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Archive for the ‘Iraq’ Category

More Evidence that the Fed Sent Money to Iraq

Submitted by George Washington

Yesterday, I quoted an economist with the U.S. House of Representatives Financial Services Committee for eleven years who assisted with oversight of the Federal Reserve to show that there might be some basis for Ron Paul’s questions to Ben Bernanke about the Federal Reserve’s alleged shipment of money to Iraq.

Here is some more information.

In July 2009, Congressman Henry Waxman stated:

In a 13 month period from May 2003 to June 2004, the Federal Reserve sent nearly $12 billion in cash, mainly in $100 bills from the United States to Iraq. To do that, the Federal Reserve Bank in New York had to pack 281 million individual bills … onto wooden pallets to be shipped to Iraq. The cash weighed more than 363 tons and was loaded onto C-130 cargo planes to be flown into Baghdad…

And an interesting New York Times op-ed written in 2004 by Martin Mayer, a prolific financial journalist, Brookings Institution scholar, and the author of more than 30 books on financial market issues, argues:

Among [Saddam] Hussein’s possessions when he was captured was three-quarters of a million dollars in United States currency in crisp new bills. Whence came the gentleman’s stash? 

Answering this question would help our understanding of terrorist financial networks. And if the cash is sequentially numbered, as is likely, then the question could be easily answered.

All United States currency is printed by the United States Mint, to the order of one of the 12 banks of the Federal Reserve system. It comes into circulation through a bank that has an account at the Fed for which it was printed. The Fed deducts the face value of the bills from that account, and an armored car takes them to their new owner.

That regional Federal Reserve Bank keeps a record that identifies the purchasing bank. And the purchaser knows how it disposed of the bills. When they are found all together, it means that the bank that bought the bills did not feed them out from the teller window or the cash machine, but delivered them to a single customer.

And the bank knows who that customer was. Between, say, Philadelphia and Iraq, there is no doubt a chain, perhaps involving banks in the Cayman or Channel Islands, in Abu Dhabi or Dubai. Still, each bank in the chain can give the name of the customer to which it gave these bills.

Although Saddam Hussein’s government had many sanctions against it, it may well be that no laws were broken in the passage of the Federal Reserve notes from the mint to Tikrit. But it would be interesting to know which banks were collaborators in getting that cash to the tyrant of Iraq.

Unfortunately, the search for these witting or unwitting collaborators cannot even get started, because the Federal Reserve Board will not permit regional banks to reveal the identity of the purchasers of large blocks of United States currency. There is no law that prohibits such disclosure; it’s simply a Fed policy. Yet in this age of payroll services and electronic payments, there are few legitimate uses outside the banking system for very large orders of hundred-dollar bills.

The Fed has always resisted placing American banks under obligation to reveal skulduggery, whether it involves drug smuggling, commercial fraud, terrorism or other international conspiracy. Banks are not, the Fed insists, law enforcement agencies. It may be that the F.B.I. has access to the Fed’s records — a spokesman for the Fed, after checking with the main office, would not say yea or nay — but it is not clear that the F.B.I. has authority to continue such searches beyond American borders.

The Fed’s manual on the Bank Secrecy Act still says that ”know your customer”rules, while desirable, are ”not presently required by regulation or statute” — though the Patriot Act has spawned some rules on the identification of new customers. At any rate, the manual says rather mysteriously, such rules ”should not interfere with the relationship of the financial institution with its good customers.”

Senators Charles E. Grassley and Max Baucus, chairman and ranking member, respectively, of the Finance Committee, complained to the Treasury Department last year that not enough has been done to keep the financiers of terrorism from paying their bills through the American financial system. Perhaps Congress should tell the Fed to release its hold on information about which banks supply the bundles of cash that facilitate international crime.

The head of the UN office on drugs and crime says that drug money kept the global banking system afloat during the height of the financial crisis.  Former Managing Director and board member of Wall Street investment bank Dillon Read, Catherine Austin Fitts, has long alleged that the American banking system launders huge amount of drug money.

I don’t know anything about money laundering, drug trafficking or terrorist networks. But I might be able to guess who could get that kind of information: the Fed.

I managed to catch up with my old friend, Santa Claus, the other day, before he took off on his global gift giving rounds. I have had a rocky relationship with old Saint Nick over the years, usually finding coal or potatoes in my stocking, as one who lives a feckless life might expect. But one year I found a Mercedes S600 V-12 under the tree! I ended up regifting it because I didn’t like the cup holders, but hey, it was a nice thought! Things are not good at the North Pole. The cost of the software upgrade needed to switch from children’s handwritten letters to email has been a killer. And what the hell is Twitter? The First National Bank of the North Pole won’t let him roll over his debt because snow appraisals aren’t coming in like they used to. Labor costs are rocketing. Elves used to work for a few pieces of candy cane a day, but no more. Now they want black snowmobiles with chrome wheels, big screen TV’s, and Blue Ray HD players. There are rumors of a strike over health care costs, which are bleeding him snow white. The Amalgamated Confederation of Elves must be the only union that gets Viagra with their benefits, besides the United Auto Workers. And now they want free mistletoe, to boot! He’s going to have to skip the unfortunate children of Afghanistan and Iraq once again because Obama’s budget cuts won’t allow the US Air Force to provide needed fighter cover. The price of reindeer food is going through the roof, thanks to Chinese hoarding, and Donner and Blitzen are down with the swine flu. Rising costs, lower revenues, and an unruly workforce are not a good business model. Since the government forced that TARP money down his throat, the green eye shades from the Treasury have been camping out in accounting. To top it all, compliance is telling him he’s being investigated for backdated stock options in Santa Claus Inc. All this while the debate rages on over whether he even exists. Tell that to the SEC! Coming on top of all the shareholder carping about his ten figure compensation package, and unlimited use of the corporate sleigh, he needs this like a hole in his head! To be honest, he would have retired by now if he had not invested so much of his savings with Bernie Madoff. Sure, being Santa Claus is a bitch, but somebody’s got to do it.

