How the Servant Became a Predator: Finance’s Five Fatal Flaws
Monday, 10/12/2009 - 7:43 pm by Bill Black | 18 Comments
Roosevelt Institute Braintruster William K. Black explains how the finance economy preys on the real economy instead of serving it. He shows how both have become dysfunctional and warns that we must not neglect the real economy — the source of our jobs, our incomes, and the creator of goods and services — as we focus on financial reform.
What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
1. The financial sector harms the real economy.
Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector’s parasitism.
Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator State, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:
• Corporate stock repurchases and grants of stock to officers have exceeded new capital raised by the U.S. capital markets this decade. That means that the capital markets decapitalize the real economy. Too often, they do so in order to enrich corrupt corporate insiders through accounting fraud or backdated stock options.
• The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds. Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation. Individuals with these quantitative backgrounds work overwhelmingly in devising the kinds of financial models that were important contributors to the financial crisis. We take people that could be conducting the research & development work essential to the success of our real economy (including its success in becoming sustainable) and put them instead in financial sector activities where, because of that sector’s perverse incentives, they further damage both the financial sector and the real economy. Michael Moore makes this point in his latest film, Capitalism: A Love Story.
• The financial sector’s fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.
• It misallocates capital by creating recurrent financial bubbles. Instead of flowing to the places where it will be most useful to the real economy, capital gets directed to the investments that create the greatest fraudulent accounting gains. The financial sector is particularly prone to providing exceptional amounts of funds to what I call accounting “control frauds“. Control frauds are seemingly-legitimate entities used by the people that control them as a fraud “weapons.” In the financial sector, accounting frauds are the weapons of choice. Accounting control frauds are so attractive to lenders and investors because they produce record, guaranteed short-term accounting “profits.” They optimize by growing rapidly like other Ponzi schemes, making loans to borrowers unlikely to be able to repay them (once the bubble bursts), and engaging in extreme leverage. Unless there is effective regulation and prosecution, this misallocation creates an epidemic of accounting control fraud that hyper-inflates financial bubbles. The FBI began warning of an “epidemic” of mortgage fraud in its congressional testimony in September 2004. It also reports that 80% of mortgage fraud losses come when lender personnel are involved in the fraud. (The other 20% of the fraud would have been impossible had these fraudulent lenders not suborned their underwriting systems and their internal and external controls in order to maximize their growth of bad loans.)
• Because the financial sector cares almost exclusively about high accounting yields and “profits”, it misallocates capital away from firms and entrepreneurs that could best improve the real economy (e.g., by reducing short-term profits through funding the expensive research & development that can produce innovative goods and superior sustainability) and could best reduce poverty and inequality (e.g., through microcredit finance that would put the “Payday lenders” and predatory mortgage lenders out of business).
• It misallocates capital by securing enormous governmental subsidies for financial firms, particularly those that have the greatest political power and would otherwise fail due to incompetence and fraud.
2. The financial sector produces recurrent, intensifying economic crises here and abroad.
The current crisis is only the latest in a long list of economic crises caused by the financial sector. When it is not regulated and policed effectively, the financial sector produces and hyper-inflates bubbles that cause severe economic crises. The current crisis, absent massive, global governmental bailouts, would have caused the catastrophic failure of the global economy. The financial sector has become far more unstable since this crisis began and its members used their lobbying power to convince Congress to gimmick the accounting rules to hide their massive losses. Secretary Geithner has exacerbated the problem by declaring that the largest financial institutions are exempt from receivership regardless of their insolvency. These factors greatly increase the likelihood that these systemically dangerous institutions (SDIs) will cause a global financial crisis.
3. The financial sector’s predation is so extraordinary that it now drives the upper one percent of our nation’s income distribution and has driven much of the increase in our grotesque income inequality.
4. The financial sector’s predation and its leading role in committing and aiding and abetting accounting control fraud combine to:
• Corrupt financial elites and professionals, and
• Spur a rise in Social Darwinism in an attempt to justify the elites’ power and wealth. Accounting control frauds suborn accountants, attorneys, and appraisers and create what is known as a “Gresham’s dynamic” — a system in which bad money drives out good. When this dynamic occurs, honest professionals are pushed out and cheaters are allowed to prosper. Executive compensation has become so massive, so divorced from performance, and so perverse that it, too, creates a Gresham’s dynamic that encourages widespread accounting fraud by both financial firms and firms in the real economy.
