Posted on Evans Liberal Politics, from Alternet, May 15, 2010, by James K. Galbraith with commentary by Paul Evans.
See James K. Galbraith: Why the 'Experts' Failed to See How Financial Fraud Collapsed the Economy, AlterNet, May 15, 2010, by James K. Galbraith, quoted verbatim:
Galbraith to senators: "I write to you from a disgraced profession. Economic theory ... failed miserably to understand the forces behind the financial crisis."
Galbraith's statement is followed by my highly critical discussion of the sweetheart relationship between Wall Street and the leading financial personalities of the Obama administration, especially Tim Geithner, Larry Summers and Ben Bernanke, with a call to start a new era of transparency and honest dealing by cleaning house.
May 15, 2010 | Editor's Note: The following is the text of a James K. Galbraith's written statement to members of the Senate Judiciary Committee delivered this May. Read the full statement and article at Evans Liberal Politics.
Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including "rational expectations," "market discipline," and the "efficient markets hypothesis" led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.
Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word "naughtiness." This was on the day that the SEC charged Goldman Sachs with fraud.
There are exceptions. A famous 1993 article entitled "Looting: Bankruptcy for Profit," by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: "the best way to rob a bank is to own one." The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.
Read the full statement here.
Commentary by Evans Liberal Politics owner Paul Evans:
First a video that's been making the rounds:
Obama: GOP Drove The Country Into A Ditch.
'Now They Want The Keys Back'
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See WSJ: Morgan Stanley Is Focus Of SEC "Criminal" Investigation, Daily Kos, May 11, 2010, by bobswern, excerpt quoted verbatim:
Tonight, we have breaking news from the Wall Street Journal telling us that Morgan Stanley is on the business end of a (what Yves Smith over at Naked Capitalism is referencing as "criminal") fraud probe by the Securities and Exchange Commission (SEC) concerning collateralized debt obligations (CDO's) which Wall Street traders nicknamed the "dead presidents" deals, due to the fact that the CDO's were named after 19th Century U.S. presidents, including Andrew Jackson and James Buchanan.
Apparently, according to the WSJ story, Morgan Stanley "...helped design the deals and bet against them, but didn't market them to clients." They left that task to Citigroup and Swiss banking giant UBS.
See Junk Bond Sales Set Record as Investors Waver: Credit Markets, Bloomberg, May 3, 2010, by John Detrixhe and Craig Trudell, excerpt quoted verbatim:
May 3 (Bloomberg) -- Companies sold $33.7 billion of junk bonds in April, a record for the month, with borrowers rushing to issue before investors pull back from the riskiest securities.
Paul Evans: And this says nothing of AAA rated bonds which are really composed, if you can dig that far into the derivatives, of mortgages -- mostly sub-prime mortgages -- which are in fact basically worthless. And STILL they are allowed to be rated as AAA bonds.... And the big investment banks like Goldman Sachs sell these packages of mortgage-derived bonds and then BET AGAINST them with insurance and other hedges. This is nothing short of fraud, and it has to be made illegal. See Midwest Banc’s Lender in Illinois Shut After Taking TARP Funds, Bloomberg, May 15, 2010, by Dakin Campbell, excerpt quoted verbatim:
May 15 (Bloomberg) -- Midwest Banc Holdings Inc., recipient of $84.8 million in bailout funds from the Troubled Asset Relief Program, had its Illinois lender seized by regulators as the count of failed U.S. banks this year rose to 72.
Midwest Bank and Trust, with $3.17 billion in assets and 23 retail branches, was closed yesterday by a state regulator, according to a statement on the Federal Deposit Insurance Corp. website. Firstmerit Bank of Akron, Ohio, assumed all the $2.42 billion in deposits.
The Wall Street Journal has an interesting and informative map and list of the 233 banks that have failed since the beginning of 2008. There is also a list of the banks which have failed since October 1, 2000 at the FDIC website.
One commenter, probably a Republican businessman, claimed there was no such thing as AAA bonds comprised of subprime mortgages, that this can't happen. I suggest anyone believing this is not a common practice look into articles from a Google search of Improper rating of bonds as AAA when they are from derivatives. There's LOTS of examples in those results, so if you have a little time you can satisfy yourself about this.
Watch GRITtv's Mary Botarri in Auditing the Fed: a Progressive Win -- 1:56.
Especially good is Real Time with Bill Maher Pts 1-5 & New Rules -- 10:59.
