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Archive for the ‘crooks’ Category

It was rather amusing to read this over the weekend from Bloomberg’s editorial department:

How would all the mortgages for these apartments and houses be funded? Lenders simply followed the people. For decades, urban investors had bought stakes in farm mortgage bonds. With the agricultural economy in such straits and the urban economy booming, groups such as the Farm Mortgage Bankers Association of America (which later dropped the “Farm” from its name) reoriented their sights on the cities, looking for ways to lend to these new urban dwellers, bringing their experience in turning mortgages into bonds.

….

Banks loved the new invention because it allowed them to skirt regulations. Although the Federal Reserve regulated the proportion of savings that could be lent as mortgages (half of savings deposits) there were no restrictions on mortgages funded by bonds. These bonds, however, had a maximum length of five years, forcing the mortgage debt to be refunded, at minimum, every five years. But since the balloon mortgage, so popular in the 1920s, was refinanced every three to five years, there shouldn’t have been a problem as long as more investors could be found.

Did you detect the elements of a Ponzi Scheme in there?  You should have.

In point of fact the reason this collapsed is the same as the reason it collapsed this time around — the “values” lent against were nothing but hot air and when the next sucker failed to appear to buy at a higher price the scheme collapsed.  Since the borrower was never able to perform to maturity on the original terms it was mathematically impossible to avoid the collapse; we were simply arguing over when, not whether, the collapse would occur.

The same thing happend this time around.  And just like the in 1930s the government this time bowed to political pressure and refused to force those who made bad loans — knowing full well that they could not be performed on their original terms, and that the collateral was not worth the amount lent — to eat their own cooking and collapse.

Having pemitted regulations to be “skirted” (a convenient word for counterfeiting) there were in fact only two options — lock everyone up who engaged in these frauds, starting with the CEOs of the financial institutions involved, clawing back every nickel they had in the process, or attempt to transfer the debt to the taxpayer in some fashion.

The government did the worst of all of it.  FDR not only allowed the depositors of the institutions involved to get hosed he also didn’t lock the banksters up and he transferred the losses to the citizens — even those who had not been a part of the scams — through currency devaluation.

In short he did basically what we’ve done this time and the result was the destruction of our economy for more than a decade, ending only when we entered WWII.

There is no answer to these dilemmas once the government turns a blind eye or worse, becomes explicitly involved in public frauds of this sort.  The choices are only to prosecute and force those who committed the evil acts to eat them or to force everyone in the economy to eat them and protect the politically powerful who committed the crimes.

The simple fact of the matter is that at the root of this crisis, as it was in the 1930s, is counterfeiting by the lending institutions involved.  The lending of money against nothing but hot air depresses the value of the currency which drives the price of assets and the real income of earners in opposite directions.  This is inherently a fraud upon the public in each and every instance, committed with license and therefore given “legality” by the government in question as that which is counterfeited is the nation’s currency.

There is no solution that can be found to this problem until it is faced head-on and stopped.

Simply put so long as banksters are allowed to counterfeit the currency we are arguing over whether we’d like to be financially raped a bit, some or deeply and long rather than whether we’re going to suffer this ignoble act at all.

It becomes even worse when, as has happened this time around, the counterfeiting becomes part and parcel of how government funds itself.  Government borrowing is inherent vice — a perhaps-necessary vice in a handful of circumstances (e.g. declared war) but nonetheless it is inherent vice, as government never borrows against value, it borrows against the promise that you will get up and go work tomorrow to pay taxes – the very definition of “hot air” unless enforced at gunpoint (at which point we call it what it is — slavery.)

There is nothing wrong with borrowing against actual market value of an asset — that is, liquifying that asset for the purpose of commerce.  That sort of lending is essential to modern commercial flows; without letters of credit, for example, international trade would be nearly impossible at any rational level of risk.

