Monday, October 8, 2012
Wall Street’s Economic Rampage
Over the past year, Wall Street’s excess has helped push the unemployment rate to epic levels and created millions of foreclosures. Yet the rules of the financial road remain unchanged. As 2009 draws to a close, it’s astonishing that so little progress towards financial reform has been made.
President Obama, Congress and federal regulators have not been tough enough on the nation’s financial elite. As Monika Bauerlein and Clara Jeffery emphasize for Mother Jones, the government has committed about $14 trillion in bailout funds to save the banking system without demanding much of anything in return. Goldman Sachs and other big banks are now planning to pay giant bonuses that come straight from taxpayer giveaways rather than invest that money in socially constructive banking.
“Bankers aren’t being rewarded for pulling the economy out of the doldrums,” Bauerlein and Jeffery write. “Nope, they’re simply skimming from the trillions we’ve shoveled at them.”
The major banks are even spending our bailout money to lobby against reform. When President Obama called a meeting for leaders of the nation’s largest banks to scold them for their lobbying, the heads of Morgan Stanley, Goldman Sachs and Citigroup didn’t even bother to show up, as Matthew Rothschild describes in a podcast for The Progressive.
It’s easy to see why the bank execs are so indifferent, Rothschild argues, even to the president. Now that almost all of these banks have repaid the loans they received under the Troubled Asset Relief Program (TARP), Obama has no negotiating leverage and the bankers know it. Even though it represents just a tiny fraction of the $14 trillion bailout, TARP was the only program that attached any strings to that money. Prior to those TARP repayments, Obama could have demanded that banks do more lending to help the economy, work harder to keep troubled borrowers in their homes—or face executive compensation restrictions or other penalties.
And many of the same regulators who helped bring about today’s economic disaster are still in power. As Sen. Bernie Sanders (I-VT) explains for Brave New Films (video below), Federal Reserve Chairman Ben Bernanke blew just about every major policy decision he faced in the years leading up to the crisis. Bernanke, who was recently named person of the year by Time magazine, failed to rein in reckless mortgage speculation, predatory lending or excessive compensation packages. Nevertheless, President Obama has appointed him to another term.
Sanders notes that even Bernanke’s financial clean-up operations have been deeply flawed. Bernanke has helped make today’s too-big-to-fail banks even bigger. If we want to stop the lobbying and policy deference that politicians grant to Wall Street, we have to break up the biggest banks into smaller firms that do not endanger the economy if they fail.
Bernanke is not the only holdover from the Bush administration that wields significant economic power under Obama. As I note in a piece for The Nation, John Dugan, the top bank regulator appointed by President George W. Bush, remains in office today, despite failing to ensure the financial health of our largest banks and actively working to undermine consumer protection.
Campaign contributions from the bank lobby will not be enough to counter the voter outrage that President Obama and members of Congress are facing, nor should they. If our leaders want a serious shot at re-election, they need to recognize the need for significant change on Wall Street. That means breaking up the big banks and setting economic policy that helps all of our citizens, not just financiers.
Bernanke Tightens the Noose
Ben Bernanke has been a bigger disaster than Hurricane Katrina. But the
senate is about to re-up him for another four-year term. What are they
thinking? Bernanke helped Greenspan inflate the biggest speculative
bubble of all time, and still maintains that he never saw it growing.
Right. How can retail housing leap from $12 trillion to $21 trillion in 7
years (1999 to 2006) without popping up on the Fed's radar?
Bernanke was also a staunch supporter of the low interest rate madness which led to the crash. Greenspan never believed that it was the Fed's job to deal with credit bubbles. "The free market will fix itself", he thought. He was the nation's chief regulator, but adamantly opposed to the idea of government regulation. It makes no sense at all. Here' a quote from Greenspan in 2002: “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.” Bernanke is no different than Greenspan; they're two peas in the same pod. Everyone could see what the Fed-duo was up to
Now Bernanke is expected to carry on where his former boss left off, using all the tools at his disposal to offset the atrophy that's endemic to mature capitalist economies. "Stagnation", that the real enemy, which is why Bernanke supports this new galaxy of oddball debt-instruments and bizarre-sounding derivatives; because it creates a world where surplus capital can generate windfall profits despite chronic overcapacity. It's financial nirvana for the parasite class; the relentless transfer of wealth from workers to speculators via paper assets. Marx figured it out. And, now, so has Bernanke.
Bernanke is just following Greenspan's basic blueprint. It's nothing new. Unregulated derivatives trading is just one of the many scams he's thrown his weight behind. The list goes on and on; one swindle after another. Just look what happened when Lehman Bros blew up. Just weeks earlier, Bernanke and Co. had worked out a deal with JP Morgan to buy Bear Stearns with the proviso that the government would guarantee $40 billion in Bear's toxic assets. Fair enough. The whole transaction went by without a hitch. Then Lehman starts teetering, and Bernanke and Treasury Secretary Henry Paulson decide to do a complete policy-flip and let Lehman default. Their reversal stunned the markets and triggered a frenzied run on the money markets that nearly collapsed the global financial system.
Why?It was because Bernanke knew that the big banks were buried under a mountain of bad assets and needed emergency help from Congress. The faux-Lehman crisis was cooked up to extort the $700 billion from taxpayers via the TARP fund. Bernanke and Paulson pulled off the biggest heist in history and there's never even been an investigation.
Bernanke was in the wheelhouse when the subprime bubble blew and carved $13 trillion from aggregate household wealth. Consumers are now so deeply underwater that personal credit is shrinking for the first time in 50 years while unemployment is hovering at 10 per cent. If Bernanke isn't responsible, than who is?
Take a look at Bernanke's so-called lending facilities. They are all designed with one object in mind, to support financial markets at the expense of workers. The media praises the Troubled asset-backed security lending facility (TALF) as a way to restart the wholesale credit system (securitzation). But is it? Under the TALF, the government provides up to 92 per cent of the funding for investors willing to buy assets backed by auto, credit card, or student loans. In other words, the Fed is putting the taxpayer on the hook for another trillion dollars (without congressional authorization or oversight) to produce more of the same high-risk assets which investors still refuse to purchase two years after the two Bear Stearns hedge funds defaulted in July 2007. Fortunately, the TALF turned out to be another Fed boondoggle that fizzled on the launchpad. Taxpayers were lucky to dodge a bullet.
Bernanke's latest stealth-ripoff is called quantitative easing (QE) which is being touted as a way to increase consumer lending by building up banks reserves. In fact, it doesn't do that at all and Bernanke knows it. As an "expert" on the Great Depression, he knows that stuffing the banks with reserves was tried in the 1930s, but it did nothing. Nor will it today. Here's how economist James Galbraith explains it:
"The New Deal rebuilt America physically, providing a foundation from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving....
“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended..... the relaunching of private finance took twenty years, and the war besides.
“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around." ("No Return to Normal:Why the economic crisis, and its solution, are bigger than you think" James K. Galbraith, Washington Monthly)
Bernanke QE is a joke. He's just creating a diversion so he can shovel more money into insolvent banks, pump-up the stock markets, and recycle Treasuries. Otherwise why would Obama's Chief Economic Advisor, Lawrence Summers say this:
"In the current circumstances the case for fiscal stimulus... is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration." ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)
QE is monetary policy writ large and--by Summers’ own admission--it won't work. It won't reduce unemployment or spark a credit expansion. That's why total consumer spending is falling, retail sales are flat, and wages are beginning to tank. Everywhere businesses are trimming hours and cutting salaries. Bernanke's $1 trillion in excess bank reserves has had no material effect on lending, credit expansion or jobs. It's been a dead loss. Here's Damian Paletta of the Wall Street Journal:
"U.S. lenders saw loans fall by the largest amount since the government began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery.
Total loan balances fell by $210.4 billion, or 3 per cent, in the third quarter, the biggest decline since data collection began in 1984, according to a report released Tuesday by the Federal Deposit Insurance Corp. The FDIC also said its fund to backstop deposits fell into negative territory for just the second time in its history, pushed down by a wave of bank failures.
“The decline in total loans showed how banks remain reluctant to lend, despite the hundreds of billions of dollars the government has spent to prop up ailing banks and jump-start lending. The issue has taken on greater urgency with the U.S. unemployment rate hitting 10.2 per cent in October, even as the economy appears to be stabilizing.
“The total of commercial and industrial loans, a category that includes business loans, fell to $1.28 trillion at the end of September, from $1.36 trillion at the end of June. The outstanding total of construction loans, credit cards and mortgages also fell. ("Lending Declines as Bank Jitters Persist" Damian Paletta, Wall Street Journal)
Bernanke, Summers, Geithner and Obama have all misrepresented quantitative easing (QE) so they can improve the liquidity position of the banks without the public knowing what's going on. The fact is, the banks are not "capital constrained" by lack of reserves. Therefore, extra reserves won't lead to increased lending. Billy Blog clarifies how the banking system really works and how that relates to QE: "Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualization suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending. But this is a completely incorrect depiction of how banks operate. Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards.”
So, if bank lending is not constrained by lack of reserves, then what does QE actually do? Not much, apparently. All quantitative easing does is exchange one type of financial asset (long-term bonds) with another (reserve balances). "The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns." (Bill Mitchell) The net result of Bernanke's meddling is just this: Quantitative easing and the lending facilities have kept the price of financial assets artificially high, which has minimized financial sector deleveraging. (Financial sector debt is currently $16.4 trillion, nearly the same as it was a year ago. $16.3 trillion) In contrast, households have lost $13 trillion which has thrust the middle class into an ongoing depression. The soaring unemployment and viscous credit contraction are the result of the Fed's policies, not economics.
Tightening the Noose
The Fed is engaged in various covert-strategies to recapitalize the banking system. At the same time, Bernanke, Summers, Geithner, and Obama have stated repeatedly, that they're committed to slashing the long-term deficits. This means that they plan to reduce liquidity and push the economy back into recession so they can launch a surprise attack on Medicaid, Medicare, and Social Security.
Last Thursday, Bernanke announced that he will begin to tighten the noose as early as March 31 2010, when the Fed ends its $1.65 trillion purchases of agency debt, mortgage-backed securities, and US Treasuries. That's why stock market volatility has picked up since the Fed released its December 16 statement. Here's a clip:
"In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010,... These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral."
By April 1, 2010 the mortgage monetization program will be over; long-term interest rates will rise and housing prices will fall. When the Fed withdraws its support, liquidity will drain from the system, stocks will drop, and the economy will slide back into recession. Obama's second blast of fiscal stimulus--which is a mere $200 billion dollars --won't make a lick of difference.
The Obama administration and the Fed are on the same page. There will be no lifeline for the unemployed or the states. Those days are over. Now it's on to "starve the beast" and crush the middle class. Maestro Greenspan summed up the Fed's approach in a recent appearance on Meet the Press when he opined, "I think the Fed has done an extraordinary job and it's done a huge amount (to bolster employment). There's just so much monetary policy that the central bank can do. And I think they've gone to their limits, at this particular stage."
Indeed. Brace yourself for a hard landing.
Bernanke was also a staunch supporter of the low interest rate madness which led to the crash. Greenspan never believed that it was the Fed's job to deal with credit bubbles. "The free market will fix itself", he thought. He was the nation's chief regulator, but adamantly opposed to the idea of government regulation. It makes no sense at all. Here' a quote from Greenspan in 2002: “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulation, none meaningfully worked.” Bernanke is no different than Greenspan; they're two peas in the same pod. Everyone could see what the Fed-duo was up to
Now Bernanke is expected to carry on where his former boss left off, using all the tools at his disposal to offset the atrophy that's endemic to mature capitalist economies. "Stagnation", that the real enemy, which is why Bernanke supports this new galaxy of oddball debt-instruments and bizarre-sounding derivatives; because it creates a world where surplus capital can generate windfall profits despite chronic overcapacity. It's financial nirvana for the parasite class; the relentless transfer of wealth from workers to speculators via paper assets. Marx figured it out. And, now, so has Bernanke.