As financial sector elites became obscenely wealthy through predation and fraud, their psychological incentives to embrace unhealthy, anti-democratic Social Darwinism surged. While they were, by any objective measure, the worst elements of the public, their sycophants in the media and the recipients of their political and charitable contributions worshiped them as heroic. Finance CEOs adopted and spread the myth that they were smarter, harder working, and more innovative than the rest of us. They repeated the story of how they rose to the top entirely through their own brilliance and willingness to embrace risk. All of their employees weren’t simply above average, they told us, but exceptional. They hated collectivism and adored Ayn Rand.
5. The CEO’s of the largest financial firms are so powerful that they pose a critical risk to the financial sector, the real economy, and our democracy.
The CEOs can directly, through the firm, and by “bundling” contributions of its officers and employees, easily make enormous political contributions and use their PR firms and lobbyists to manipulate the media and public officials. The ability of the financial sector to block meaningful reform after bringing the world to the brink of a second great depression proves how exceptional its powers are to corrupt nearly every critical sector of American public and economic life. The five largest U.S. banks control roughly half of all bank assets. They use their political and financial power to provide themselves with competitive advantages that allow them to dominate smaller banks.
This excessive power was a major contributor to the ongoing crisis. Effective financial and securities regulation was anathema to the CEOs’ ideology (and the greatest danger to their frauds, wealth, and power) and they successfully set out to destroy it. That produced what criminologists refer to as a “criminogenic environment” (an atmosphere that breeds criminal activity) that prompted the epidemic of accounting control fraud that hyper-inflated the housing bubble.
The financial industry’s power and progressive corruption combined to produce the perfect white-collar crimes. They successfully lobbied politicians, for example, to legalize the obscenity of “dead peasants’ insurance“(in which an employer secretly takes out insurance on an employee and receives a windfall in the event of that person’s untimely death) that Michael Moore exposes in chilling detail. State legislatures changed the law to allow a pure tax scam to subsidize large corporations at the expense of their taxpayers.
Caution: Never Forget the Need to Fix the Real Economy
Economic reform efforts are focused almost entirely on fixing finance because the finance sector is so badly broken that it produces recurrent, intensifying crises. The latest crisis brought us to the point of global catastrophe, so the focus on finance is obviously rational. But the focus on finance carries a grave risk. Remember, the sole purpose of finance is to aid the real economy. Our ultimate focus needs to be on the real economy, which creates goods and services, our jobs, and our incomes. The real economy came off the rails at least three decades ago for the great majority of Americans.
We need to commit to fixing the real economy by guaranteeing that everyone willing to work can work and making the real economy sustainable rather than recurrently causing global environmental crises. We must not spend virtually all of our reform efforts on the finance sector and assume that if we solve its defects we will have solved the other fundamental reasons why the real economy has remained so dysfunctional for decades. We need to be work simultaneously to fix finance and the real economy.
Roosevelt Institute Braintruster William K. Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist and was a senior financial regulator. He is the author of The Best Way to Rob a Bank is to Own One.
I agree with you completely. I have been working on a solution to the crisis in the real economy. I have written many articles about this subject. They are posted on my web site. http://www.economysflaw.wordpress.com I have posted a letter I sent to Treasurer Geithner and Elizabeth Warren.
To Elizabeth Warren
And the Oversight Committee:
Would it be beneficial for American families, the foreclosure problem, and the economy in general if Fannie Mae and the other GSEs created a mortgage with the terms that are outlined in this letter I sent to Secretary Geinther?
Please e-mail or call me with an answer with pros and cons at: economysflaw@yahoo.com or Ph 661-619-4858 if I have sent this letter to the wrong dept. please forwards it to the correct person or dept.
To Treasurer Geithner:
When the financial crisis occurred last September 2008 the Fed and Treasury helped the economy by using the TARP money to stop the economy from collapsing. The financial section of the economy is now in much better condition. It is Main Street that is now in need of a shot in the arm for it to get well. It can be done without costing the taxpayer any money.
To stimulate the economy we need to change the terms of our mortgages so Fannie Mae and Freddie Mac and other government agencies can fund mortgages at lower interest rates.
Banks, financial institutions and investors in mortgage-backed securities are not able to loan homeowners money to refinance their homes, create new mortgages to buy a home or make a loan modification, when home prices are decreasing.