But as soon as you allow someone to lend money unbacked by anything — that is, not backed by the actual liquidation value of the asset nor actual capital put forward by an investor or equity holder then you have committed a public fraud.  You have allowed the lending institution to counterfeit the currency in question by increasing its quantity in the market simply on whim.

This is exactly identical, in mathematical and economic terms, to the lending institution running off stacks of $100 bills on the office copier.  That act, when performed, is universally recognized as a serious felony worthy of prosecution and incarceration.

It is no different in economic and mathematical impact when a bank creates credit money out of thin air, backed by nothing other than a promise to get out of bed and go to work tomorrow, irrespective of whether that credit money is created by The Fed or a commercial bank.

We will never solve our economic problems until we face the mathematical reality of what has been done and thus why these acts must, in each and every instance, fail and lead to economic ruin.

Why Politicians Let MF Global Investors Get Taken

For those waiting for our economic problems to be solved, you can quit holding your breath.  There is simply not going to be a solution to our economic problems on the national level.  So why is that the case?  Well, it is because the economic policies of both major political parties are very, very similar when you take a close look at them.  Yes, that statement may sound downright bizarre to many Americans, but it is true.  Both major political parties supported the Wall Street bailouts, both of them fully support the job-killing “free trade” globalization agenda, both of them have dramatically increased the national debt when in power, both of them fully support the currency-killing policies of the Federal Reserve, and neither major political party would get rid of the income tax and the IRS.  And that is just for starters.  Yes, there are some minor differences when it comes to taxing and spending between the two parties, but the truth is that they are a lot more similar on economic issues than they are different.  What we desperately need on the national level is a fundamental change in direction when it comes to economic policy, but we simply are not going to get that from either the Democrats or the Republicans.  That means that there is no hope that the economic storm that is coming will be averted.

So why are the Democrats and the Republicans so similar on these issues?  Well, a big reason is because of who they are trying to please.

The reality of the matter is that most politicians do not really care about what you or I have to say.  Instead, what they are really concerned about is getting as much money for their campaigns as possible so that they can keep getting elected.

When you take a close look at the results of federal elections over the past several decades, it quickly becomes apparent that the candidate that raises the most money almost always wins.

So most politicians have learned to please those that fund their campaigns so that the money will keep rolling in.

Yes, there are a few candidates that are willing to rebel against “the system”, but they are few and far between and the major parties tend to marginalize them.

Once again in 2012, political races will overwhelmingly be won by those that raise the most cash.  The following is from Politifact….

In congressional races in 2010, the candidate who spent the most won 85 percent of the House races and 83 percent of the Senate races, according to the Center for Responsive Politics. That’s a large percentage, but it’s lower than what the sign indicated.

Indeed, the percentage for 2010 was lower than it had been in recent election cycles. The center found that in 2008, the biggest spenders won 93 percent of House races and 86 percent of Senate races. In 2006, the top spenders won 94 percent of House races and 73 percent of Senate races. And in 2004, 98 percent of House seats went to candidates who spent the most, as did 88 percent of Senate seats.

Once you understand how Washington works, it becomes easier to understand why our politicians do such stupid things.

For example, big corporations tend to donate large amounts of money to political campaigns and they love the “free trade” globalization agenda.

They love to import massive quantities of super cheap foreign goods so that they can undercut the prices of goods made in the United States.

They love to set up manufacturing facilities on the other side of the globe where it is legal to pay slave labor wages to workers.

The “free trade” agenda is great for the largest corporations, but it is horrible for the average American worker.

According to the Economic Policy Institute, the U.S. economy loses approximately 9,000 jobs for every $1 billion of goods that are imported from overseas.

Trade with other countries can be good as long as it is balanced.  Unfortunately, the U.S. trading relationship with the rest of the world is tremendously imbalanced.

In 2011, the United States bought more than 550 billion dollars more stuff from the rest of the world than they bought from us.

This trade deficit has enormous consequences that most Americans simply do not understand.

Over the past decade, tens of thousands of businesses, millions of jobs and trillions of dollars have left our country.

