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James Galbraith On Economic Theory As A Disgraced Profession

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James K. Galbraith: Why the 'Experts' Failed to See How Financial Fraud Collapsed the Economy
By James K. Galbraith, AlterNet
Posted on May 15, 2010, Printed on May 16, 2010, first posted on AlterNet

The following is the text of a James K. Galbraith's written statement to members of the Senate Judiciary Committee delivered this May.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including "rational expectations," "market discipline," and the "efficient markets hypothesis" led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word "naughtiness." This was on the day that the SEC charged Goldman Sachs with fraud.

There are exceptions. A famous 1993 article entitled "Looting: Bankruptcy for Profit," by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: "the best way to rob a bank is to own one." The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart's Den of Thieves on the Boesky-Milken era and Kurt Eichenwald's Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a "license to steal." In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found "fraud, abuse or missing documentation in virtually every file." An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.

When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.

A third element in the toxic brew was a simulacrum of "insurance," provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.

Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: "liars' loans," "ninja loans," "neutron loans," and "toxic waste," tells you that people knew. I have also heard the expression, "IBG,YBG;" the meaning of that bit of code was: "I'll be gone, you'll be gone."

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails -- those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the "Paulson Put" was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye. What is the appropriate response?

Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.


James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, and of a new preface to The Great Crash, 1929, by John Kenneth Galbraith. He teaches at The University of Texas at Austin.

 


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Sun, 05/16/2010 - 21:26 | Link to Comment akak
akak's picture

Interesting that this spawn and heir of an even more prominent, outspoken (and discredited) Keynesian witchdoctor should now speak out against the current financial and political criminals and sociopaths, when it was his and his father's very own elitist, statist theories and prescriptions that encouraged, enabled and led us to the grim and degenerating financial, monetary and political quagmires that we are all stuck in today.

Sun, 05/16/2010 - 21:36 | Link to Comment Rusty_Shackleford
Rusty_Shackleford's picture

Well said.  Especially given this recent depantsing.

http://www.youtube.com/watch?v=YnKsgelpuHU

Sun, 05/16/2010 - 21:43 | Link to Comment Fedup
Sun, 05/16/2010 - 21:53 | Link to Comment akak
akak's picture

Rusty, I saw that mini-debate with Schiff live on CNBC, and I kept waiting for the large hook to come in from stage left and drag that Keynesian quack off before his ludicrous babble and smug arrogance caused Peter Schiff's head to explode and make a mess of the CNBC sound stage.  Unfortunately for Galbraith and CNBC but fortunately for Peter, the crisis was averted.

At least Ghoulbreath managed to drive another large nail into the coffin of whatever shred of credibility he may still have had before this interview.

Sun, 05/16/2010 - 21:54 | Link to Comment snowball777
snowball777's picture

Meh....a draw...Schiff is as big a quack as JKG.

Sun, 05/16/2010 - 23:28 | Link to Comment akak
akak's picture

I strongly disagree.

Don't confuse personality with policies. 

Schiff may come across at times as a bit of a blow-hard, but he is right on the ball when it comes to his fundamental beliefs in the free market and the insanity of the current unsustainable governmental policies that are driving this nation and its economy into the ground.

Sun, 05/16/2010 - 23:38 | Link to Comment Apostate
Apostate's picture

Schiff is an obviously inept hedge fund manager (picking Chinese stocks from a distance is never wise), but he's a great educator.

You must also remember that he's fighting for his father's honor. That's a powerful motivator. 

Sun, 05/16/2010 - 23:53 | Link to Comment malek
malek's picture

I am very happy with his Chinese stock picks for me (actually "ideas" - I make the decision).

Until very recently, he was never running a fund, much less a hedge fund. Only 5 weeks ago he started his first fund, symbol EPIVX.

(But IMHO it's clearly not the time to go into an equity investment fund right now, no matter who is running it.)

Sun, 05/16/2010 - 22:41 | Link to Comment three chord sloth
three chord sloth's picture

Yep. You could tell a self-serving hatchet job was on the way from the beginning:

"I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis."

He's just another ideologically blind fool. He thinks this current mess somehow rehabilitates Keynesianism. No, Galbraith, you and yours are still hacks... a few new names were just added to the list. You didn't come off it.

Sun, 05/16/2010 - 22:53 | Link to Comment DirtySouth
DirtySouth's picture

"When the facts change, I change my mind. What do you do, sir?"

"A study of the history of opinion is a necessary preliminary to the emancipation of the mind."

"I work for a Government I despise for ends I think criminal."

"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals..."

"The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds."

~ John Maynard Keynes

 

Every single time someone uses the word Keynesian without actually comprehending what it means, you let the State win.  When articles and sites do not explain to you the real facts about Keynesian policies, the State wins. Posting articles like these are emulating the same state policies.  Most of you are being taken for a ride, and have absolutely no clue..

Mon, 05/17/2010 - 00:30 | Link to Comment Matto
Matto's picture

Here Here!

 

When i read "keynesian this, keynesian that" i treat it as a reference to unchecked deficit spending rather than a reference to keynesian economics.

