, and innovations are adopted at a rate that would be unthinkable in times past (especially in America, where if you turn your back on an innovation, your competitor won't).

This means that an innovation with a catastrophic long term consequence can spread far and wide before it collapses. Before that, examples were few and far between. (Off the top of my head, the Irish Potato famine - potatoes were a magnificent innovation that increased farming productivity until we found a catch).

So, unless the USA becomes a low-innovation culture (which I doubt) and loses the world-leading growth that it has experienced for the last 60 years, I think you're going to see disasters like this on an irregular basis. Where the next one comes from, I don't know. (Solar flare fries most of the world's electronics, single crop failure on one of the world's staples are my best guesses.)

So, we can try and close the door on this crisis by inventing regulation that is practically unnecessary in the rest of the world, but we'll all be blaming another group of successful people in a decade or three's time for leading us down a different catastrophic path.

Posted by: Tom West on June 3, 2009 1:48 PM



Upstate Guy:

2008 NASA budget-$17 billion

2008 Welfare budget-$324 billion
2008 Medicaid/SCHIP budget-$209 billion

We all may or may not believe in the welfare state, but let's try to be a little more truthful in our postings.

Posted by: Brutus on June 3, 2009 2:38 PM



Engage at will Moira. Although it would, however, be refreshing to see you respond to a point I actually make in a comment rather than simply reaming me a new one on general principle or tossing excrement just because you want to see poop land on a leftist's head.

To add some fuel to the fire as far as the actual topic here is concerned, let me take another crack at making the point behind my first comment. Labeling any and all groups that lobby the government as being "special interests" results in it being a very nebulous label. In political discourse the term is generally used by one side of an issue to disparage efforts made to influence government decisions by interested parties on the other side. The right tends to label groups like gays or women or unionized workers as "special interest" groups. The left prefers to save the appellation for industries like insurance, big agriculture, and, most germane to this thread, the financial services industry as "special interest" groups.

While recognizing that any and all groups will ... and should ... make efforts to have their voices heard and influence legislation on areas of concern to them, it nevertheless seems to me that some interest groups are more "special" than others. When large numbers of average citizens band together to make their opinions known, each individually contributing very modest sums to pay for lobbying efforts, I don't get upset. I have very different views than those espoused by the NRA, but respect their efforts to make sure the views of their large membership are heard when gun control legislation come up. I may, like hundreds of thousands of citizens, join an environmental group that lobbies for better protection of air quality. To me, these is not the same as a very small number of exceedingly wealthy beneficiaries of the banking system contributing vast sums to lobbying and campaign efforts while working hand in glove with former colleagues who are now on the governmental side of the revolving door to assure that the status quo benefiting them remains undisturbed. IMHO This is where "special interests" become toxic and reveal the underlying and dangerous oligarchic structures that have developed over time.

And yet again, I offer my opinion that we need Instant Runoff Balloting in order to break the stranglehold of the Duopoly system. Public financing of elections which would still remain virtually impossible for independent parties and candidates to win or even influence, would be merely applying an ineffective bandaid to an open wound.

Posted by: Chris White on June 3, 2009 2:46 PM




Well, clearly I've given offense to those who justify injecting personalities into debate, so I apologize and will abandon ship here.

Posted by: Richard S. Wheeler on June 3, 2009 3:41 PM



Richard S. Wheeler: Hissy fits only undermine the persuasiveness of the commenter.

Richard, Michael requested that everybody stop picking on Chris. His blog, his rules. Don't be churlish.

They suggest that the commenter cannot come to grips with the subject at hand,....

If you inserted a "to me", between "suggest" and "that" in the above sentence, you would be making a correct, if uninterestng, statement about your personal perceptions. Others, who can intuit that a venue labeled "Two Blowhards" is likely to call on a different set of social skills and conventions than one with, say, "Circuit Court of Appeals" chiseled into the frieze, and who possess the capacity to sift the wheat from the chiding, have stylistic preferences different from yours that bear no relation to the objective content of arguments.

