Welcome Jamie, thanks so much for being here today. We really appreciate your willingness to speak out.

Do you think people are going to have confidence in the markets until there’s some transparency? It seems like the level of cynicism with regard to our banking system is high right now, and rightly so.

Dr. Galbraith, a great honor to have you here at FireDogLake.

Welcome to Firedoglake – an honor to have you here.

How much time pressure do you think Geithner is under? I get the impression that they are terrified at the prospect of another credit meltdown like the one that happened at the end of September. To me, at least, it always comes back to that: ‘the horror, the horror.’ To us on the outside, there’s just no way to know. To be sure, they’ve had time to do some sampling since then. Funny thing, it hasn’t been done yet.

Welcome Prof. Galbraith — we’re so pleased to have you here. If you could reform any regulations or add them back in where things have been deregulated, where would you start?

I don’t see transparency ever happening Real transparency would show that the banks were insolvent and that they had engaged in massive fraud. So whenever I hear transparency and not either of these two things, I know it is a con.

Well, I know where I would start.

Glass-Steagall

Regulate or replace the ratings agencies

Eliminate CDSs by having them conform to current insurance requirements.

Not one goddam cent until the Treasury has done proper due diligence on the assets that it proposes to purchase or guarantee.

I must thank you for this. To me, the unknowns in this situation are huge, even to the people who ought to know. Yet we’ve been shoveling money into this thing like it was paper.

How long do you reckon it would take to do that research? Is it possible that the government thinks they can’t manage it in time?

hi james. thanks for taking the time to talk with us today.

i’ve been calling my representative since the first week in october – because i didn’t think $700 billion should have been handed over just because paulson demanded it. my representative claimed that all the progressive economists were telling him he had to vote for it even if there wasn’t any explanation or accountability. is that true and if so, why the heck was that the message our congress critters were given at the time when they could have done something about it?

Citizen James Galbraith:

It is a treat to have you here, I have 2 questions…

First, will there be any “recovery” without a lot of rich folks jumpin out of windows or goin to jail? By that I mean that the losses the economy has suffered have got to be recouped at least in part from those who have benefited from this massive swindle…either by taxin the shit out of ‘em or haulin their asses into court, bankrupting their family trusts and sendin ‘em to Leavenworth.

Second, where do you put reorganization of the workforce through unionization and reinvigorating the public schools from K-12 in the priotities for economic recovery?

Thank you again for showin up here…I wish you could spend some time with Obama…it seems as though Gaithner and Summers are blowin up a bubble around the man.

To piggyback on Jane’s question and Hugh’s comment:

WHich do you think will have more seismic consequence on the economy

1) people finding out that the banks are insolvent as a result of increased transparency, or

2) people becoming more and more paranoid about the banks and the market because oof all of the secrecy and obvious fibbing going on?

We’re having login issues, Jamie should be here shortly.

Dr. Galbraith, thank you for coming here to speak to us. Some have considered recent economic crises to be a sort of deliberate shock therapy/doctrine, for the purpose of depleting our national treasury and our social security obligations. Do you believe that the simultaneous attacks on Social Security and Medicare were intentional? Were we intended to be so unnerved by attacks upon entitlements that we were to overlook mass infusions of help to the financial giants? Or was it more so that, Obama anticipated attacks from the fiscal conservatives and and attempted to ward them off by acceding to their demands for review?

I wrote this up yesterday in a comment but was interested in any feedback.

There are all kinds of places where transparency has not occurred. For example, we have all been talking about the lack of transparency with regard to AIG but there are many more:

Treasury eventually after much delaying came up with which banks received TARP money but it never explained the process by which these banks were approved for such funds, and it never released the names of banks that were rejected or the reasons for their rejection. The idea was this might cause runs on them. But if these banks were so insolvent that not even Treasury wanted to touch them, why weren’t they taken over immediately by FDIC. And if they were in better shape, then why didn’t they receive the money? And of course how the banks used the money has only dribbled out in bits and pieces, not through Treasury but through some of the oversight boards that were tasked with monitoring TARP.

The Fed has a bunch of programs which have received no scrutiny. One allowed banks to park various of their crap assets at the Fed in exchange for loans. Which banks did this, how much money was involved, and where the money went we have no idea.

There was another program set up to backstop money market funds. The funds were allowed to choose (secretly) who was to give them these funds and again who received what was not publicly disclosed.

There are also large currency swap programs with other central banks. These have been used to prop up other currencies. But we don’t know anything about how they have been used.

Then there is a program to pay banks interest on their reserves. How much money has been spent on this and to whom, again we don’t know.

All of these programs are part of the reaction to the financial system’s problems. But none of them get to the secrecy surrounding the crap assets which are the heart of it all. 18 months into this, we still don’t know which banks are holding which crap assets, what the value of these are (and yes, they can be accurately valued), and how insolvent the banks are. Nor do we know how many of these are missing crucial documentation, or how many show evidence of fraud.

OK I am here. Give me a minute to read the comments so far. JG

BTW, Bernie Madoff is reported to have plead guilty before a judge known for harsh sentences. His offense level puts in in a range for a sentence of up to 150 years.

Do you think a harsh sentence (or two or three) would shake Wall Street executives out of their entitlement bubble and get them ot realize that they need to radically change how they do things and actually embrace oversight and regulation?

we may ask a lot of questions, but we’re patient with the answers. please take your time.

And on top of that, I wish people would stop talking about liquidity as if it were some magic fix-it.

As a technical note: there is a “reply” button in the lower right hand of each comment that will pre-fill the comment you are replying to and will help folks know to whom you are replying.

plus,

- repeal Gramm-Leach-Bliley
- jail Gramm for good measure (sorry, this step is gratuitous and can be skipped)
- reform the Bank Holding Company Law of 1956 to create a tiered system built on core deposite-taking-business-landing banks, probably regional in structure
- create a Federally owned national infrastructure development bank from the carcass of Citibank
- bring hedge funds and private equity under direct SEC supervision
- outlaw speculative derivative trades
- investigate (and possibly prosecute) the rating agencies

DIGG IS OPEN

Welcome Dr. Galbraith.

It has been years since I read your father’s “American Capitalism” but it seemed to me when I read it- and it seems even more true today- that his point that Management adds an entirely new element to traditional analysis of the behavior of firms….that Corporations are as likely now to act in the interest of management as in the interest of shareholders- magic hand be damnned!

Are most economists aware of this important limitation in applying classical models and have any tried to add the interests of management into formal economic models?

I wish people would stop talking about liquidity as if it were some magic fix-it.

i get the impression that is supposed to be a magic incantation meant, not to inform, but to prevent us from thinking about solvency.

Well, it certainly doesn’t work for me as a cure-all incantation, given that any money that goes into the system would be going right back out in the same cockeyed way it’s been going without some serious changes. And there haven’t really been many of those in any meaningful way, have there?

Getting to Jane’s question on confidence in the markets, I think it is tough to have any when you feel that real, needed lessons don’t seem to have been learned.

Add on question-

Many of the huge compensation plans for upper management were done by those representing shareholders in order to insure that management was motivated by share price–what is the latest thinking on the wisdom of these compensation plans?

We have been talking here in the last few days about Geithner’s blowing the IMF response to the Asian crisis back in the 90s. Taken together with his missing the housing bubble or the likelihood of a resulting financial meltdown, his roles in the dubious Bear Stearns and AIG deals, and now his refusal to nationalize banks and weird public-private/hedge fund plan for overaying on crap assets, what grade would you give him? For me, if he (and Summers) is around for the next 18 months, the depression is going to be long and hard.

Dr. Galbraith,
Thanks for taking the time to talk with us!

One question I have is that I’ve heard that Geithner is not staffed up at Treasury, and that most of the top spots are vacant. Is that true, and if so, how can he do a decent job of due diligence?

And in general, what about the problem of the trail of derivative controls? I’m not saying that quite right, but I’ve heard that the holders of the derivatives are so large and numerous, and worldwide, that nationalizing a company like Citigroup or AIG could set off ripple effects that would cascade like dominoes. How can that be controlled?

Thanks again for your presence here,
Bob in HI

Welcome Dr. Galbraith. It’s an honor.

