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Archive for the ‘regulatory capture’ Category

One of the brightest regulars who comments on my blog has a totally distorted view of what Libertarian economics is all about. Unfortunately, I am quite confident that her view is mainstream.

Tin Hat writes …

Here is the core premise behind libertarian economics:

The private business sector will put ethics, morality and public employee good above profits, shareholders, bonuses, golden parachutes and CEO compensation — IF they were completely unfettered from any government imposed rules, laws, and regulations.

And IF the private sector entity failed in its fiduciary duty to the public, Main Street would rise up and kick them out.

That’s Corporatism.

Regulation Model vs. the Libertarian Model

Sorry Tin Hat but that is not what Libertarian economics is all about or stands for at all.

First let’s ponder the “Regulation” Model.

The “Regulation” model assumes Barney Frank (feel free to substitute your least favorite representative) will write responsible legislation and Congress will stop taking bribes for legislation they want.

Here are some examples of what the regulation models has wrought.

• The regulation model sponsored Fannie Mae and Freddie Mac.
• The regulation model gave huge tax breaks written by GE for GE
• The regulation model encourages flight of jobs overseas
• The regulation model supports corrupt public unions that have bankrupted cities and states
• The regulation model gave us the Fed and its bubble blowing policies
• The regulation model gave us thousands of affordable home programs all of which drove up the price of homes
• The regulation model provides hundreds of billions of dollars of student loans the effect of which is to make those graduating from school now, perpetual debt slaves.
• The regulation model gave us a healthcare bill we literally “had to pass to find out what was in it” according to Nancy Pelosi. Congress did not write that bill, it was entirely written by a consortium of special interest lobbyists.

I can provide thousands of more examples of what the “regulation” model has given us.

The very best financial regulation will ever do is prevent the last crisis. However, we are not going to have another housing bubble for decades. At worst, and far more likely, new financial regulation is highly likely to sow the seeds of the next crisis.

Regulation sponsoring Moody, Fitch and the S&P did just that. So did thousands of affordable housing programs. So did the Community Reinvestment Act. So did sponsorship of Fannie Mae and Freddie Mac. So did HUD. So did thousands of financial loopholes. And most importantly so did the legislation that created the Fed and FDIC.

The legislation model has been disproved in spades yet otherwise intelligent people keep clamoring for more of it as if we could find, hire, and listen to some “all-knowing” super-regulator that can identify the next crisis in advance and write timely legislation that the likes of Barney Frank would deem wise and pass.

The idea is ludicrous given we cannot even get consensus about what to do after the housing bubble has already burst. Also bear in mind the Fed is supposed to regulate the economy. How well did that work out?

It’s preposterous to believe that Congress can identify and appoint some sort of super-regulator because no such person exists in the first place.

Sure, many people identified the housing bubble in advance. I did, so did other bloggers and so did people like Elizabeth Warren.

What good did it do?

I am quite certain a huge number of bight people can identify the next crisis. Indeed they already have. Some people are calling for hyperinflation, some are calling for deflation, some are calling for stagflation, some think Japan will blow up, and others think peak oil will send oil prices to the moon. Some think printing money is a good idea, others don’t.

Lots of people are going to be right because there are lots of people in every one of those camps, and one of them is guaranteed to happen. When one of them does, many people will say “I told you so”.

So who do you want the Fed to believe?

I don’t want the Fed to act on any of those calls because there should not be a Fed in the first place. The Fed failed as a regulator, again, and again, and again.

Libertarian Economic Model

The Libertarian model does not end all regulation. Indeed the basis of the Libertarian economic model is that we need to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

Had we done that, and “just” that we would not be in this mess.

In the Libertarian model, Fannie Mae and Freddie mac would not have existed. Nor would there have been a Fed keeping interest rates too low, too long. Without the loose lending model of the Fed, and without banks being able to lend more money than they have, the housing securitization model that blew up would not have happened or if somehow it did, it would have been less problematic by orders of magnitude

In the Libertarian model, there would not have been government sponsorship of the rating agencies Moody’s, Fitch, and the S&P.

In the Libertarian model the construct of “Too big to fail” does not exist. Indeed, allowing failure is one of the tenants of the Libertarian model.