...which is the power of financial institutions to continue their destructive behavior.

Yet all the wags have come to grips, while the finger-wag has only griped.

Posted by: Moira Breen on June 3, 2009 5:26 PM



Tom West: When the crisis first hit, I, as a Canadian, was felt slightly smug - our more highly regulatory culture had turned out to be the best after all. Sadly, I was wrong. In pretty much all of the areas where the crisis hit, there was no effective difference in regulation.

What was different was culture.

That's no reason to pass up an opportunity for feeling smug. In fact, feeling superior in your culture gets you get much more bang for your buck, er, loonie than feeling superior in mere legal technicalities. If I were Canadian, I would certainly be permitting myself some (nice, low-key, Canadian) schadenfreude right now.

However, innovation is not without risk...

Hmmm. "Financial innovation" - standard Frankenstein cautionary tale, or good old-fashioned smoke-and-mirrors fraud? What to think, what to think.

Richard S. Wheeler: Well, clearly I've given offense to those who justify injecting personalities into debate, so I apologize and will abandon ship here.

Gasp. It's a wonder how we bear up under Richard's repeated, devastating Parthian shots.

Posted by: Moira Breen on June 3, 2009 6:25 PM



I think the great unwashed - of which I am one - get it. We get that we're being raped. We get that TARP I, TARP II, TARP X, are massive pieces of institutionalized theft. We get it but what can we do about it? Vote for the other head of the two headed monster? March on Washington as part of a people's army and burn the place to the ground? That, by the way, would be a start. But who among is willing to ruin his life?
I see no way to resist. This madness of a broke government monetizing its own debt will play itself out. All the way. Maybe to Weimar. Maybe to worse. What follows that is anybody's guess but it's certain to be godawful.

Posted by: ricpic on June 3, 2009 9:20 PM



"So, unless the USA becomes a low-innovation culture (which I doubt)...

Don't worry Mr. West, our elites are working on it! The types they want this nation to consist of aren't exactly known for their innovative thinking. And anyone who is productive will be taxed to death. The US is gonna get a VAT on top of all the other taxes planned. Gotta pay for all them sharp thinkers from Latin America and the ghetto!

Posted by: Anonymous on June 3, 2009 9:29 PM



Yet all the wags have come to grips, while the finger-wag has only griped.

I am in love with a beautiful woman who is not you. But you're making it hard for my heart to be faithful, Moira. So hard.

Posted by: PatrickH on June 3, 2009 9:37 PM



...Richard's repeated, devastating Parthian shots.

Okay, it's official now. I don't know how I will break the news to my love, but I shall. How will you let your husband know that you and I are going to be together forever? Please, break it to him gently. I don't want him coming after me with his gun collection. But do, do break it to him.

...Parthian shots. Who knew the name of an Iranian formerly nomadic people notable for the deadliness of their horseback archery would be the word that made me lose my heart (and mind)?

Parthian. Sigh.

Posted by: PatrickH on June 3, 2009 9:42 PM



@ricpic:

Sounds like you're saying it's sort of like a situation where one man with a gun can control an angry mob: if the mob makes a rush for it, they'll win, but whoever is in front gets shot. Something like that?

Posted by: i_have_seen on June 4, 2009 1:48 AM



@Upstate Guy
But, I take issue with one point: please, and this is an honest question, what do you think is the percentage of people who are on "the public dole" that are there simply because they WANT to be?

Wrong question with regard to the root of this problem. The answer of course is none, but then again no criminal ever wants to be in jail, no woman ever wants to be a single mother, no one wants to have the bank foreclose on their loan and of course no smoker ever wants to get cancer. However, idiotically chosen behaviours may get you results that you do not want.

I grew up amongst the poor, my father was a machinist and my mother worked in a tannery. I have an intimate and first hand knowledge of the lower classes. My professional career has been spent bobbing in and out of the sewer of humanity. What seperates the poor from the middle class is not resources but habit. The great left trope that the poor are poor because they don't have resources is pretty much a lie in modern western societies. You could give them all the money in the world and they would squander it. Nine times out of ten success is the product of virtue, delayed gratification and responsibility.