It seems clear that the President has surrounded himself with industry insiders. Accordingly, I think it fair to assume that he is hearing a very heavily screened version of reality. Are you aware of any other input the President might be receiving, or (failing that), is there a way to inject more reasoned analyses into ongoing WH discourse? I’m speaking of yourself, Roubini, Krugman, and other notables.

Thank you again.

Jane asks whether there can be confidence without transparency. I think that transparency by itself will not produce confidence. How could it? A clean audit will almost certainly reveal the depths of a very deep problem.

But insisting on transparency is a way to oblige the administration to face reality, and therefore to act.

The Treasury’s position is that the mortgage-backed securities have been underpriced by the market, and will recover value if the panic and uncertainty subside. In my view, this position is unrealistic, because private markets cannot and will not purchase “securities” that lack credible documentation.

So the issue is: how credible is the documentation? This is an empirical question, open to investigation and resolution.

Obviously, a review will find some fraud; that is clear. But the important question is: how much? To what extent is a security that represents a tranche of (say) 10,000 mortgages based on fraudulent, misrepresented or undocumented loans?

We ought to be able to find that out, to a reasonable approximation, by sampling the loan tapes underlying securities in different asset and ratings classes. And that, in turn, ought to tell us if the Treasury’s position, that the assets might recover value, has any merit.

If not, then the course of action that the Treasury has been on, would be foreclosed.

Since the information is obtainable, in principle, it seems to me there is no coherent argument against making such a study.

JG

selise I believe pointed out this article by Stiglitz at the Nation:

http://www.thenation.com/doc/2…..l=nofollow

where he pointed out that everything done so far and planned to be done actually increases moral hazard and risk taking since no matter how badly the bank gamble and screw up the government is there to bail them out no questions asked.

Do Geithner and Summers have conflicts which if they were lawyers would prevent them from being involved in the bank bailout?

Possible, but I’m disinclined to think they’re smart enough to run such a subterfuge. They might actually think liquidity is the key, which would, of course, preclude the need for discussions about (in)solvency.

“We ought to be able to find that out, to a reasonable approximation, by sampling the loan tapes underlying securities in different asset and ratings classes. And that, in turn, ought to tell us if the Treasury’s position, that the assets might recover value, has any merit.”

How would such a far-reaching study be conducted from a purely practical standpoint? And by whom?

Word the Stockup tick rule was coming back seems to have sparked a rally today.

The uptick rule is a securities trading rule used to regulate short selling in financial markets. The rule mandates, subject to certain exceptions, that, when sold, a listed security must either be sold short at a price above the price at which the immediately preceding sale was effected or at the last sale price if it is higher than the last different price. In 1938, the SEC adopted the uptick rule, more formally known as rule 10a-1, after conducting an inquiry into the effects of concentrated short selling during the market break of 1937. [1] The original rule was implemented by Joseph P. Kennedy, Sr., the first SEC commissioner.[2]

http://en.wikipedia.org/wiki/Uptick_rule

Any other rules that can help the market long term that you want back?

I don’t see transparency ever happening

it has become painfully obvious that lack of transparency is a feature, not a bug.

our gov is giving us less transparency while calling it more transparency.

i don’t know what to do about this other than to keep reminding my representative and other members of congress that we’re not fooled by their attempts to deceive us (and probably themselves). i’ve also started sayin that the damage it is doing to trust and legitimacy is immense, especially coming off 8 years of bushco.

Getting to Jane’s question on confidence in the markets, I think it is tough to have any when you feel that real, needed lessons don’t seem to have been learned.

Which is why I wonder if making an example of Maddof and few others might bring some lessons home?

There’s some smoke and mirrors for you…

That’s a great question — thanks for asking it. Frankly, that sort of questions applies across the board so often in DC, I often wonder how any of the folks in and out of government service and private/corporate practice resolve it oftentimes.

Folks,

Government is the problem. NOT the answer.

This all started in 1977 with Jimmy Carter and a Democrat congress. If congress had kept OUT of the markets, we would not be here.

The Role of Congress in the Recession of 2008

[edited by moderator for length - please when reprinting articles, give an excerpt and a link - thank you]

If we can but prevent the government from wasting the labours of the people, under the pretence of taking care of them, they must become happy. Their finances are now under such a course of application as nothing could derange but war or federalism. The gripe of the latter has shown itself as deadly as the jaws of the former.
Thomas Jefferson, 29 November 1802

In 2008, the United States would enter a recession that was 32 years in the making. Actions taken by congress starting in 1977 would begin the process that led to the catastrophic collapse of the housing market, which directly brought about the banking crisis that triggered the recession. The Community Reinvestment Act (CRA) passed in 1977 would create the framework for a machine of catastrophe. Building upon that framework, the Housing Enterprises Regulatory Reform Act of 1992 would force banks by law, to write sub-prime loans in federally mandated numbers that would eventually cause banks to collapse in America and around the world. Exacerbated by ACORN (Association of Community Organizations for Reform Now) and the Cloward-Piven Strategy of Orchestrated Crisis, the economy continues to spiral down in 2009.
In order to put the fiscal situation of the United States into some context, a basic understanding of several factors is necessary. The CRA, Federal Housing Enterprises Regulatory Reform Act of 1992, ACORN, The Cloward-Piven strategy, the Government Sponsored Entities (GSE’s) Fannie Mae and Freddie Mac, and their relationship with Congress are all significant gears in the machine that stopped the economy in its tracks.
First, the Community Reinvestment Act of 1977, known as CRA, was designed to ensure banks serviced their entire communities, community being defined by the area from which the bank accepted deposits. CRA made law the concept that banks should make loans to everyone, and follow standards of safe banking at the same time (FDIC). This is a contradictory mandate, as banks cannot make good safe loans to borrowers who are high risk. It is not the bank that makes the borrowers high risk; it is the borrowers themselves who are the risk. This is the foundation upon which our current crisis is built. The rate at which these types of borrowers default on their loans is higher than loans made to those with sounder credit and better more reliable sources of income, making them unsafe for both the bank and the borrower. CRA dictated to banks that they were to disregard those safe practices and begin to meet the needs of what supporters called the underserved market, those with poor credit and or very low incomes who could not otherwise get a loan.
Alex Schwartz in an article for Fannie Mae reported that Community Organizations (ACORN for example) could and did challenge banks trying to merge or acquire new assets on meeting their CRA requirements and “by 1997 more than 300 negotiated and voluntary agreements had been launched, amounting to more than $353 billion (National Community Reinvestment Coalition [NCRC] 1998)” (qtd. in Schwartz). The dollars wrapped up in the Sub-prime market would only continue to pile up in the ten years following that report. This is the frame work that would hold the machine together. What is perhaps as relevant, Fannie Mae and Freddie Mack knew as early as 1997 what was happening.
Another significant cog in the machine was manufactured in 1992. Congress would pass the Federal Housing Enterprises Regulatory Reform Act. Among other things, this Law would build upon the CRA. It would set specific goals for numbers of loans written to very low income to moderate income households otherwise known as Sub-Prime market, and would set penalties banks would be subject to if they failed to meet their quotas (United States 102nd Congress Title III Sec 305). Because the Federal Government was backing the loans through Fannie Mae and Freddie Mac, it made the inherent risk of loaning money to very low income families or those with poor credit acceptable. This law also opened the door to lawsuits against banks that failed to “adequately” meet those goals.
This brings up the question of exactly what “adequate” means and this was the basis for the legal challenges made to the banking industry. The 1992 Bill established several levels of compliance; however anyone could now challenge a bank at any level of compliance (United States 102nd Congress). Agencies like ACORN would hire lawyers to file law suits challenging the banks on the numbers of loans they wrote to the sub-prime market. As reported by Parke Chapman, in general those finding themselves facing ACORN would give in, it was easier than fighting the pickets, intimidation and bad publicity which were the strong arm techniques used by ACORN in achieving their goals (Chapman). Robert Garsson reports much the same thing, reporting briefly on ACORN storming the American Bankers Association meeting around the time that Bill Clinton was beginning his career in Arkansas politics (Garsson).
This brings us to the fuel system of this machine. ACORN, what is ACORN? It has been for years heavily invested in making use of CRA and the quotas set up in 1992. Where did this organization come from? In the 1960’s a group calling itself the National Welfare Rights Organization (NWRO), led by George Wiley and founded on the principles developed by Robert Cloward and Francis Piven, was fighting for the rights of the poor (“Roots”). According to ACORN’s own history, Wiley had a protégée, Wade Rathke, whom he would send to Little Rock Arkansas in 1970, tasked with uniting people across the social spectrum in the fight for the rights of the poor. By using a clause in the Arkansas Welfare laws, he was successful, and ACORN was created out of that success. Originally founded in 1970 under the name Arkansas Community Organizations for Reform Now, it later became the Association of Community Organizations for Reform Now, and the acronym remained the same (“Roots”).
As part of a wider social goal, Wiley and Rathke used Cloward-Piven Strategy of Manufactured Crisis in their success. The Sophia Smith Collection Biography of Francis Fox Piven includes this information on the Strategy:
In Regulating the Poor, Piven and Cloward argued that any advances the poor have made throughout history were directly proportional to their ability to disrupt institutions that depend upon their cooperation. This academic commentary proved useful to George Wiley and the NWRO as well as a great many other community organizers and urban theorists (Sophia Smith Collection Smith College Northampton, MA).