Supporters of an escalation of the Afghanistan war often ask that we give military options a chance.  They also respond to criticism of the surge by asking “okay smart guy, what would YOU do to fight Al Qaeda in Afghanistan?”  Several pro-war posters also asked that pro-military arguments be given a chance.

Well, initially, the U.S. admits there are only a small handful of Al Qaeda in Afghanistan. As ABC notes:

U.S. intelligence officials have concluded there are only about 100 al Qaeda fighters in the entire country.

With
100,000 troops in Afghanistan at an estimated yearly cost of $30
billion, it means that for every one al Qaeda fighter, the U.S. will
commit 1,000 troops and $300 million a year.

There are
probably more than 100 homicidal maniacs in any large American city.
But we wouldn’t send soldiers into the city to get those bad guys.

Indeed, a leading advisor to the U.S. military – the very hawkish Rand Corporation – released a study
in 2008 called “How Terrorist Groups End: Lessons for Countering al
Qa’ida”. The report confirms what experts have been saying for years:
the war on terror is actually weakening national security.

As a press release about the study states:

Terrorists
should be perceived and described as criminals, not holy warriors, and
our analysis suggests that there is no battlefield solution to
terrorism.

There are additional reasons why prolonging the Afghan war may reduce our national security, such as weakening our economy.

But if you want a military solution anyway, Andrew J. Bacevich has an answer.

Bacevich
is no dove. Graduating from West Point in 1969, he served in the United
States Army during the Vietnam War. He then held posts in Germany,
including the 11th Armored Cavalry Regiment, the United States, and the
Persian Gulf up to his retirement from the service with the rank of
Colonel in the early 1990s. Bacevich holds a Ph.D. in American
Diplomatic History from Princeton University, and taught at West Point
and Johns Hopkins University prior to joining the faculty at Boston
University in 1998. Bacevich’s is a military family. On May 13, 2007,
Bacevich’s son, was killed in action while serving in Iraq.

Last year, Bacevich wrote in an article in Newsweek:

Meanwhile,
the chief effect of allied military operations there so far has been
not to defeat the radical Islamists but to push them across the
Pakistani border. As a result, efforts to stabilize Afghanistan are
contributing to the destabilization of Pakistan, with potentially
devastating implications. September’s bombing of the Marriott hotel in
Islamabad suggests that the extremists are growing emboldened. Today
and for the foreseeable future, no country poses a greater potential
threat to U.S. national security than does Pakistan. To risk the
stability of that nuclear-armed state in the vain hope of salvaging
Afghanistan would be a terrible mistake.

All this means that the
proper U.S. priority for Afghanistan should be not to try harder but to
change course. The war in Afghanistan (like the Iraq War) won’t be won
militarily. It can be settled—however imperfectly—only through politics.

The
new U.S. president needs to realize that America’s real political
objective in Afghanistan is actually quite modest: to ensure that
terrorist groups like Al Qaeda can’t use it as a safe haven for
launching attacks against the West. Accomplishing that won’t require
creating a modern, cohesive nation-state. U.S. officials tend to assume
that power in Afghanistan ought to be exercised from Kabul. Yet the
real influence in Afghanistan has traditionally rested with tribal
leaders and warlords. Rather than challenge that tradition, Washington
should work with it. Offered the right incentives, warlords can
accomplish U.S. objectives more effectively and more cheaply than
Western combat battalions. The basis of U.S. strategy in Afghanistan
should therefore become decentralization and outsourcing, offering cash
and other emoluments to local leaders who will collaborate with the
United States in excluding terrorists from their territory.

This
doesn’t mean Washington should blindly trust that warlords will become
America’s loyal partners. U.S. intelligence agencies should continue to
watch Afghanistan closely, and the Pentagon should crush any jihadist
activities that local powers fail to stop themselves. As with the
Israelis in Gaza, periodic airstrikes may well be required to pre-empt
brewing plots before they mature.

Were U.S. resources unlimited
and U.S. interests in Afghanistan more important, upping the ante with
additional combat forces might make sense. But U.S. power — especially
military power — is quite limited these days, and U.S. priorities lie
elsewhere.

Rather than committing more troops, therefore, the
new president should withdraw them while devising a more realistic —
and more affordable — strategy for Afghanistan

In other
words, America’s war strategy is increasing instability in Pakistan.
Pakistan has nuclear weapons. So the surge could very well decrease not
only American national security but the security of the entire world.

I think that diplomatic rather than military means should be used to
kill or contain the 100 bad guys in Afghanistan. But if we are going to
remain engaged militarily, Bacevich’s approach is a lot smarter than a
surge of boots on the ground.