The questions to ask is: Should the vote be given to people who are incapable of managing their own affairs? What are the political consequences of giving the franchise to such men? Will they choose wise representatives? Or will they choose like they live their lives, on impulse and appearance? Are they likely, like battered women, to choose men who will promise one thing and deliver another?

A man who is the recipient of welfare is a burden on his fellows. He does not pull his own weight in society, he is living proof that, barring being the subject of misfortune, he is unable to manage his affairs in the small sphere of life allotted to him. A man that shirks his small responsibilities in life such as to his kids, his debtors or his partner is more likely to shirk the great responsibilities of office. Virtue is acquired through habit. He who is faithful in small things is faithful in the large ones. If a man can't manage the little and simple things, why should his opinion matter on the great issues of the nation? This is an honest question as inquiring minds would like to know. Citizenship is a right that comes with responsibilities.

Chris White:
How would disenfranchising "welfare recipients" in favor of a bold and blatant move toward overt oligarchy serve to make us stronger, richer, or more free?

Less chance of having people who are representative of their own successful worldviews being voted into office.

First, I am confused as to what similarities beyond age, gender and nationality are supposed to exist between the banker Dick Fuld and me.

Evil is polymorphic.

@Ricpic

But who among is willing to ruin his life?

That's the difference Ricpic; the early colonists were prepared to loose their lives for liberty, the modern man isn't. Republican virtue is dead. The American republic assumes the form and not the substance of the ideal. No one gives a shit.

@RCWhalen.

THE RCWhalen! Wow, Friedrich you really do get some high powered commentators. Question from the audience please. We are doomed, aren't we?

Posted by: slumlord on June 4, 2009 8:35 AM



Anonymous - the VAT issue is actually very interesting and important. It can (and is, but not by us) used to game trade (by using it along with export rebates, rebates to consumers, etc.) to favor home manufacturers. In other words, it is a WTO-sanctioned tariff in all but name, and that we don't use it while most of our trading partners do puts domestic manufacturers at a serious disadvantage. At least, that's my limited understanding of a raging debate I'm trying to follow and understand. I'd be interested to know what an actual small business owner like FvB thinks of it.

I do see a lot of knee-jerk, short-sighted criticism that focuses on the cost to consumers strictly at the point of sale. It's another instance of Americans not grasping that cheap goods, like cheap labor, can actually be very, very expensive to them. It's a tough problem, and very tough on lower-income people. "Walmartization" - facilitated by current trade rules - is a vicious circle. But if we don't address it, our economy is going to die.

Of course, the problem with the U.S. implementing a VAT now is that it is unlikely that it would end up functioning as anything but what its critics say it is, a highly regressive consumption tax. The clowns in charge like our destructive trade relations just the way they are, so I don't realistically see them using VAT in any way to correct them.

PatrickH: But you're making it hard for my heart to be faithful, Moira. So hard.

Not to worry, P-dawg, I have a cure for your lovesickness. I'll just send you a recent pic. Nothing like the reality of a middle-aged Iowa housewife to put a potato in yer tailpipe.

Posted by: Moira Breen on June 4, 2009 11:29 AM



Should the vote be given to people who are incapable of managing their own affairs? What are the political consequences of giving the franchise to such men?

The question has been put to the forum, any takers?

Posted by: slumlord on June 4, 2009 6:31 PM



read "The Mystery of BANKING" by Murray N. Rothbard. (You can get a free digital download of the text here: http://www.mises.org/Books/mysteryofbanking.pdf)


One of the sentences that caught my eye "Only in 1933, with the establishment of the Federal Deposit Insurance Corporation, was the government of the U.S. able to stop bank runs by putting the unlimited taxing and counterfeiting power of the federal government behind every bank deposit."

Posted by: Bob Durtschi on June 7, 2009 2:22 PM






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