Mon, 05/17/2010 - 05:40 | Link to Comment macroeconomist
macroeconomist's picture

One of the few things I have been unhappy about ZH and its community is the way they understand Keynesian macroeconomics..Matto, your post is a confession of what a lot of people think Keynesianism is..I seriously recommend everyone to read Hyman Minsky, though I know most people here are very familiar with his works..Him and his followers call themselves Post-Keynesian, and explain why Keynesianism in standard textbooks has nothing to do with what Keynes was trying to say..I would also refer to Keynes' 'Treatise on Money' if you really want to know what he thought..I have even been planning to write a lengthy article and send it to ZH so this mis-use of Keynesianism does not torture one of the best economist that has walked the earth in his grave anymore..I bet he's been screaming 'That's not what I'm saying' since Hicks drew those ridiculous IS-LM curves..

Mon, 05/17/2010 - 10:41 | Link to Comment Pat Hand
Pat Hand's picture

Please do.  Keynes got so much right.  What got labeled "Keynesianism" is a distortion of what Keynes said and meant.  Unfettered markets have their own problems.  The Austrians are wrong.  The Keynesians are wrong.  The neoclassicists of course are really really really wrong.

We need a neo Keynesianism, via Minsky.  It's a fine line - how to account for externalities, and what the proper role of the state is in moderating dynamics. 

Mon, 05/17/2010 - 00:39 | Link to Comment scaleindependent
scaleindependent's picture

I love ZH and its community, but I am somewhat dissapointed here with those who criticize Galbraith's thesis that fraud was pervasive and that for the financial system, the economy and the US political process and freedoms to survive that fraud must be prosecuted and penalized with extreme prejudice. How can anyone disagree with this? 

Can anyone disagree that fraud was pervasive from the highest to lowest rungs of the subprime fiasco; That the regulators and ratings agencies were neck deep in criminal fraud themselves, that politicians and cops looked the other way, that the whole business was criminally corrupt. No one can.

The truth that it is all a criminal Ponzi fraud is leaking to J6P. Who fails to see that without credibility the financial-economic and political system will fail and our freedoms numerated in the constitution will someday be negated.  

 

I fail to see how his petition that  "the country faces an existential threat....the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case" is somehow socialist or anti-market because it requires regulation yada yada. 

If Galbraith's petition is ignored by the public, the government and the cops then I  predict that the latent fascist tendencies that our country now has will someday become rampant and one day the US will become a flaming outta the closet fascist limiting freedom of the press, freedom of religion and association etc.

Mon, 05/17/2010 - 01:55 | Link to Comment Fraud-Esq
Fraud-Esq's picture

I think most agree with you on fraud. TD posted it after all. Bill Black is one of my favs too. 

Mon, 05/17/2010 - 03:55 | Link to Comment akak
akak's picture

I do not dispute Galbraith's indictments against the corruption and crimes of the financial (and political!) elites taken at face value, I merely assert that he is a hypocrite in making those indictments given his statist economic "theories" and policy recommendations over the years that enabled, encouraged and (at least until now) excused those very same end results, whether he is willing to acknowledge that his longstanding statist policy prescriptions would have inevitably led to such results or not.

Mon, 05/17/2010 - 03:27 | Link to Comment jp
jp's picture

They disagree with it because it does not suit their idea of the correct party in power at the time the crimes might have taken place. Nothing short of complete and total B.S.

 

Mon, 05/17/2010 - 07:53 | Link to Comment DudleyDoRight
DudleyDoRight's picture

Agree that fraud must be pursued.  Reverting to discussions re: is keynesianism good or bad diverts from the important task of pursuing fraud.  Meanwhile, Bloomberg is reporting that Greece is considering legal action against various banks that may have contributed to the crisis: http://www.bloomberg.com/apps/news?pid=20601010&sid=aDxF1YfeViEc.  Let the sun shine in!

Mon, 05/17/2010 - 10:34 | Link to Comment obewon
obewon's picture

Well said, Scale!

There's not one phrase in your commentary that I could have rebutted; nor could I have improved on your phraseology!

Sadly, Galbraith's petition will be ignored by the Senate Judiciary Committee and by the US Congress; none of them, save Ron Paul, have the courage and political will to carry this message forward.

Even more sad is the fact that the American people will remain ignorant, while the US news media continue to pump disinformation and baby pablum.

Mon, 05/17/2010 - 13:19 | Link to Comment awells
awells's picture

The letter is about the need to eliminate financial fraud. Apparently you disagree.

I gather that you are reluctantly justifying the continuation of the fraud based on your classification of the author as a Keynesian, whom you would oppose at all costs. 

Sun, 05/16/2010 - 21:31 | Link to Comment the grateful un...
the grateful unemployed's picture

i'm going to disagree with this fellow, only because i think the market is a self regulating system. the problem arose when the market wasn't allowed to police itself. we don't need more regulators (who watch porno) and we don't need Glass Steagall, if we're willing to let the market players fails, and not bail them out with the invisible hand of government. now that we passed that sign post, draconian laws and corrupt regulators are the solution. sadly

Sun, 05/16/2010 - 21:38 | Link to Comment snowball777
snowball777's picture

Sure, except for the fact that we can't 'let them fail' without taking out the entire world economy in the process.