Moreover, it would save hundreds of billions or trillions of dollars…

War hawks also ask “what would YOU have done after 9/11?”  Gee, I don’t know . . . maybe gotten the Taliban to turn over Bin Laden?

BONUS UPDATE 2-FOR-1 AFTER THANKSGIVING PACKAGE DEAL SPECIAL: If you don’t hear about alternative plans such as Bacevich’s from the corporate media, here is why …

5 Reasons that Corporate Media Coverage is Pro-War

There are five reasons that the mainstream media is worthless.

1. Self-Censorship by Journalists

Initially, there is tremendous self-censorship by journalists.

For example, several months after 9/11, famed news anchor Dan Rather told the BBC that American reporters were practicing “a form of self-censorship”:

There
was a time in South Africa that people would put flaming tires around
peoples’ necks if they dissented. And in some ways the fear is that you
will be necklaced here, you will have a flaming tire of lack of
patriotism put around your neck. Now it is that fear that keeps
journalists from asking the toughest of the tough questions…. And
again, I am humbled to say, I do not except myself from this criticism.

 

What we are talking about here – whether one wants to recognise it
or not, or call it by its proper name or not – is a form of
self-censorship.

Keith Olbermann agreed that there is self-censorship in the American media, and that:

You
can rock the boat, but you can never say that the entire ocean is in
trouble …. You cannot say: By the way, there’s something wrong with
our …. system.

As former Washington Post columnist Dan Froomkin wrote in 2006:

Mainstream-media
political journalism is in danger of becoming increasingly irrelevant,
but not because of the Internet, or even Comedy Central. The threat
comes from inside. It comes from journalists being afraid to do what
journalists were put on this green earth to do. . . .

 

There’s
the intense pressure to maintain access to insider sources, even as
those sources become ridiculously unrevealing and oversensitive.
There’s the fear of being labeled partisan if one’s bullshit-calling
isn’t meted out in precisely equal increments along the political
spectrum.

 

If mainstream-media political journalists don’t start
calling bullshit more often, then we do risk losing our primacy — if
not to the comedians then to the bloggers.

 

I still believe that
no one is fundamentally more capable of first-rate bullshit-calling
than a well-informed beat reporter – whatever their beat. We just need
to get the editors, or the corporate culture, or the self-censorship –
or whatever it is – out of the way.

2. Censorship by Higher-Ups

If
journalists do want to speak out about an issue, they also are subject
to tremendous pressure by their editors or producers to kill the story.

The
Pulitzer prize-winning reporter who uncovered the Iraq prison torture
scandal and the Mai Lai massacre in Vietnam, Seymour Hersh, said:

“All
of the institutions we thought would protect us — particularly the
press, but also the military, the bureaucracy, the Congress — they
have failed. The courts . . . the jury’s not in yet on the courts. So
all the things that we expect would normally carry us through didn’t.
The biggest failure, I would argue, is the press, because that’s the
most glaring….

 

Q: What can be done to fix the (media) situation?

 

[Long
pause] You’d have to fire or execute ninety percent of the editors and
executives. You’d actually have to start promoting people from the
newsrooms to be editors who you didn’t think you could control. And
they’re not going to do that.”

In fact many journalists are warning that the true story is not being reported. See this announcement and this talk.

And a series of interviews with award-winning journalists also documents censorship of certain stories by media editors and owners (and see these samples).

There are many reasons for censorship by media higher-ups.

One is money.

The media has a strong monetary interest to avoid controversial topics in general. It has always been true that advertisers discourage stories which challenge corporate power.
Indeed, a 2003 survey reveals that 35% of reporters and news executives
themselves admitted that journalists avoid newsworthy stories if “the story would be embarrassing or damaging to the financial interests of a news organization’s owners or parent company.”

In addition, the government has allowed tremendous consolidation in ownership of the airwaves during the past decade.

Dan Rather has slammed media consolidation:

Likening
media consolidation to that of the banking industry, Rather claimed
that “roughly 80 percent” of the media is controlled by no more than
six, and possibly as few as four, corporations.

This is documented by the following must-see charts prepared by:

• Media Channel

• The Nation

• Free Press

And check out this list of interlocking directorates of big media companies from Fairness and Accuracy in Media, and this resource from the Columbia Journalism Review to research a particular company.

This image gives a sense of the decline in diversity in media ownership over the last couple of decades:

The
large media players stand to gain billions of dollars in profits if the
Obama administration continues to allow monopoly ownership of the
airwaves by a handful of players. The media giants know who butters
their bread. So there is a spoken or tacit agreement: if the media
cover the administration in a favorable light, the MSM will continue to
be the receiver of the government’s goodies.

3. Drumming Up Support for War

In addition, the owners of American media companies have long actively played a part in drumming up support for war.

It
is painfully obvious that the large news outlets studiously avoided any
real criticism of the government’s claims in the run up to the Iraq
war. It is painfully obvious that the large American media companies
acted as lapdogs and stenographers for the government’s war agenda.

Veteran reporter Bill Moyers criticized
the corporate media for parroting the obviously false link between 9/11
and Iraq (and the false claims that Iraq possessed WMDs) which the
administration made in the run up to the Iraq war, and concluded that
the false information was not challenged because:

“the
[mainstream] media had been cheerleaders for the White House from the
beginning and were simply continuing to rally the public behind the
President — no questions asked.”

