Friday, December 31, 2010

Hellhounds on your trail

"If only part of the things brought out prove true, These men have done the American people more damage than all the incidental operations of Al Capone. Capone had the merit of confining his robbery and the infliction of physical violence to the wicked.... [I]f these stories are true these men are not bankers , they are banksters who rob the poor, drive the innocent to poverty and suicide and do infinite injury to those who honestly work and strive. Worse than that, they are traitors to our institutions and national ideas."
        US president Herbert Hoover 1933.

    As 2010 closes out, we're two years into a Democratic administration in the US and at least two years into the worst speculative bubble since the Crash of '29. Praise must go to the Obama administration for their masterful work in preserving the international financial system without actually making any systemic changes to help prevent a recurrence of the same problems. That there is any confidence in the international financial system is testament to the loosely coordinated international effort to disguise the depth of the problems from the public at large while desperately injecting trillions of dollars into resuscitating the system.
    In the US, the administration is allowing millions of foreclosures to go forward under the same conditions that prevailed during the issuing of the original mortgages; that is, a system without protection for the consumer, with perverse incentives built in that breed casualness, incompetence, and outright fraud, and where the 91% of US citizens who consider themselves "middle class" are cheated, lied to, and exploited. (Personally, I love the stories of the people who have frozen the foreclosure proceedings on their homes by the simple act of asking the foreclosing bank to prove that they actually hold the mortgage on the property. With the extensive collateralization and re-collateralization of these debt obligations, the actual ownership of even a portion of a mortgage is often impossible to define).
    The only real difference between this crash and the Crash of '29 is that this time there isn't the panic of depositors trying to get their money out of the bank before the bank fails. The creation of federal deposit insurance has kept the banks, and the countries they do business in, liquid.  But after the Crash in '29, it took the US four years and a change in administration (from Hoover to Roosevelt) before the excesses and failures were recognized and corrective legislation was considered. It is depressing that the most important corrective, the Glass-Steagall act separating commercial from investment banking--repealed under Reagan, seems to be at the heart of the current series of speculative boom and bust cycles. And it is even more depressing that one of the same banks, Citigroup, is again at the epicentre of the crisis.
    There are differences between crashes; the last time it took years for the tricksterism, fraud, and near-criminality to be exposed. This time there are plenty of books and information being generated on the same topics, although they are being presented in formats that most people (particularly in the US) no longer access (books and newspapers, primarily). But the root causes of the crisis' are pretty much identical. Roosevelt intimate and (eventual) Supreme Court justice Felix Frankfurter wrote that:

    [I do] not believe that vice inheres in the rich and virtue in the poor. But for too long we have been largely operating on the assumption that the converse is the truth, and more particularly that the rich are the guardians of wisdom and should control affairs.... The crux of the business is not the wickedness of the Mitchells [head of City Bank in 1933] but the power which is wielded by concentration of financial  power which they are wholly unworthy--no matter who they are--to wield because of the obfuscations and the arrogances which power almost invariably generates. [sic]
       (quoted in Hellhound of Wall Street, Michael Perino, page 223)

    People are no smarter today than 80 years ago (in many respects, they're more ignorant), and although we have some experience with worldwide financial crisis', our governments are still allowing laws to be written by the same group of people the same laws are meant to regulate, we still fall under the spell of the same slogans ("Greed is Good") and economic theories (the Chicago School, neo-liberalism, laissez-faire). The same people selling CDOs knew that a crash was coming--which led them to re-double their efforts to sell more of them in order to get their money while the getting was good. All we've really changed is the degree to which our economies are interlinked. And we still persist in our view that crashes and speculative bubbles are aberrant, rather than the normal operation of the financial system we live under. Welcome to a new decade.