Bernanke is just following Greenspan's basic blueprint. It's nothing new. Unregulated derivatives trading is just one of the many scams he's thrown his weight behind. The list goes on and on; one swindle after another. Just look what happened when Lehman Bros blew up. Just weeks earlier, Bernanke and Co. had worked out a deal with JP Morgan to buy Bear Stearns with the proviso that the government would guarantee $40 billion in Bear's toxic assets. Fair enough. The whole transaction went by without a hitch. Then Lehman starts teetering, and Bernanke and Treasury Secretary Henry Paulson decide to do a complete policy-flip and let Lehman default. Their reversal stunned the markets and triggered a frenzied run on the money markets that nearly collapsed the global financial system.
Why?It was because Bernanke knew that the big banks were buried under a mountain of bad assets and needed emergency help from Congress. The faux-Lehman crisis was cooked up to extort the $700 billion from taxpayers via the TARP fund. Bernanke and Paulson pulled off the biggest heist in history and there's never even been an investigation.
Bernanke was in the wheelhouse when the subprime bubble blew and carved $13 trillion from aggregate household wealth. Consumers are now so deeply underwater that personal credit is shrinking for the first time in 50 years while unemployment is hovering at 10 per cent. If Bernanke isn't responsible, than who is?
Take a look at Bernanke's so-called lending facilities. They are all designed with one object in mind, to support financial markets at the expense of workers. The media praises the Troubled asset-backed security lending facility (TALF) as a way to restart the wholesale credit system (securitzation). But is it? Under the TALF, the government provides up to 92 per cent of the funding for investors willing to buy assets backed by auto, credit card, or student loans. In other words, the Fed is putting the taxpayer on the hook for another trillion dollars (without congressional authorization or oversight) to produce more of the same high-risk assets which investors still refuse to purchase two years after the two Bear Stearns hedge funds defaulted in July 2007. Fortunately, the TALF turned out to be another Fed boondoggle that fizzled on the launchpad. Taxpayers were lucky to dodge a bullet.
Bernanke's latest stealth-ripoff is called quantitative easing (QE) which is being touted as a way to increase consumer lending by building up banks reserves. In fact, it doesn't do that at all and Bernanke knows it. As an "expert" on the Great Depression, he knows that stuffing the banks with reserves was tried in the 1930s, but it did nothing. Nor will it today. Here's how economist James Galbraith explains it:
"The New Deal rebuilt America physically, providing a foundation from which the mobilization of World War II could be launched. But it also saved the country politically and morally, providing jobs, hope, and confidence that in the end democracy was worth preserving....
“What did not recover, under Roosevelt, was the private banking system. Borrowing and lending—mortgages and home construction—contributed far less to the growth of output in the 1930s and ’40s than they had in the 1920s or would come to do after the war. If they had savings at all, people stayed in Treasuries, and despite huge deficits interest rates for federal debt remained near zero. The liquidity trap wasn’t overcome until the war ended..... the relaunching of private finance took twenty years, and the war besides.
“A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around." ("No Return to Normal:Why the economic crisis, and its solution, are bigger than you think" James K. Galbraith, Washington Monthly)
Bernanke QE is a joke. He's just creating a diversion so he can shovel more money into insolvent banks, pump-up the stock markets, and recycle Treasuries. Otherwise why would Obama's Chief Economic Advisor, Lawrence Summers say this:
"In the current circumstances the case for fiscal stimulus... is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration." ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)
QE is monetary policy writ large and--by Summers’ own admission--it won't work. It won't reduce unemployment or spark a credit expansion. That's why total consumer spending is falling, retail sales are flat, and wages are beginning to tank. Everywhere businesses are trimming hours and cutting salaries. Bernanke's $1 trillion in excess bank reserves has had no material effect on lending, credit expansion or jobs. It's been a dead loss. Here's Damian Paletta of the Wall Street Journal:
"U.S. lenders saw loans fall by the largest amount since the government began tracking such data, suggesting that nervousness among banks continues to hamper economic recovery.
Total loan balances fell by $210.4 billion, or 3 per cent, in the third quarter, the biggest decline since data collection began in 1984, according to a report released Tuesday by the Federal Deposit Insurance Corp. The FDIC also said its fund to backstop deposits fell into negative territory for just the second time in its history, pushed down by a wave of bank failures.
“The decline in total loans showed how banks remain reluctant to lend, despite the hundreds of billions of dollars the government has spent to prop up ailing banks and jump-start lending. The issue has taken on greater urgency with the U.S. unemployment rate hitting 10.2 per cent in October, even as the economy appears to be stabilizing.
“The total of commercial and industrial loans, a category that includes business loans, fell to $1.28 trillion at the end of September, from $1.36 trillion at the end of June. The outstanding total of construction loans, credit cards and mortgages also fell. ("Lending Declines as Bank Jitters Persist" Damian Paletta, Wall Street Journal)
Bernanke, Summers, Geithner and Obama have all misrepresented quantitative easing (QE) so they can improve the liquidity position of the banks without the public knowing what's going on. The fact is, the banks are not "capital constrained" by lack of reserves. Therefore, extra reserves won't lead to increased lending. Billy Blog clarifies how the banking system really works and how that relates to QE: "Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualization suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending. But this is a completely incorrect depiction of how banks operate. Bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards.”
So, if bank lending is not constrained by lack of reserves, then what does QE actually do? Not much, apparently. All quantitative easing does is exchange one type of financial asset (long-term bonds) with another (reserve balances). "The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns." (Bill Mitchell) The net result of Bernanke's meddling is just this: Quantitative easing and the lending facilities have kept the price of financial assets artificially high, which has minimized financial sector deleveraging. (Financial sector debt is currently $16.4 trillion, nearly the same as it was a year ago. $16.3 trillion) In contrast, households have lost $13 trillion which has thrust the middle class into an ongoing depression. The soaring unemployment and viscous credit contraction are the result of the Fed's policies, not economics.
Tightening the Noose
The Fed is engaged in various covert-strategies to recapitalize the banking system. At the same time, Bernanke, Summers, Geithner, and Obama have stated repeatedly, that they're committed to slashing the long-term deficits. This means that they plan to reduce liquidity and push the economy back into recession so they can launch a surprise attack on Medicaid, Medicare, and Social Security.
Last Thursday, Bernanke announced that he will begin to tighten the noose as early as March 31 2010, when the Fed ends its $1.65 trillion purchases of agency debt, mortgage-backed securities, and US Treasuries. That's why stock market volatility has picked up since the Fed released its December 16 statement. Here's a clip:
"In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010,... These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral."
By April 1, 2010 the mortgage monetization program will be over; long-term interest rates will rise and housing prices will fall. When the Fed withdraws its support, liquidity will drain from the system, stocks will drop, and the economy will slide back into recession. Obama's second blast of fiscal stimulus--which is a mere $200 billion dollars --won't make a lick of difference.
The Obama administration and the Fed are on the same page. There will be no lifeline for the unemployed or the states. Those days are over. Now it's on to "starve the beast" and crush the middle class. Maestro Greenspan summed up the Fed's approach in a recent appearance on Meet the Press when he opined, "I think the Fed has done an extraordinary job and it's done a huge amount (to bolster employment). There's just so much monetary policy that the central bank can do. And I think they've gone to their limits, at this particular stage."
Indeed. Brace yourself for a hard landing.
Health care profiteers: A billion-dollar lobby
A study by the Center for Responsive Politics (CRP), Northwestern
University and the Chicago Tribune, published in the newspaper Sunday,
found that health care lobbyists have spent more than $396 million this
year to influence senators and congressmen engaged in passing the health
care restructuring legislation, and $862 million in 2008-2009 combined.
With the frenzy of lobbying in the last quarter of 2009, the two-year total will go well beyond $1 billion.
The drug industry alone has spent $199 million on lobbying in the first nine months of the year, which CRP said was the largest such amount ever spent by any industry on any issue. The drug lobby negotiated a deal with the White House in the spring to limit to $80 billion over ten years the amount that the drug companies would have to accept in discounts and rebates as their "contribution" to paying for the health care overhaul. Efforts by some Senate and House Democrats to impose greater costs on the industry, as much as $200 billion, have been beaten back with the support of the Obama administration.
The 338 health care corporations and associations hired at least 166 former staffers and 13 former members of the nine congressional leadership offices and five committees with a role in shaping health care legislation. Another 112 former staffers worked as lobbyists on health care legislation for non-health care companies.
The value of such lobbying was demonstrated in the case of one former staffer for the late Massachusetts Senator Ted Kennedy, a leading liberal and chairman of one of the key Senate committees. Donal Nexon went to work for the trade association representing small and mid-size manufacturers of medical devices, and was able to reduce a proposed $40 billion tax over ten years to one only half as large - a $20 billion saving that dwarfs the lobbying expense.
Top staffers and former congressmen can count on tripling or quadrupling their incomes when they leave Capitol Hill for positions with major lobbying groups.
According the figures assembled by the CRP researchers, former Democratic staffers led the way in cashing in on the health care legislation, including 14 former aides to House Majority Leader Steny Hoyer and 13 former aides to Senator Max Baucus, chairman of the Finance Committee, whose draft legislation is largely intact in the bill currently going through the Senate.
The biggest single employer of insider lobbyists is the Pharmaceutical Research and Manufacturers of America, or PhRMA, which employs at least 26 former congressional aides and members. The head of PhRMA is Billy Tauzin, a Louisiana Democratic congressman who became a Republican, shepherded the Bush administration's Medicare drug benefit through the House - a huge boondoggle for the drug companies - then retired to become the top drug industry lobbyist at an annual salary of $2.5 million.
These CRP figures actually understate substantially the total cash being expended to ensure that the overhaul is tailored to various corporate interests. Insurance company lobbying is not included, as the reports filed by these companies do not distinguish between lobbying on health insurance and lobbying on other insurance issues. Nor does the report consider spending by general business lobbies like the US Chamber of Commerce, the Business Roundtable, or individual corporations like Walmart.
The insurance industry is, next to the drug companies, the biggest spender on health care lobbying. Its bribes - thinly concealed as campaign contributions and "educational" expenses - have paid big dividends. The Senate bill will require at least 30 million Americans to buy health insurance, thereby becoming forced customers of the big insurers, while there will be no public option and no expansion of Medicare to compete with them.
The favorite senator of the health insurance lobby, Independent Democrat Joseph Lieberman of Connecticut, was not coincidentally the key player in ditching the public option, as he threatened to join the Republican filibuster and kill the overall legislation if the public option was not withdrawn.
Other reports give a glimpse of the vast flow of money from private corporations to Capitol Hill in the course of the health care "debate." GlaxoSmithKline spent $2.3 million in the first half of 2009, Novartis $1.8 million, MetLife $1.7 million, Allstate $2.4 million. The American Medical Association spent $8.2 million in the first half of the year.
There are a total of 3,300 registered health care lobbyists, approximately six for every senator and congressman. Throughout the year, this force was increased at the rate of three new lobbyists each day.
The beneficiaries of the health care slush fund include both the leading opponents of the current Senate bill - Republican John McCain leads with $546,000 and Senate Minority Leader Mitch McConnell follows with $425,000 - and the leading supporters, including Senator Baucus, with $413,000 in contributions. Baucus collected $3 million from health and insurance companies from 2003 to 2008, and his top contributors include Schering-Plough, New York Life, Amgen, Blue Cross and Blue Shield and the CEO of Merck.