Excellent, because of the high level of detail and because you present it so compactly without sacrificing accessibility.

The Treasury’s position is that the mortgage-backed securities have been underpriced by the market, and will recover value if the panic and uncertainty subside. In my view, this position is unrealistic, because private markets cannot and will not purchase “securities” that lack credible documentation.

Well, in a deflating economy they are not going to recover in price either. I have been wondering for a while now if people have been factoring in the effects of deflation/depression into their economic scenarios.

Originally, the idea was that banks would not lend to each other because they knew they were all insolvent and this led them to lend less to everyone. But in a deflating economy, money gains in value relative to everything else so the incentive is for the banks to hang on to and not lend it. As I said I don’t think this has been factored in as much as it needs to be.

Citibank just declared profits and the markets jumped 379 points.
Why are we shoveling them money? Makes me furious to see 50 million Americans go without affordable healthcare, housing and food. 40 million below the poverty level. And we are subsidizing investor/gamblers instead of creating a safety net for our own. Why?

A number of comments already address this — there are many lost and lamented casualties of the Reagan-Bush era that might have protected us.

But we should recognize that the problem is not one that can be solved by patching up the regulatory structure, and pushing the reset button on the big banks.

There has been a meltdown. The reactor core is in a puddle on the floor of the containment building. Adding graphite, at this point, isn’t going to get us back to normal.

Looking at it from a very broad perspective, we know the banking sector got far too big. It was ten percent of wages and 30 percent of profits, before the bust. We also know that individual banks got far too big. Too big to regulate, is too big to manage.

So let’s ask: how do we want to proceed? By protecting the biggest banks, which are both unsound and unmanageable, and thereby forcing the smaller banks, which are in relatively good shape, to compete with them? Or by letting the big banks, with their over-paid executives, offshore operations, shell corporations and so forth take the adjustment?

Obviously, taking apart big banks gracefully is not going to be easy, and up to a point one can understand why the government is nervous about trying to do it. But from a strategic point of view, that seems to me to be the central issue.

JG

Is AIG a third party shell corporation for the Fed and the banks like Chewbacca and Deathstar were for Enron? I do not see any way they can pay back the debt they have with their current business even if the economy goes up?
Are not these corporations illegal? Propping up AIG just seems to keep the debt off the Fed and the Banks books AIG was a real business once but now it seems to have been transformed into a third party shell corporation whose only purpose is to keep debt off the books.

How do we reinstate all the fail safe measures that have, ahem, failed. By this, I mean not only a firewall between banking functions and investment functions, but accounting and audit functions from consulting functions, plus the ratings function and the so-called SEC oversight.

It seems to me that things have gotten so crazy we expect burglars to turn themselves in voluntarily. Who is looking out for the consumer any more?

Madoff, 3-5 years. He’s old, a well connected plutocrat and the first rule of the plutocracy is “we take care of our own.”

How do you think we can handle the expected bank failures if we get transparency?

FDIC chair Bair said much the same thing on 60 Minutes on Sunday with regard to the larger financial institutions — she was loathe to call them banks. I’ve heard the same from other quarters as well lately. I wonder if there is beginning to be a consensus that the larger financial players have done their own damage to themselves and have gotten enough public cash which they have frittered away on “incentives” (can’t call it bonuses any longer)?

The major issue would be that those who promulgated, marketed, made loans, funded loans, packaged the loans or repackaged and resold packages of loans were all careless, negligent, etc. and failed to disclose the increased level of risk which arose from the failure to apply normal financial risk measurement tools including qualifications such as evaluating an applicant’s assets and income level.

This “relaxed standards” loan approval behavior helped to propel house prices to record highs because of increases in buyer demand DIRECTLY ATTRIBUTABLE to the ease of getting these loans. Buyers who would not have qualified under more careful guidelines bought homes.

Does this behaviour merit criminal prosecution? And if so, how would the government, which appears to be indebted to these elites caroy this out?

You can sample the files; you don’t need to look at them all. The Fitch study sampled just 45 files, all of them well-rated, and found evidence of misrepresentation or fraud in virtually all of them. If that proved to be true of say, a thousand files chosen across asset and ratings classes, you’d have a pretty strong case.

And if it didn’t, if (say) eighty percent of the files were clean, then Treasury’s argument would be much stronger than it is. So it’s hard to see why the request for a study should not be accepted.

JG

Those are all good questions, some of which I hadn’t even thought of asking. The notion of trying to figure out how big the problem is, and then sharing that analysis with the public for debate and help deciding what to do (personally and as a society) seems a basic one to me. Yet it’s one that the government doesn’t seem to be embracing, at least not publicly.

a few economic points I would like to make;

first, we should be talking about nationalizing “banking” not “banks”

banks can remain private however their banking business needs to be nationalized where they can make a set commission, any gambling they do is on their dime not ours

we should not be “nationalizing banks” because they need to eat their own debt, in this crisis we should not be paying dollars on the penny for assets that are still in decline

next I would like to know why the administration insists on framing his tax structure as “raising tax the wealthy”, that is not what he’s going to do, he’s going to “rescind tax incentives that have not only been counter productive but have put a burden on our economic security”

he should also consider pointing out that since the midddle class spends a larger portion of their wages then the wealthy, they are subject to far more tax then the wealthy, (local, state, sales, etc)

if all is told the middle class are taxed at a rate close to 40%, the wealthy are taxed at a rate around 25%, EVEN THOUGH there is a “supposed” progressive tax, in reality that progression is directed at the middle class not the wealthy

if the administration used the facts I just made in the previous two paragraphs he would get far more support for his tax rescheduling program

Isn’t part of the problem with AIG that they hold a large amount of municipal bonds from across the country? I know there were the primary bond source when I was a municipal attorney here in WV back when I was in private practice, and had been a primary source of bond capitalization for cities across the state for quite a while. That’s enormously valuable at a time when infrastructure and development questions are being pushed, too — you need someone to hold municipal paper, and AIG has held a lot of that for a long, long time.

There is an institutional as well as a governmental pull to make that stay solvent for any number of reasons, I’d suspect.

Extremely helpful, thank you.

How much would ending the wars in Iraq and Afghanistan plus cutting the military budget 20% and putting it all into creating jobs like building bridges, roads green power help the economy.
How much would the entire G 20 nations cutting military spending 10% and spending it on job creation roads, green power etc help?

So let’s ask: how do we want to proceed? By protecting the biggest banks, which are both unsound and unmanageable, and thereby forcing the smaller banks, which are in relatively good shape, to compete with them?

Mason brought this out in Congressional testimony. We are throwing trillions at the bad actors in this. What we should be doing is funding the good actors in the economy. As it is, we are dumping money on those parts which have behaved and performed the most poorly and have been starving those parts of the economy that, you know, actually are productive.

How does the “stress test” differ from what you recommend?

Thanks Christy I keep hearing about their former ties to the people they regulate and wonder WTF.

“Obviously, taking apart big banks gracefully is not going to be easy, and up to a point one can understand why the government is nervous about trying to do it. But from a strategic point of view, that seems to me to be the central issue.”