And as NBC News’ David Gregory (later promoted to host Meet the Press) said:

“I
think there are a lot of critics who think that . . . . if we did not
stand up [in the run-up to the war] and say ‘this is bogus, and you’re
a liar, and why are you doing this,’ that we didn’t do our job. I
respectfully disagree. It’s not our role”

But this is nothing new. In fact, the large media companies have drummed up support for all previous wars.

For example, Hearst helped drum up support for the Spanish-American War.

And an official summary of America’s overthrow of the democratically-elected president of Iran in the 1950′s states, “In
cooperation with the Department of State, CIA had several articles
planted in major American newspapers and magazines which, when
reproduced in Iran, had the desired psychological effect in Iran and
contributed to the war of nerves against Mossadeq.” (page x)

The mainstream media also may have played footsie with the U.S. government right before Pearl Harbor. Specifically, a highly-praised historian (Bob Stineet) argues
that the Army’s Chief of Staff informed the Washington bureau chiefs of
the major newspapers and magazines of the impending Pearl Harbor attack
BEFORE IT OCCURRED, and swore them to an oath of secrecy, which the
media honored (page 361) .

And the military-media alliance has continued without a break (as a highly-respected journalist says,
“viewers may be taken aback to see the grotesque extent to which US
presidents and American news media have jointly shouldered key
propaganda chores for war launches during the last five decades.”)

As the mainstream British paper, the Independent, writes:

There
is a concerted strategy to manipulate global perception. And the mass
media are operating as its compliant assistants, failing both to resist
it and to expose it. The sheer ease with which this machinery has been
able to do its work reflects a creeping structural weakness which now
afflicts the production of our news.

The article in the
Independent discusses the use of “black propaganda” by the U.S.
government, which is then parroted by the media without analysis; for
example, the government forged
a letter from al Zarqawi to the “inner circle” of al-Qa’ida’s
leadership, urging them to accept that the best way to beat US forces
in Iraq was effectively to start a civil war, which was then publicized
without question by the media..

So why has the American press has consistenly served the elites in disseminating their false justifications for war?

One of of the reasons is because the large media companies are owned by those who support the militarist agenda or even directly profit from war and terror (for example, NBC – which is being sold to Comcast – was owned by General Electric, one of the largest defense contractors in the world — which directly profits from war, terrorism and chaos).

Another seems to be an unspoken rule that the media will not criticize the government’s imperial war agenda.

And
the media support isn’t just for war: it is also for various other
shenanigans by the powerful. For example, a BBC documentary proves:

There
was “a planned coup in the USA in 1933 by a group of right-wing
American businessmen . . . . The coup was aimed at toppling President
Franklin D Roosevelt with the help of half-a-million war veterans. The
plotters, who were alleged to involve some of the most famous families
in America, (owners of Heinz, Birds Eye, Goodtea, Maxwell Hse &
George Bush’s Grandfather, Prescott) believed that their country should
adopt the policies of Hitler and Mussolini to beat the great
depression.”

Moreover, “the
tycoons told the general who they asked to carry out the coup that the
American people would accept the new government because they controlled all the newspapers.“

See also this book.

Have you ever heard of this scheme before? It was certainly a very large one. And if the conspirators controlled the newspapers then, how much worse is it today with media consolidation?

4. Access

Politico reveals:

For
$25,000 to $250,000, The Washington Post has offered lobbyists and
association executives off-the-record, nonconfrontational access to
“those powerful few”: Obama administration officials, members of
Congress, and — at first — even the paper’s own reporters and editors…

The
offer — which essentially turns a news organization into a facilitator
for private lobbyist-official encounters — was a new sign of the
lengths to which news organizations will go to find revenue at a time
when most newspapers are struggling for survival.

That may
be one reason that the mainstream news commentators hate bloggers so
much. The more people who get their news from blogs instead of
mainstream news sources, the smaller their audience, and the less the
MSM can charge for the kind of “nonconfrontational access” which leads
to puff pieces for the big boys.

5. Censorship by the Government

Finally,
as if the media’s own interest in promoting war is not strong enough,
the government has exerted tremendous pressure on the media to report
things a certain way. Indeed, at times the government has thrown media owners and reporters in jail
if they’ve been too critical. The media companies have felt great
pressure from the government to kill any real questioning of the
endless wars.

For example, Dan Rather said, regarding American media, “What you have is a miniature version of what you have in totalitarian states”.

Tom Brokaw said “all wars are based on propaganda.

And the head of CNN said:

There
was ‘almost a patriotism police’ after 9/11 and when the network showed
[things critical of the administration's policies] it would get phone
calls from advertisers and the administration and “big people in
corporations were calling up and saying, ‘You’re being anti-American
here.’

Indeed, former military analyst and famed Pentagon Papers whistleblower Daniel Ellsberg said that the government has ordered the media not to cover 9/11:

Ellsberg seemed hardly surprised
that today’s American mainstream broadcast media has so far failed to
take [former FBI translator and 9/11 whistleblower Sibel] Edmonds up on
her offer, despite the blockbuster nature of her allegations [which
Ellsberg calls "far more explosive than the Pentagon Papers"].