The point of Glass-Steagall was to keep assholes like Dick Fuld Jr from failing with despositors money. If they can con idiot clients into a tar trap, so be it, but they were creating this credit bubble via Fed largesse and rampant securitization backed by the hard-earned savings of innocents.

Firewalls and transparency are requirements for self-regulation of markets. Not recognizing that makes you as guilty as Greenspan.

 

Sun, 05/16/2010 - 22:02 | Link to Comment the grateful un...
the grateful unemployed's picture

myth one that the financial crisis would have destroyed the economy. myth two that somehow the speculators make off with most of the money, in a market crash money simply disappears. without transparency the  market prices risk, but with the invisible had of the Fed keeping rates low, the market wasn't allowed to regulate itself. the fortunes of the oil market, the grain markets, and the stock market all provide the american people with wealth, often taken from labor of third world nations. our government intervenes in these markets, to their detriment, on our behalf, so we doth protest, not much at all, except when we think our ox is gored.

the typical american parasite works for the government, crys loud and long that he is overtaxed, ,myth three, nobody pays taxes, our paid poltical hitmen simply deficit spend at the expense of our trading partners. we are not a good or great people, we are selfish and amoral. we aren't willing to accept the consequences for taking risk, but we want all the rewards.

and in a free and fair market those who held gold, and no debt would survive an economic collapse, but they won't this time.

Sun, 05/16/2010 - 22:33 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The sole purpose of our public myth keepers is to adjust our public myths to support currently popular lies, which are themselves perpetrated by the powers that be in order to cover their thieving tracks.

The myth keepers are usually well compensated for their efforts and everyone who wishes to believe what they're told are extremely satisfied with the adjusted myths.....that is until they need to be adjusted once again to provide cover for the latest scam.

The public myth keepers are always extremely busy and are usually guaranteed life time employment.

Sun, 05/16/2010 - 23:21 | Link to Comment hbjork1
hbjork1's picture

CD, IMO, once again correct, undeniably. Although, I might not be able to call it a deliberate scam.  We have to consider that it was a possible belief, out of flawed logic, just as scientists have ocassionally believed in perpetual motion machines, polywater or cold fusion.  Their reach exceeds their grasp. 

I am sure all know about Dr. Robert C. Merton's involvement in the LTCM afair of the late 90's.  He was a Nobel Prize winner and is still regarded as a distinguished economist.  But he (as well as others) did not grasp the simple fact that standard statistics could not be reliably applied to risk where human communication and emotion was involved.  

We haven't heard much from Dr. Merton during this last decade.  He is, no doubt working hard on new models.

Were his models myths or were the economic equivilient of a perpetual motion machine?

I don't know and I know I don't know.  Some of these learned economists don't know that they don't know.

Enjoy your posts.

 

 

Sun, 05/16/2010 - 22:33 | Link to Comment snowball777
snowball777's picture

Myth One may yet finish the job, despite the pretend and extend myth-to-market fantasy world currently inhabited by the prop trading criminals at the Big 5.

Myth Two doesn't mean much when the bonuses and commissions (kick-backs?) pocketed by the assholes from Myth One and the GSEs aren't clawed back.

How is the market supposed to 'price the risk' of several hundred trillion dollars in derivatives without transparency?

No, we're not overtaxed...at least not our corporations or our cap gains and certainly not hedge manager compensation.

As someone who has worked hard (as in months of hundred hour weeks) since I was a teen and has no debt, I sincerely hope you're wrong on that last point, but I'm not standing still and taking it on the other cheek.

Sun, 05/16/2010 - 23:28 | Link to Comment the grateful un...
the grateful unemployed's picture

and i continue to suggest that the current president should be impeached for his failure (his parties failure) to impeach the last president, but that sort of circular logic will get me nowhere. money in the mattress was the best investment decision you could have made in 29'.

Sun, 05/16/2010 - 23:57 | Link to Comment bretondog
bretondog's picture

we are not a good or great people, we are selfish and amoral. we aren't willing to accept the consequences for taking risk, but we want all the rewards.

..........................

 

Excellent.

And the entire Post is dead on.

Thanks for a short bitter elucidation.

 

Sun, 05/16/2010 - 21:46 | Link to Comment Matto
Matto's picture

I tend to disagree, as the perpetrators of a fraud could reside in the financial systems institutions and then exit before the system collapses. Therefore the market cant self regulate because the individuals who make the decisions wont be held accountable or pay a price for the collapse, they'll be long gone leaving their mess behind.

I think a clear regulatory framework needs to be in place and enforced, particularly in the banking and financial industries but freedom to operate within that framework should not be limited. A system like: 'these are the rules, they are the boundaries, you can do what you like within the boundaries but if you make the decision to step outside of them and operate agaisnt the public good or agaisnt those who you represent and whose trust is enabled to you, you will be held fully and personably accountable.'