See Yves Smith, et al: "The Emperors Strike Back", Daily Kos, May 9, 2009, by bobswern, excerpt quoted verbatim:
So, here we are, roughly 27 months into (or, "past," as some would have us believe) the biggest economic crash and burn this country's seen in at least three generations.
We're now at a point in our society where there's a greater disparity between the haves and have-nots than at any time in the past 82 years. If economic matters continue as is--which appears to be the case based upon the state of regulatory reform efforts in our Senate--if we haven't yet already exceeded those class disparity numbers from 1928, we soon will.
It's the new normal: The rich get richer. The poor get poorer. The middle class gets eviscerated.
Commentary by Evans Liberal Politics owner Paul Evans: These guys, the big investment bankers, the big players and people in Bush's Treasury Department -- as well as players from that era who made the transition into Obama's administration, and also the Congressmen who enabled these predators: these guys are guilty as hell. And OH so respectable, aren't they, in their Gucci shoes and tailored suits, being driven around in their limos, with their illegal alien nannies and gardeners and trophy wives... makes you want to puke. And Hank Paulson belongs in jail. Probably so do Summers, Geithner and Bernanke.... "Just an opinion."
In the above video by MSNBC and Talking Points Memo, President Obama correctly states that the GOP "drove the car into the ditch" and that "they created this mess" and can't have the keys back. He laments the failure of Republican leadership to cooperate in any meaningful was about "fixing the mess". This is all very true, but the same economic leaders who led the Republican economic team are now Obama's own advisers and power players. So long as Summers, Geithner and Bernanke are the leading players in Obama's administration, calling the kettle black will not work when your own pot is the same damned color, so to speak. I KNOW we are trying to get some meaningful reform, but Rahm Emanuel and Tim Geithner are fighting it from within the Obama administration tooth and nail, themselves.
On a more positive note see Obama Says Finance Rules Will Guard Against ‘Predatory’ Lending, Bloomberg, May 15, 2010, by Nicholas Johnston.
But see Ron Paul: Obama’s not Socialist, he’s Corporatist, Christian Science Monitor, April 29, 2010, by Rocky Vega: To quote Ron Paul:
"A careful examination of the policies pursued by the Obama administration and his allies in Congress shows that their agenda is corporatist. For example, the health care bill that recently passed does not establish a Canadian-style government-run single payer health care system. Instead, it relies on mandates forcing every American to purchase private health insurance or pay a fine. It also includes subsidies for low-income Americans and government-run health care "exchanges". Contrary to the claims of the proponents of the health care bill, large insurance and pharmaceutical companies were enthusiastic supporters of many provisions of this legislation because they knew in the end their bottom lines would be enriched by Obamacare.
"Similarly, Obama’s ‘cap-and-trade’ legislation provides subsidies and specials privileges to large businesses that engage in ‘carbon trading.’ This is why large corporations, such as General Electric support cap-and-trade. To call the President a corporatist is not to soft-pedal criticism of his administration. It is merely a more accurate description of the President’s agenda."
I by no means entirely agree with Dr. Paul, but one has to admit he's pretty accurate in making this judgment of Obama. For example, I have no knee jerk opposition of big government and certainly consider myself a liberal; thus Evans LIBERAL Politics. But Ron Paul is right: Obama is defacto a corporatist. Sadly.
How can Obama hope to maintain credibility as a populist and a progressive when Summers, Geithner and Bernanke comprise his economic team? People aren't fooled any more. We know that the same sweetheart deals between the Fed and the investment banks are going through that went through under Bush. We know that Summers and Geithner have been involved in some very shady dealings personally, that they facilitate Wall Streets greed and corruption, and that there is no hope for equitable, even-handed interaction between the Fed and Wall Street when Ben Bernanke is in charge of the Fed. It's time for Barack Obama to truly jettison this baggage from the Bush administration and move into a new era of transparency and honest dealing. Stop secretly opposing auditing the Fed and start staffing your administration with honest dealers. Get rid of Summers, Geithner and Bernanke. Then maybe people will start to believe you are for the middle class and everyman. Otherwise, "reform" or no reform, it's just business as usual.
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See Jon Stewart to Bankers: We Give Up. Just Take all the Money, AlterNet, May 14, 2010 by AlterNet Staff:
Watch the hilarious but somewhat angering video, "Jon Stewart: We Give Up. Just Take all the Money" on Evans Liberal Politics.