 

As
Edmonds has also alluded, Ellsberg pointed to the New York Times, who
“sat on the NSA spying story for over a year” when they “could have put
it out before the 2004 election, which might have changed the outcome.”

 

“There
will be phone calls going out to the media saying ‘don’t even think of
touching it, you will be prosecuted for violating national security,’” he told us.

 

* * *

 

“I am confident that there is conversation inside the Government as to ‘How do we deal with Sibel?’” contends Ellsberg. “The
first line of defense is to ensure that she doesn’t get into the media.
I think any outlet that thought of using her materials would go to to
the government and they would be told ‘don’t touch this . . . .‘”

Of course, if the stick approach doesn’t work, the government can always just pay off reporters to spread disinformation.

Famed Watergate reporter Carl Bernstein says the CIA has already bought and paid for many successful journalists. See also this New York Times piece, this essay by the Independent, this speech by one of the premier writers on journalism, and this and this roundup.

Indeed,
in the final analysis, the main reason today that the media giants will
not cover the real stories or question the government’s actions or
policies in any meaningful way is that the American government and
mainstream media been somewhat blended together.

Can We Win the Battle Against Censorship?

We
cannot just leave governance to our “leaders”, as “The price of freedom
is eternal vigilance” (Jefferson). Similarly, we cannot leave news to
the corporate media. We need to “be the media” ourselves.

“To stand in silence when they should be protesting makes cowards out of men.”
- Abraham Lincoln

“Our lives begin to end the day we become silent about things that matter.”
- Dr. Martin Luther King Jr.

“Powerlessness
and silence go together. We…should use our privileged positions not
as a shelter from the world’s reality, but as a platform from which to
speak. A voice is a gift. It should be cherished and used.”
– Margaret Atwood

“There
is no act too small, no act too bold. The history of social change is
the history of millions of actions, small and large, coming together at
points in history and creating a power that [nothing] cannot suppress.”
- Howard Zinn (historian)

“All tyranny needs to gain a foothold is for people of good conscience to remain silent”
- Thomas Jefferson

? Washington’s Blog.

A 2005 letter in premier scientific journal Nature reviews the research on trust and economics:

Trust … plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down.
In the absence of trust in a country’s institutions and leaders,
political legitimacy breaks down. Much recent evidence indicates that
trust contributes to economic, political and social success.

Forbes wrote an article in 2006 entitled “The Economics of Trust”. The article summarizes the importance of trust in creating a healthy economy:

Imagine
going to the corner store to buy a carton of milk, only to find that
the refrigerator is locked. When you’ve persuaded the shopkeeper to
retrieve the milk, you then end up arguing over whether you’re going to
hand the money over first, or whether he is going to hand over the
milk. Finally you manage to arrange an elaborate simultaneous exchange.
A little taste of life in a world without trust–now imagine trying to
arrange a mortgage.

 

Being able to trust people might seem like a pleasant luxury, but
economists are starting to believe that it’s rather more important than
that. Trust is about more than whether you can leave your house
unlocked; it is responsible for the difference between the richest
countries and the poorest.

 

“If you take a broad enough definition of trust, then it would
explain basically all the difference between the per capita income of
the United States and Somalia,” ventures Steve Knack, a senior
economist at the World Bank who has been studying the economics of
trust for over a decade. That suggests that trust is worth $12.4
trillion dollars a year to the U.S., which, in case you are wondering,
is 99.5% of this country’s income. ***

 

Above all, trust enables people to do business with each other. Doing business is what creates wealth. ***

 

Economists distinguish between the personal, informal trust that
comes from being friendly with your neighbors and the impersonal,
institutionalized trust that lets you give your credit card number out
over the Internet.

Similarly, market psychologists Richard L. Peterson M.D. and Frank Murtha, Ph.D. wrote in October:

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won’t move.

Trust is gone: there is no longer trust between counterparties in the
financial system. Furthermore, confidence is at a low. Investors have
lost their confidence in the ability of shares to provide decent
returns (since they haven’t).

And two professors of finance write:

The
drop in trust, we believe, is a major factor behind the deteriorating
economic conditions. To demonstrate its importance, we launched the
Chicago Booth/Kellogg School Financial Trust Index. Our first set of
data—based on interviews conducted at the end of December 2008—shows
that between September and December, 52 percent of Americans lost trust
in the banks. Similarly, 65 percent lost trust in the stock market. A
BBB/Gallup poll that surveyed a similar sample of Americans last April
confirms this dramatic drop. At that time, 42 percent of Americans
trusted financial institutions, versus 34 percent in our survey today,
while 53 percent said they trusted U.S. companies, versus just 12
percent today.

 

As trust declines, so does Americans’ willingness to invest their
money in the financial system. Our data show that trust in the stock
market affects people’s intention to buy stocks, even after accounting
for expectations of future stock-market performance. Similarly, a
person’s trust in banks predicts the likelihood that he will make a run
on his bank in a moment of crisis: 25 percent of those who don’t trust
banks withdrew their deposits and stored them as cash last fall,
compared with only 3 percent of those who said they still trusted the
banks. Thus, trust in financial institutions is a key factor for the
smooth functioning of capital markets and, by extension, the economy.
Changes in trust matter.