Mon, 05/17/2010 - 08:20 | Link to Comment Dreamwalker420
Dreamwalker420's picture

A clear regulatory framework was in place in September 2008.  On September 1, 2008 FASB 157 required that the banks mark their assets to current values ... and then Lehman failed.  The result was the implosion of the international banks which then imploded the entire Federal Reserve System right down to your community banks.  Who does the FDIC sell a failed bank to when they have all failed simultaneously?  And where does the FDIC get the cash to cover the insured deposits?  And how do we avoid war with the nations of the people who lost their un-insured deposits?

These very real questions came to bear when $500 billion was removed from money-market accounts on September 16th, 2008 in the span of just a few hours as those international depositors figured out that their cash wasn't insured by the FDIC.  Electronic fund transfers changed the pace of a bank run: speeding it up to occur within hours instead of weeks.  And our President and representatives made a decision to "save" the current financial system at the expense of the public (more precisely people who have large debt to income ratio's).  Obama furthered this policy by declaring "no bank will fail" during his stress test farce ... essentially a bank holiday like FDR without the bank closures.

Too Big Too Fail happened.  And the system did exactly what one should expect of politicians and police officers ... in a real emergency, all men seek to preserve their own self-interests.  While I dispise what happened, I wonder if there are truly any better solutions?  American society has become completely dependent on the beast of socialism ... very little of our economy exists outside of the wage-tax-debt-inflation slave trade.

As our political system attempts to grapple with this perplexing problem, how do I navigate through it to preserve my own prosperity?

I believe we start with the Rule of Law.  At the core of what makes our national economy work is the public trust that the Rule of Law is applied equitably.  In the wake of massive financial fraud perpetrated by the banking industry, the only solution that will satisfy the public's anger is one they believe in ... what do you think they want?

Most of us believe that we should be responsible for our debt.

Most of us believe that the principals of bankruptcy are essential to the fairness of the system.

Most of us believe that no one should be compensated for failure (including athletes).

Most of us believe that we should retain the wealth we create for ourselves.

Most of us believe that we should put in a good effort and be compensated justly for it.

Most of us believe that all contracts must be executed under the assumption of goodwill.

Some of us don't ... and we need to prosecute those who violated the Rule of Law.  In order to form a more perfect union, we must learn from the mistakes of our past ... and continue forward, building a better society for ourselves and our children.

What most of us believe is not how some of us will act.

Mon, 05/17/2010 - 00:45 | Link to Comment scaleindependent
scaleindependent's picture

Question:  Do you disagree that CRIMINAL fraud was pervasive and that it should be agressively prosecuted by the DA's?  IMO, that is Galbraiths main thesis. Do you disagree with that or are we splitting hairs here?

Prosecute the criminals. That is a must for credibility to return. It is the best way now to counter act the effects of moral hazard. Otherwise we're doomed.

Mon, 05/17/2010 - 01:53 | Link to Comment faustian bargain
faustian bargain's picture

'criminals' in this case should include first and foremost members of our own government, elected and unelected, who perpetuate economy-destroying monetary and fiscal policy. First in line, dismantle the Federal Reserve System.

Mon, 05/17/2010 - 15:08 | Link to Comment hooligan2009
hooligan2009's picture

I heartily agree. The criminals in this case, if so proven, should have their assets impounded to the extent of the harm caused. We know this will not happen though since the fraud perpetrated is equal in scale to the lack of ability to capture the hard drug culture that is similarly pervasive. The social system is in danger of becoming wholly corrupt. Some may argue this is the case. I don't.

I think that we are at a crossroads and agree with Galbraith. If we were to treat this crime as seriously as 9/11 then we would form an equivalent of Homeland Security and prosecute (and be damned short term but benefit with a fair system in the long run). If we do not prosecute then we condone the behaviour and encourage it.

Mon, 05/17/2010 - 01:26 | Link to Comment Breaker
Breaker's picture

". . . we don't need more regulators (who watch porno) and we don't need Glass Steagall, if we're willing to let the market players fails, and not bail them out with the invisible hand of government."

In principle, I agree. But the root of the problem is that we have to be willing to let bank depositors lose their money to make that work. FDIC and FSLIC guarantees are a fundamental part of the problem. Depositors have no reason to examine the financial health of their bank. Banks do not have to be sound to attract customers. That is a huge gap in what should be a fundamental policing mechanism of the market on what banks do with their depositor's money. To make things worse, large banks get bailed out above and beyond the FDIC and FSLIC guarantees. And, the mortgage origination market is driven entirely by what loans Fannie and Freddie are willing to buy. Those standards are driven by politicians, not market considerations.

As currently constructed, the taxpayer pays for unsound banking practices. And, the government encourages unsound banking practices for whatever reason politicians do stuff. The government encourages unsound personal finances. The government promises to pay public employees unsustainable pensions. The government promises medical care and retirement income far beyond anything it can reasonably be expected to be able to provide. Raising taxes is no solution because, if the politicians have more money, they will just make more unsustainable promises. Of course, the public goes along and elects the fools because it feels good to have stuff and own homes and besides, they just saw that ad on TV where a teacher was almost crying for the children because of "cuts" in education spending or the ad where the old lady has cancer and a mean insurance company that the politician de jour will "fight."