Our industrial base is being dismantled and we are rapidly becoming poorer as a nation.

According to U.S. Representative Betty Sutton, an average of 23 manufacturing facilities a day closed down in the United States during 2010.

Just think about that.

Every single day we lost 23 more.

Overall, America has lost a total of more than 56,000 manufacturing facilities since 2001.

Why do you think cities like Detroit are dying?

The truth is that we killed them with our idiotic policies.

America has a trade imbalance that is more than 5 times larger than any other nation on earth has.  We are losing wealth, jobs and businesses at a pace that is absolutely astounding.

It is neither “conservative” nor “liberal” to commit national economic suicide.

Our trade imbalance with China is particularly bad.  The U.S. spends about 4 dollars on goods and services from China for every one dollar that China spends on goods and services from the United States.

Does that sound fair to you?

China slaps huge tariffs on many of our products, they deeply subsidize their own national industries, the brazenly steal technology from us, and they manipulate currency rates so that their products end up being significantly cheaper than ours.

Our trade deficit with China in 2011 was nearly 300 billion dollars.  That was the largest trade deficit that one country has had with another country in the history of the world.

Yet both major political parties refuse to do anything about it.

Back in 1985, the U.S. trade deficit with China was only 6 million dollars for the entire year.

In 2011, our trade deficit with China was more than 49,000 times larger.

The consequences of this trade deficit with China are being felt all over the United States every single day.

For example, the United States has lost an average of 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001.

Do you support losing more than half a million manufacturing jobs a year?

If not, then you should be for “fair trade” instead of “free trade” where other nations can cheat us blind as often as they want.

The Economic Policy Institute says that since 2001 America has lost approximately 2.8 million jobs due to our trade deficit with China alone.

Do you think that the U.S. economy could use an extra 2.8 million jobs right now?

Sadly, if current trends continue things are going to get a lot worse.

According to Professor Alan Blinder of Princeton University, 40 million more U.S. jobs could be sent offshore over the next two decades.

So why won’t our politicians do something?

The United States has run a trade deficit every single year since 1976.

During that time, America has had a total trade imbalance of more than 7.5 trillion dollars with the rest of the world.

That 7.5 trillion dollars could have gone to support U.S. jobs and U.S. businesses.

Taxes could have been paid on that 7.5 trillion dollars.

Instead, it went out of the country and made foreigners wealthier.

So what is Barack Obama doing about all of this?

Well, Obama has been aggressively pushing for even more “free trade” agreements.  The Obama administration has inked deals with Panama, South Korea and Colombia and the Obama administration is making the Trans-Pacific Partnership (“the NAFTA of the Pacific“) a very high priority.

Well, Mitt Romney must be criticizing these moves, right?

No, Romney has actually criticized Obama for not pushing for more “free trade” fast enough.

Mitt Romney wants to make it even easier for jobs to go out of the country and for other countries to drain our wealth.  The following quote comes directly from the Romney campaign website….

Access to foreign markets is crucial to growing our economy. We must reassert American leadership in international negotiations, follow through on commitments we have already made, and push aggressively for advantageous new agreements.

So we are not going to see a change in direction in trade policy no matter who wins the next election.

Well, what about the national debt?

Are there differences between the two parties on this issue?

Sadly, there are only minor differences.

Both major political parties are packed with big spenders that have been spending us into oblivion.

Since Barack Obama entered the White House, the U.S. national debt has increased by $5,027,761,476,484.56.

That comes to $16,043.39 for every man, woman and child living in the United States.

What the Obama administration and the Democrats are doing to future generations is absolutely criminal.

So what about the Republicans?

Well, when the Republicans have had control of the White House they have run up debt “like a drunken sailor” as well.

If the Republican Party wants to have any credibility when it comes to fiscal issues, it needs to publicly admit that George W. Bush was a horrible failure when it came to the federal budget.

George W. Bush was a “big government” politician that dramatically increased the size of the federal government and spent money like it was going out of style.

