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Monthly Archives: September 2013

Forget it, Jake…it’s Chinatown

-Chinatown (1974) dir. Roman Polanski

When, in a moment of quiet contemplation, you look back on your life, at the decisions and vagaries that have brought you to where you are today, does that final line from Chinatown ever pop into your head?  It does mine.  The resigned, laconic advice seems wise when you consider the insuperable nature of the entrenched corruption and evil Jake is facing.  It’s advice that times like these make very tempting to take.

It’s been five years since the Lehman Brothers collapse, five years since the global financial melt down.  It’s been five years of economic stagnation and anemic job growth.  But sas anything of significance changed?  Have there been lessons learned and people brought to account?  Well it sure doesn’t look like it.

Take this interview with William Black, a former bank regulator and current law and economics professor.  The interview focuses on the contrast between the lack of prosecutions following the most recent financial crisis and what happened after the Savings and Load debacle of the 80’s and early 90’s.  The entire interview is wide ranging and worth a read, but I’ll excerpt some of the more depressing bits:

And what people don’t understand about the criminal justice system is there are roughly a million people employed in it — and of course, millions incarcerated in it. But of the million employees, 2,300 do elite white-collar investigations. And of those 2,300, you have to contrast that to the number of industries in the United States, which is over 1,300. Notice I didn’t say ‘corporations,’ I said ‘industries.’

So a couple of things should be obvious. First, the FBI agents will not have expertise in the industry. And second, they can’t patrol the beat. They have to wait until a criminal referral comes in, and won’t come from the bank itself. Banks don’t make criminal referrals against their CEOs.

It could episodically come from whistleblowers, but against an epidemic of fraud that can never work. It has to come overwhelmingly from the regulators. So when the regulators ceased making criminal referrals — which had nothing to do with an end of crime, obviously; it just had to do with a refusal to be involved in the prosecutorial effort anymore — they doomed us to a disaster where we would not succeed.

So here we get a sense of how the deck is stacked against any sort of robust law enforcement efforts, not only against the big players, but the little fish as well.  A few beats later Black says this:

Because of changes in executive compensation, it’s very uncommon for people to blow the whistle in the modern era. What people often don’t understand is that executive compensation bonuses go down very low in the food chain. And so if I’m a boss and I see a crime being committed, it isn’t just that I risk losing my bonus, it’s that Fred and Mary who report to me — Fred with three kids about to go to college and Mary with a kid that has severe problems — they’ll lose their bonuses as well. And so it’s not even my greed — it’s my altruism that gets in the way.

I might interpret how low in the food chain executive compensation goes as something akin to Mob “dirtying up” or just flat out bribery, but I suppose using altruism to shield top executives from whistle blowers does have a certain dark poetry to it, even if I don’t necessarily buy it.  And then, for the cheery on top, Black’s opinion of what we can expect going forward:

The failure to prosecute under any theory of economics and any theory of criminality means that the next crisis is far more likely, and that it’s going to be far larger, because this accounting control fraud recipe is a sure thing that guarantees that you will be made wealthy immediately as the controlling officers, and there will be no risk — zero. Not a single elite banker who caused this crisis is in prison, period. So you have absolutely maximized what we call a “criminogenic environment,” and a key element of that, as you say, is that we have taken moral hazard — the fraud dimension — and maximized it.

Sleep tight.  Also a good segue (I was certain that word was spelled ‘segway’) for another another heart warming piece over at the Institute for New Economic Thinking titled “The Next Financial Crisis” by Eric J. Weiner.  Again the whole piece is worth a read, but here are a few excerpts:

By the time the real crisis hit and Lehman and Bear Stearns imploded, the Dow was below 10,000. The S&P 500 index was down almost 30%. The market was waiting for more bad news.

But that was five years ago. Surely in the intervening half a decade we’ve made the necessary changes to create safer financial markets that aren’t as susceptible to damaging excess and are insulated enough that they can’t crush the overall economy?