If a 30 yr. adjustable rate mortgage was created with a starting interest rate (3% to 3.5%) to jolt the economy back to life, the toxic securities will become valuable again as they become performing assets and home prices stabilize and then appreciate. The interest rate on these new mortgages should increase one-quarter percent per year and cap out at the currant market rate of 5%. To decrease defaults on mortgages, the borrower would have to qualify at the 5% interest rate to obtain the loan. These new mortgages should not be tied to any index. People do not trust indexed mortgages because they do not know what will happen in the future with interest rate.
We are currently trying to capitalize the banks by infusing money directly into them. This policy is wrong because the collateral is losing value. The value of the collateral must be stabilized first, for the banks and investors to be confident enough to lend money against it.
What will this stimulus plan do for the economy? When the homeowner refinances their home from a 6% mortgage interest rate to a 3% interest rate their monthly interest payment will decrease by 50%. A $1500.00 monthly mortgage interest payment will decrease to $750.00. That will be like the person receiving a $750.00 stimulus check each month for the first year and thereafter a little less each year for the next seven years. Multiply this by millions of people and you will have a stimulus plan that puts the purchasing power were it should be, with the people. The foreclosed property inventory would be quickly sold and housing prices would stabilize. Banks and investors should be encouraged to modify the underwater mortgages by changing the tax code so that it would be beneficial to them and the borrower when the excess amount of the mortgage is reduced. Loaning money to banks does not create demand in the economy, people do!
If mortgage interest rates were available at a starting rate of 3 or 3.5% and the borrower was qualified at a 5% interest rate, the chance of a foreclosure would be close to zero. The eight years it would take for the interest rate to rise to 5% would allow the economy to heal. Business activity would increase; this would increase the value of commercial properties reducing the coming crisis in that area of the economy. With home values stabilized investors will be willing to invest in mortgage securities again rather than treasuries. With the mortgage interest rate increasing every year, the investor will know that their rate of return will increase for the next seven years unlike treasuries.
Mortgage interest rates historically have been about 100% above the inflation rate for the last 30 yrs. With inflation at 0% and home prices deflating, mortgage interest rates for the last year have been about 5 to 6% that means they are 500% to 600% above the inflation rate! Interest rates are not at historical low rates, as many people believe.
With the enactment of the Zero Inflation Taxation Policy this will help control inflation and inflation psychology, which will maintain the lowest possible interest rate, which will help maintain the value of mortgage, backed securities. (Go to web site to read about this policy change and its benefits.) http://www.economysflaw.wordpress.com/ Please read Alternative Economic Stimulus Plan also.
Leonard C. Tekaat
10-6-09
Posted by Leonard C. Tekaat | October 12th, 2009 at 2:07 pm
Come on, Bill, no predation by the financial interests even would be possible if it weren’t for a legal structure and a political climate that enables it. Its hardly news that many of those you describe are the worst sort of reptiles, that’s clear enough. But what you haven’t mentioned - and I hope that your not mentioning it doesn’t manifest a fear of doing so - is that our entire political structure is beholdened by way of an insatiable appetite for campaign contributions to these birds. Dick Durbin even acknowledges openly that these vermin “own” the Senate. And that’s to say nothing of the similar ownership claims that are regularly exerted by the arms, drug, and Israel lobbies as well.
Please, don’t blame the devil for being devilish, he’s only doing what he knows how to do. Blame the filth in public office who are charged with protecting citizen interests ahead of all else yet routinely function as though they were serving some madame in a brothel somewhere. Save your ire for them, they’re the real predators.
Posted by Andrei Vyshinsky | October 12th, 2009 at 3:30 pm
A fine report on the financial sector which is missing but one important point: the reason that the financial sector grew to this size in the first place was the crisis of the real economy back in the 70s. Until that is acknowledged and explained the growth of finance and the continued acceptance of this growth by those in power cannot be understood.
Posted by Jan Briggs | October 14th, 2009 at 8:29 am
“Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation”
That is pure baloney.
I am one of those persons “with strong mathematical, engineering, and scientific backgrounds” with a PhD from a top university.
The sub sector of the industry I worked in was dominated by 2 billion dollar companies. First Company C announced they were shutting down all R&D operations to cut costs. Within weeks, company S followed suit by shutting down their R&D department as well. The day to day work at both places has gotten to be mind numbingly boring with 0 innovation.
