"Banking was conceived in iniquity and was born in sin. The bankers own the earth."
- Sir Josiah Stamp, 1927
It was a news story that didn't get much traction. Yet it is a reflection of all that is wrong with the world of finance today.
The United Nations' crime and drug watchdog has indications that money made in illicit drug trade has been used to keep banks afloat in the global financial crisis, its head was quoted as saying on Sunday.
The United Nations Office on Drugs and Crime had found evidence that "interbank loans were funded by money that originated from drug trade and other illegal activities," Costa was quoted as saying. There were "signs that some banks were rescued in that way."
Economics and morality started parting ways in the days of the Medici Bank. That process was completed when the Democrats revoked Regulation Q in 1980.
With no moral compass, is it any wonder that the world's banking industry is a morass of thieves and prostitutes?
"Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class."
- James K. Galbraith
The nation is short of a lot of things, but one thing it isn't short of is denial.
For example, has anyone heard the news media use the term "crash" in regards to what happened to the stock market in late 2008? I haven't. Nor have I heard the term "financial panic". Yet that is exactly what happened to the stock market, but the media doesn't tell you that because it wants you to keep sending your money to Wall Street in the form of your 401k.
Just look at the firms that the taxpayer has bailed out. They've set up off-shore operations in order to avoid paying taxes. Sweet deal, huh?
We're Americans. Therefore we are better and smarter than the rest of the world, right? Then again, maybe we aren't.
“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at Japan’s Financial Services Agency during the crisis. “Why is it making the same mistakes?”
“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H.Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”
Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.
What Bush and Japan tried, and what Obama is trying, isn't new. Hoover tried the same thing in 1931 - swapping bank mortgage-backed securities for treasuries.
One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.
If we are going to get less than half back, that means that we've just flushed over $2 Trillion down the drain. We've already flushed $78 Billion down the drain in overpriced securities and no one seems to care.
To put that in perspective, remember when Hillarycare was too expensive for America? It's cost was $110 Billion to insure all Americans. But then that didn't reflect America's values, I guess.
What does seem to reflect American values is loaning Wall Street Hedge Funds taxpayer money to speculate on the market. Huh? When did subsidizing financial speculators become an American value? That's like giving money to a gambling addict, along with a bus ticket to Vegas, because he has agreed to split any profits with you that he might make. If not, you are out all that money and he doesn't have to pay it back. What a deal!
Speaking of values, our government has now gotten into the business of trying to reinflate the housing bubble.
Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees.
Let me translate for you. "Drop credit-score requirements" = subprime. "Reduce income-documentation standards" = Liar Loans.
That's right people - our government is now trying to reinflate the real estate bubble using the exact same methods that got us into this mess in the first place. This is total insanity!
But it doesn't stop there. The Obama Administration plans to subsidize at-risk borrowers. Has anyone bothered to ask "How long"? Meanwhile the Fed is buying up all those subprime, liar-loans that Fannie and Freddie are pumping out.
Seeing the forest through the trees
"The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes."
- Kevin Rudd
What is happening is obvious - the politicians are trying to get us back to where we were a few years ago. The problem is that we can never go back to where we were a few years ago, because we were in an unsustainable credit bubble.
The politicians, and the Wall Street crooks, both want to get the credit flowing again, and therefore look at this crisis as a liquidity problem. However, they are wrong. This isn't a liquidity problem, this is an insolvency problem.
We can't get home prices back to where they were because new home buyers had been priced out of the markets. Home prices must fall. We can't get people taking out new loans to spend again because they don't have the incomes to service the debts they already have. And we can't get banks to loan money again because they are insolvent from lending out too much money to people who couldn't pay it back.
The problem is so basic, and so overwhelmingly obvious, that no one in charge can acknowledge it:
People don't need loans to buy stuff. They need good-paying jobs so they can pay off their loans and save money.
Thus we have both the political and financial leaders of the world trying to apply the wrong solutions to a crisis that they are unable or unwilling to diagnose correctly. Thus we waste time and resources trying to pump blood into a corpse.
The stimulus package will fail because it is intended to get people to spend money again. People spending money isn't the problem. The problem is people not making money. We don't need more shopping malls, we need more factories.
People use the New Deal as a blueprint for how we can fix our problems today, but they are wrong.
Over in China right now their stimulus package is starting to work. Their economy is starting to recover. So it should work here too, right?
Wrong. China's problem was that there was no large domestic market. They built factories to sell goods to America, and then saved their money. They needed a stimulus package to get people to spend.
America in the 1930's was in a similar situation to China today. We had the largest manufacturing base in the world. We build things to sell to other nations and then saved our money. That's why the New Deal worked. It created ways for people to buy homes for the first time. It encouraged people to invest again.
That isn't the situation in America today. Americans refer to themselves as "consumers", not "producers". We are already The Mouth Of The World. So why would more consumption be a good thing? Why would it fix anything?
So why doesn't the government attack the root of the problem?
The answer to that question has many layers.
For starters it would involve long-term solutions, and the government is only interested in quick fixes that conform into the election cycle. Another reason, possibly more important, is that it would open up all sorts of other questions about the nature of the world's economic structure that the ruling elite would rather not talk about.
But the most important reason is because Wall Street, the true owners of Washington, aren't interested in fixing the root of the problem. They have immense wealth and power from the current system, and even if the current system is unsustainable, dysfunctional, and breaking down, they want it to continue for as long as possible.
"Government has coddled, accepted, and ignored white collar crime for too long. It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives."
- Harry Markopolos in Congressional Testimony