He was not a conservative when it came to fiscal issues, and that is the truth.

Sadly, neither political party is proposing to balance the federal budget any time soon.  There are a few politicians that have suggested doing this, but they have been marginalized.

So why don’t our politicians support living within our means?

Well, the truth is that if the federal government balanced the budget today, it would result in a catastrophic drop in living standards inside the United States.  We are currently living in an era of debt-fueled “false prosperity”, and if that false prosperity were to disappear there would be riots in the streets of our major cities within months.

It is much easier for our politicians to continue to pile up more debt and to continue to kick the can down the road.

But this party cannot go on too much longer.  Already, the United States has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.

As you can see from the chart below, we are in a whole lot of trouble….

Our foolishness will catch up to us in a big way eventually.

Another area where the two major political parties agree is that they both fully support the Federal Reserve.

The Federal Reserve is supposed to keep inflation low, but the truth is that the Fed has absolutely killed the value of the U.S. dollar.  Just check out the chart below which was produced by the Fed itself.  It shows how dramatically the purchasing power of the U.S. dollar has declined over the years….

Keep in mind that the chart above is using official government numbers which actually downplay how much the U.S. dollar has been debased.

If inflation was measured the exact same way that it was back in 1980, the annual rate of inflation would be more than 10 percent right now.

By any measure, the Federal Reserve has been a colossal failure for the American people.  Since the Fed was created, our currency has lost more than 95 percent of its value and our national debt has gotten more than 5000 times larger.

The current Federal Reserve Chairman, Ben Bernanke, has a track record of failure that is legendary.  If you doubt this, just read this article, this article and this article.

But Barack Obama just loves Bernanke.  He nominated him for another term as Fed Chairman and he never criticizes anything that he does.

Thanks Obama.

So will things be any different under Mitt Romney?

Of course not.

During one Republican debate, Mitt Romney actually had the gall to try to explain to all of us why “we need to have a Fed“.

Mitt Romney says that he is “not going to take my effort and focus on the Federal Reserve“.

But the Federal Reserve is at the very heart of our economic problems.

Doesn’t Mitt Romney understand that?

The mainstream media is already telling us not to expect any significant changes at the Fed if Romney wins.  A recent Reuters article had the following headline….

“Analysis: A Romney win would likely change little at Federal Reserve”

Are you starting to understand why I am saying that there is not going to be a solution to our economic problems at the national level?

A great economic cataclysm is coming, and there is very little hope that it can be averted.

So what does that mean?

It means that we all need to start preparing to weather the coming storm on an individual level.

The nation as a whole may not change course, but as individuals and as families we can change course.

All of us can work to reduce our expenses, get out of debt, build up a six month financial cushion, learn to grow a garden and slowly become more independent of the system.

Both political parties are leading us down a road that will only end in economic disaster.

Instead of waiting for a “national solution” that is never going to come, you need to focus on being your own solution.

Time is short, so you better get ready.

The Economic Collapse

As white-collar criminologists (and a former financial regulator and enforcement head) and experts in ferreting out sophisticated financial frauds, our careers and research focus on financial fraud by the world’s most elite private sector criminals and their political cronies.  Therefore, we write to thank Congress and the President for preparing to adopt a JOBS Act that will provide us with job security for life. We will be the personal beneficiaries of Congress’ decision to adopt the law without the pesky hearings that would allow critics to launch devastating attacks on the proposed bill based on a brutally unfair tactic – the presentation of facts.  Unfortunately, in our professional capacities, we must oppose the bill.  This bill is an atrocity.

The “Jumpstart Our Business Startups” Act, the comically forced effort to create a catchy acronym, is the most cynical bill to emerge from a cynical Congress and Administration.  It is an exemplar of why congressional approval ratings are well below those of used car dealers.  The JOBS Act is something only a financial scavenger could love.  It will create a fraud-friendly and fraud-enhancing environment. It will add to the unprecedented level of financial fraud by our most elite CEOs that has devastated the U.S. and European economies and cost over 20 million people their jobs.  Financial fraud is a prime jobs killer.