The Washington Post described one summer meeting between Baucus and a group of health care lobbyists who included two of his former chiefs of staff: David Castagnetti, whose clients include PhRMA and America's Health Insurance Plans, and Jeffrey A. Forbes, who represents PhRMA, Amgen, Genentech, Merck and others. A third Baucus chief of staff, Jim Messina, is now deputy White House chief of staff.
With the frenzy of lobbying in the last quarter of 2009, the two-year total will go well beyond $1 billion.
The drug industry alone has spent $199 million on lobbying in the first nine months of the year, which CRP said was the largest such amount ever spent by any industry on any issue. The drug lobby negotiated a deal with the White House in the spring to limit to $80 billion over ten years the amount that the drug companies would have to accept in discounts and rebates as their "contribution" to paying for the health care overhaul. Efforts by some Senate and House Democrats to impose greater costs on the industry, as much as $200 billion, have been beaten back with the support of the Obama administration.
The 338 health care corporations and associations hired at least 166 former staffers and 13 former members of the nine congressional leadership offices and five committees with a role in shaping health care legislation. Another 112 former staffers worked as lobbyists on health care legislation for non-health care companies.
The value of such lobbying was demonstrated in the case of one former staffer for the late Massachusetts Senator Ted Kennedy, a leading liberal and chairman of one of the key Senate committees. Donal Nexon went to work for the trade association representing small and mid-size manufacturers of medical devices, and was able to reduce a proposed $40 billion tax over ten years to one only half as large - a $20 billion saving that dwarfs the lobbying expense.
Top staffers and former congressmen can count on tripling or quadrupling their incomes when they leave Capitol Hill for positions with major lobbying groups.
According the figures assembled by the CRP researchers, former Democratic staffers led the way in cashing in on the health care legislation, including 14 former aides to House Majority Leader Steny Hoyer and 13 former aides to Senator Max Baucus, chairman of the Finance Committee, whose draft legislation is largely intact in the bill currently going through the Senate.
The biggest single employer of insider lobbyists is the Pharmaceutical Research and Manufacturers of America, or PhRMA, which employs at least 26 former congressional aides and members. The head of PhRMA is Billy Tauzin, a Louisiana Democratic congressman who became a Republican, shepherded the Bush administration's Medicare drug benefit through the House - a huge boondoggle for the drug companies - then retired to become the top drug industry lobbyist at an annual salary of $2.5 million.
These CRP figures actually understate substantially the total cash being expended to ensure that the overhaul is tailored to various corporate interests. Insurance company lobbying is not included, as the reports filed by these companies do not distinguish between lobbying on health insurance and lobbying on other insurance issues. Nor does the report consider spending by general business lobbies like the US Chamber of Commerce, the Business Roundtable, or individual corporations like Walmart.
The insurance industry is, next to the drug companies, the biggest spender on health care lobbying. Its bribes - thinly concealed as campaign contributions and "educational" expenses - have paid big dividends. The Senate bill will require at least 30 million Americans to buy health insurance, thereby becoming forced customers of the big insurers, while there will be no public option and no expansion of Medicare to compete with them.
The favorite senator of the health insurance lobby, Independent Democrat Joseph Lieberman of Connecticut, was not coincidentally the key player in ditching the public option, as he threatened to join the Republican filibuster and kill the overall legislation if the public option was not withdrawn.
Other reports give a glimpse of the vast flow of money from private corporations to Capitol Hill in the course of the health care "debate." GlaxoSmithKline spent $2.3 million in the first half of 2009, Novartis $1.8 million, MetLife $1.7 million, Allstate $2.4 million. The American Medical Association spent $8.2 million in the first half of the year.
There are a total of 3,300 registered health care lobbyists, approximately six for every senator and congressman. Throughout the year, this force was increased at the rate of three new lobbyists each day.
The beneficiaries of the health care slush fund include both the leading opponents of the current Senate bill - Republican John McCain leads with $546,000 and Senate Minority Leader Mitch McConnell follows with $425,000 - and the leading supporters, including Senator Baucus, with $413,000 in contributions. Baucus collected $3 million from health and insurance companies from 2003 to 2008, and his top contributors include Schering-Plough, New York Life, Amgen, Blue Cross and Blue Shield and the CEO of Merck.
The Washington Post described one summer meeting between Baucus and a group of health care lobbyists who included two of his former chiefs of staff: David Castagnetti, whose clients include PhRMA and America's Health Insurance Plans, and Jeffrey A. Forbes, who represents PhRMA, Amgen, Genentech, Merck and others. A third Baucus chief of staff, Jim Messina, is now deputy White House chief of staff.
Hedge fund manager makes $2.5 billion betting on US bailout of Wall Street
David Tepper, manager of the hedge fund Appaloosa Management, is set to
pocket more than $2.5 billion this year after successfully gambling that
the Obama administration would provide unlimited public funds to bail
out the major banks. According to an article in Monday's Wall Street
Journal, Tepper's firm, which specializes in buying up "distressed"
shares and assets, has already racked up $7 billion in profits this
year.
In the early stages of the bank bailout, the Journal reports, investors were fearful that the government might ultimately nationalize major banks, which would have wiped out shareholders. These fears, combined with the virtual collapse of credit markets and huge losses reported by some of the biggest Wall Street firms, led to a sharp fall in bank stocks.
But, according to the Journal, when the Obama administration announced its Financial Stability Plan in early February of this year, including a virtually open-ended commitment to inject capital into the banks, Tepper interpreted the plan as a signal that the government would do whatever was necessary to cover the bad debts of the financial elite. He took for good coin repeated statements by top administration officials that they had no intention of taking control of teetering Wall Street firms.
Thus, when most investors were dumping bank stocks, driving their prices to bargain basement levels, Tepper directed his traders to begin buying bank stocks and debt. By the end of the following month, the flood of cash, cheap loans and other government subsidies to the banks began to lift bank stock prices, fuelling a run-up on the markets that has seen the Dow rise by more than 50 percent since its lows in early March.
Tepper bet that the Obama administration would respond to the financial crash with an unprecedented plundering of the national treasury, and he bet right.
On February 20, for example, Bank of America stock hit a low of $2.53. Citigroup had fallen to 97 cents by March 5. Tepper responded by buying huge blocks of shares and cashing in when Citigroup shares tripled and Bank of America stock rose five-fold from its low point.
Tepper, the Journal reports, has generally kept his hedge fund profitable - it has averaged 30 percent yearly returns - by betting that markets would recover after major crises. During the Asian financial crisis of 1997, he bought Russian debt and Korean stocks, both of which staged major rebounds. He made a killing when commodity purchases he made in 2007 took off in value amid a general commodity price boom in 2008. "His biggest scores over the years have come from buying large chunks of out-of-favor investments," the Journal notes.
However, his fund lost more than $1 billion in big bets in 2008, and its earnings fell 25 percent, worse than the industry's average decline of 19 percent. His fortunes turned in 2009 when he bet everything on the government's total subordination to Wall Street.
In many ways, Tepper's success is emblematic of the social layers that have benefitted from the Obama administration's financial policies, even as millions of workers have lost their jobs, seen their wages and benefits cut, lost their homes and been thrown into poverty.
This is how the Journal describes Mr. Tepper:
"The husky, bespectacled trader laughs easily, but employees say he can quickly turn on them when he's angry. Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues."
The newspaper reports that Tepper has turned his attention to a new investment target, purchasing about $2 billion in "beaten-down" commercial mortgage-backed securities. He is betting that the government will make sure that the billions in such toxic assets on the books of the major banks will rebound, allowing the banks to eventually sell them off at top dollar.
To put Tepper's windfall in perspective, his $2.5 billion in personal earnings this year is larger than the $2.4 billion allocated by the federal government for homeless assistance programs. It is equivalent to the medium household income of 50,000 Americans. His hedge fund's $7 billion profit is greater than the gross domestic product of 57 of 190 countries listed in the 2008 CIA World Fact Book.
Tepper's payout comes alongside an expected $140 billion in compensation this year for employees of the biggest Wall Street firms, according to estimates by the Wall Street Journal. The top 50 hedge fund managers took in a combined sum of $29 billion last year.
Hedgefund.net, writing on Tepper's windfall, commented that "David Tepper pulled a John Paulson," referring to the hedge fund manager who took home $3.7 in 2008 after betting on the collapse of the subprime mortgage market.
Paulson made billions betting on the collapse of the market, Tepper bet on its bailout. This social layer made money on the way down, and even more on the way up. That these people should receive such immense sums for activity that produces no real value is an indictment of capitalism. Tepper's bonanza demonstrates further that the entire economic policy of the Obama administration has been crafted to preserve the wealth of this parasitical elite.
In the early stages of the bank bailout, the Journal reports, investors were fearful that the government might ultimately nationalize major banks, which would have wiped out shareholders. These fears, combined with the virtual collapse of credit markets and huge losses reported by some of the biggest Wall Street firms, led to a sharp fall in bank stocks.
But, according to the Journal, when the Obama administration announced its Financial Stability Plan in early February of this year, including a virtually open-ended commitment to inject capital into the banks, Tepper interpreted the plan as a signal that the government would do whatever was necessary to cover the bad debts of the financial elite. He took for good coin repeated statements by top administration officials that they had no intention of taking control of teetering Wall Street firms.
Thus, when most investors were dumping bank stocks, driving their prices to bargain basement levels, Tepper directed his traders to begin buying bank stocks and debt. By the end of the following month, the flood of cash, cheap loans and other government subsidies to the banks began to lift bank stock prices, fuelling a run-up on the markets that has seen the Dow rise by more than 50 percent since its lows in early March.
Tepper bet that the Obama administration would respond to the financial crash with an unprecedented plundering of the national treasury, and he bet right.
On February 20, for example, Bank of America stock hit a low of $2.53. Citigroup had fallen to 97 cents by March 5. Tepper responded by buying huge blocks of shares and cashing in when Citigroup shares tripled and Bank of America stock rose five-fold from its low point.
Tepper, the Journal reports, has generally kept his hedge fund profitable - it has averaged 30 percent yearly returns - by betting that markets would recover after major crises. During the Asian financial crisis of 1997, he bought Russian debt and Korean stocks, both of which staged major rebounds. He made a killing when commodity purchases he made in 2007 took off in value amid a general commodity price boom in 2008. "His biggest scores over the years have come from buying large chunks of out-of-favor investments," the Journal notes.
However, his fund lost more than $1 billion in big bets in 2008, and its earnings fell 25 percent, worse than the industry's average decline of 19 percent. His fortunes turned in 2009 when he bet everything on the government's total subordination to Wall Street.
In many ways, Tepper's success is emblematic of the social layers that have benefitted from the Obama administration's financial policies, even as millions of workers have lost their jobs, seen their wages and benefits cut, lost their homes and been thrown into poverty.
This is how the Journal describes Mr. Tepper:
"The husky, bespectacled trader laughs easily, but employees say he can quickly turn on them when he's angry. Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues."
The newspaper reports that Tepper has turned his attention to a new investment target, purchasing about $2 billion in "beaten-down" commercial mortgage-backed securities. He is betting that the government will make sure that the billions in such toxic assets on the books of the major banks will rebound, allowing the banks to eventually sell them off at top dollar.
To put Tepper's windfall in perspective, his $2.5 billion in personal earnings this year is larger than the $2.4 billion allocated by the federal government for homeless assistance programs. It is equivalent to the medium household income of 50,000 Americans. His hedge fund's $7 billion profit is greater than the gross domestic product of 57 of 190 countries listed in the 2008 CIA World Fact Book.
Tepper's payout comes alongside an expected $140 billion in compensation this year for employees of the biggest Wall Street firms, according to estimates by the Wall Street Journal. The top 50 hedge fund managers took in a combined sum of $29 billion last year.