Where should people like me find interesting, challenging and rewarding work that involves Mathematics, Sciences and Engineering? I will give you a clue - there are no high paying technical jobs outside of finance in America.
Stop paying the lawyers, sportsmen and Hollywood stars so much and pay more to scientists - you will immediately see a large number of scientists and technologists. This has happened only twice in 20th century America - the post Sputnik era was the first and the tech boom of the late 90’s was the second.
Enough of this “we need more scientists” nonsense. The highly trained scientists are willingly walking to Wall street because this society does not value science. People like me are in no mood to ruin our life and health slaving away at unappreciated technology jobs when society pays us neither good money nor social respect. Put your money where your mouth is or else shut up.
Here is a simple proposition: if you want me to work in science instead of on Wall Street, then pay me more on Main Street.
Posted by SantaClarite | October 15th, 2009 at 12:57 pm
This is exactly right. Thank you. And by not addressing the corruption and decay in the financial sector we ensure that the crisis will persist.
Of course, it is 180 degrees divergent from the “save the big banks first” scheme being pursued by the Fed. One wonders how much time will pass before people realize that bailing out the banks and buying up their bad paper did not restart the economy, but only created another bad bank, this time the central bank.
These people do not need a bailout, they needed a wooden stake.
Thank you again. Extremely cogent, informed and useful. Nothing is more discouraging to me than the absence of critical thinking that is so widespread and the persistence of the power of the financial elites. (Though some of the comments here are discouraging, too.)
This should be — and probably after more suffering, will be — the main line of economic thinking. One hopes that day will occur prior to the gutting of the real economy.
Posted by Alan Harvey | October 16th, 2009 at 1:20 pm
Maybe you are a cop outfit. But I will just ask a few questions.
1) What is your definition of the physical economy and how does that generate praise for the tech bubble?.
2) What is your treatment of the TVA project?
3) Six factoids came to me Monday. Let us see if I can reproduce them.
a) M1 now more than double a year ago.
b) riots, or by some sources, near riots in Detroit. The .local government was taking applications for a stimulus money give-away. They had money for 3500 people. 65,000 people showed up. Six people were taken away in ambulences.
c) Front page in Bloombergs. Something like Dollar at red-line. It reported banks were going to euros.
d) bank lending down 24% from last year.
e) 20% of auto parts manufacturers in bankruptcy and another 50% expected. No demand.
f) manufacturing shutting down because they cannot get short-term credit for daily operations
So from this and other info you might have, do you conclude we are in a depression? What is your program for stopping the process?
What is your forcast for economic events in the remainer of the year?
Posted by max stalnaker | October 17th, 2009 at 4:15 pm
I believe SEC must Regulate the Market Capitalization of all listed companies to twice their Quarterly Revenue.
Posted by Police Officer | October 17th, 2009 at 11:03 pm
Ok people …lets clear our heads and just observe this with objective sensabilities…Clearly the financial sector has become so large and parasitic that we need to have a national house cleaning…If you are willing to sell out your fellow countrymen for a quick buck then in my opinion you deserve nothing less than to be hanged in the town square….Those individuals who have shipped all our factories to China in an effort to increase their own wealth at the expense of our nations industrial capacity are guilty of treason and should be held accountable. All idealogical arguments aside, the repurcussions of their selfish actions are a diminished American industrial base and a populace enslaved by debt….Come on you selfish bastards…wake up and make things right … or we will do it for you!
Posted by Solliss | October 18th, 2009 at 4:39 am
I really enjoyed seeing you on Democracy Now! (Th 15 October 09). I heard a similar theme in the interview with Slavoj Zizek: First comes the myth, then comes the jacking.
WILLIAM BLACK: Yes. He [Richard Hohlt] is the most notorious lobbyist out of the savings and loan crisis. Even within a notorious group, the US League of Savings Institutions,… That group had, in essence, a black ops subgroup, and Richard Hohlt led it and is responsible for causing immense damage in the savings and loan crisis.
…And now he’s back being hired by—in essence, by taxpayer money to help loot the taxpayers again. My phrase for it in the New York Times was that it was “singularly obscene.”
[...]