Powerful regulatory regimes — strong accounting rules, strict corporate governance, tough securities laws, and vigorous civil and criminal enforcement of the regulations and laws is the greatest infrastructure for strong economic growth that a nation can provide.  For decades, the U.S. had an enormous competitive advantage over other nations in raising funds through securities because investors placed great trust in issuers that were subject to effective regulation.  U.S. equities traded at a substantial premium compared to securities issued in other nations (which means that companies could raise capital much more effectively and inexpensively).  Regulators serve as the “cops on the beat” that prevent a Gresham’s Dynamic in which “bad ethics drives good ethics out of the markets.”

Our system worked brilliantly.  America prospered.  American businesses and investors prospered.  Unfortunately, economists decided to destroy what worked and to replace it with a fraud-friendly, deregulated world.  Alan Greenspan was only the most prominent high priest of the following dogma: “a rule against fraud is not an essential or … an important ingredient of securities markets” (Easterbrook & Fischel 1991).  This faith-based economics had no basis in reality, but it led to aggressive anti-regulatory leaders whose policies were so criminogenic that they led to recurrent and ever-larger serious financial crises.

George Akerlof, Nobel Laureate in Economics (2001), and Paul Romer wrote the definitive economics article on financial fraud in 1993 (Looting: the Economic Underworld of Bankruptcy for Profit).  They ended it with the following to emphasize a profound policy message.

“Neither the public nor economists foresaw that S&L deregulation was bound to produce looting.  Therefore, they could not imagine how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself” (p. 60).

But economists, as a group, proved that they did not “know better” and that their problem was not that they were “unaware of the concept” of looting “control frauds” (frauds led by the leaders of seemingly legitimate entities).  Economists, overwhelmingly, have ignored a Nobel Laureate in economics, white-collar criminologists and experts on public administration and regulation.  They have compounded their mistakes and they have dominated financial policy in the U.S. and Europe — the epicenters of the crises.

Among the many fraud-friendly policies that led to the deregulation that prompts our recurrent, intensifying financial crises, the undisputed most destructive aspect is the recurrent, intensifying embrace of the “regulatory race to the bottom.”  The “logic” of the argument in the securities law context is that (1) dishonest issuers like bad regulation because it allows them to defraud with impunity, (2) our “competitor” nations (typically described as the City of London) offer weaker regulation to induce the fraudulent issuers to locate abroad, and (3) we must not allow this to happen; we must make sure that fraudulent issuers are based in America.  Of course, they never phrase honestly their “logic” about dishonesty.  Four national commissions investigated the causes of financial crises — the S&L debacle, the ongoing U.S. crisis, the Irish crisis, and the Icelandic crisis.  Each of the commissions has decried the idiocy of the “race to the bottom” dynamic and warned that it must end.  The arguments advanced by industry in support of the JOBS Act reflect and worship at the altar of “the race to the bottom.”

It is self-defeating for us to say this because as criminologists and anti-fraud specialists we would have job security for life if this bill was adopted.  It is literally composed of the wish list in regard to fraud-friendly provisions that those intent on cheating have been dreaming about and salivating to achieve for decades.  This bill will kill millions of jobs because financial frauds are weapons of mass financial destruction.  It will start an international fraud-friendly deregulation race to the bottom and will become the basis for further criminogenic U.S. Congressional actions.

* William K. Black is Associate Professor of Economics and Law at the University of Missouri-Kansas City. Henry N. Pontell is Professor of Criminology, Law and Society at the University of California, Irvine. Gilbert Geis is Professor Emeritus of Criminology, Law and Society at the University of California, Irving. Janet Tavakoli is President of Tavakoli Structured Finance, Inc. Barry Ritholtz is CEO; Director of Equity Research, Fusion IQ.

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