Nicely stated. Now how do we get Congress and the WH to understand and then to act? So far, all we really see is the rearrangement of deck chairs…

If I may, the parties involved certainly hid the risk with assistance of ratings industry. This, to me, seems to constitute fraud on the most global scale. Rotten through and through. jmho. these banksters have killed the golden goose of their entire industry and customer base.

“We ought to be able to find that out, to a reasonable approximation, by sampling the loan tapes underlying securities in different asset and ratings classes. And that, in turn, ought to tell us if the Treasury’s position, that the assets might recover value, has any merit.”

How would such a far-reaching study be conducted from a purely practical standpoint? And by whom?

great question. i hope our guest weighs in on.

yves smith of naked capitalism had an article with william black (”former senior bank regulator, best known for his thwarted but later vindicated efforts to prosecute S&L crisis fraudster Charles Keating. He is currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City.”) that made me think it might not be so easy.

From William Black:

There are no real stress tests going on.

1) If you did a real stress test, as Geithner explained them, you wouldn’t just have a $2 trillion hole — you’d impose regulatory capital requirements of 50%. (FYI, the regulators have the power to set HIGHER individual capital requirements based on unusually large risks at a particular bank.)

Yves here. By implication, the results of anything approaching a true stress test, plus reasonable regulatory responses, would dictate radical action. We have not seen any corresponding groundwork laid for that sort of thing. Back to Black:

2) You can’t conduct a meaningful stress test without reviewing (sampling) the underlying loan files and it seems likely that the purchasers of securitized instruments (not just mortgages) do not even have the loan file data. Moreover, loss ratios vary enormously depending on the issuer, so even a bank that originates (or has purchased a bank that originates) similar product cannot simply take its own loss rate and extrapolate it to the measure the risk on the value of securitized credit instruments.

3) The regulators are overwhelmed because of personnel cuts (particularly heavy among their best, most experienced examiners that had worked banks that had engaged in sophisticated frauds. Buyouts were common, because more experienced examiners appear more expensive. This isn’t true when you consider effecitiveness and productivity, but management didn’t care about that. Treat what I write after the colon as hearing from me at my most serious and thoughtful: it is vastly more difficult to examine a bank that is engaged in accounting control fraud. You can’t rely on the bank’s books and records. It doesn’t simply take more, far more, FTEs — it takes examiners with experience, care, courage, and investigative instincts and abilities. Very few folks earning $60K are willing to get in the face of the CEO and CFO making $25 million annually and tell them that they are running a fraudulent bank and they are liars. FYI, this is one of the reasons why having “resident examiners” never works. The examiners don’t even get to marry the natives. They get to worship God’s annoited. Effective examination is good for you, but it is very unpleasant, ala a doctor’s finger up your rectum. It requires total independence.

So, the examination force doesn’t have remotely the numbers or the relevant experience and mindset to examine the largest banks with the greatest problems.

Yves here. Black is not using the fraud word lightly. He believe that we have Enron-level accounting fraud happening, now, in the financial services industry. And we have asked repeatedly, why has there been no investigation of fraud at Lehman? There was a $100 billion plus hole in its balance sheet, meaning a substantial negative net worth, when its financial statements presented a completely different picture

3-5 years in Prison Resort, no doubt. “Do you call this bilge champagne?”

Madoff to plead guilty to 11 counts of fraud Thursday with maximum 150 yrs sentence

People already know.

You can operate a bank in insolvency. You can guarantee deposits and senior debt, and prevent a panic. The FHLBB did this with scores of S&Ls in the late 1980s and early 1990s, and many of them recovered eventually.

The important job is to get the bank audited, to get it back to serving public purpose (making sensible loans to people with good credit), and to prevent insiders from multiplying the losses either by gambling or fraud. The longer the delay, the greater the risk of this.

Once you have a clean audit, then you decide what to do about the bank itself: whether it should be sold, merged, broken up, shrunk, or closed. This is a long process, unavoidably, but meanwhile there are other banks which can take up any slack in the system.

JG

How do you overcome any institutional resistance to admit there is massive fraud going on? How do you overcome the fact that intensive bank lobbying will help to squelch any congressional effort? Perhaps I’m completely out to lunch. It seems to me the guys in charge (Geithner, etc) are part of the gang.

Are Muni bonds going under the problem with AIG now? I know they will get worse in the future as States must raise taxes because of declining revenue. Bonds are not my subject I admit.

Like every other vast financial empire/bank, I think AIG dabbled in a lot of sketchy betting schemes rather than sticking just to munis. Which is the problem on their end of things — but having them go under would take all those municipal holdings with them, in theory — which presents a much larger problem than CDS investments. Unfortunately. At least, that’s what I’ve heard with regard to AIG…

I’m gradually coming to the opinion that the financial structure can be quite simple and serve the economy better than the one we had. For example, there’s no need to resort to financial deregulation to explain the marcroeconomic behavior of the past decade. And the profits that the industry allegedly earned turned out to be illusory, and set the stage for a macroeconomic bust.

We need to reframe the issue. Financial innovation piggybacks off of the good reputation of scientific innovation. But instead it is only destructive. Financial terrorism, as Hugh would say. We should try to get the word out that financial innovation is a big negative and unnecessary for healthy economic growth.

By the Government Accountability Office. Or by the FDIC. It would not be difficult to find people to replicate what Fitch did, officially and on a larger scale.

Why are the ratings agencies still in business?

Dr. Galbraith,
“…taking apart big banks gracefully is not going to be easy,…”
Someone today was trying to do the numbers on taking apart Citigroup, as an example. They found the number of branch banks in Citigroup, their locations all across the country, and calculated that the FDIC would need something like 11,000 staff to do the takeover, which would have to happen instantaneously in four time zones, presumably on a Friday afternoon. The sheer logistics of such a takeover are breathtaking, but if it’s not done right, a lot could go wrong. How can it be done?

Bob in HI

Is “too big to fail” really too big to be allowed to fail? And if they are already failed, but hiding those facts (e.g. transparency), hasn’t the federal government already bought alot of that failure?

I thought there was risk involved, but the CEOs and Investors seem to have arranged for their risk to be taken over by the government.

First, no lobbying from those who’ve accepted TARP or other Gov’t funds.

Second, sample the base of the securities, what is the fraud rate.

Third, prosecute fraud where ever it leads.

Fourth, point out solid banks, highlight them from the others.

There is an institutional as well as a governmental pull to make that stay solvent for any number of reasons, I’d suspect.

The rotten part of AIG was its London office headed by Joseph Cassano. It was this division that took AIG off the deep end. The other parts of the company were in much better shape and operated in a much more conventional fashion. That has been what some of these funky Maiden Street entities have been about: trying to segregate the crap.

Yes, and the good actors don’t require funding. What they require is a fair chance to compete, in a market that isn’t weighted down by gargantuan failures on life support. And with sufficient demand being fed into the base so that their customers reappear. JG

That’s ridiculous. There’s no need for govt regulators to be in every branch. That’s not at all what an FDIC takeover looks like.

Banks loaned Hedgefunds money at $30 to every $1 of collateral from what I gather I hear all sorts of numbers on this. The hedges put their stock up as collateral that stock has gone down in value why or when will the banks start asking the hedges for more stock or cash as collateral?
I see a big wave of selling on the Dow if this happens.
Or is it already happening quietly? Was Mitt Romney of Bain Capital selling 2 of his 4 mansions in a down real estate market a sale forced by the banks to raise collateral?
Is the current selling on Wallstreet a hedgefund garage sale everything must go? I doubt that its an Obama sale as the simple minded Main Stream Media call it.
I’m just looking for a why for the current huge selling.

If he were poor, uneducated, of color, working class and not well connected who had robbed a bank to feed his family and try and keep his head above water he’d get his 150 years. As an insider, Madoff’s sentence will be far, far less than the maximum. The poor and uneducated typically turn to crime out of necessity while the rich when they turn to crime is due to the fact they are often sociopaths.

Rather like a roving migraine, isn’t it?

Credit Default Swaps how can we get rid of them?

Best regards to you and your wife.

On the banks, I blame the Clintons and Robert Rubin for starters.