Note that something like Glass-Steagall would work in the context of a Libertarian model because its purpose is to put a firewall to prevent fraud. Pollution laws would still be needed to protect private property. Child labor laws would still be needed to protect human rights. Public safety laws are fine. No one would be allowed to yell “fire” in a movie theater.

If you want to take that model and add some social safety nets, all but strict Libertarians might agree.

Failure of Regulation

All the corporatism, all the bank failures, the credit bubble, the housing bubble, and all the warmongering is a direct result “of” regulation that Libertarian economics has nothing to do with.

Indeed most of those those things could not happen in a Libertarian model. To the extent that any of them could happen, they would not occur to the same magnitude.

Libertarian Solution

The solution is to throw away all legislation except what is needed to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

That means all tax breaks that favor GE as well as all tax breaks for homes, have to go. Tax code should not favor any group or thing. Drug imports from Canada would be allowed in this model and warmongering would stop. Subsidies to home builders would stop. Subsidies for ethanol would stop. In fact, subsidies for everything would stop.

Government would not be allowed to spend more than it takes in, banks would not be allowed to lend more money than they have ownership of, and the Fed would be abolished.

Instead, those in the regulation camp want to patch a million misguided pieces of legislation that should not even exist, and worst of all they expect Barney Frank to get it right.

One model has been tried and failed a million times. One model has never been tried.

Yet misguided souls want more of the model guaranteed to fail. Quite frankly it is preposterous.

Mike “Mish” Shedlock
Global Economic Analysis

The American people are becoming increasingly angry about the extraordinary amount of power and influence that corporations have in the United States today.  A new Gallup poll found that 67 percent of Americans are dissatisfied with the size and influence of major corporations in the United States today.  Not only that, the most recent Chicago Booth/Kellogg School Financial Trust Index found that only 26 percent of Americans trust our financial system at this point.  The mainstream media is acting as if this is a new phenomenon, but the truth is that a dislike of giant corporations goes all the way back to the founding of this nation.  Our founders held a deep distrust for all big concentrations of power, and they intended to set up a nation where no one person or no one institution could become too powerful.

Unfortunately, we have very much strayed from those principles.  In the United States today, the federal government completely dominates all other levels of government and mammoth international corporations completely dominate our economy.

If our founding fathers could see what is going on today they would probably roll over in their graves.

The history of the corporation can be traced back to the early part of the 17th century when Queen Elizabeth I established the East India Trading Company.

Our founders were not too fond of the East India Trading Company.  In fact, it was their tea that was dumped into the harbor during the original Boston Tea Party.

In his book entitled “Unequal Protection”, Thom Hartman described the great antipathy that our founders had for the East India Trading Company….

“Trade-dominance by the East India Company aroused the greatest passions of America’s Founders – every schoolboy knows how they dumped the Company’s tea into Boston harbour. At the time in Britain virtually all members of parliament were stockholders, a tenth had made their fortunes through the Company, and the Company funded parliamentary elections generously.”

So a disgust for great concentrations of financial power is built into our national DNA.

Many people today think of giant international corporations as being synonymous with “capitalism”, but that is just not the case.

Our founders envisioned a land where free enterprise could flourish in an environment where no institution held too much power.

So this false left/right debate about whether we should give more power to the government or more power to the corporations is largely a bunch of nonsense.

If the founders were around today they would say that we need to take a lot of power away from both of them.

Fortunately, it looks like the American people are starting to think the same thing.  Not only are the American people dissatisfied with government, they are also becoming increasingly dissatisfied with big corporations.

As mentioned above, according to Gallup two-thirds of Americans are now dissatisfied with the size and influence of major corporations in America today….

As you can see, the gap between those in favor of the size and influence of major corporations and those not in favor has been significantly widening over the past decade.

That is a good thing.

Not only that, but the latest Chicago Booth/Kellogg School Financial Trust Index shows that Americans have very little trust in the financial system at this point.

The following are some of the key findings from their most recent report….

*Only 26 percent of Americans trust the nation’s financial system.

*Only 13 percent of Americans trust big corporations.

*Only 16 percent of Americans trust the stock market.

*Only 43 percent of Americans trust the banks.