Hedgefund.net, writing on Tepper's windfall, commented that "David Tepper pulled a John Paulson," referring to the hedge fund manager who took home $3.7 in 2008 after betting on the collapse of the subprime mortgage market.
Paulson made billions betting on the collapse of the market, Tepper bet on its bailout. This social layer made money on the way down, and even more on the way up. That these people should receive such immense sums for activity that produces no real value is an indictment of capitalism. Tepper's bonanza demonstrates further that the entire economic policy of the Obama administration has been crafted to preserve the wealth of this parasitical elite.
AN ECONOMIC WONDERLAND: DERIVATIVE CASTLES BUILT ON SAND
"Virtually every aspect of conventional economic theory is
intellectually unsound; virtually every economic policy recommendation
is just as likely to do harm as it is to lead to the general good. Far
from holding the intellectual high ground, economics rests on
foundations of quicksand. If economics were truly a science, then the
dominant school of thought in economics would long ago have disappeared
from view (Steve Keen, 2001, p. 4)."
In the full flood of the current credit/financial crisis there appears to be no shortage of people and organisations to blame short-sellers in the market, profligate home-owners in the USA who signed up for mortgages that they could not afford, Fannie Mae, Freddy Mac, the executives of investment banks and their million-dollar bonuses, hedge funds, the Fed, etc. Whilst the desire to find a culpable victim is perfectly understandable, it is also obvious that there is no "silver bullet" causal mechanism for this rapidly developing systemic failure. This article looks at the political and cultural determinants of the current crisis, using three intertwined themes:
(1) the development of financial derivatives themselves;
(2) the subversion of risk analysis by globalising capitalism; and
(3) the co-opting of the concept and analysis of fair value by the big accountancy firms and banks, through which financial derivatives were valued.
It will be the suggestion of this article that the development of an enculturated, fundamentalist, market-orientated economic discourse since the 1970s has acted as a stalking-horse for the development of new, powerful, unrestricted and unregulated markets in the financial services sector, a stalking-horse which is by its very character anti-democratic. Thus far nothing particularly new except that, with the development of financial derivatives and CDOs, such is the power of this supremacist ideology that a massive global market has developed in products which are essentially imaginary.
Whether we're talking about democracy underpinned by law or constitutional framework, the liberal democracies of Western Europe or the constitutional democracy of the USA, democracies work on the basis of the refreshing and realistic precept of the inevitability of human frailty all power corrupts and democracy is the politics-made-flesh of that acceptance. There can be no end-state to democracy, it is and will always be a process undergoing continual fracture, revision and change. To paraphrase the quote about art often attributed to Mussorgsky, any given form of democracy is not an end in itself, but a means of addressing humanity; it is a process whose development is characterised by endless subversion, thwarted and side-stepped by constant attempts from within and without to turn its frail authority into forms of power to be used against it.
Democracy by its very nature both hosts and is vulnerable to a limitless range of counter-narratives, ranging from tiny political movements to global meta-narratives which, in being given freedom to thrive, may at any time metastasise into the illness that kills the host. Ideological fundamentalists of whatever kind (Christian, Islamic, nationalist/populist or left/populist, for instance) whose core beliefs may allow them to use democratic mechanisms to achieve power within a given democratic type, may then use those same mechanisms to restrict or even close down democratic practices as being inimitable with contradictory core beliefs.
Not all core belief systems have arisen under democracies, of course, and many of them predate the earliest democratic ideas by thousands of years, but Western liberal/constitutional democracies are presently threatened by one of the youngest. The Trojan horse of theoretical market fundamentalism that has been made flesh since the 1970s has carried within it a market fantasist belief, the presumption over and above the theoretical dominance of market forces that a market exists simply because we will it to be so and that its workings will be self-correcting and tend towards healthy equilibria, under no matter what circumstances.
The theoretical dictates of market fundamentalism have long been more dangerous than any other core discourse for different reasons. Amongst the most important of these are because it has become a core belief directly contradicting the central precept of democracy discussed above it represents the idea that the unheeding self-interest of billions (in reality, of course, no more than a few thousand elite worldwide) acting together will lead to a universally prosperous and orderly society. In the late-twentieth and early twenty-first century mutation of the Classical economic school of the late nineteenth century, self-interest and conflict of interest have been inverted into virtues and internalised as good for the health of the body politic human fallibility and the tendency towards corruption become in this reading essential motors for a prosperous society.
It might seem a long step from a discussion of democracy and markets towards the present credit crunch (plus housing market collapse, plus banking collapse) and yet the connecting thread is firm and direct. Market fundamentalism contains a further anti-democratic core belief, which is its claim to scientific status and from that an objective, "truth-giving' capacity; to quote the then-Chief Economist to the World Bank, Larry Summers, at an IMF summit in Bangkok in 1991: "The laws of economics, it's often forgotten, are like the laws of engineering. There's only one set of laws, and they work everywhere". There is no alternative under this reading of the laws of economics, and market fantasy has become one symptom of this delusional illness that the body democratic has become host to.
The current theological mutation of market fundamentalism is not alone in this, however; there are (for instance) significant numbers of Muslims, Jews and Christians who believe that their core religious beliefs are quite literally true and the only valid explanation for the world in which we live; these core essentialists from each religion would advance the argument that since they are the unique possessors of an incontrovertible truth, ideally all countries and all people should live under the rules dictated by that core discourse. Since the turf fights between Islamic and Christian belief systems from the seventh century onwards, few core belief systems have come as close to being accepted on a global basis as market fundamentalism has after the collapse of the Socialist Bloc in 1989. Market fundamentalism comes close to being the first universal modern religion; a core belief system that is still just a belief system, but which has overcome the traditional limitations of religion by asserting the coloration of scientific inevitability from which springs the market fantasist mindset.
Necrotising marketitis
"Monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background" for example as reflected in low and stable inflation [. . .] I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again (Bernanke, 2002).
Whilst the Socialist Bloc existed, the governments of liberal Western democracies needed to be politically restrained in their approach to market freedom; the threat of an alternative belief-system existed (however imperfect) and the governments of the Western Bloc had to exert caution over permissible amounts of volatility and instability (the central concern was of course the mass unemployment such volatility might incur and the resulting social/civil unrest that might accompany it, a more direct challenge to the system).
Financial derivatives began a new era with the deregulation of foreign currency exchanges in the 1970s and the introduction of standardised options in 1973. By the 1980s, at the same time that it no longer seemed probable that Western liberal democracy would succumb to the global advance of Soviet Socialism, increasing confidence in the supremacy of globalising capitalism overthrew any perceived need for regulatory caution, especially during monetarist regimes of Margaret Thatcher in the UK and Ronald Reagan in the USA. The terminal decline of the Socialist Bloc came accompanied in globalising capitalism by an increasing boldness in the development of market instruments. Two of the more important amongst these, the packaging of US mortgage bonds from the 1980s onwards to create collateralised debt obligations and the selling of default protection as credit default swaps from the 1990s (after the fall of the USSR) became two key actors in the current crisis.
Accompanied by massive and sustained pressure towards the deregulation of all markets and stock exchanges in particular, what had been originally created as relatively crude instruments for hedging loan exposure developed rapidly into far more sophisticated instruments to feed the voracious demand for capital fuelling the non-inflationary continuous expansion (NICE) era of the 1990s. By the turn of the century credit derivatives had multiplied so rapidly in type and extent and capital capture that they constituted a market of themselves, and the fall of Enron and what that had to say about the risk associated with credit derivatives was effectively dismissed by markets, institutions, academics and professionals alike. As an editorial piece in Risk magazine implied, shortly after the fall of Enron:
"Credit derivatives proved to be resilient [. . .]. The episode, and the fact that the exercise of the Enron credit default swap contracts was done in an orderly manner without controversy, showed that the market had come of age."
Derivatives had been weighed in the balance and not found wanting; added to which of course the amounts of capital now invested in them plus the maturity of what had become a market of central importance meant that, barring a disaster like the current one, they could not be allowed to be perceived as having failed, as having an essential flaw.
This "coming of age" of the market was accompanied by an acceleration of the amount of money invested in this market. As we now know, whereas banks in particular were important participants in this market from the beginning, hedge funds became increasingly involved as they too became important players in global capital markets. Financial derivatives became somehow synonymous with the buzzword "globalisation" exotic, powerful and barely understood even by the most unquestioning fans. So representative had they become as part of the market fantasist discourse that they were accepted almost universally (with a few notable exceptions such as George Soros and Warren Buffett) as what they have become fatal to the securitisation of risk. Derivatives were institutionally accepted as a marker of good health to the extent that (with exceptional irony) by 2004 the credit default swap (CDS) market was accepted as an accurate measure of credit quality.
What had also become clear, however, was that no one state had the capacity to understand, much less supervise, the CDS market, whether it be through the more formal regulatory approach of the USA or the "light hand", self-regulatory approach of the UK proprietors, respectively, of the most important financial centres in the world, i.e. the New York and London stock exchanges. In the market fantasist view, however, not only was this not seen as a disadvantage but, given the apparently "perfect" functioning of derivative markets this was one more proof of the superiority of market over state and over state-channelled democratic oversight the markets were themselves become democracy in action.
At the same time that the international financial institutions (World Bank, IMF etc.) were demanding more transparency, openness and accountability from the governments of countries in development, the globalising financial services sector was lauding the development of markets of increasing obscurity and impenetrability, over which regulation and oversight were all but impossible. The full scale and surreal nature of this market and its critical importance become apparent only when one looks at Bank of International Settlements estimates for the total monitored trade in derivatives some $680,290,700,000,000 for 2007-2008.
Continuing faith in market fundamentalism, however, means that in all of the current talk of "bail-outs" and "rescue packages" the concentration of governments around the world has been overwhelmingly on easing the short-term liquidity crisis, which is to say examining the symptoms of the illness whilst doing little to examine the long-term causes. It might (for instance) be thought that the massive state intervention which the crisis has occasioned, the nationalisation of banks and the loans of taxpayers' money to failing institutions should be accompanied by task forces not only to investigate the exposure of each and every recipient of public money to the "toxic" instruments, but in working out how to defuse the global market in derivatives, how to regulate such instruments effectively and how to licence very strictly their future development. Despite lip-service being paid to regulation of these kinds, the emphasis is strongly on bail-outs and interest rate cuts "recapitalisation" is the order of the day. The bankruptcy of this particular way of thinking, however, is obvious in phenomena such as the gap between the LIBOR inter-bank lending rate and central bank interest rates banks know very well what they've been up to and they also now know that they can't trust the value of their assets.
They f * * * you up your markets do, but they were built to, just by you . . .
"So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives (CDOs of CDOs of CDOs and the entire other alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing (Roubini, 2007)".
Market fundamentalism purports to be a moral analysis of human activity, and as a consequence of the necessity to justify the functioning of capitalism, a variety of ethical arguments are attached to both markets and capitalism:
"Capitalism is the only system that fully allows and encourages the virtues necessary for human life. It is the only system that safeguards the freedom of the independent mind and recognizes the sanctity of the individual (Tracinski, 2002)."
The signalling of virtuous market functioning is transmitted by price structures decided on through the use of relevant information and the analysis of risk, with the concomitant effect that this has on changes in market prices over time. The precept of risk is another fundamental pillar in the moral basis of market fundamentalism, the idea that an entrepreneur undertakes to risk capital through analysing the market for a product, setting the price through use of available information on both market and product, and accepting the risk of losing capital that failure to get your calculations right may bring it is not an exaggeration to say that the taking of virtuous risk by the entrepreneur justifies by itself the profit-making underlying capitalism in this reading.