Financial terrorism, as Hugh would say. We should try to get the word out that financial innovation is a big negative and unnecessary for healthy economic growth.

Yes, is a Ferrari necessary or even desirable if the job is to haul compost?

Bull’s Eye!

“It is vastly more difficult to examine a bank that is engaged in accounting control fraud. You can’t rely on the bank’s books and records. It doesn’t simply take more, far more, FTEs — it takes examiners with experience, care, courage, and investigative instincts and abilities. Very few folks earning $60K are willing to get in the face of the CEO and CFO making $25 million annually and tell them that they are running a fraudulent bank and they are liars. FYI, this is one of the reasons why having “resident examiners” never works. The examiners don’t even get to marry the natives. They get to worship God’s annoited. Effective examination is good for you, but it is very unpleasant, ala a doctor’s finger up your rectum. It requires total independence.”

BTW, Bernie Madoff is reported to have plead guilty before a judge known for harsh sentences. His offense level puts in in a range for a sentence of up to 150 years.

150 years heck 20 would surprise me and given his age its a life sentence :)

You can wait until the bank closes in Honolulu on Friday night, before moving.

I doubt you need an examiner immediately in every branch, though you would get there eventually. At the outset you issue directives limiting loan growth and otherwise setting policy, and keep the middle-managers on the job. If you guarantee all deposits, there would not be a run; the branches would reopen on Monday and go about their business.

JG

Ferrari bad analogy as it has it uses, and it is certainly fun. Financial innovation is neither.

Why are the ratings agencies still in business?

Because for Wall Street, ratings are critical even if they are crap. It isn’t just the banks that are zombies.

I’d think one of the primary spots to put an examiner or law enforcement or an FDIC replacement group would be at the various IT locations.

In order to protect the data integrity of the bank.

Agreed

What concerns me sir, is the fact that congress is completely ignoring the CAUSE of all this, and that is the laws IT WROTE! When is Congress going to deal with the disease? Or is it just going to leave that cancer in place, given that so many in the halls of power on the left are reaping the benefits of the corrupt relationship between Congress Fannie Mae and ACORN? All just to pass the buck to an Administration that is 1) no longer in power, and 2) not the Authors of the disaster. Congress is the cause. The Problem lay there, and people are becoming aware of it. The crisis of confidence we face now stems from the fact that congress is doing everything in it’s power to make it worse, while ignoring the problem, and the Obama Administration is whistling the same tune. How is it that those in power wonder why investors are not getting into the market? We are smart enough to recognize that the cause of the problem is still in place, and being badly covered up by the party in power that created it.

There will undoubtedly be criminal investigation and prosecution. Already in 2004 the FBI was warning of an “epidemic” of mortgage fraud. But the Bush DOJ never put resources into investigations and prosecutions in this area. Surprise. JG

An FDIC takeover is practically seamless to branch personnel and to the customers who use those branches. What we’re talking about is a change in control.

Financial innovation piggybacks off of the good reputation of scientific innovation. But instead it is only destructive.

i like atm machines (tongue-in-cheek, the post supports your point)

Welcome Professor Galbraith.

Regarding the phantom financial system of outstanding derivative risk liabilities, I’ve seen estimates that range from $50T to $600T. AIG is the poster child of this dead zone. After taxpayers borrowed $180B to dump into the so called purchase of 80% of AIG, how much CDS liability was assumed by Treasury? The sum of those two numbers is the true purchase price of this black hole.

Madoff, never could have done it the last eight years, without the SEC chairman, Chris Cox, and of course the complicity of we’ll do anything for access journalists such as CNBC. See Jon Stewart’s latest, In Cramer We Trust.

If you guarantee all deposits, there would not be a run; the branches would reopen on Monday and go about their business.

citi has operations in something like 100 countries. are you advocating those deposits be guaranteed also?

There has been a meltdown. The reactor core is in a puddle on the floor of the containment building. Adding graphite, at this point, isn’t going to get us back to normal.

You understand nuclear reactors interesting

What I find disturbing about this thought is that I’m a child of Depression-era kids, as are most of the people who made these decisions. What I learned from them was that you never risk what you can’t afford to risk. Were the rest of us just not listening when that lesson was taught to us?

Perhaps that’s a question outside the scope of this thread, but it’s a fascinating sociological one, for sure.

I assume that margin calls are a major reason for the relentless selling pressure in the market. What else could it be? JG

That was my initial thought, but my law partner reminded my that Judge Chin is no softy when it comes to sentencing….so….?

Both should go to jail too:)

Excellent point.

I meant why are the current ratings agencies still in business. The ones in the cartel should be replaced by a whole new group. And with Wall St. layoffs, it wouldn’t be hard to staff them. There are plenty of ex-Wall Streeters who both know how to do the job and who understood how crooked Wall St. is. Shouldn’t be hard to separate the wheat from the chaff in an interview.

Agreed how or when can we get confirmation I want to stick this Obama market run talking point down the GOP’s throat!

And if it didn’t, if (say) eighty percent of the files were clean, then Treasury’s argument would be much stronger than it is. So it’s hard to see why the request for a study should not be accepted.

Well, if in private conversations the banks admitted that it was closr to 8% than 80%…? I don’t know how anxious folks who don’t want the insolvency of the banks to be revealed might be to do that study.

It is bizarre to go looking for “the cause” of this meltdown- as if there is only one thing….

A kid drowns- the lifeguards were playing cards, the parents were off drinking- the kid had been told to stay out of the water and ignored what it was told- those around the kid paid no attention when the kid started hollering for help

What was the cause of the kid’s drowning?

The entire wall street set up with “ratings agencies” is nonsense. They banks pay these agencies to rate their paper. What are the agencies supposed to do? Give crap ratings? They will lose fees. What you have is simply a system to buy a “reputation” and call it a rating. The whole concept is pure hooey.

Banking needs to be a public utility.

Credit needs to be controlled at the federal level and any “derivative” products should be illegal. If you want to “invest” in a corporation, you purchase their shares and perhaps get a dividend and maybe increased share value. But you also own the losses too.

Leveraging has gotten completely out of hand. Banks were supposed to limit the lending to 10:1 and maintain reserves with FDIC insurance. They went off to hypervagas and gambled way more than they could pay – all to make profits. There is no reason for US to pay.

Close the banks. Create public banks all regulated. And start all over again. Bummer but in time things will move OK.

Financial Terrorism

Banks don’t own that money, they borrow it. The effects of deflation on their balance sheets are thus about a wash. There are other reasons for them not lending, and that’s what we’d like to get to the bottom of.

That’s how it looks- a big down day is routinely followed by more down days as the margin calls and preset “sell” triggers take effect.

I agree but it is interesting how the ratings agencies that were absolutely necessary to all these cons have managed to fly beneath the radar so far.

“Undoubtably investigations” have not materialized over many clearly illegal actions in recent years.

Clearly, the fraud and other crimes in the financial sector have destabilized this country and most others far more than would thousands of suicide bombers. Where is the call for investigation, prosecution?

Our own Fed is stonewalling congress!!!

We also know that individual banks got far too big. Too big to regulate, is too big to manage.

Any plans in the works to break up the big banks from the Obama people and how do we decide how big they should be allowed to get in the future? How do we adjust up and down for population and increased/decreased wealth?

I don’t believe its bizarre to look for the cause. Only those that were part of making it would want to cover up the fact they had a hand in it. The rest of us would like to know so that we can make sure 1) to correct what was done and 2) to hold those responsible to account. There is a reason the Democrat party is trying very hard not to look back, they know they are the cause.

It sounds to me as if this is what the KC Fed President was talking about last Friday. Shiela Bair seems to be on board with this, but Geithner . . . not so much.

What did you think of his remarks entitled “Too Big Has Failed”?

How do you overcome resistance? In my view, you make a reasonable demand, explain why it’s reasonable, and insist on it. Reasonable people will join you, and eventually that becomes a large and powerful group.

This is why I’m pressing for due diligence. It is nothing more than asking that the Treasury do what any private investor would do, in the absence of a credible ratings agency.

It seems to me that there really is no argument against this step, but that the consequences of taking it could be profound.