JUAN GONZALEZ: And William Black, what is your sense of the prospects now for stronger financial regulation…
WILLIAM BLACK: Well, the earliest effort is—should be a real wake-up call, because it’s horrible. Barney Frank has proposed legislation on financial derivatives that essentially exempts what are called over-the-counter derivatives from most regulation, and it is over-the-counter derivatives that have been a major cause of this crisis. So that’s utterly insane. There’s no conceivable justification for it. And he stacked the hearing. … So it’s not only a farce; they’re willing to have us see that it’s a farce. They are so little afraid of public opinion and outrage that they’re not even taking steps to cover up the cover-up.
http://www.democracynow.org/2009/10/15/black
Which brings us to the garrulous Slovenian.
AMY GOODMAN: Relate the protests to the meltdown and why—how it was predictable.
SLAVOJ ŽIŽEK: This brings me, as a psychoanalyst, into the play, because I think this makes us aware as to what extent our everyday dealing is controlled by what in psychoanalysis we call the mechanism of fetishist disavowal. “Je sais bien, mais quand même…” “I know very well, but…” You know, we can know very well the possible catastrophic consequences, but somehow you trust the market, you think things will somehow work out, and so on and so on. It’s absolutely crucial to analyze this, not only in economy, but generally. This is the focus of my work: how beliefs function today. What do we mean when we say that someone believes?
…You know Niels Bohr, Copenhagen, quantum physics guy. You know, once he was visited in his country house by a friend who saw above the entrance a horseshoe, [A friend asked,] “But why do you have it there?” You know what Niels Borh answered? He said, “I don’t believe in it, but I have it there, horseshoe, because I was told that it works even if you don’t believe in it.”
That’s ideology today.
http://www.democracynow.org/2009/10/15/slovenian_philosopher_slavoj_zizek_on_the
With great respect, I disagree with SZ; that’s the power of myth.
I’m not just splitting hairs. Ideology is all about abstracting out of their emotional context a set of beliefs, and labeling them with the prefix ‘ideo-’ both of which are intended to make them appear scientific, ie, stripped and cleansed of superstition, bias, etc.; in short, in pursuit of illusory objectivity, they are made inhuman. Having done that, we then must figure out how pure ideas move muscles and bone, neglecting that our own assumptions have vivisected the patient to death in the first place. Ideologies can’t exist apart from humans, yet we discuss them that way all the time.
Having reduced the cosmos, and ourselves along with it, to a mechanism, as Peter Hershock makes clear, we tend toward “an infinite regress that demands all our available attention and energy to no meaningful effect.” This is the root of our folly.
PETER HERSHOCK: In shifting our attention from the controlled redress of factual oppression and structural inequity to improvising novel conditions for meaningful contribution, we initiate a decisive return to dramatic immediacy and the disciplines of responsive creativity.
http://www.buddhistethics.org/6/hershock991.html#Change
IOW, as I’ve been saying, we have but to reclaim our inalienable humanity from within in order to humanize our affairs. I agree with SZ’s critique of control. But not his mechanistic reduction. Appealing to the myths and mechanisms of our oppression can hardly set us free of them.
That’s why I so enjoy your recent statements.
WILLIAM BLACK: But the bigger part of the problem, in many ways, is that they have such an ideology about the market and its ability to deal with all problems that has no basis in reality, has been exposed in this crisis as completely fictional, and yet they can’t give it up. I mean, think of yourself as one of these professors who’s been trained in the Milton Friedmanish views, and you’re in your fifties, and you’ve been saying—you know, everything you’ve said in your career is wrong. Everything you’ve learned in your career is wrong. All of your areas of expertise are wrong. Are you going to admit that? “Hi, I’ve been misleading you, and I’m sorry I caused this disaster. And by the way, I have no meaningful skills or experience.”
AMY GOODMAN: Would Alan Greenspan—
WILLIAM BLACK: It’s not going to happen.
AMY GOODMAN: —fit into that picture?
WILLIAM BLACK: Well, Alan Greenspan, of course, is doing this when he’s in his eighties and isn’t going to teach and isn’t going to do anything else. And even then, he didn’t volunteer it. He was asked pointed questions in front of Congress.
http://www.democracynow.org/2009/10/15/black
Your words remind me of the way Jim Hightower emphasized the power of myth, mislabeled “ideology,” as evidenced by The Maestro himself:
JIM HIGHTOWER: Why was Greenspan so insistent on no regulation? Because he is the hardest of hardcore laissez-faire ideologues, holding a blazing disdain for government. An avowed worshiper of libertarian novelist Ayn Rand, he views public oversight of business as an evil force that deters the creativity of smart elites. He is so psyched by his religious-like faith in the “free market” that he fervently believes in what he considers to be the innate good will and moral superiority of investors and bankers. He asserts that these self-interested individuals can simply be trusted to do the right thing, and that government should not second-guess their decisions.