The fundamental problem is that democracy doesn't work unless it is constitutional and the limits on politicians' powers are real. Politicians will almost always make the wrong decision when it comes to regulations that make people happy in their new home they can't afford, or promising stuff in the future, or giving money to people who elect them--and that creates bubbles. The US tossed restraints on politicians' power to do whatever they wanted in the 1930's. The rest of the world never really had any.

But to get back around to the start of this post, if politicians are going to promise that no depositor will ever lose money up to $100,000, then the banks have to have some limits on what they can do with the money. And the politicians will eventually screw up the regulation big time. And here we are.

Mon, 05/17/2010 - 03:12 | Link to Comment Fraud-Esq
Fraud-Esq's picture

 i think the market is a self regulating system. the problem arose when the market wasn't allowed to police itself.

This was Alan Greenspan's theory, proven wrong. Totally wrong. They do not self-regulate, never did, never will. Especially when you can bank a retirement by 27 and walk away from the carnage. You must have lots of faith in bankers.  

I agree with you on bailouts, but that in no way affected self-regulation. Not all of them knew or relied on a bailout to make their bonus and Q report. Look at Lehman.

Mon, 05/17/2010 - 13:23 | Link to Comment awells
awells's picture

it is sad to see such a jumble of shallow opinions warring in one head.

Sun, 05/16/2010 - 21:32 | Link to Comment snowball777
snowball777's picture

And, after searching like Diogenes with a lamp in daytime, Wall St is 'cleaned out' and we find there is no one left? What then?

Sun, 05/16/2010 - 21:48 | Link to Comment Simon Jester
Simon Jester's picture

peace, liberty and justice for all....and all the Belgian ale you can safely consume at my place

Sun, 05/16/2010 - 21:52 | Link to Comment snowball777
snowball777's picture

Those Trappist monks do know what they're on about...

 

Sun, 05/16/2010 - 23:14 | Link to Comment akak
akak's picture

Curious how great minds (and great palates) think alike!

Sun, 05/16/2010 - 22:15 | Link to Comment Trial of the Pyx
Trial of the Pyx's picture

hear hear

 

that's the stuff

Mon, 05/17/2010 - 01:55 | Link to Comment faustian bargain
faustian bargain's picture

If you clean out Wall Street without also cleaning out the government and the Fed, you won't have accomplished much.

Sun, 05/16/2010 - 21:34 | Link to Comment Carl Marks
Carl Marks's picture


As long as people will accept crap, it will be financially profitable to dispense it.
- Dick Cavett

Sun, 05/16/2010 - 21:35 | Link to Comment Hulk
Hulk's picture

Its about fucking time. I hope the senate JC reads it and takes it serious. I can dream though.

There is a must watch interview of Jim Rogers on bloomberg over at dollarcollapse.com

Rogers is nervous about all western fiat currencies now. States that we have a massive problem that our children don't have to worry about, we have to worry about it NOW

Sun, 05/16/2010 - 21:37 | Link to Comment fxrxexexdxoxmx
fxrxexexdxoxmx's picture

They must have one nut claiming the obvious or else TPTB will not be trusted.

Sun, 05/16/2010 - 21:37 | Link to Comment Apostate
Apostate's picture

Wow.

Can anyone make sense of his arguments? I mean, control fraud, whatever, fine. It's an effect of something much larger. This is the same guy who wants Bernanke to eliminate the deficit by punching a few keys. 

Right. And default on those Treasuries, which are held by plenty of foreign governments, toppling those in the process. The default is happening as we speak, but I suspect that it will need to appear like a crisis to allow the US leadership to save face. 

They let this guy run the show. 

Sun, 05/16/2010 - 21:58 | Link to Comment Double down
Double down's picture

Agreed this guy may diagnose the problem, but I do not think he, and keynesians in general can grasp how markets work.  It is like they only see two parties in a transaction they do not understand the context or substance within which the transactions occur.

In the end, they do not respect markets, as if the latter are benneith the economist. 

Sun, 05/16/2010 - 22:27 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

It's not really supposed to make sense. Just think back to Greenspan speak for an example of this. We seem to like it when our geniuses mindlessly babble with little flecks of white spittle hanging off the corner of the mouth.

I'm being almost entirely serious with my comment above. There is no understanding insanity, particularly publicly displayed insanity. This goes back thousands of years. It's just that it's only recently been televised and thus it's mistaken as a recent phenomenon. It has a rich and storied history going back to Egyptian times.

Mon, 05/17/2010 - 01:47 | Link to Comment Fraud-Esq
Fraud-Esq's picture

Control fraud is a massive issue at the heart of this crisis. read Bill Black. He invented the Keating Five

Sun, 05/16/2010 - 21:41 | Link to Comment AN0NYM0US
AN0NYM0US's picture

the country faces an existential threat"

 

JG you have been awarded the prize for understatement of the year, congratulations. It is available for pick-up at your convenience.

Sun, 05/16/2010 - 21:42 | Link to Comment Problem Is
Problem Is's picture

"Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud?"

SURE:  If you were shredding the original mortgage documents...
Because you planned on fraudulently RE-securitizing the same mortgage on the same property over and over again...