These numbers are staggering, but they should not be surprising.  The American people were not pleased at all when the major banks and big financial institutions were showered with bailouts during the recent financial crisis.  A lot of that anger is still simmering.

The recent housing collapse, which is still ongoing, was caused in great part by the behavior of the major banks and big financial institutions, but it is the American people which have suffered the most from it.  The following very brief animation from Taiwan demonstrates this very humorously….

The American people are still wondering where their “bailouts” are.  Most of the big banks and big corporations seem to be thriving even while the number of Americans slipping into poverty continues to grow.

According to Calculated Risk, approximately 15 million Americans are unemployed, about 9 million Americans are working part-time for “economic reasons” and approximately 4 million American workers have left the labor force since the beginning of the economic downturn.

When you total that all up, you get 28 million Americans that wish they had full-time jobs.

Ouch.

There are other numbers that are very disturbing as well.  In the month of November, the number of people on food stamps set another new all-time record: 43.6 million Americans.

So we have tens of millions of Americans that can’t get the jobs that they want and we have tens of millions of Americans that can’t feed themselves without government assistance.

No wonder so many people are angry at the big corporations!

The U.S. government has showered the big corporations and the big banks with bailouts, tax breaks and cheap loans and yet the big corporations and the big banks are not coming through for the American people.

Meanwhile, food prices continue to go up.  According to the United Nations food agency, global food prices set another new all-time record during the month of January, and they are expected to continue rising for months to come.

That certainly is not going to ease tensions in the Middle East and elsewhere around the world.  When people are not able to pay for the food that they need that tends to make them very, very angry.

For now we are not likely to see food riots in the United States, but as food prices rise all of those food stamp cards are not going to go as far as they used to.  Average American families are going to feel more strain at the supermarket.  There will be less money available for other things.

A key indicator to watch is the price of oil.  The price of oil is one of the key components of the price of food, and if we see the price of oil go up to $120 or $150 a barrel that could mean really bad things for both the U.S. economy and the overall global economy.

If we do see another financial crisis like we did in 2008, is the U.S. government going to rush to bail out the big corporations and the big banks like they did the last time?

As we have seen from the numbers above, that certainly would not sit well with the American people.

The Economic Collapse

By Donald Hank

In a recent video featuring former finance regulator Bill Black exposing fraud and corruption in major financial institutions, the GOP is seen as sticking to a highly questionable philosophy of non-regulation of finance even in situations where non-regulation leads, directly or indirectly, to implementation of taxpayer-paid bailouts and guarantees for bad banker decisions:

Former Finance Regulator Bill Black: Criminal Charges Must Be Laid

This video shows that the old Republican habit of defending a regulation-free banking system could soon be an albatross.

The Old Republican theory is that too many regulations on banks will hamstring the free market. In theory, this libertarian approach to finance makes sense. But only in a vacuum or a libertarian (laissez-faire) utopia does it hold true. In the real world, the government is obliged to guarantee deposits of bank customers against bank failure. But when you relax regulations to the point that banks are no longer responsible for their actions, and the public is obliged to pick up the tab, you get the kind of situation that led to Reagan’s savings and loan scandals. This scandal shows you can’t treat banks as independent businesses subject only to the laws of supply and demand as long as the government guarantees deposits and loans made in these banks. This kind of practice costs the taxpayer a lot of cash, which, in a free market, they would not have to pay. If you want to apply totally libertarian (or free market) solutions, you would also have to deny bank customers all taxpayer subsidized guarantees. This is not going to happen, so some regulations are necessary to protect the taxpayer against either poor judgment errors or criminal behavior of the kind discussed by Mr. Black.

The government used to just guarantee deposits up to a certain amount to protect the bank customer against failure – a practice that in itself led indirectly to some warps. But now we have additionally introduced the reckless concept of government guarantees for loans – in the form of bailouts for banks with lax lending practices but also in the form of coercion of the CRA variety.

That is an untenable situation for the taxpayer, who now is often held at gunpoint every time a bank fails for abusing this protection.
It is arguably more favorable to a free market if the bank is either made 100% responsible for its actions – ie, no bailouts – or the bank is 100% regulated so that bad loans cannot be made. It is also essential to the operation of the free market to prosecute to the fullest extent of the law and breach of bank rules that make banks dependent on public funding in the form of bailouts or the like.