In a word, no. Indeed, there have been practically no structural changes in our financial system at all. The systemic risks of another bubble booming and busting remain as acute as they were five years ago. All that’s different, for now, are the surrounding economic conditions.

The real problem, however, is that we haven’t responded to the lessons of five years ago by making substantive changes. Banks that were deemed “too big to fail” by the federal government during the crisis — Bank of America, Citigroup and JPMorgan Chase — remain, well, too big to fail. Wall Street is back to creating synthetic collateralized debt obligations, one of the more pernicious varieties of securities that blew up during the crash. And some consumers can still get a federally guaranteed mortgage with just 3.5% down.

The point is that although the economic conditions for a bubble haven’t yet materialized, the seeds of our destruction are still there, lying dormant. And with the same financial system in place, another crisis essentially is waiting to happen.

There are no simple answers. It will take a complex plan to seriously regulate a system that affects the broader economy in ways that it never has before and is dominated by banks the size of sovereign nations.

No simple answers?  At this point in history can Americans comprehend, or tolerate, any other kind?  I’ve read the Internet, so I have my doubts.  So what to do?  How to avoid the next financial disaster?  How to hold those who caused the last one to account?

I find myself bereft of brilliant ideas.  I could recommend you start a blog, but from personal experience that doesn’t appear to have much of a impact on the world.  I suppose it might help if people read it.  You could write your Congressperson or Senator I suppose…but the financial services industry writes them letters as well, and I bet their letters contain many more 0’s that yours will.  It would be kind of cool to get a form letter on some US Senate letterhead though.

Maybe it’s all the Stoic philosophy that I’ve read (actually about two pages of Epictetus, but I think I get the gist), but perhaps all this is just the part of life that needs to be borne with quiet reservation by us little people.  Perhaps the best we can hope for is the play Cassandra, able to see impending disaster, but powerless to prevent it.  Maybe we live in Chinatown.  Pleasant dreams!

Continuing on with the award winning series of “everything is rigged’ posts, here is a link to an informative piece at Barry Ritholtz’s blog.  The title is “Banks Are Manipulating Gold and Silver Markets”, but it goes on to list all kinds of market rigging, like energy, commodities, interest rates, currencies, etc.  With a plethora of links (as opposed to a plethora of piñatas).

I wonder:  At what point does the ubiquity though space and time of a phenomenon lead you to the conclusion that it’s a feature, not a bug?  Just how easily, and readily, is the invisible, though iron clad, hand of the market thwarted or appropriated?  The expansive list provided at the link would indicate that the answer is pretty damn readily.

In anything approaching a rational discourse, the endless lists of fraud, abuse, and manipulation that is the history of capitalism would serve as a insurmountable indictment against the benevolent, all powerful god of the free market.  But there is always a true believer to offer up a theodicy.  Like any fundamentalist, the market fundamentalist is looking for the practice of the pure, the true faith, one unsullied by the grimy compromises of this fallen world.  Something he will never find, at least not until he shuffles off this mortal coil to his final reward.

What’s become obvious to me: the markets aren’t magic, they’re us.  They always have been.  Markets are powerful, useful tools that can spurn innovation and improve lives.  They are tools created by us, and they can be broken by us.  They can be used for good or bad.  Having lived through the last five years of economic crisis and stagnation, how could you come to any other conclusion?

I’m neither a Constitutional scholar nor an historian of American politics of any repute, but I have to imagine that the game of war powers hot potato that’s recently played out between President Obama and (some in) Congress is a rare thing in the history of the Republic.  Because it doesn’t stand to reason that those who aspire to, and obtain, political office would in general be eager to cede power to another branch of government.  Say what you like about politicians, but blushing at the exercise of power is not to be found as one of their core characteristics.  Except, maybe, when the decision to be made is fraught with down side.  Then you may want to toss that potato to the next poor shlub.