I thought Geithner reacted to Doggett’s question like the devil to a dousing in holy water.

JG

No, the major cause is the market knows Congress, specifically Democrats, are the cause, and the democrats hold power now. No one has confidence in those that created this debacle.

Banks don’t own that money, they borrow it. The effects of deflation on their balance sheets are thus about a wash. There are other reasons for them not lending, and that’s what we’d like to get to the bottom of.

Except they can get from the Fed for almost nothing. The Fed will even pay them interest if they hold it in reserve. And you still have the gain from deflation.

Fine if you are open to the liklihood that there were hundreds of “causes”.

Some like to focus on one chain of events that fit their preconceptions and pretend that it was the only factor involved. Life is seldon so simple as that.

Thanks for addressing my question, I agree that if there were one or two bad abnks, this would not cause a panic. During the S&L crisis I did not personally know a soul who had their money in a troubled S&L. The had their money in regular banks and in credit unions, etc and therefore never had cause for panic

Today, people have seen their retirement investments disappear overnight, and if they now are told their bank may fail….

I wonder if they will liquidate what’s left of their portfolis (thereby realizing what are now peper losees) pull their money out of their banks and start stuffing mattresses with it.

It is more of a crisis of confidence issue. Massive runs on the banks type of panic that I am wondering about

Got to make that the meme instead of financial innovation.

“There is a reason the Democrat party is trying very hard not to look back, they know they are the cause.”

The what party? You should probably consider taking a remedial English course.

Right, but it’s still a very reasonable request, on the merits. JG

Did AIG chop up muni bonds and mix bad bonds from say Eastern Europe, or Orange County which I think had some financial problems not to long ago with good American bonds? That would explain things I think.

I thought Hoenig was very good on this, which surprised me, since I don’t often find myself agreeing with him. JG

Thats called Nationalization – Socialism, and socialism does NOT work. Let the market sort itself out. They are far more interested in being profitable that anyone else. They aren’t in business to lose money. But when Congress steps in and MANDATES they write bad loans and agencies like ACORN come along and force them to use Food stamps as income, yea the house of cards is going to fall down.

To piggyback on that, rwcole’s original scenario shows us a number of things that, had they been done differently, could have prevented the drowning. All are worth pointing out, and some are probably worth attempting to fix.

I stand by my statement. The Democrat Party. As a whole.

Stealth dittohead slip up?

I absolutely agree!

Because the Republican party were the masters of oversight the last 8 years? Dude, put down the kool-aid and take a step back for a moment. Both parties are at fault for various problems in this, including deregulation for self-interested reasons (see, e.g., Phil Gramm, Enron and his gift to UBS right before he left the Senate as a GOP example, just like there are any number of Democratic examples I could toss out.) There is no one cause — there are many, and exempting Republicans doesn’t help matters any more than exempting Democrats would.

There is a presence on this thread who should not be fed.

The credit economy is a bubble which we can’t escape. The whole idea of selling credit, rating credit, financing with debt is quite the house of cards.

We need to have a reality based economic system which works for LABOR and working people, not the investor class and top management. Our system is a conveyor for moving wealth from working people to the wealthy or don’t work – their “money works”. Bad concept.

No, that’s called creating a free market again, which does work. Having too few banks means there are a few entities that can control and influence a market. That’s called oligopoly, and it doesn’t work very well, either.

No the Republicans were not, the Democrat congress in 1977 and the CRA is what did it. the 1992 Congress and Bill Clinton put the CRA on steroids and forced banks with mandated numbers and penalties to write bad loans. ACORN made darned good use of that. The Republicans didn’t have any where near the same level of involvement, though for certain the RINOS helped.

How, exactly, would independent FDIC personnel taking control of insolvent institutions do any worse than the clowns who created this disaster in the first place? Please be specific.

The FDIC has the power to guarantee all deposits, even beyond the $250K limit, in exigent circumstances. And it should certainly do so. I would also guarantee the senior debt. This should avoid panic. There is no reason for depositor panic and no excuse for it.

Repairing people’s losses is another matter, going far beyond the banks to housing, the stock market, and so forth. The way to keep the population out of poverty is relatively straightforward: increase Social Security benefits and cut the payroll tax. Plus open-ended revenue sharing, a national infrastructure fund and a foreclosure-mitigation program aimed at keeping people in their homes. But I digress. JG

The what party? Like I said, a little remedial English, please.

Greater Financial complexity makes fraud easier to hide and the extra *cough* value does not justify the risk.
Simple is easier to build and maintain.

selise in particular has written on the role of Democrats in the 1990s, especially Gramm-Leach-Bliley in 1999 and the CFMA in 2000 but this deregulation was championed by Republicans as well. And when Bush came to office, his Administration prohibited in 2003 the moves of all 50 state Attorney Generals to prevent predatory lending. It also backed the elimination of the net capital rule that removed limits on leveraging. And of course it was Bush who pushed for home ownership through his “Ownership” society. So yes, there is plenty of blame to spread around. Democrats and Republicans in the Clinton years backed really stupid deregulatory regimes but it was the Bush Administration that took these tools and destroyed the economy with them. You do know that Bush was President for the last 8 years, and that he was a Republican, right?

You are correct. Guilty as charged. I apologize.

A truly independent FDIC could, but it is still a Government agency. THAT is where the problem lay. Congress regulates the FDIC correct? What on earth makes anyone think that congress can possibly regulate anything given the absolutely hideous performance it has given us in the last 4 years?

Folks — let’s stay on topic, please and knock off the personal crap. Thanks.

Apparently, being a Republic means never being responsible for things that happen while you’re in complete control of the government.

Go Christy!!!

Our own Fed is stonewalling congress!!!

Whose Fed is it. I think it is of the banking interests, by the banking interests and for the banking interests.

Nonsesense. Here’s reality. See where the commercial and prime mortgage properties losses dwarf the subprime mortgages? Stop trying to answer complex questions with simpleminded answers that conveniently scapegoat the people who can’t buy TV and radio networks.

I would love that.

I don’t know the backstories of the relationships between the various Fed Presidents. Do you know anything of the history between Hoenig and Geithner (from when he headed the Fed in NY)? Did they agree a lot, were they always at each other over one thing or another, or was their relationship somewhere in between?

Socialism does not work have you seen the market lately bank stocks are trading at dollar menue prices. A bank that is to big becomes to powerful and becomes the government.
Government by corporation is our problem now. Blaming the banks for making loans to poor people? When did government force the banks to make Ninja (No Income No Job ) loans?
The banks gave worse lending terms to dark and poor people than to others with comparable credit histories I want the banks investigated for that!

Among other things, this crisis shows that Management is willing to take enormous risks with shareholder funds when the incentives are stacked wildly in favor of risk. When rewards are so HUGE and paid on a short term basis- it’s as if the shareholders handed management a loaded gun and said “shoot me”.

Somewhere this dialogue needs to begin and a better means of corporate governance needs to be developed.

The possibility of collecting enough money in a few years to make one filthy rich for life is too damned tempting for most humans to pass up.

I would also guarantee the senior debt.

how much would this cost the taxpayer?

Thank you. I have serious questions, and regardless of the light mocking, I think they are VALID questions. I think ALL Americans got screwed, and if we, as AMERICANS don’t deal with the real problem, and the “Leaders” who created it, then we are only going to get more of the same. Let me ask this, are you (meaning anyone reading this) better than you were when the Democrats took over the House of Reps in 2006? Regardless of which party, the leaders who have rung us over need to be held to account, not allowed to “Fix” a problem they created.

I would also guarantee the senior debt.

Another aspect of this is why bonds are being given a pass when everyone else is taking a hit? I would also like to know if you have any views on the role that PIMCO has played.

Folks, when I said take off-topic discussions to the prior thread, I meant it. We have a guest, please be polite enough to stay on topic in this thread. Or we’ll have to help you do so.

I am with you, however, the banks were forced to write those loans by the Government. I an telling you, its the Government that created it that has to be held to account and right now it IS NOT.

if we demand due diligence and geithner and summers say that is what they are doing – what objective measures can we, the public, use to judge?