They quote a Nobel laureate economist on the subject:

“Virtually
every commercial transaction has within itself an element of trust,”
writes economist Kenneth Arrow, a Nobel laureate. When we deposit money
in a bank, we trust that it’s safe. When a company orders goods, it
trusts its counterpart to deliver them in good faith. Trust facilitates
transactions because it saves the costs of monitoring and screening; it
is an essential lubricant that greases the wheels of the economic
system.

Americans clearly don’t trust the big banks and financial companies.

Indeed, as leading economists have pointed out, the big financial institutions don’t even trust each other,
because they know that all of the other companies might have hidden
toxic assets in SIVs, overvalued their assets, gamed their books, or
otherwise tried to bury their problems.

For example, Anna Schwartz – co-author with Milton Friedman of the leading monetarist book on the Great Depression – told the Wall Street Journal:

We
now hear almost every day that banks will not lend to each other, or
will do so only at punitive interest rates…This is not due to a lack
of money available to lend, Ms. Schwartz says, but to a lack of faith
in the ability of borrowers to repay their debts. “The Fed,” she
argues, “has gone about as if the problem is a shortage of liquidity.
That is not the basic problem. The basic problem for the markets is
that [uncertainty] that the balance sheets of financial firms are
credible.” 

So even though the Fed has flooded the credit markets with cash,
spreads haven’t budged because banks don’t know who is still solvent
and who is not. This uncertainty, says Ms. Schwartz, is “the basic
problem in the credit market. Lending freezes up when lenders are
uncertain that would-be borrowers have the resources to repay them. So
to assume that the whole problem is inadequate liquidity bypasses the
real issue”…

 

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in “A Monetary History,” the country and the Federal Reserve were faced with a liquidity crisis in the banking sector…

 

But “that’s not what’s going on in the market now,” Ms. Schwartz
says. Today, the banks have a problem on the asset side of their
ledgers — “all these exotic securities that the market does not know
how to value.”

 

“Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because
you cannot sell them, you don’t know what they’re worth, your balance
sheet is not credible and the whole market freezes up. We don’t know
whom to lend to because we don’t know who is sound.”

As financial writer Will Hutton says:

“Such
was the break down in trust and sense of panic that some of the most
familiar names in British high street banking would not lend to each
other at all or, at best, just overnight. Instead, the Bank of England
had to supply tens of billions to banks who found the normal sources of
funds blocked.

***

Unless there is a radical and government-led change in ownership,
structure, regulation and incentives so that the principles of fairness
are put at the heart of the Anglo American financial system -
proportionality of reward and fair distribution of risk – there is no
chance of the return of trust and integrity upon which long-term
recovery depends.”

Economist and former Secretary of Labor Robert Reich agrees that Wall Street’s biggest problem right now is the collapse of trust:

The
problem is, government bailouts, subsidies, and insurance aren’t really
helping Wall Street. The Street’s fundamental problem isn’t lack of
capital. It’s lack of trust. And without trust, Wall Street might as
well fold up its fancy tents.

Reich also writes:

Despite
all the money going directly to the big banks, despite all the
government guarantees and loans and special tax breaks, despite the
shot-gun weddings and bank mergers, despite the willingness of the
Treasury and the Fed to do almost whatever the banks have asked, the
reality is that credit is not flowing.

 

Why? Because the underlying problem isn’t a liquidity problem. As I’ve noted elsewhere, the
problem is that lenders and investors don’t trust they’ll get their
money back because no one trusts that the numbers that purport to value
securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years — the derivatives, credit default swaps, collateralized debt instruments, and so on — has undermined all notion of true value.

 

Many of these fancy instruments became popular over recent years
precisely because they circumvented financial regulations, especially
rules on banks’ capital adequacy. Big banks created all these
off-balance-sheet vehicles because they allowed the big banks to carry
less capital.

In other words, I would argue that our economy is not
fundamentally stabilizing (notwithstanding a couple of temporary “green
shoots”) because the government and the financial giants are taking
actions and releasing data which encourage more distortion and less trust.

The
crisis will deepen unless honest and transparent accounting is used,
investments become transparent and understandable again, and the
government stops gaming the system for the benefit of the big boys.

As structured finance and derivatives expert Janet Tavakoli says, lack
of transparency, lying and fraud which “we’ve seen massively in the
financial system” has undermined trust, so no one wants to buy our
financial products.

As John Carney writes:

“We’re probably making things worse. Allowing insolvent
institutions to fail and requiring worthless and worth less assets to
be fully written down would provide transparency to the market.
Instead, we’re dedicated to the post-Lehman proposition of “Never
Again.” The various programs of our government continue to obscure
asset pricing and conceal insolvency. This means that you can’t trust
the market to tell you which firms are failing.

 

Twisting the arms of bankers to lend to institutions that may be
insolvent is a recipe for deepening the crisis. We’ve just been through
a period of malinvestment–we spent too much borrowed money on junk.
Borrowing more to spend on junk only digs us in deeper.

 

Bank lending won’t get going again until trust in the markets can
be restored. Fighting a Great Depression era problem probably won’t
help. More transparency, which means more write-downs and failures, is
probably necessary if we’re going to get through this. Unfortunately,
we’re still sailing in the opposite direction.”

Happy Talk: Then and Now

It
is true that consumers and small investors drive a large portion of the
economy. And it is true that consumers and small investors, in turn,
are largely driven by their perception of what is happening.