Neither situation will ever develop in the real world, so a balance between regulations for banks and taxpayer-paid guarantees for bank customers must be found.

The blind policy of simply refusing to regulate (to meet GOP demands) while continuing to provide taxpayer-subsidized guarantees for loans and deposits (to meet essentially Democrat demands) will lead to an untenable situation, especially for the GOP. If the GOP is eventually seen as blindly deregulating in ways that directly or indirectly trigger taxpayer subsidies for banks, the GOP will fail to hold onto its lead among voters. Only a few rich bankers could desire such a situation.

The only sensible move is for the GOP to start being more flexible with regard to regulations, specifically where deregulation would entail a risk of public monies being used for bailouts, guarantees on deposits and the like.

Deregulation is a free-market solution only if the government is not paying the bill for bad banking policies and decisions.

It is time for the GOP to realize that taxpayer subsidies to the rich can put them right back behind the eight ball again. The Tea Party must take up this issue.

Here’s someone who thinks we need to STOP THE LOOTING AND START PROSECUTING!

William Black: Regulations were deliberately weakened to create conditions for systemic fraud.

Click book cover to order William Black’s book:

Oh we’ve got a gem of an article this morning, in of all places, The New York Times. 

The commission’s report finds fault with two Fed chairmen: Alan Greenspan, right, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

Well, that’s certainly a statement of the obvious….but it gets better.

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

While I don’t necessarily disagree with the premise, the idea that this was merely a result of deregulation is ridiculous.  It was a failure to apply existing laws to blatant criminality…..you know, like FRAUD.  There have been laws on our books regarding fraud and criminal behavior (like stealing) since this country was founded, yet not a single law has been applied during this crisis but to one individual, Bernie Madoff.  Bet he’s wondering, ‘Why me?’ about now.

Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them.

Former and current officials named in the report, as well as financial institutions, declined Tuesday to comment before the report was released.

The report could reignite debate over the influence of Wall Street; it says regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.

Color me surprised that they all declined to comment…..not.   I don’t think it is likely that Henry Paulson ‘got it wrong’ – not when he was at the helm of Goldman Sachs when these little ‘financial weapons of mass destruction’ were developed.  He was also there when Goldman Sachs (the only firm to do so), bet against the very clients they sold these ‘investments’ to!   No chance in hell he didn’t understand what was going on.   To argue he and Ben Bernanke were ‘mistaken’ would be to argue that they didn’t understand what the banks and lenders were doing.  Pull the other one.  No, this was a case of blatant and willful lying to the American people.   Matter of fact, I would argue it was absolutely essential that Henry Paulson be appointed Treasury Secretary in order for the massive cover-up to occur and to work the way it did.  The myriad of the lies told by Paulson, Bernanke, Geithner and others have been documented meticulously here on FedUpUSA and can still be found linked in the right-hand column.

In summation, the NYT article does convey one thing quite clearly:  Our government is comprised of those that run the banking industry and Wall Street, have spent years in the banking industry and/or those who are being directly paid by Wall Street and the banking industry.  Those that control the quantity of money have entirely captured our government.  We have no independent government.  None.  Zip.  Nada.  I believe there is a word for this:  fascism.

When will you wake up America?  Apparently not when you’ve lost your job.  Apparently  not when you’ve gone broke, and apparently not when you’ve lost your home (fraudulently, I might add).  Here it is in black and white:  You have been robbed in broad daylight and you continue to re-elect those directly responsible for doing so.   As long as Americans continue to elect Congressional Representatives with a ‘D’ or an ‘R’ behind their names; those that are ‘professional politicians,’  YOU are contributing to your own demise.  As long as you continue to elect people who are paid by Wall Street, you are not going to change anything.  Just try to find a Representative not owned by Wall Street banks OpenSecrets.  Yes, even now with the 112th Congress.

Are you going to leave this criminal, captured government to your children?  It’s past time to wake up America.  What will it take?

‘Americans can always be counted on to do the right thing, when all other possibilities have been exhausted.’ — Winston Churchill

Could we work on not making this man a liar?

STOP THE LOOTING & START PROSECUTING!