However, the entire purpose of many derivatives (and the CDS in particular) has been to separate risk from product. Risk analysis, the commodification of and the trade in risk are specifically designed to factor out this virtuous uncertainty that justifies profit:
"They mass manufacture moral hazard. They remove the only immutable incentive to succeed market discipline and business failure. They undermine the very fundaments of capitalism: prices as signals, transmission channels, risk and reward, opportunity cost (Vaknin, 2005)."
The development of financial derivatives throughout the period since the 1970s which have evolved to reduce risks to the minimum, the continued failure and bail-out of national and regional banking systems (Mexico, Brazil, Asia, Turkey) plus unpunished failures (Russia (several times), Argentina, China, Nigeria, Thailand) notwithstanding market fantasist belief in moral hazard must continue because it acts as an essential theological support for market fundamentalism and its corollary, market discipline. For market fantasists and those tending towards the left/social democratic section of the political spectrum alike, the sight of US, European and UK governments effectively nationalising major actors in their banking sector during the ongoing credit crisis heralds nothing less than the "end of capitalism".
Financial derivatives have developed since the 1970s, not merely as a counter to the risk-based functioning of capitalism and themselves weapons of mass moral hazard, but in virtual defiance of all precepts of risk analysis, if by risk analysis we understand a process that uses the systematic analysis of available information in identifying hazards. Using obscure equations to detach the element of risk on bundles of sub-prime mortgages so that they can be repackaged as products with an excellent credit rating, after all, is effectively reversing that process taking a known product with a probabilistically high risk quotient and then obscuring that which is known about it.
CDOs using subprime packages, after all, have the effect of making it impossible to determine the probability and frequency of mortgage default by mortgagee and the possessing bank alike, making it impossible to determine the severity of the likely consequences of that risk and thereby neutralising the two main determinants of which risk itself is a function. In an inversion of the separation of risk and uncertainty introduced by Frank Knight's (1921) pioneering work on risk analysis, "Risk, Uncertainty and Profit", CDOs internalise uncertainty as something highly profitable a process which could only work (with the benefit of hindsight) under special, "irrationally exuberant' market conditions such as those underwritten by the housing and consumer bubble of the mid-1990s onwards.
Quis custodiet ipsos custodes?
"There are ominous long-term implications in the accountants' slide to marginalization. Balance sheets loaded with toxic assets that are "marked-to-whatever" will suffer for credibility under the noses of skeptical investors, who know full well that the pile of manure is still fermenting somewhere (Peterson, 2008)."
Concealed by the market-fundamentalist beliefs discussed above there is another interesting and powerful socio-political theme of really-existing globalization. This is the effective development over the last three decades of a supra-politics of hyper-accountancy, the massive increase in growth and concentration of power in the accountancy sector and the extension of the involvement of the big four accountancy firms (PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG) in every area of nation-state activity, as well as those of international and multi-national quasi-governmental institutions. The concentration of power in the big four firms of the accountancy sector has given those firms shadow-state powers in vital areas of the business of the nation-state, by becoming at the same time national and international advisors on privatisation of state functions, prime engines for the carrying-out of that privatisation and then auditors of the effectiveness of that privatisation in the UK and the USA. In addition, there has been a substantial "revolving door" for important political and governmental actors between employment and executive/non-executive positions within the big accountancy firms and employment in public office or government-contracted consultancies.
Historically, the series of mergers that increased the power of the big accountancy firms in the last two decades of the twentieth century came accompanied by two further phenomena that at once increased conflicts of interest whilst at the same time pushing the firms to ignore them, in the search for audit clients and profits. These two phenomena were, firstly, that audit clients became increasingly sophisticated purchasers of accountancy services and thus shopped around more for the best deal; and secondly, because of the flexibility in the interpretation of accounting standards, audit clients increasingly looked for accounting firms that would give interpretations as close as possible to those desired by the board, so-called "opinion shopping", so that the financial statements of the firm resembled as closely as possible the picture of the firm that the board wished to present.
Both of these two factors increased pressures to lower prices and diminish profit margins and thus increased the tendency towards mergers, to take advantage of the economies of scale that such mergers might bring. At the same time, the increasingly unhealthy nature of the auditor/client relationship was further exacerbated by the increase in numbers of accountants leaving their previous employer and taking up posts in the firms that they had previously been auditing (for instance the relationship between Arthur Andersen and Enron). One other logical consequence of the shrinkage in profit margins for auditing was the diversification of the big accountancy firms into (particularly) management consultancy, in order to pursue non-audit profitability.
Whilst this may have been logical, it of course represented an even starker conflict of interest; providing management services to a firm for which one also had responsibility for auditing was a direct conflict and yet the practice grew and was subjected to very little effective regulation. As a direct result of the increasing influence of the big firms over accountancy institutions, as well as increases in direct political influence in the US and UK governments, initiatives to regulate auditor/client relationships by bodies such as the Auditing Practices Board in the UK and the Securities and Exchange Commission in the USA were stillborn, whilst the big accountancy firms continued to insist that if no direct evidence of conflict of interest could be produced, then none existed.
Auditors of course became involved in the trade in derivatives through the auditing service which they provided to financial services and banking institutions, only here the problems and conflicts of interest were worse. Firms were being paid to audit banks/financial services firms to whom they were also contracted, in order to "properly audit" capital, cash flow and assets of the bank/firm, to asses the "fair value" for existing and new derivative products, a value which was arrived at by using selected information from and modelled by methods provided by the firm itself effectively a perfect storm of interest conflicts. As discussed above, however, derivatives have increasingly been constructed to detach them from the inherent risk of the original product and the auditors had little knowledge of the market into which they were sold (where markets actually existed), so as to make the concept of fair value increasingly imaginary yet it became an increasingly important factor in marketing these surreal products.
In general terms auditing services provided by firms of accountants have been consistently promoted as a technology for the management of risk, whereas the reality of the ways in which auditing has developed in the last three decades of the twentieth century mean that auditing is in increasing danger of becoming that thing of which it purports to be the cure, i.e. a creator rather than a manager of risk. As Ernst & Young themselves put it:
". . . mathematically modelled fair values based on management predictions are not fair values as that term is generally understood, and their use raises many questions about the reliability and understandability of the information (Ernst & Young, 2005)"
By 2008, however, during the first financial crisis to occur under a predominantly fair value regime, opinions seemed to have changed. PricewaterhouseCoopers for instance still believes that: "Fair value measurement does not create volatility in the financial statements, any more than a pipeline creates what flows through it. It captures and reports current market values".
According to PWC the financial statement by the auditor is an objective and neutral analysis of the current state of affairs; there has been no pressure on the auditor to comply with board requirements, there is no close and mutually beneficial relationship between auditor and client, and the information provided by the firm (or the model used) is as fair and objective as can be managed.
Despite the massive problems that financial derivatives have already caused and (as related above) the sheer volume of those still being traded, the big four accountancy firms continue to defend fair value calculations as being the best way to assess the value of such derivatives. Irrespective of "financial statement volatility, reporting the impact of risks and the judgements required to develop and implement fair value measures" and "the impact of fair value on regulatory measures of the capital adequacy of financial institutions" (PricewaterhouseCoopers, 2008, p. 9), "fair value yields a relevant measure for most financial instruments". The big accountancy firms quite rightly point out that there were few complaints from financial services firms and investment banks concerning fair value when the markets were forging ahead; the complaints (akin to those about short selling) have all occurred since the roll-out of the sub-prime initiated financial crisis which, given what is now known about the way that CDOs have been put together, is not really relevant to a consideration of whether the ways by which fair value is calculated can ever be sufficient for such surreal financial instruments.
Markets through the looking-glass
"The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." . . . "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality" (Suskind, 2004)."
"There is no use trying", said Alice. "One can't believe impossible things". "I dare say you haven't had much practice", said the Queen. "When I was your age, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast (Carroll, 1871)".
The causes behind the current crisis are multiple, complex and are the reflection of a rapid, massive and surreal change in the culture of market governance globally a leap from a "reality-based" market system into one based on imagination. The development of such an enormous market in financial derivatives has involved the global co-optation and active participation of states, multinational and international organisations, international financial institutions, professional organisations and institutional bodies, governments, civil services, political parties and political actors over a short period of time. The willing suspension of disbelief on the part of so many important actors globally meant that this crisis was (along with others like it in the future) inevitable. It is important to remember as well, however, that this was not just a willing suspension of disbelief concerning the market in derivatives, the market in bonds, the housing market and so on, if not a willing suspension of democratic control by which the governments of the North/West gave up control over their own governance to the random vagaries of shadow markets which guaranteed disaster.
It is also highly unlikely that an ideology of such penetration and extent (in which the self-interest of so many important global actors is involved in praising the market-emperor's new clothes) will learn too much from such a crisis. There are too many vested interests in patching up the old system and willing the derivatives market back into life, even though it is extremely likely that there are more problems than the infamous "sub-prime" derivatives lurking in these muddy waters. In the light of $680,290,700,000,000-worth of global trade in derivatives, $700 billion to "rescue" the perpetrators of this market looks not only feeble but pointless.
The recession in the rich North/West is going to be made longer and harder by a refusal of responsible parties to address fundamental flaws in the system, and pessimists such as Joseph Stiglitz and Nouriel Rabini are already predicting a prolonged, L-shaped recession of the type experienced by Japan from the 1990s up to 2005 (and now again). In the meantime, those same investment banks whose collapse occasioned sundry rescue packages use those rescue packages to pay themselves pre-collapse era bonuses, continuing to behave as if nothing had happened.
The consequences of fundamentalist market fantasies have come home to roost it should be for the last time but it almost certainly will not be. The development of market bubbles facilitated by the development of ever-more sophisticated financial instruments has spawned a growth industry and a global support network based on the power of belief, a belief that no government and no multi-national or supranational institution need depend on something as boring and irritating as mere democracy. Instead, politician, minister, president, accountant and CEO alike, all will take deep breaths, close their eyes and believe six impossible things before breakfast.
In the full flood of the current credit/financial crisis there appears to be no shortage of people and organisations to blame short-sellers in the market, profligate home-owners in the USA who signed up for mortgages that they could not afford, Fannie Mae, Freddy Mac, the executives of investment banks and their million-dollar bonuses, hedge funds, the Fed, etc. Whilst the desire to find a culpable victim is perfectly understandable, it is also obvious that there is no "silver bullet" causal mechanism for this rapidly developing systemic failure. This article looks at the political and cultural determinants of the current crisis, using three intertwined themes:
(1) the development of financial derivatives themselves;
(2) the subversion of risk analysis by globalising capitalism; and
(3) the co-opting of the concept and analysis of fair value by the big accountancy firms and banks, through which financial derivatives were valued.
It will be the suggestion of this article that the development of an enculturated, fundamentalist, market-orientated economic discourse since the 1970s has acted as a stalking-horse for the development of new, powerful, unrestricted and unregulated markets in the financial services sector, a stalking-horse which is by its very character anti-democratic. Thus far nothing particularly new except that, with the development of financial derivatives and CDOs, such is the power of this supremacist ideology that a massive global market has developed in products which are essentially imaginary.
Whether we're talking about democracy underpinned by law or constitutional framework, the liberal democracies of Western Europe or the constitutional democracy of the USA, democracies work on the basis of the refreshing and realistic precept of the inevitability of human frailty all power corrupts and democracy is the politics-made-flesh of that acceptance. There can be no end-state to democracy, it is and will always be a process undergoing continual fracture, revision and change. To paraphrase the quote about art often attributed to Mussorgsky, any given form of democracy is not an end in itself, but a means of addressing humanity; it is a process whose development is characterised by endless subversion, thwarted and side-stepped by constant attempts from within and without to turn its frail authority into forms of power to be used against it.