You know judge, the dog ate my loan documents...
Who'd a thunk you and two other banks would show up in the same Florida court to foreclose on the same primary mortgage, on the same house and tell the same the judge you all lost the mortgage documents...

Ain't that a bitch...

Sun, 05/16/2010 - 22:21 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

LOL

May I amend your comment?

JG you have been awarded the prize for understatement of the year, congratulations. It is available for pick-up at your local convenience store in the beef jerky isle.

Just having some fun on a Sunday night. :>)

Sun, 05/16/2010 - 21:47 | Link to Comment Catullus
Catullus's picture

James Galbraith and his father John are both failures.  He's allowed to speak before our Senatorial farcists because he's one of the leading academic farcists.  Tell us again Dr. Galbraith how deficits don't matter because the Fed can just print money and it's money we owe ourselves. 

As for this latest piece of garbage, I'm not surprised to see a career academic say the "failure" is not enough research.  I've got an idea, ask an auditor.  The reason the banks do it is because they can.  It's very simple.  They know they're not going to jail, and even if they believe they could, they get paid so well in the interim up to the discovery of fraud that the benefits far outweigh the cost. 

The fraud is obvious though.  The banks never have the money they say they do under fractional reserve banking.  You're just going through periods of delusion and discovery. And which 20th century economist pointed this out so clearly?  Murray N. Rothbard.

"Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion."

RIIIGHT.  Deficient in the fundamental analysis as always, Dr. Galbraith. 

Sun, 05/16/2010 - 21:54 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"I've got an idea, ask an auditor. The reason the banks do it is because they can." 

Reminds me of that old joke asking why do dogs lick their balls.

To wonder why anyone lies, cheats or steals is to wonder who has extra grant money they must disburse before the end of the fiscal year.

Mon, 05/17/2010 - 13:46 | Link to Comment awells
awells's picture

This is getting ridiculous. One commenter after another is so strongly disliking J. Galbraith, that they don't bother to read what he wrote.

He points out that there has not been enough research on fraud, so the perpetrators are getting away with it without everyone realizing the extent of it, and that the future of the state is at stake. He admonishes the Senate Judiciary Committee to prosecute the perpetrators with the "Some appear to believe ..." bit.

I thougt from the basic tone of the comment that you would agree. But maybe not.

Mon, 05/17/2010 - 14:02 | Link to Comment mikla
mikla's picture

We agree that fraud is huge/significant, and Galbraith is correct to assert there should be more investigation and prosecution.  Yes, you heard that right:  I agree with Galbraith on this point.

However, fraud (amazingly) isn't the biggest problem, and economists have a world view so fundamentally wrong that they can't see that.

Economists, including Galbraith, are drunk teenagers attempting to rationalize and reason after-the-fact why/how they crashed the family sedan.  Galbraith, as an economist, causes death, chaos, and destruction every time he opens his mouth.

As an economist, he does not speak with sense, insight, and constructive ability (even though he might find an acorn now-and-again, as he did this time).

Sun, 05/16/2010 - 21:50 | Link to Comment Privatus
Privatus's picture

Pearls before swine.

Sun, 05/16/2010 - 22:04 | Link to Comment SofaPapa
SofaPapa's picture

The emperor has no clothes -- and we are rapidly moving along the path where an adequate percentage of the populations in the western countries knows it. This basic fact has the potential to destroy the system the emperor has been feeding on. What happens next is not usually pretty, looking at historical precedent. Fiat currency requires its acceptance as legitimate by those who use it. We are losing that fast.

Sun, 05/16/2010 - 21:53 | Link to Comment LarryKudlow
LarryKudlow's picture

He is speaking against Ronald Reagan's "voodo" economics

Sun, 05/16/2010 - 21:59 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

If paid enough money, I can not only believe anything you want me to believe but I can come up with a pile of research and scientific studies to back up what you want me to believe.

The question is not whether I can be bought but what price would it take for me to produce the whole kit and kaboodle.

http://www.worldwidewords.org/qa/qa-who2.htm

Sun, 05/16/2010 - 21:56 | Link to Comment tony bonn
tony bonn's picture

although i disagree with some of galbraith's opposition to free markets i could do business with him....there is nothing in his statement with which i disagree....

the universities and culture are committed to fraud and power worship. the elite elevate "wealth creation" to a religion and thus any achievement of the ends is justified. the faithful seek to emulate their so-called betters.

the culture of fraud is regnant because morality has disintegrated into a miasma of post modern nihilism - all justified by too clever by half academic theories.....

and into the breach comes another fraud - keynesiansim - to rescue the witch doctors...the markets would have worked if the criminals' enterprises were allowed to fail....yet they were saved by bigger crooks.

i remember being taught that debt was good yet no one explained the mathematical relationship between economic growth and debt growth.....the craponomics of keynes was gilded with greed and christened free enterprise....but fascism by any other name is still fascism....the assymetry of loss and profit ownership has been irreparably institutionalized by statism....

fuck the universities, the culture, and the fed....until bush-fraud, paulson, greenspan, geithner, obama, bernanke, blankfein, dimon, wamu's and countrywide's ceos, the keating 5, and a cast of thousands more are rotting in jail there will be no cure for what ails us...