That may be what we’re seeing with the decision on how the US should respond to what we are told is a Sarin gas attack by Assad’s forces on a suburb of Damascus on Aug. 21 that killed nearly 1,500 civilians, including many women and children.  Initially a retaliatory strike by the Obama administration seemed a foregone conclusion, but then on Aug. 21 Obama stepped back and said that he would seek Congressional approval for military action against the Assad regime in Syria.  Then some in Congress wanted to pass that potato right back.  Rep. Peter King (R-N.Y.):

President Obama is abdicating his responsibility as commander-in-chief and undermining the authority of future presidents.  The president doesn’t need 535 members of Congress to enforce his own red line.

And it’s not too hard to see why that may be.  While Rep. King may be honestly defending firmly held constitutional principles, there is little certainly and a lot of danger in military action.  There doesn’t look to the possibility of developing any sort of coalition around a military operation, excepting perhaps France.  It doesn’t appear that the chemical weapons are in areas that can be struck without the high risk of collateral damage.  And what would the mission be exactly?  To weaken the Assad regime enough that the rebel factions can overthrow him?  To fight for the good guys?  Who are the good guys exactly?  Are there any?  If you care to you can go to Youtube and watch plenty of examples of executions and atrocities on both sides.  Some of the rebel factions, such as the Al-Nusra Front, have Al-Qaeda ties.

So it doesn’t look neat and tidy, at least to me.  There are a myriad of serious constitutional, humanitarian, and international relations issues intersecting in Syria.  Though, if you are one of those who peruse the Internet from time to time you may be forgiven for failing to grasp the severity and seriously of the situation.  Because, of the many sins of the Internet, the pumping into the atmosphere of untold metric tons of snark and glib has to be in the top five.

With a blog, or worse Twitter, so many folk are looking for that one liner, that bon mot, that 140 character smart bomb that will incinerate the enemy and bring fame, favorites, and retweets (and then…profit I suppose? I’ve never been clear on what comes next).  The examples are legion, but take this tweet from Glenn Greenwald:

The link is to a short blog post at Eschaton titled Hard Work, the complete contents:

The serious people seem to agree that, well, yes, maybe there are other things we could do besides blowing stuff up. But, you know, that’s hard work. Blowing stuff up is easy!

It’s also expensive, kills people, and doesn’t achieve anything positive.

At least it’s easy.

Well that was glib!  Blowing stuff up is is bad, it does lots of bad things.  But it’s easy!  That exclamation point may be indicative of some snark.  Do you feel edified?  Even a little?  Maybe not, but at least it afforded some commenters to join the snarkoff.  Here is Steve Simels, he has Brian the dog from Family Guy as his avatar, so he is pretty hip:

As I said a few weeks ago, this country hasn’t just jumped the shark, it’s jumped the Sharknado.

Hah!  Remember Sharknado?  Yeah that thing from Twitter.  It also may be been a show on some basic cable station.  Not skipping a beat JeffCO responds to Steve: “Another failure of the War on Tara.”  I think I get that one, because Tara Reid was an actress in Sharknado!  But enough with Internet comments, that’s one abyss you do not want gazing into you.

The snark will be there, and I can’t imagine it will do anything but get worse.  But there are those out there who are neither glib nor snarky, you just have to find them.  My personal recommendation, for any topic in general but Syria in particular is The War Nerd, he tweets and writes for NSFWcorp.  You won’t find any snark or glib, but a question from a recent tween does haunt me as I think it may serve as an epitaph for our times:

What did you think, they were ironists like us?

A little who?  Those who know Adam Smith only by reputation, or as a neglected saint of the modern right and libertarians may be a bit surprised at the sympathy he expressed towards the strivings of labor, particularly its attempts to organize.  I know I was.  Here’s a selection from Book I Section VIII of Wealth of Nations:

What are the common wages of labour depends everywhere upon the contract usually made between those two parties [workmen and masters], whose interests are by no means the same.  The workmen desire to get as much, the masters to give as little as possible.  The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.  The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen.  We have no acts of parliament against combining to lower the price of work; but many against combining to raise it.  In all such disputes the masters can hold out much longer.  A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired.  many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment.  In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

We rarely hear, it has been said, of the combinations of the masters; though frequently those of workmen.  But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.