Democracy by its very nature both hosts and is vulnerable to a limitless range of counter-narratives, ranging from tiny political movements to global meta-narratives which, in being given freedom to thrive, may at any time metastasise into the illness that kills the host. Ideological fundamentalists of whatever kind (Christian, Islamic, nationalist/populist or left/populist, for instance) whose core beliefs may allow them to use democratic mechanisms to achieve power within a given democratic type, may then use those same mechanisms to restrict or even close down democratic practices as being inimitable with contradictory core beliefs.
Not all core belief systems have arisen under democracies, of course, and many of them predate the earliest democratic ideas by thousands of years, but Western liberal/constitutional democracies are presently threatened by one of the youngest. The Trojan horse of theoretical market fundamentalism that has been made flesh since the 1970s has carried within it a market fantasist belief, the presumption over and above the theoretical dominance of market forces that a market exists simply because we will it to be so and that its workings will be self-correcting and tend towards healthy equilibria, under no matter what circumstances.
The theoretical dictates of market fundamentalism have long been more dangerous than any other core discourse for different reasons. Amongst the most important of these are because it has become a core belief directly contradicting the central precept of democracy discussed above it represents the idea that the unheeding self-interest of billions (in reality, of course, no more than a few thousand elite worldwide) acting together will lead to a universally prosperous and orderly society. In the late-twentieth and early twenty-first century mutation of the Classical economic school of the late nineteenth century, self-interest and conflict of interest have been inverted into virtues and internalised as good for the health of the body politic human fallibility and the tendency towards corruption become in this reading essential motors for a prosperous society.
It might seem a long step from a discussion of democracy and markets towards the present credit crunch (plus housing market collapse, plus banking collapse) and yet the connecting thread is firm and direct. Market fundamentalism contains a further anti-democratic core belief, which is its claim to scientific status and from that an objective, "truth-giving' capacity; to quote the then-Chief Economist to the World Bank, Larry Summers, at an IMF summit in Bangkok in 1991: "The laws of economics, it's often forgotten, are like the laws of engineering. There's only one set of laws, and they work everywhere". There is no alternative under this reading of the laws of economics, and market fantasy has become one symptom of this delusional illness that the body democratic has become host to.
The current theological mutation of market fundamentalism is not alone in this, however; there are (for instance) significant numbers of Muslims, Jews and Christians who believe that their core religious beliefs are quite literally true and the only valid explanation for the world in which we live; these core essentialists from each religion would advance the argument that since they are the unique possessors of an incontrovertible truth, ideally all countries and all people should live under the rules dictated by that core discourse. Since the turf fights between Islamic and Christian belief systems from the seventh century onwards, few core belief systems have come as close to being accepted on a global basis as market fundamentalism has after the collapse of the Socialist Bloc in 1989. Market fundamentalism comes close to being the first universal modern religion; a core belief system that is still just a belief system, but which has overcome the traditional limitations of religion by asserting the coloration of scientific inevitability from which springs the market fantasist mindset.
Necrotising marketitis
"Monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background" for example as reflected in low and stable inflation [. . .] I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again (Bernanke, 2002).
Whilst the Socialist Bloc existed, the governments of liberal Western democracies needed to be politically restrained in their approach to market freedom; the threat of an alternative belief-system existed (however imperfect) and the governments of the Western Bloc had to exert caution over permissible amounts of volatility and instability (the central concern was of course the mass unemployment such volatility might incur and the resulting social/civil unrest that might accompany it, a more direct challenge to the system).
Financial derivatives began a new era with the deregulation of foreign currency exchanges in the 1970s and the introduction of standardised options in 1973. By the 1980s, at the same time that it no longer seemed probable that Western liberal democracy would succumb to the global advance of Soviet Socialism, increasing confidence in the supremacy of globalising capitalism overthrew any perceived need for regulatory caution, especially during monetarist regimes of Margaret Thatcher in the UK and Ronald Reagan in the USA. The terminal decline of the Socialist Bloc came accompanied in globalising capitalism by an increasing boldness in the development of market instruments. Two of the more important amongst these, the packaging of US mortgage bonds from the 1980s onwards to create collateralised debt obligations and the selling of default protection as credit default swaps from the 1990s (after the fall of the USSR) became two key actors in the current crisis.
Accompanied by massive and sustained pressure towards the deregulation of all markets and stock exchanges in particular, what had been originally created as relatively crude instruments for hedging loan exposure developed rapidly into far more sophisticated instruments to feed the voracious demand for capital fuelling the non-inflationary continuous expansion (NICE) era of the 1990s. By the turn of the century credit derivatives had multiplied so rapidly in type and extent and capital capture that they constituted a market of themselves, and the fall of Enron and what that had to say about the risk associated with credit derivatives was effectively dismissed by markets, institutions, academics and professionals alike. As an editorial piece in Risk magazine implied, shortly after the fall of Enron:
"Credit derivatives proved to be resilient [. . .]. The episode, and the fact that the exercise of the Enron credit default swap contracts was done in an orderly manner without controversy, showed that the market had come of age."
Derivatives had been weighed in the balance and not found wanting; added to which of course the amounts of capital now invested in them plus the maturity of what had become a market of central importance meant that, barring a disaster like the current one, they could not be allowed to be perceived as having failed, as having an essential flaw.
This "coming of age" of the market was accompanied by an acceleration of the amount of money invested in this market. As we now know, whereas banks in particular were important participants in this market from the beginning, hedge funds became increasingly involved as they too became important players in global capital markets. Financial derivatives became somehow synonymous with the buzzword "globalisation" exotic, powerful and barely understood even by the most unquestioning fans. So representative had they become as part of the market fantasist discourse that they were accepted almost universally (with a few notable exceptions such as George Soros and Warren Buffett) as what they have become fatal to the securitisation of risk. Derivatives were institutionally accepted as a marker of good health to the extent that (with exceptional irony) by 2004 the credit default swap (CDS) market was accepted as an accurate measure of credit quality.
What had also become clear, however, was that no one state had the capacity to understand, much less supervise, the CDS market, whether it be through the more formal regulatory approach of the USA or the "light hand", self-regulatory approach of the UK proprietors, respectively, of the most important financial centres in the world, i.e. the New York and London stock exchanges. In the market fantasist view, however, not only was this not seen as a disadvantage but, given the apparently "perfect" functioning of derivative markets this was one more proof of the superiority of market over state and over state-channelled democratic oversight the markets were themselves become democracy in action.
At the same time that the international financial institutions (World Bank, IMF etc.) were demanding more transparency, openness and accountability from the governments of countries in development, the globalising financial services sector was lauding the development of markets of increasing obscurity and impenetrability, over which regulation and oversight were all but impossible. The full scale and surreal nature of this market and its critical importance become apparent only when one looks at Bank of International Settlements estimates for the total monitored trade in derivatives some $680,290,700,000,000 for 2007-2008.
Continuing faith in market fundamentalism, however, means that in all of the current talk of "bail-outs" and "rescue packages" the concentration of governments around the world has been overwhelmingly on easing the short-term liquidity crisis, which is to say examining the symptoms of the illness whilst doing little to examine the long-term causes. It might (for instance) be thought that the massive state intervention which the crisis has occasioned, the nationalisation of banks and the loans of taxpayers' money to failing institutions should be accompanied by task forces not only to investigate the exposure of each and every recipient of public money to the "toxic" instruments, but in working out how to defuse the global market in derivatives, how to regulate such instruments effectively and how to licence very strictly their future development. Despite lip-service being paid to regulation of these kinds, the emphasis is strongly on bail-outs and interest rate cuts "recapitalisation" is the order of the day. The bankruptcy of this particular way of thinking, however, is obvious in phenomena such as the gap between the LIBOR inter-bank lending rate and central bank interest rates banks know very well what they've been up to and they also now know that they can't trust the value of their assets.
They f * * * you up your markets do, but they were built to, just by you . . .
"So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives (CDOs of CDOs of CDOs and the entire other alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing (Roubini, 2007)".
Market fundamentalism purports to be a moral analysis of human activity, and as a consequence of the necessity to justify the functioning of capitalism, a variety of ethical arguments are attached to both markets and capitalism:
"Capitalism is the only system that fully allows and encourages the virtues necessary for human life. It is the only system that safeguards the freedom of the independent mind and recognizes the sanctity of the individual (Tracinski, 2002)."
The signalling of virtuous market functioning is transmitted by price structures decided on through the use of relevant information and the analysis of risk, with the concomitant effect that this has on changes in market prices over time. The precept of risk is another fundamental pillar in the moral basis of market fundamentalism, the idea that an entrepreneur undertakes to risk capital through analysing the market for a product, setting the price through use of available information on both market and product, and accepting the risk of losing capital that failure to get your calculations right may bring it is not an exaggeration to say that the taking of virtuous risk by the entrepreneur justifies by itself the profit-making underlying capitalism in this reading.
However, the entire purpose of many derivatives (and the CDS in particular) has been to separate risk from product. Risk analysis, the commodification of and the trade in risk are specifically designed to factor out this virtuous uncertainty that justifies profit:
"They mass manufacture moral hazard. They remove the only immutable incentive to succeed market discipline and business failure. They undermine the very fundaments of capitalism: prices as signals, transmission channels, risk and reward, opportunity cost (Vaknin, 2005)."
The development of financial derivatives throughout the period since the 1970s which have evolved to reduce risks to the minimum, the continued failure and bail-out of national and regional banking systems (Mexico, Brazil, Asia, Turkey) plus unpunished failures (Russia (several times), Argentina, China, Nigeria, Thailand) notwithstanding market fantasist belief in moral hazard must continue because it acts as an essential theological support for market fundamentalism and its corollary, market discipline. For market fantasists and those tending towards the left/social democratic section of the political spectrum alike, the sight of US, European and UK governments effectively nationalising major actors in their banking sector during the ongoing credit crisis heralds nothing less than the "end of capitalism".
Financial derivatives have developed since the 1970s, not merely as a counter to the risk-based functioning of capitalism and themselves weapons of mass moral hazard, but in virtual defiance of all precepts of risk analysis, if by risk analysis we understand a process that uses the systematic analysis of available information in identifying hazards. Using obscure equations to detach the element of risk on bundles of sub-prime mortgages so that they can be repackaged as products with an excellent credit rating, after all, is effectively reversing that process taking a known product with a probabilistically high risk quotient and then obscuring that which is known about it.
CDOs using subprime packages, after all, have the effect of making it impossible to determine the probability and frequency of mortgage default by mortgagee and the possessing bank alike, making it impossible to determine the severity of the likely consequences of that risk and thereby neutralising the two main determinants of which risk itself is a function. In an inversion of the separation of risk and uncertainty introduced by Frank Knight's (1921) pioneering work on risk analysis, "Risk, Uncertainty and Profit", CDOs internalise uncertainty as something highly profitable a process which could only work (with the benefit of hindsight) under special, "irrationally exuberant' market conditions such as those underwritten by the housing and consumer bubble of the mid-1990s onwards.
Quis custodiet ipsos custodes?
"There are ominous long-term implications in the accountants' slide to marginalization. Balance sheets loaded with toxic assets that are "marked-to-whatever" will suffer for credibility under the noses of skeptical investors, who know full well that the pile of manure is still fermenting somewhere (Peterson, 2008)."
Concealed by the market-fundamentalist beliefs discussed above there is another interesting and powerful socio-political theme of really-existing globalization. This is the effective development over the last three decades of a supra-politics of hyper-accountancy, the massive increase in growth and concentration of power in the accountancy sector and the extension of the involvement of the big four accountancy firms (PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG) in every area of nation-state activity, as well as those of international and multi-national quasi-governmental institutions. The concentration of power in the big four firms of the accountancy sector has given those firms shadow-state powers in vital areas of the business of the nation-state, by becoming at the same time national and international advisors on privatisation of state functions, prime engines for the carrying-out of that privatisation and then auditors of the effectiveness of that privatisation in the UK and the USA. In addition, there has been a substantial "revolving door" for important political and governmental actors between employment and executive/non-executive positions within the big accountancy firms and employment in public office or government-contracted consultancies.