Dr. Galbraith:

Are you aware of any input (other than Geithner, Summers, etal) the President might be receiving these days? If not, is there a way to inject more reasoned analyses into ongoing WH discourse? I’m speaking of yourself, Roubini, Krugman, Stiglitz and other notables. I suspect this would involve “crashing the gate”.

Thank you.

One of the most useful things the government could do, right now, from the standpoint of economic policy, is reassure the public that social security and medicare are safe and will be defended.

Raising doubts about this is only going to deepen the slump, by making the working population even more fearful and therefore more inclined to squirrel away their savings.

I don’t know what the administration’s economists are thinking when they tell David Brooks that they are still looking for politically acceptable ways to cut Social Security. After the collapse of housing, the collapse of the stock market, and the collapse of interest earnings on cash balances, social security benefit cuts are the last thing the country needs. Or Medicare cuts, for that matter.

JG

James, I do want to take a moment to thank you very much for being here today and discussing these complex issues with all of us. There are so many problems all cropping up at once these days, and so few people willing to give clear-cut and straight-forward answers about them. Your candor about a lot of this mess for the last couple of years has been refreshing and is much appreciated.

Good question, and I don’t think we’d know the answer until we have the results of an audit. JG

73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites. Dark-skinned borrowers aren’t stupid – they had no choice. They were ‘steered’ as it’s called in the mortgage sharking business.

http://www.gregpalast.com/elli…..ts-nailed/

I want an investigation!

Makes you wonder. Social Security was originally meant to give people some reassurance during the Depression. That’s not a difficult lesson to translate to today.

Thank you for having this discussion with us.

Show me proof cite a law on the books and look at my 161

60% of Obama’s funding came from Wall St. Gotta keep his contributors rolling in business.

What effects do you see from the inflation of the money supply that has been done so far? Will this result in consumer price inflation, or just counteract the asset deflation?

Why are the people who pushed this deregulation and derivative invited to steer the economy after they took it on the rocks?

What creds do these people have… Greenspan, Summers, Rubin, Volker… these are free market capitalists who worship derivative products and the “wisdom” of the market… as long as they can stack the deck.

They have tanks the whole world and they have really leaned heavily on developing nations with their odious policies. We need to clean house and have the whole lot of them be put on trial for fraud and RICO and that should include the CEOs and top management of all the large financial operations such as AIG Goldman, Morgan Stanley, Case and White and the financial law firms which created this web of criminality.

We don’t need this system fixed., We don’t need to rescue the banking system or the banks. We need a new system free of the speculation and derivative products. And we need to out law shorting by large investors for sure.

Thanks. Some questions will remain unanswered. Thanks for coming today.

Also I find it hard to believe that the Bankers lobby which spends allot on Congress could be forced to do anything that they really did not want to do.
We can’t even get them to open their books now under a Democratic President, House and Senate and we are giving them money!

The U.S. economy is in a liquidity trap, meaning all that liquidity is falling into a black hole. No need to worry until, if ever, the U.S. economy recovers, at which point monetary policy can change.

FYI, Jane Hamsher’s Accountability Now — Democracy “Headache from February 2009:

[…]It was really hard to get people away from the idea that we’re attempting some kind of party purge rather than trying to neutralize the influence of corporate lobbyist money and beltway “groupthink” on Washington DC, which really doesn’t have an ideological identification.

It’s insider vs. outsider, not left vs. right. And despite the fact that we’ve worked with Republicans on FISA and the initial Accountability Now money bomb, and told everyone we’d be willing to get involved in a GOP primary, we were consigned to a Democrat vs. Democrat story. We’re working within the Democratic party right now because they’re in power and that’s where the money is flowing, but that doesn’t mean the political landscape will remain static or that getting involved in Republican primaries won’t make sense in the future.

But hey, you’ve got to start breaking that frame somewhere.[…]

And that’s another thing which needs to change pronto – public finance and no lobbying by for profit companies – NONE.

And to remove the temptation – TERM LIMITS

Why are the ratings agencies still in business?

I second that question

Bullshit. No one “forced” the banks to give SISA (Stated Income) & NINA (No Income) loans to people, so they could get loans they could not afford by avoiding proving income.

The primary fiduciary responsibility of a lender is ensure the loans they make are made to people with the ability (income and stable jobs), to repay. If this was so bad, and done by Clinton (or Carter), why was it not a problem before 2002 & why did Bush & the Republican congress not correct it?

Again, a good question. I’m wary of causing a panic in the bond market but there is a question of whether you enforce a haircut on the senior bondholders.

A small story: back in 1975, I drafted the early congressional plans to save New York City from bankruptcy. (I was 23 at the time.) These included a demand that the bondholders take a haircut, alongside city services and the unions. It was a controversial stand.

At a certain point, the chairman of the banking committee, Henry Reuss, got a call from the former governor of New York, asking for a briefing. Averell Harriman. I was sent. Over to the Harriman manse in Georgetown.

After penetrating a series of courtyards to the innermost sanctum, I found myself in a small room. On one wall, Van Gogh’s sunflowers. In a glass case, a Degas ballerina. And between them, in his pyjamas (he was in his 80s and recovering from a broken hip), Averell Harriman.

I made my case, including the bit about requiring a default on the bonds. Harriman listened carefully. And when I finished, he leaned forward on his cane, and said:

“I understand completely. Capital must pay, as well as labor.”

JG

via jane, from opensecrets.org: TARP Recipients Paid Out $114 Million for Politicking Last Year:

The struggling companies whose freewheeling business practices have contributed to the country’s economic woes are getting a lucrative return on at least one of their investments. Beneficiaries of the $700 billion bailout package in the finance and automotive industries have spent a total of $114.2 million on lobbying in the past year and contributions toward the 2008 election, the nonpartisan Center for Responsive Politics has found. The companies’ political activities have, in part, yielded them $295.2 billion from the federal government’s Troubled Asset Relief Program (TARP), an extraordinary return of 258,449 percent.

“Even in the best economic times, you won’t find an investment with a greater payoff than what these companies have been getting,” said Sheila Krumholz, the Center’s executive director. “Some of the companies and industries that have received payments may now consider their contributions and lobbying to be the smartest investments they’ve made in years.”

from the excel file available for download:

grand totals:

“Campaign Contributions, 07-08 Cycle” = $37,477,300.00
“Campaign Contribs to Democrats” = $21,423,761.00
“Campaign Contribs to Republicans” = $15,991,543.00

We have a distinguished guest on the thread, and we have a troll on the thread. I know which I’d rather read. Please do not feed the troll.

Thanks all, I enjoyed the conversation. JG

if we demand due diligence and geithner and summers say that is what they are doing – what objective measures can we, the public, use to judge?

I think it is not just due diligence but the whole concept of fiduciary responsibility that needs to be addressed. That Geithner came to Congress to present a $2 trillion bank bailout and didn’t even have the broad outlines for it was not quite 3 times as shocking as when Paulson did much the same asking for $700 billion.

Thanks so much for your time and your discussion today — it was wonderful having you here. Please feel free to come back and chat any time!

Thank you so much for coming!

Dr Galbraith thank you for joining us and explaining things in simple English for non-economists.

Thank you so much, Prof. Galbraith

I assume that margin calls are a major reason for the relentless selling pressure in the market. What else could it be? JG

Next question when will it end any idea?

Thanks for answering my questions please come back:)

Jane upstairs on EFCA

Agree completely on the fiduciary obligation concept needing to be reinforced. That was a primary topic of discussion in my corporate law classes way back in law school, and something I reinforced with business clients in private practice. I know it’s still taught — and discussed — but it seems to have gotten lost in the shuffle in some quarters the last few years.

THANK YOU Prof. Galbraith.

Well digressed…we need much more on that subject, Do you have a book on it to recomend?

Banking needs to be a public utility.

I meant to highlight this. This is certainly one way to go and perfectly legitimate to consider. It is part of what eCahn was getting at too, when she challenged the need for unrestrained innovation in capital markets. What we need banks to do is fairly simple and can be handled by a public corporation or heavily regulated private ones.