 

Sun, 05/16/2010 - 22:08 | Link to Comment Apostate
Apostate's picture

I would do business with Galbraith on the level of buying groceries from him. But I would never trust him to handle money.

Mon, 05/17/2010 - 03:14 | Link to Comment Fraud-Esq
Fraud-Esq's picture

A

Sun, 05/16/2010 - 22:33 | Link to Comment Mercury
Mercury's picture

Black points out that accounting fraud is a sure thing when you can control the institution engaging in it...

I'm sure it never crossed Galbraith's mind that he's literally preaching to the choir here.

Apparently most "latter-day financial economists" (The Church of?) are also unable to detect the problems and conflicts inherent in a marketplace where the government is the largest and most powerful participant. More cowbell (government) is always the answer it seems.

You'd never guess the government was at all involved in the residential housing market and mortgage business from reading this.  Maybe that's because Galbraith is basically reading out a federal job description in front of the government lawmakers whom he hopes will hire him to do it. Or you might lose your seats!

As if the history books will one day read: "...and then on the advice of John Gabraith an army of lawyers was unleashed upon the land and The Republic was saved."  Give me a break.

Mr. Galbraith, demand instead an answer to this question and everything else will take care of itself: should the government continue with it's mountain of policies and regulations that essentially make an "affordable" mortgage a civil right - and if so who is expected to bear that reciprocal risk and under what conditions?

Sun, 05/16/2010 - 22:59 | Link to Comment three chord sloth
three chord sloth's picture

Down deep, pretty much every academic and intellectual thinks there will be a history book like that... with their name in it... someday... if they can just get enough power over us, the supposed idiot masses. Wannabe superstars of a modern-day Plato's Republic one and all.

Sun, 05/16/2010 - 22:02 | Link to Comment LeBalance
LeBalance's picture

The Galbraiths are not part of a "failed profession." They are part of the co-enabling apparatchik suck-ups, who ran with it while it was Holy and now are recalcitrant when it falls apart.

James, like your father before you reading Mises and Rothbard was surely beyond your freshman days at college.  Such a reading would have immediately scoured this Keynsian theft mechanism from your mind and you would have gone forth true and blue.

But that is not what happened did it?  And not for just one, but *two* generations.

Second generation snake oil society destroyer!  And a newly minted flounder as well.  My, my!

Or should I say, "Interesting behavior there, James, no go out and see if the rest of the world wants to play with you."

Sun, 05/16/2010 - 22:18 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Or should I say, "Interesting behavior there, James, no go out and see if the rest of the world wants to play with you."

I know where there are some frequently used train tracks he can play on. Or maybe we can tie a pork chop around his neck and send him into the hyenas cage at the public zoo.

Just trying to think outside of the box here.

Sun, 05/16/2010 - 22:34 | Link to Comment akak
akak's picture

Perhaps (trying to) teach him to juggle bottles of nitroglycerine might be a highly socially benefical activity for all concerned.

I mean, his credibility as an economist has already been blown to smithereens --- he might as well go all the way now.

Sun, 05/16/2010 - 22:36 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

LOL

Clearly you have a great deal of experience thinking outside the box. I am humbled by your presence. Do you accept tuition paying students and what is your hourly rate?

Sun, 05/16/2010 - 22:45 | Link to Comment akak
akak's picture

I am always happy to take on new and dedicated students!

Rates will vary based on prior education (and possible need for re-education due to prior pro-establishment contamination), willingness to shatter paradigms, and desired distance of removal from "the box".  Payment may be made in advance in either gold, silver or platinum --- sorry, fiat funnymoney will not be accepted.

 

Sun, 05/16/2010 - 23:10 | Link to Comment Apostate
Apostate's picture

He can help pay off the national debt bent over in a Chinese brothel.

He's make a great "liquidity trap," if you catch my drift. 

Sun, 05/16/2010 - 23:19 | Link to Comment akak
akak's picture

Dammit, you made me spit out my wine on my keyboard!

Most excellent comment!

Mon, 05/17/2010 - 03:17 | Link to Comment Fraud-Esq
Fraud-Esq's picture

He bet his reputation on the 10 year staying below 4% last week, didn't he? At least it gives critics something to work with. He stuck his neck out 4 sure

Sun, 05/16/2010 - 22:02 | Link to Comment Bigdaddydvo
Bigdaddydvo's picture

JKG jr is the author of the following, possibly the biggest pile of Keynesian Fail I've ever had the misfortune to gaze upon:

"In Defense of Deficts"

http://articles.sfgate.com/2010-03-21/opinion/18841327_1_wasteful-spending-deficit-private-loans

Sun, 05/16/2010 - 22:08 | Link to Comment ufamizm
ufamizm's picture

He makes no apology for his profession. His twisted argument blames everything on fraudsters and inadequate regulation. He entreats the government to act with strength and bring the fraudsters and lax porn-viewing regulators to justice. He is wrong. The government itself is the fraudster. The FED invited the looters with interest rate manipulation. And when the market was about to reign down the justice of bankruptcy on the looters, the gubmint fraudulently engaged in the greatest wealth transfer in history to the very same looters. The answer is LESS government, not more. Stop market manipulation and allow the justice of bankruptcy punish the looters. 