Historically, the series of mergers that increased the power of the big accountancy firms in the last two decades of the twentieth century came accompanied by two further phenomena that at once increased conflicts of interest whilst at the same time pushing the firms to ignore them, in the search for audit clients and profits. These two phenomena were, firstly, that audit clients became increasingly sophisticated purchasers of accountancy services and thus shopped around more for the best deal; and secondly, because of the flexibility in the interpretation of accounting standards, audit clients increasingly looked for accounting firms that would give interpretations as close as possible to those desired by the board, so-called "opinion shopping", so that the financial statements of the firm resembled as closely as possible the picture of the firm that the board wished to present.
Both of these two factors increased pressures to lower prices and diminish profit margins and thus increased the tendency towards mergers, to take advantage of the economies of scale that such mergers might bring. At the same time, the increasingly unhealthy nature of the auditor/client relationship was further exacerbated by the increase in numbers of accountants leaving their previous employer and taking up posts in the firms that they had previously been auditing (for instance the relationship between Arthur Andersen and Enron). One other logical consequence of the shrinkage in profit margins for auditing was the diversification of the big accountancy firms into (particularly) management consultancy, in order to pursue non-audit profitability.
Whilst this may have been logical, it of course represented an even starker conflict of interest; providing management services to a firm for which one also had responsibility for auditing was a direct conflict and yet the practice grew and was subjected to very little effective regulation. As a direct result of the increasing influence of the big firms over accountancy institutions, as well as increases in direct political influence in the US and UK governments, initiatives to regulate auditor/client relationships by bodies such as the Auditing Practices Board in the UK and the Securities and Exchange Commission in the USA were stillborn, whilst the big accountancy firms continued to insist that if no direct evidence of conflict of interest could be produced, then none existed.
Auditors of course became involved in the trade in derivatives through the auditing service which they provided to financial services and banking institutions, only here the problems and conflicts of interest were worse. Firms were being paid to audit banks/financial services firms to whom they were also contracted, in order to "properly audit" capital, cash flow and assets of the bank/firm, to asses the "fair value" for existing and new derivative products, a value which was arrived at by using selected information from and modelled by methods provided by the firm itself effectively a perfect storm of interest conflicts. As discussed above, however, derivatives have increasingly been constructed to detach them from the inherent risk of the original product and the auditors had little knowledge of the market into which they were sold (where markets actually existed), so as to make the concept of fair value increasingly imaginary yet it became an increasingly important factor in marketing these surreal products.
In general terms auditing services provided by firms of accountants have been consistently promoted as a technology for the management of risk, whereas the reality of the ways in which auditing has developed in the last three decades of the twentieth century mean that auditing is in increasing danger of becoming that thing of which it purports to be the cure, i.e. a creator rather than a manager of risk. As Ernst & Young themselves put it:
". . . mathematically modelled fair values based on management predictions are not fair values as that term is generally understood, and their use raises many questions about the reliability and understandability of the information (Ernst & Young, 2005)"
By 2008, however, during the first financial crisis to occur under a predominantly fair value regime, opinions seemed to have changed. PricewaterhouseCoopers for instance still believes that: "Fair value measurement does not create volatility in the financial statements, any more than a pipeline creates what flows through it. It captures and reports current market values".
According to PWC the financial statement by the auditor is an objective and neutral analysis of the current state of affairs; there has been no pressure on the auditor to comply with board requirements, there is no close and mutually beneficial relationship between auditor and client, and the information provided by the firm (or the model used) is as fair and objective as can be managed.
Despite the massive problems that financial derivatives have already caused and (as related above) the sheer volume of those still being traded, the big four accountancy firms continue to defend fair value calculations as being the best way to assess the value of such derivatives. Irrespective of "financial statement volatility, reporting the impact of risks and the judgements required to develop and implement fair value measures" and "the impact of fair value on regulatory measures of the capital adequacy of financial institutions" (PricewaterhouseCoopers, 2008, p. 9), "fair value yields a relevant measure for most financial instruments". The big accountancy firms quite rightly point out that there were few complaints from financial services firms and investment banks concerning fair value when the markets were forging ahead; the complaints (akin to those about short selling) have all occurred since the roll-out of the sub-prime initiated financial crisis which, given what is now known about the way that CDOs have been put together, is not really relevant to a consideration of whether the ways by which fair value is calculated can ever be sufficient for such surreal financial instruments.
Markets through the looking-glass
"The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." . . . "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality" (Suskind, 2004)."
"There is no use trying", said Alice. "One can't believe impossible things". "I dare say you haven't had much practice", said the Queen. "When I was your age, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast (Carroll, 1871)".
The causes behind the current crisis are multiple, complex and are the reflection of a rapid, massive and surreal change in the culture of market governance globally a leap from a "reality-based" market system into one based on imagination. The development of such an enormous market in financial derivatives has involved the global co-optation and active participation of states, multinational and international organisations, international financial institutions, professional organisations and institutional bodies, governments, civil services, political parties and political actors over a short period of time. The willing suspension of disbelief on the part of so many important actors globally meant that this crisis was (along with others like it in the future) inevitable. It is important to remember as well, however, that this was not just a willing suspension of disbelief concerning the market in derivatives, the market in bonds, the housing market and so on, if not a willing suspension of democratic control by which the governments of the North/West gave up control over their own governance to the random vagaries of shadow markets which guaranteed disaster.
It is also highly unlikely that an ideology of such penetration and extent (in which the self-interest of so many important global actors is involved in praising the market-emperor's new clothes) will learn too much from such a crisis. There are too many vested interests in patching up the old system and willing the derivatives market back into life, even though it is extremely likely that there are more problems than the infamous "sub-prime" derivatives lurking in these muddy waters. In the light of $680,290,700,000,000-worth of global trade in derivatives, $700 billion to "rescue" the perpetrators of this market looks not only feeble but pointless.
The recession in the rich North/West is going to be made longer and harder by a refusal of responsible parties to address fundamental flaws in the system, and pessimists such as Joseph Stiglitz and Nouriel Rabini are already predicting a prolonged, L-shaped recession of the type experienced by Japan from the 1990s up to 2005 (and now again). In the meantime, those same investment banks whose collapse occasioned sundry rescue packages use those rescue packages to pay themselves pre-collapse era bonuses, continuing to behave as if nothing had happened.
The consequences of fundamentalist market fantasies have come home to roost it should be for the last time but it almost certainly will not be. The development of market bubbles facilitated by the development of ever-more sophisticated financial instruments has spawned a growth industry and a global support network based on the power of belief, a belief that no government and no multi-national or supranational institution need depend on something as boring and irritating as mere democracy. Instead, politician, minister, president, accountant and CEO alike, all will take deep breaths, close their eyes and believe six impossible things before breakfast.
The rot of the "free-market'
When Thomas Jefferson wrote in his March 17, 1814 letter to Horatio
Spatford that "Merchants have no country, the mere spot they stand on
does not constitute so strong an attachment as that from which they draw
their gains," he was being honest and ominously prescient.
A report in the December 19, 2009 New York Times, "In Industrial Thailand, Health and Business Concerns Collide," (click here=1&th&emc=th) ruthlessly rips the scab from the festering sore that is the Asian country's industrial city of Map Ta Phut, on the northern shores of the Gulf of Thailand.
The Republican mantra has long been to leave every issue to the free market. In Map Ta Phut the free market is literally, not figuratively, killing people with pollution so extreme that the villagers cannot walk in the streets after a rain or breathe at night when the spewing stacks from the Japanese steel companies and the German chemical plants crank highest. Litigation brought by 27 villagers to halt new expansion was fought bitterly by international industrial investors and the Thai Chamber of Commerce. However the villagers won, and the proposed expansion has been halted (for now), the verdict did nothing to restrict the level of present toxins that are wafting from the stacks or being flushed into sewers, and thence into the Gulf and the Pacific Ocean.
More -- as if more might now be needed -- evidence that neither the free market nor its corporate components give the first damn what damage they do to the environment, or the peoples who live in it. After all, the executives don't have to. They reside in the rarified atmospheres that are never touched by the putrefying carnage their manufacturing schemes provoke.
Exactly as it is with American health insurers, by the way. Their Gulfstream private jets fly well above and their 110-foot yachts sail well beyond and their stretch limos with blackened windows drive well away from the cemeteries of the 45,000 who perish each year because they either cannot afford health insurance coverage, or have had their coverage canceled when they needed it most.
These are not good people, the likes of Ben Nelson, Joe Lieberman, Mary Landrieu, Blanche Lincoln, and every Republican in the House and Senate have attached themselves to. I am conflicted, whether to support the Senate's current health reform bill. Given its emasculated form of no single-payer, no public option, no Medicare buy-in, nor not even a trigger, it nonetheless is better than leaving the status quo the status quo that will consume, and therewith doom the entire US economy within a very brief period. (Simple arithmetic: By the Rule of 72, wherein the currently escalating premium rate of 10 - 15%, the present family of four premium of $15,000 will double within six to seven years, both employers and individuals will be forced to opt out of coverage altogether. And how do ya like them apples?) As bitter a pill as it is, if we get nothing, it's unlikely we'll get anything for another decade or more, which by then will be a decade too late for most, if not all, of us.
What I am not conflicted over, however is the moral obligation to strive as hard as we can to remove from office every Democratic senator and representative who put the welfare of Jefferson's merchants above that of their countrymen. Nor must we shirk from working as diligently to also separate every Republican from their offices. Let them, as private citizens, devote as much time as they wish to bed the corporate johns they hired themselves out to.
A report in the December 19, 2009 New York Times, "In Industrial Thailand, Health and Business Concerns Collide," (click here=1&th&emc=th) ruthlessly rips the scab from the festering sore that is the Asian country's industrial city of Map Ta Phut, on the northern shores of the Gulf of Thailand.
The Republican mantra has long been to leave every issue to the free market. In Map Ta Phut the free market is literally, not figuratively, killing people with pollution so extreme that the villagers cannot walk in the streets after a rain or breathe at night when the spewing stacks from the Japanese steel companies and the German chemical plants crank highest. Litigation brought by 27 villagers to halt new expansion was fought bitterly by international industrial investors and the Thai Chamber of Commerce. However the villagers won, and the proposed expansion has been halted (for now), the verdict did nothing to restrict the level of present toxins that are wafting from the stacks or being flushed into sewers, and thence into the Gulf and the Pacific Ocean.
More -- as if more might now be needed -- evidence that neither the free market nor its corporate components give the first damn what damage they do to the environment, or the peoples who live in it. After all, the executives don't have to. They reside in the rarified atmospheres that are never touched by the putrefying carnage their manufacturing schemes provoke.
Exactly as it is with American health insurers, by the way. Their Gulfstream private jets fly well above and their 110-foot yachts sail well beyond and their stretch limos with blackened windows drive well away from the cemeteries of the 45,000 who perish each year because they either cannot afford health insurance coverage, or have had their coverage canceled when they needed it most.
These are not good people, the likes of Ben Nelson, Joe Lieberman, Mary Landrieu, Blanche Lincoln, and every Republican in the House and Senate have attached themselves to. I am conflicted, whether to support the Senate's current health reform bill. Given its emasculated form of no single-payer, no public option, no Medicare buy-in, nor not even a trigger, it nonetheless is better than leaving the status quo the status quo that will consume, and therewith doom the entire US economy within a very brief period. (Simple arithmetic: By the Rule of 72, wherein the currently escalating premium rate of 10 - 15%, the present family of four premium of $15,000 will double within six to seven years, both employers and individuals will be forced to opt out of coverage altogether. And how do ya like them apples?) As bitter a pill as it is, if we get nothing, it's unlikely we'll get anything for another decade or more, which by then will be a decade too late for most, if not all, of us.