But
I would also argue that all of the happy talk in the world won’t turn
the economy around when the fundamentals of the economy are lousy, or
there has been a giant bubble and vast overleveraging, or there has
been massive fraud, or the government has gone so far into debt that it
has formed a black hole.

Happy talk did not work during the first couple of years of the Great Depression, once the speculative bubble and leverage of the Roaring 20′s burst, leading to the inevitable crash.

As economist Irving Fisher pointed out (as recounted by economist Steve Keen):

Hobbled
by this naive belief in equilibrium, the economics profession was as
unprepared for today’s crisis as it had been for the Great Depression.
Now that the crisis is well and truly with us, all
conventional “neoclassical” economists can offer is the hope that the
crisis can be overcome by a good, strong dose of confidence.

From [Irving] Fisher’s point of
view, such a belief is futile. In an economy with an excessive level of
debt and low inflation, he argued that confidence was irrelevant–and in
fact dangerously misleading, as he knew from painful personal experience.

University of Maryland professor economics professor and former Chief
Economist at the U.S. International Trade Commission Peter Morici wrote in 2006:

The
speculative frenzy of recent years is causing a major adjustment, and
the happy talk of realtors is prolonging the process. The absence of
realistic analysis about the extent of overvaluation is characteristic
in an industry that sees nothing but an upward progression for values,
but houses like any other asset can be overpriced.

Things are likely to get worse before they get better.

Morici was pointing out that there was a bubble in housing, and happy talk would not keep the bubble from bursting.

As Washington Post business writer Steven Pearlstein predicted in August 2007:

Despite
the happy talk from Washington and Wall Street investment houses –
eerily reminiscent, by the way, of the early days of the
savings-and-loan crisis of the late ’80s — these shocks [the subprime
and credit crises] will have serious consequences …

And economist James Galbraith is saying now (just as his father economist John Kenneth Galbraith said 50 years ago) – that “happy talk” won’t solve the crisis.

Indeed, the chair of the congressional oversight committee of the bailouts (Elizabeth Warren) and the senior regulator
during the S & L crisis (William Black) both say that hiding the
true state of affairs and trying to put a happy face on an economic
crisis just prolongs the length and severity of the crash

Donald
W. Riegle Jr. – former chair of the Senate Banking Committee from 1989
to 1994 – wrote (along with the former CEO of AT&T Broadband and
the international president of the United Steelworkers union) wrote recently:

It’s
almost as if the [Obama] administration is opting for a
rose-colored-glasses PR strategy rather than taking a hard-nose look at
actual consumer and employment figures and their trends, and modifying
its economic policies accordingly.

In short, happy talk and fake confidence-building exercises (like the stress tests, which Time Magazine called a con game) don’t work.

Indeed, I believe that trying to instill false confidence will actually backfire on Summers, Geithner, Bernanke and the boys and make the crisis worse.

Why?

Well, initially, as Yves Smith points out:

Team Obama has made it clear that it sees restoring confidence as paramount, when anyone
with consumer marketing experience will tell you that advertising
campaigns that make exaggerated claims about the product often don’t
simply fail (as in customers see through the hype) but often backfire
(buyers discount future ad messages about the product). The
press has had a manipulated feel, with readers on sending news stories
that have misleadingly positive stories with Panglossian headlines and
upbeat initial paragraphs that are often undercut by other material in
the same article.

So in our new branding, “the economy is no longer in a freefall” has
become “recovery.” The self-congratulatory tone among US financial
regulators (who should instead be engaging in serious
self-recrimination for failing to foresee and prevent this crisis) is
premature.

In addition, psychologists say that – until
government and business leaders prove they can behave responsibly, and
until the perpetrators of financial fraud are held accountable – real
trust will not be restored and the economy will not recover

For example, one of the leading business schools in America – the Wharton School of Business – has written an essay
on the psychological causes and solutions to the economic crisis.
Wharton points out that restoring trust is the key to recovery, and
that trust cannot be restored until wrongdoers are held accountable:

According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the
crisis today is not one of confidence, but one of trust. “Abusive
financial practices were unchecked by personal moral controls that
prohibit individual criminal behavior, as in the case of [Bernard]
Madoff, and by complex financial manipulations, as in the case of AIG.”
The public, expecting to be protected from such abuse, has suffered a
trauma of loss similar to that after 9/11. “Normal expectations of what
is safe and dependable were abruptly shattered,” Sachs noted. “As is
typical of post-traumatic states, planning for the future could not be
based on old assumptions about what is safe and what is dangerous. A
radical reversal of how to be gratified occurred.”

 

People now feel more gratified saving
money than spending it, Sachs suggested. They have trouble trusting
promises from the government because they feel the government has let
them down.

 

He framed his argument with a fictional patient named Betty Q.
Public, a librarian with two teenage children and a husband, John, who
had recently lost his job. “She felt betrayed because she and her
husband had invested conservatively and were double-crossed by
dishonest, greedy businessmen, and now she distrusted the government
that had failed to protect them from corporate dishonesty. Not only
that, but she had little trust in things turning around soon enough to
enable her and her husband to accomplish their previous goals.

 

“By no means a sophisticated economist, she knew … that some
people had become fantastically wealthy by misusing other people’s
money — hers included,” Sachs said. “In short, John and Betty had done
everything right and were being punished, while the dishonest people
were going unpunished.”