I think it is not just due diligence but the whole concept of fiduciary responsibility that needs to be addressed.

from wikipedia:

A fiduciary duty[1] is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the “principal”): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.

if i understand this correctly, my impression so far is that we are not considered the “principals”

Which brings me back to my earlier thought – where did all this go so wrong? Why did we baby boomers forget the lessons our parents learned from the Depression? (By “we”, I don’t mean you, Christy.) At least from a sociological standpoint, it’s an interesting question. We’ve had at least four similar depressions or panics prior to this one, all caused by “innovative” financial practices of one sort or another. Maybe we could avoid a sixth?

minsky?

i don’t know, but he’s on my reading list (have a long way to go before i get there though)

Yes, the function of ‘complexity’ is to obscure both clarity and reason, to put up barriers to understanding, meaningful regulation AND determinations of responsibility.

Whenever any aspect of society is deliberately either made sacred (as the Military-Industrial-Congressional is still yet ‘made’) and or, made to appear so complex that no one can either understand or comprehend it, of a certainty, the major ‘players’ on that ‘field’ are up to no good.

Our Economic System has been, historically, both claimed as sacred, the ‘unseen hand’ and all that and, by design, made to appear so convoluted, complex beyond the understanding of all but the anointed few, and to be subject to no limits, needing to be ‘free’, such that we conflate ‘free enterprise’ with democracy itself.

In point of fact, unfettered markets must assume that not only is greed good, but that it is the highest ‘good’. Such a ‘perspective’ is utterly and totally inimical to democracy and to the social fabric itself, for the ‘commons’ are the very ‘field’ upon which the ultimate designs of the avaricious must be directed.

Mindless expansion and the extensive use of resources for the profit of the few cannot mesh with the reality of a finite world or a fragile environment.

The greedy, of their own volition, will never settle for ‘less’; they feel entitled to ‘all’ and, in an era of the Divine Right of Money, when money is all that matters, how one gets it does not.

Adam Smith well understood the notion of, “Devil take the hindmost”, and it is truly amazing (or not) that those aspects of his writings on economic matters are either glossed over or totally ignored.

We have, now, the opportunity of changing our ’system’, of making it more fair, equitable AND sustainable.

Therein lies our fate and the fate of our world, insofar as human beings are concerned.

Sadly, the powers that be, feeling threatened by a growing awareness of that truth, seem bent upon denying, to the bitter, whimpering end, the acceptance of that truth within their own minds (and hearts and souls, if they have them) and thereby are the primary impediment to the advance of understanding, of peace, and of sanity.

The most powerful amongst us are the most-frightened, the least imaginative, and the least able to become more than their timid , pinched little infantile selves.

They are a sad lot, actually, and we shall all be far better off when their power, through their own ineptitude, eventually displaces them.

Look to ACORN. They are the ones that were primarily responsible for that. The law is: United States Senate 109th Congress, “S. 190: Federal Housing Enterprise Regulatory Reform Act of 2005.”

Look also at this, ACORN really does brag about what it has done: “To Each Their Home.” http://www.capitalresearch.org…..irhome.pdf

I have as much right to ask relevant questions as you do.

Please explain ACORN’s Brochure then for me. It can be found here: http://www.capitalresearch.org…..irhome.pdf

Thank you for coming on the thread.

I am sorry I posted the incorrect bill, that one might have prevented all this. The bill I should have posted is this: United States 102nd Congress. “Federal Housing Enterprises Regulatory Reform Act of 1992 S. 2733 .”

I don’t see anything that says no income no job, child support and food stamps counted as income yes buy not no income. I do not see anything that says ACORN people are defaulting more than poor people who got loans from banks without ACORN at a higher rate.
I do not see anything about ACORN getting rich charging Dark people more for loans like the banks did as per my comment at 161.
Cujo @ 146 at his link shows that subprime is not the biggest source of bankruptcies in the housing market.

Looks like some informative reading.

What is it with this stupid ACORN reference, anyway? Talk about a tempest in a teapot. Give the wingnuts a tall glass of kool aid, throw up a smokescreen and then proceed to rape and pillage the federal treasury. Nice game.

You are correct. Time to jettison the private financial system for a while. Take the bail-out money and create a government-run national bank which would make the loans that need to be made, while guaranteeing deposits at the private banks as the FDIC presently does.

Then, after the bad private banks have failed and the good private banks have survived, begin to allow the good banks any federal assistance they need to take over the loan operations from the national bank. Re-establish the New Deal regulations and generally start over.

It is a sheer waste of money to give the bandits more money to steal while penalizing the healthy private banks.

Credit Default Swaps how can we get rid of them?

New regulation and banning new naked CDSs stops new stuff from appearing and then letting the market work it’s way through existing ones. If they’re related to mortgage backed securities, then a lot of the foreclosures will require the CDSs on those assets to be paid off and that brings that contract to an end.

Any quicker forceful way of dealing with them would be extremely risky in terms of damaging innocents as well as the guilty and of perhaps screwing up the more real market assets and firms which had used CDSs to hedge risky positions.

I stand by my statement. The Democrat Party. As a whole.

Are you certain you don’t mean “the Republican party as a hole”?

Agreed:)

Seconded.

On the matter of securing data centers in a takeover: it would probably be a good idea, but would probably be unnecessary.

I know a (very) little about bank IT operations, and I wouldn’t worry too much. I’d be more interested in securing the main office email and backups of desktop systems. That’s where it might be possible to hide evidence. Datacenters are probably much tougher in this regard.

There’s a lot of redundancy in bank IT shops–mirrored data centers in different parts of the country, continuous data protection by snapshots, journaling file systems, backup disk storage, and backup tapes both on-site and in bunkers in the desert. So cooking the books in the data center consistently enough to really hide fraud should be impractical.

Security in bank data centers is also pretty tight. I doubt that even the CFO has unfettered access (much less the IT skills to exploit what access he does have). Cabinets are locked, networks are walled off. Lots of stuff is encrypted. Executives get reports, not access to raw data.

The system administrators in the bank data center are probably at least as reliable as branch employees. They have no loyalty to the individual CEOs and CFOs–quite the contrary. Their job is to keep and protect the company records, not the CEO/CFO.

So if bank policy is criminal, the bank records will probably document criminal activity, and hiding it will be more than any reasonable conspiracy can manage. What we lack is the will to look, audit, prosecute, and punish, not the material.

I’ll eat my losses as long as the banking wise guys and the Wall Street touts eat theirs AND pay their debts to society. The key to avoiding chaos is to have justice and to have it seen to be done.

It’s when some are getting away scot free that people panic and it becomes every man for himself.

This is why I find Mr. Galbraith’s comment about due diligence particularly heartening. We have laws and regulations to handle the potential for chaos. After years of circumventing them, we need to let the rules do their work.

Amen to that. Since the Berlin Wall fell, it seems like the CEO class and their stooges on the right are the only ones left that believe in a centrally planned, monopoly economy. Their brand of Antisocialism makes their economic policy more cynical and less excusable than Socialism, but no more effective.

Term limits can always be gamed to deny the voters the representation we choose while giving the big money a series of bought-and-paid-for representatives.

The way to attack this is to attack the money directly using severely progressive income taxes and and confiscatory inheritance taxes. Eliminate surplus riches and you eliminate loose money in politics.

Concentration of wealth in a few hands is the same as concentration of power. This is why the Right seems willing to let the bulk of the nation’s wealth evaporate: as long as the slice that remains to the wealthiest grows proportionately larger, their power survives and grows.

I’m sure you mean well, but can’t buy in to that. I know what a fiduciary duty is, though I’ve never been a lawyer or banker. I’ve lived by the Depression rules my folks gave me. I never run a credit card balance. I have no loans other than a car and a modest mortgage that I never refinanced and will pay off in a couple of years. I’m paying tuition out of pocket. I never, ever mistake investment advisers, bankers, or realtors for my friends. So I’m doing better than many that I know.

But my generation didn’t get defined benefit pensions or steady careers. We got 401Ks, savings accounts that return 1% or so, and corporate takeovers that lowered our benefits over and over, if they didn’t lay us off for a year or so. So I probably won’t be retiring.

Our economy was stolen, systematically embezzled, looted. The thieves didn’t use the traditional, .45-caliber “innovative financial instrument” for leverage, but they stuck us up even so and continue to do so.

So no generational angst, please. It’s the crooks against the honest and the rich against everyone else. Nothing new.

As A-Hole?