What I am not conflicted over, however is the moral obligation to strive as hard as we can to remove from office every Democratic senator and representative who put the welfare of Jefferson's merchants above that of their countrymen. Nor must we shirk from working as diligently to also separate every Republican from their offices. Let them, as private citizens, devote as much time as they wish to bed the corporate johns they hired themselves out to.
Stephen King Meets the Estate Tax
Imagine a story about tax policy created by horror writer Stephen King. A
fictional Congress, divided between anti-tax ideology and fiscal
responsibility, amends the inheritance tax on the very wealthy so that
it disappears entirely one year and then returns at steeper rates the
following year.
Over the zero year, death rates skyrocket in the nation's most affluent zip codes. Seemingly robust and healthy billionaires perish in mysterious accidents. Lexus wheels fall off from Bloomfield Hills to Scarsdale to Beverly Hills. Sailboats and yachts inexplicably crash in calm coastal and Caribbean waters. Tainted champagne wipes out clusters of prosperous alumni at class reunions from dozens of elite prep schools from Groton to Choate.
Meanwhile, thousands of infirmed elders take their own lives in organized rituals called "legacy sacrifices." Pledging unlimited inheritances to their heirs, these multi-millionaires die with smiles on their faces knowing they've outfoxed Uncle Sam one last time.
If only this were a fiction.
We could actually see these scenarios play next year, unless the real U.S. Congress takes action and prevents one of the more bizarre twists in tax legislation in history from coming to pass.
In 2010, the estate tax, our nation's only levy on inherited wealth, is set to disappear completely. Then in 2011 the tax returns to 2001 levels, with substantially lower wealth exemptions and higher rates. Talk about perverse incentives.
The stage was set for this scene in 2001, when President Bush and conservative tax cutters tried to abolish the estate tax. They didn't have the Senate votes, however, for permanent repeal, nor could they afford to lose the hundreds of billions of dollars the estate tax would generate over the subsequent decade.
Congress structured the law to gradually phase out the tax, allowing it to expire in 2010. Then, in a gimmick to mask the real cost of the tax cut, the law sunsets in 2011, reverting back to its 2001 levels.
Tax cutters in 2001 were confident they would return in subsequent years to finish off the estate tax. But the nation's fiscal situation immediately began to deteriorate and Republicans lost their majority in Congress. In October of this year, the organized wealthy families that spent millions in lobbying Congress to save billions finally conceded they lacked the votes to get rid of the estate tax forever.
You have to remember that the estate tax ‹ at its 2009 level ‹ only effects one in 500 estates. Over the last eight years, the law has been revised so the wealth exemption level rose from $1 million to where it is today, at a generous $3.5 million or $7 million for a couple. Rates declined from 55 percent in 2001 to 45 percent today. This exclusive tax cut for multi-millionaires and billionaires cost hundreds of billions of dollars in lost revenue, a cost added directly to our national debt.
Two weeks ago, the U.S. House of Representatives voted to freeze the federal estate tax at this current level. This is a positive and responsible step. Now the Senate must act.
The Senate could pass legislation that mirrors the House version and settle the issue for years to come. Or they could freeze the tax at its current level for one year ‹ and take it up next year. What they shouldn't do is further weaken the estate tax by passing proposals such as those introduced by Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR).
Without the estate tax, we could lose almost $1 trillion in revenue over the next two decades. There are only three ways to fill that gap: cut spending, raise taxes on the middle class, or, our current favorite: pile it onto the national debt.Instead of leaving prodigious amounts of debt for the next generation, we should retain a meaningful estate tax.
During a time of war and economic crisis, the idea of further tax breaks for multi-millionaires and billionaires is unseemly and unfair.
Over the zero year, death rates skyrocket in the nation's most affluent zip codes. Seemingly robust and healthy billionaires perish in mysterious accidents. Lexus wheels fall off from Bloomfield Hills to Scarsdale to Beverly Hills. Sailboats and yachts inexplicably crash in calm coastal and Caribbean waters. Tainted champagne wipes out clusters of prosperous alumni at class reunions from dozens of elite prep schools from Groton to Choate.
Meanwhile, thousands of infirmed elders take their own lives in organized rituals called "legacy sacrifices." Pledging unlimited inheritances to their heirs, these multi-millionaires die with smiles on their faces knowing they've outfoxed Uncle Sam one last time.
If only this were a fiction.
We could actually see these scenarios play next year, unless the real U.S. Congress takes action and prevents one of the more bizarre twists in tax legislation in history from coming to pass.
In 2010, the estate tax, our nation's only levy on inherited wealth, is set to disappear completely. Then in 2011 the tax returns to 2001 levels, with substantially lower wealth exemptions and higher rates. Talk about perverse incentives.
The stage was set for this scene in 2001, when President Bush and conservative tax cutters tried to abolish the estate tax. They didn't have the Senate votes, however, for permanent repeal, nor could they afford to lose the hundreds of billions of dollars the estate tax would generate over the subsequent decade.
Congress structured the law to gradually phase out the tax, allowing it to expire in 2010. Then, in a gimmick to mask the real cost of the tax cut, the law sunsets in 2011, reverting back to its 2001 levels.
Tax cutters in 2001 were confident they would return in subsequent years to finish off the estate tax. But the nation's fiscal situation immediately began to deteriorate and Republicans lost their majority in Congress. In October of this year, the organized wealthy families that spent millions in lobbying Congress to save billions finally conceded they lacked the votes to get rid of the estate tax forever.
You have to remember that the estate tax ‹ at its 2009 level ‹ only effects one in 500 estates. Over the last eight years, the law has been revised so the wealth exemption level rose from $1 million to where it is today, at a generous $3.5 million or $7 million for a couple. Rates declined from 55 percent in 2001 to 45 percent today. This exclusive tax cut for multi-millionaires and billionaires cost hundreds of billions of dollars in lost revenue, a cost added directly to our national debt.
Two weeks ago, the U.S. House of Representatives voted to freeze the federal estate tax at this current level. This is a positive and responsible step. Now the Senate must act.
The Senate could pass legislation that mirrors the House version and settle the issue for years to come. Or they could freeze the tax at its current level for one year ‹ and take it up next year. What they shouldn't do is further weaken the estate tax by passing proposals such as those introduced by Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR).
Without the estate tax, we could lose almost $1 trillion in revenue over the next two decades. There are only three ways to fill that gap: cut spending, raise taxes on the middle class, or, our current favorite: pile it onto the national debt.Instead of leaving prodigious amounts of debt for the next generation, we should retain a meaningful estate tax.
During a time of war and economic crisis, the idea of further tax breaks for multi-millionaires and billionaires is unseemly and unfair.
Who Really Owns the Assets of America
Walter Burien is a personal friend of mine and his message about economics is one of the most important one on the planet!
Greece's Debt: The Hypocrisy of Neoliberalism
Two
days ago Greece suffered its second debt-rating blow
in a week, when Standard & Poor's downgraded two top banks and
warned that the Greek economy was actually
in worse shape than it had predicted. Last week,
Fitch Ratings lowered its rating on Greece thus raising fears of a
potential default. On Monday the Greek government started a
'counter-attack' against the negative perspective of the country's
economic situation. In a televised address Prime Minister George
Papandreou outlined sweeping changes to increase competitiveness and
combat corruption and tax evasion.
Athens has come
under strong pressure these days from the European Central Bank and
the bureaucratic leadership of Brussels to adopt radical measures to
rebuild its economy after the recent downgrades. Indirectly, but
clearly, the EU asks from the newly-elected Greek government to send
the bill to the middle and lower classes; to exercise a strict
economic policy of austerity, reduce social spending and freeze
salaries for at least four years.
The major problem is
that Europe's economic leadership, as well as these uncontrollable
rating agencies, pretend to ignore the actual reasons which brought
Greece and possibly other countries in the near future on the
edge of fiscal precipice. It shouldn't surprise anybody. The appeal
to public debt and deficit is a known tactic of neoliberalism,
especially in times of financial disorder.
The advocates of
uncontrollable, devouring, Capitalism, try to suppress the fact that
among the major factors for public deficits burgeoning, is the
continuous feeding of Capital's tremendous profits - benefits through
scandalous tax exemptions and various sponsorships as a result of the
existing corruption between the State and the capitalist private
sector. Its characteristic that the Greek State loses around 1.2
billion Euros as a result of tax exemptions on ship-owning companies,
while between 2005 and 2009 the profits of the country's 300 largest
Cos. and banks were increased by almost 365%. "Some 300 companies
and banks in the last five years benefited from a reduction in tax
rates," Finance Minister George Papaconstantinou had said last
November.
Furthermore, the
Greek State loses around 2 billion Euros every year from the tax
evasion of employers who promote uninsured labor, thus contributing
to the devitalization of the pension system. This amount is
infinitely small related to the profiteering of Greece's creditors
mainly foreign or local banks. It should be noted that from the
annual budget of 2009, almost 42 billion Euros had been withheld for
this purpose. As a result of this social spending has been
significantly reduced, in favour of those who benefit from the high
rates of Greek government bonds.
An obvious question
comes to my mind: Doesn't the European Union carry any
responsibilities for this situation? Nobody can deny that national
governments, including Greece's, committed significant mistakes
in their economic policies. But, on the other hand, the bureaucratic,
pro-capitalist, elites in Brussels, Frankfurt or London cannot behave
like Pontius Pilate. Furthermore, they were the captains of Europe's
route to economic neoliberalism during the last decade a route
which brought the EU in today's crisis. The so-called Stability and
Growth Pact (SGP) is in danger due to the financial circumstances
while there is a need for a generous institutional reform of the
Eurozone. Because, unfortunately, the recent economic crisis exposed
the Union's actual impotence to foresee and, moreover, face such
negative economic situations.
The victims of
national debt throughout the years aren't few. From Yugoslavia (1991)
to Ukraine (1994) and from Indonesia to Zimbabwe, the onerous
conditions set by their foreign creditors led to strict austerity,
tax increases, rapid salaries decreases and job cuts thus destroying
their economies. Greece, or any other EU member-state, is not going to be their next victim.
The 'Priesthood' of rating agencies
Standard & Poor's,
Fitch and Moodys are regarded as the three major rating agencies
which provide opinions to investors on the ability and willingness of
issuers to make timely payments on debt instruments. According to an
official testimony by U.S. Senator Paul. S. Sarbanes, who since 2002
had publicly noted their controversial function, credit rating
agencies play a very important role in the capital markets, thus
having crucial impact on world economic structure (03-07-2006). On
November 2004, the Washington Post wrote that "from their Manhattan
offices, they can, with the stroke of a pen, effectively add or
subtract millions from a company's bottom line, rattle a city budget,
shock the stock and bond markets and reroute international
investment". It's characteristic that until the day of their
collapse, banking giants like AIG and Lehman Brothers were given very
positive investment-grade ratings from the above agencies.
The article was quite
revealing: "Without their ratings, in many cases, factories can't
expand, schools can't get built, highways can't be paved. Yet there
is no formal structure for overseeing the credit raters, no one
designated to take complaints about them, and no regulations about
employee qualifications. The big three ostensibly function as
a disinterested priesthood. When a company, town or entire nation
wants to borrow money by selling bonds, the market almost always
requires that the rating companies bless the move by running a kind
of credit check. Bonds they deem safe get a good rating. The higher
the rating, the lower the interest rate the borrower must pay"
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