 

Helping an individual recover from a traumatic experience provides
a useful analogy for understanding how to help the economy recover from
its own traumatic experience, Sachs pointed out. The public will need to “hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.” In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.

Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.

Are the “perpetrators of the economic disaster” being held accountable?

So
far, Obama, Summers, Geithner, Bernanke and the crew have tried to
paper over the cause and severity of the financial crisis, instead of
honestly addressing them. They haven’t lifted a finger to hold anyone
accountable (other than a Madoff or two), but have actually thrown
billions of dollars at the perpetrators (or else appointed them to
government posts).

Indeed, William Black says that “the [government's] entire strategy is to keep people from getting the facts”.

Economist Dean Baker made a similar point, lambasting
the Federal Reserve for blowing the bubble, and pointing out that those
who caused the disaster are trying to shift the focus as fast as they
can:

The current craze in DC policy circles
is to create a “systematic risk regulator” to make sure that the
country never experiences another economic crisis like the current one.
This push is part of a cover-up of what really went wrong and does
absolutely nothing to address the underlying problem that led to this
financial and economic collapse.

 

The key fact that everyone must always remember is that the story
of the collapse was not complex. We did not need great minds sifting
through endless reams of data and running incredibly complex computer
simulations to discover the underlying problem in the economy. We just
needed some people who understood the sort of arithmetic that most of
us learned in 3rd grade.

 

If the people at the Fed, the Treasury, and in other key positions
had mastered arithmetic, and were prepared to act on their knowledge,
they would have taken steps to stem the growth of the housing bubble.
They would have prevented the bubble from growing to the point where
its inevitable collapse would bring down both the U.S. economy and the
world economy…

 

We didn’t need some super-genius to solve the mystery. We just
needed an economist who could breath and do arithmetic. But the DC
policy crowd tells us that if only we had a systematic risk regulator
this disaster could have been prevented.

 

Okay, let’s do a thought experiment. Suppose we had our systematic
risk regulator in 2002. Would this person have stood up to Alan
Greenspan and said that the country is facing a huge housing bubble the
collapse of which will sink the economy?…

 

Alan Greenspan said that there was no housing bubble; everything
was just fine. Would our systematic risk regulator have said that
Greenspan was nuts and that the whole economy was a house of cards
waiting to collapse?

 

Anyone who believes that a risk regulator would have challenged
the great Greenspan knows nothing about the way Washington works. The
government is run by people who first and foremost want to advance
their careers.

 

And, the best way to advance your career in Washington is to go
along with what everyone else is saying. If that was not completely
obvious before the collapse of the housing bubble, it certainly should
be obvious now.

 

How many people in government have lost their jobs because they
failed to see the bubble? How many people even missed a promotion? In
fact, the top financial officials in the Obama administration, without
exception, completely missed the housing bubble. One might think it was
a job requirement.

This lack of accountability among economists and economic analysts is the core problem that must be tackled.
Unless these people are held accountable for their failures in the same
way as custodians and dishwashers, there will never be any incentive to
buck the crowd and point out looming disasters like the housing bubble.

The reality is that we have a systematic risk regulator. It is called the Federal Reserve Board. They blew it completely. We
will do far more to prevent the next crisis by holding our current risk
regulator accountable for its failure (fire people) than by pretending
that we somehow had a gap in our regulatory structure and creating
another worthless bureaucracy.

Remember also that the Wharton study pointed out that
“the public, expecting to be protected from such abuse, has suffered a
trauma of loss similar to that after 9/11.”

Trying to put a happy
face on a grim situation, continuing to do things which are transparent
attempts to instill false confidence, and leaving in power the people
who caused the crisis reinforces the market’s convictions that (1)
government and business leaders are behaving irresponsibly instead of
addressing the fundamental problems and (2) there is no accountability.

Keeping
quiet about how bad things are won’t help. As numerous leading
independent economists and financial experts agree, the three things
that will help are:

1. Honestly addressing the causes of the crisis;
2. Honestly addressing the necessary – if bitter – medicine needed to get out of the crisis; and
3. Holding responsible those who caused the crisis.

Postscript: Time Magazine notes:

Traditionally, gold has been a store of value when citizens do not trust their government politically or economically.

In other words, the government’s political actions affect investments, such as gold.

It is interesting to note that Americans no longer trust their politicians, the justice system, their ability to obtain liberty, or the media. Americans know that the boys launched the war in Iraq (which will end up costing $3-5 trillion dollars) based upon justifications which turned out to be untrue. Many Americans have read that the government imported communist Soviet Union torture techniques and then said “we don’t torture”. Many Americans also know that the government spied on American citizen (even before 9/11 … confirmed here and here) while saying “we don’t spy”, and that the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.

This
is an economic, not a political, essay. But I think the lack of trust
in government concerning political issues poses an interesting
question. Specifically, is it possible that the American people’s
distrust of the government concerning the above-described issues also
bleeds over into a lack of trust in the government’s economic actions
and statements? In other words, if people discover that a government is
lying about political issues, do people trust the government’s
pronouncements about economic issues less?

I
don’t know the answer, but analyzing the possibility could provide a
researcher with an interesting project (or a PhD candidate with a
potential doctoral thesis).