Even the faith of snake handlers is not as devout as Greenspan’s. Unfortunately, however, he was able to hitch our nation’s economic well-being to his own absurdist ideological fancy. The guy who was lionized as the smartest, most- stable economic thinker in the land essentially turns out to have been a quasi-religious nut.
http://www.hightowerlowdown.org/node/1801
And that, my dear friends, is the freakin’ power of freakin’ myth: to shape our freakin’ world prior to our freakin’ acting in it. Calling it “ideology” does not make us proof against it. On the contrary, it leaves us all the more open to getting jacked.
Posted by knowbuddhau | October 18th, 2009 at 3:23 pm
WILLIAM BLACK: But the bigger part of the problem, in many ways, is that they have such an ideology about the market and its ability to deal with all problems that has no basis in reality, has been exposed in this crisis as completely fictional, and yet they can’t give it up. I mean, think of yourself as one of these professors who’s been trained in the Milton Friedmanish views, and you’re in your fifties, and you’ve been saying—you know, everything you’ve said in your career is wrong. Everything you’ve learned in your career is wrong. All of your areas of expertise are wrong. Are you going to admit that? “Hi, I’ve been misleading you, and I’m sorry I caused this disaster. And by the way, I have no meaningful skills or experience.”
I had a friend tell me back in 2002 that he found out Wall street was a bunch of people that took undergraduate liberal arts and then got an MBA after their family connections put them in jobs there. The meat of a business education is in undergraduate work. Kind of like making a peanut butter sandwich without the bread.
The government would immediately outlaw it, but what the people of the US should do is sell their stocks, take the check to the bank and get the cash. Force these banks to deliver the cash, which they can’t do. You have no idea the rampage I have been on for a year over the fact these banks weren’t closed and that their insolvency was covered up. This thing was allowed to fester because Citi was broke. There is no telling what went on between AIG and its counterparties, but it clearly wasn’t the actions of an insurer. That branch of AIG should have been taken out of the conglomerate and put into bankruptcy. Goldman stuffs $1 million an employee in their pockets while the rest of us get the bill. I did simple math on GE the other day and it is clear that despite actions to keep them solvent, they had repurchased a sizable percentage of the corporate stock during the past year. The proportion of the per shares isn’t even close. I have been telling people for years the stock market is a pool of fraud and Wall Street/Ivy League misinformation and people in general have been too interested in making an easy buck then realizing they are getting scalped.
Posted by mannfm11 | October 19th, 2009 at 1:57 am
BTW, we aren’t talking about a market. The market would defeat these guys, but every time it does, the government bails them out. LTCM was where the market defeated genius. Greenie and Wall Street banded together and pretended it didn’t happen while they split up the loot in LTCM once the dust settled. The market works, these guys have merely been put above loss. Notice so much of this stuff is backed up with Nobel Economic prizes.
Posted by mannfm11 | October 19th, 2009 at 2:00 am
M1 isn’t 200% of a year ago
http://www.federalreserve.gov/releases/h6/current/h6.htm
The money everyone keeps talking about being printed doesn’t exist outside banks.
Posted by mannfm11 | October 19th, 2009 at 2:04 am
If the financial sector owns the senate then would it not be wise to repeal the 17th amendment to the constitution? There would be no schumers, unless all of the states’ legislators are complete stooges. Something to think about.
Posted by responpress | October 19th, 2009 at 9:49 pm
Dear Professor Black:
I enjoyed your article.
You say, “The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds.” I have these backgrounds. When I graduated from college, nobody would hire me. I ended up in the financial sector because (apart from law and medicine) it is just about the only part of our economy that values intelligence enough to hire intelligent applicants. Our country has too many doctors, lawyers, brokers, etc., because these industries have all the intelligent people. They have them because they hire them. Their success is not their fault. It is the fault of the other industries that refuse to hire intelligent job applicants.
The problem starts in elementary school. Students want a teacher’s affection. Because grades (A, B, C, etc.) rate relative performance instead of absolute accomplishment (e.g., successfully learning all the rules of punctuation or how to add any two numbers) children are conditioned to perceive intelligent peers as a threat. They are conditioned to be jealous of the intelligent. Teachers teach that an intelligent child helping a stupid child is WRONG. With universal education based on this competitive model, we have a society, the majority of which has a phobia, a subconscious, neurotic fear of the intelligent and an intense feeling of jealousy toward them. Americans don’t look to the intelligent as a source of help. They fear the intelligent. This is especially true of educators. Teachers and professors are most jealous of the intelligent, while administering a system that rewards them.
Employers don’t outsource computer programming to India because of labor arbitrage. If labor arbitrage were their aim, they would outsource their CEO position to India. They outsource computer programming, because computer programmers tend to be intelligent, and subconsciously managers feel more comfortable with intelligent employees as far away as possible. They don’t want intelligent employees in the same office. Is it any wonder they drive their business into the ground?
Sincerely,
Tom
Tom Zavist
Posted by Tom Zavist | October 22nd, 2009 at 7:15 am
While I do agree that the financial sector clearly has it’s issues, I don’t believe we can simply blame everything on them.
Let’s be clear. Finance is the life-blood of the capitialist system. Businesses, Mortgages, and so on WOULD NOT EXIST without the capital markets. It is nearly impossible to get a loan in many under-developed nations— and that’s one of the many reasons why they cannot develop their economies.
If you don’t like the financial sector, then you must not like capitalism. If there is a better system than capitalism, please let the world know.
Posted by Jon D. | October 22nd, 2009 at 4:56 pm
Government Industrial Complex- H1N1 Vaccine
Promise 100% + production
Deliver 10%
Public will perceive delivery as 70%
Win Win situation
Posted by John Jensen | October 26th, 2009 at 5:46 pm
The new deal has always been the old deal, until now.
If you take a look, this nexus between agency and the inside rulers has been going on forever.
Start with the chief-medicine man, and move through king-pope, to the present day. Part of the deal is always to erase the historical record, and make up a new one to reatart the system.
The nexus controls breeding to ensure control over ignorant masses, employing the laws if physics to their benefit. Ignorance is contagious. The algorithm of History remains the same; increased participation simply fragments and exponentially increases the sypmtoms, adding new clothes on an old frame for a new engagement.
In the current version, the institutions pay kids to have kids, and turn them over to the institutions, for compliance training from cradle to k-12.
Family Law, again, ensures the elimination of dissent, with no due process, and the ability to make dissenters non-persons at will, with a global banking, credit, and criminal family law information system.
The American Enterprise System is the USSR of the 21st century.
Evolution accepted this mechanism because it accelerated human planetary saturation. Now that we have saturation and global information systems, we really don’t need money.
We have already proven that we live in a world of abundance, producing more food, shelter, and clothing than the population needs. We have a distribution problem, because the nexus controls all the gates for absolutely no rational reason. We don’t need middlemen anymore.
While the nexus of multinationals have joined all the nation / state systems into a cartel to enforce labor arbitrage on the population, the result is necessarily self-liquidating, as each generation of kids gets better and better at cutting off Goliath’s circulation.
Be patient. Oil consumption, real estate prices, and tax receipts will continue to fall, and social service demand will continue to increase. The volume will decrease and the pressure will increase until the system explodes.
Once we have disassembled to the root problem, we can roll out a new economy to meet the planetary demand for equilibrium development, with a quantum improvement to the Internet, independent fuel cells, and a free global education system.
New family formation, as the articulation between planetary biology and humanity, is the self-adjusting mechanism of economics. They allow unfettered new family formation to build up assets, then they rescind to liquidate. This time around, they went to far, and have no more space under their control to roll out a new economy. Their economy locked up because it cannot execute the normal code at this stage.
They shorted the motor to liquidate the economy, discharged the entire middle class battery, and are now burning up the components.
Once everyone recognizes the problem, we can get on with the work at hand.
If you want to accelerate the process, do what the kids do, stop chasing infrastructure to feed the monster, and make infrastructure chase you. Sell all your non-performing assets, and get mobile.
Posted by kevinearick | November 4th, 2009 at 7:46 pm
I report this type of information every day on my site.
Thank you for all you do to keep us as knowledgeable as possible.
I publicize everything that I can find from the lips of Prof. Black.
S
Posted by Suzan | November 16th, 2009 at 1:33 pm