Sun, 05/16/2010 - 22:15 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"He makes no apology for his profession. His twisted argument blames everything on fraudsters and inadequate regulation."

Agreed. The keepers of the public myth are simply adjusting the public myth to reflect...........whatever. Rarely does the public myth aligned with facts, common sense, reason or actual practices. When it does, it's entirely accidental and is quickly adjusted again.

Mon, 05/17/2010 - 00:05 | Link to Comment mikla
mikla's picture

He makes no apology for his profession.

Agreed -- and his "profession" is a sin against God and man.

We agree that fraud is huge, but never underestimate the simple fact that economists are morons, with reasoning and rationalization on the order of a drunk teenager that just crashed the family sedan.

  1. Economists talk.
  2. Countries default through debt.
  3. War, millions die.
  4. Economists go on book tours, pretending to modify their theories or assert their theories weren't "practiced" properly.

Economics is not a science, economists provide nothing but misery, and should be banished from human existence.

http://www.zerohedge.com/article/long-periods-drought-%E2%80%A6-followed-high-winds

Sun, 05/16/2010 - 22:49 | Link to Comment snowball777
snowball777's picture

The answer is better government, not less.

If you can show us how less government would prevent fraud, please do (and share the wisdom with Somalia).

 

Mon, 05/17/2010 - 00:04 | Link to Comment akak
akak's picture

At least in Somalia, the theives and gangsters are honest about their professions --- they do not try to convince their victims that their rape, theft and extortion is "for their own good", or that their crimes are necessary "to save the system".

Mon, 05/17/2010 - 02:03 | Link to Comment faustian bargain
faustian bargain's picture

It's not that less government would prevent fraud, it's that less government is more fiscally responsible and less threatening to individual liberty. Different argument. You can ask the same question about 'more' government - how can that be shown to prevent fraud? It can't, but it can be shown that it tends to oppress the populace and put a drag on the economy.

Mon, 05/17/2010 - 06:25 | Link to Comment snowball777
snowball777's picture

Most people who say 'less government' mean less regulation...what regulations there are generally go unenforced (SEC, I'm looking at you) or are underfunded to the point of toothlessness. When I say 'better government' I mean enforcing the regulations that work and giving them teeth.

Your 'oppress the populace' statement sounds like "if we put more police on the street, less people will go shopping", to my ears.

There is an upside to well-regulated markets in that the risk premium is lower and the returns less volatile and also less subject to being mispriced.

 

Mon, 05/17/2010 - 00:01 | Link to Comment three chord sloth
three chord sloth's picture

Congress knew perfectly well that fraud was rampant in the mortgage industry as far back as 2004 when the FBI began issuing reports about the widespread problem.

But congress chose to ignore it. Why?

Because it was the best social welfare program ever invented.

Think about it: It needed no taxes, so no pissed-off taxpayers complained; it cost no Federal money, so no deficits were raised; and the receiver of the benefit paid the whole cost of the benefit himself. All the congressman had to do was take credit from former-renters-now-homeowners. All glory, no hassles! Even better than free money.

All Mr. Congressman had to do was give a few speeches about "spreading the American dream", highlight his opposition to "red-lining", and blather something about "new rules for a new economy and a new America"... then stand back and accept huzzahs from the new landed gentry.

As long as everybody kept making those payments it was a win-win...

 

Sun, 05/16/2010 - 22:14 | Link to Comment aint no fortuna...
aint no fortunate son's picture

Anybody know where that AG guy is, uh, what's his name? Holder? Yeah, I think that's it... Eric Holder. Anybody seen him the past 18 months? Maybe HE should be prosecuted for letting the scumbags off the hook. His refusal to prosecute one single person is as criminal as the crimes themselves. What a fucking coward.

Sun, 05/16/2010 - 22:22 | Link to Comment Simon Jester
Simon Jester's picture

the honorable AG is busy keeping the republic safe from people like...us

Sun, 05/16/2010 - 22:37 | Link to Comment snowball777
snowball777's picture

Did your Wells Notice get lost in the mail?

Sun, 05/16/2010 - 22:42 | Link to Comment chindit13
chindit13's picture

I believe he's a bit of a dandy.  He's probably getting his hair coifed and putting the final touches on all his suits, so that when he does make an appearance on the stage, he will do so with all the sartorial splendor he feels truly represents the empty garment that he is.

Obama really has put together an impressive group of "public servants".  From Holder to Timmy to Summers to Napolitano...well, we just could not possibly be in better hands.

Mon, 05/17/2010 - 03:19 | Link to Comment Fraud-Esq
Fraud-Esq's picture

His silence will either be an historic failure or, he's listening to his boss and they're working a grand scheme out. If it's not the later, I'll eat my tie in shock. 

Sun, 05/16/2010 - 22:24 | Link to Comment dcb
dcb's picture

Lots of folks not being rational here.

Just because the author believes in economic theories I don't, doesn't mean he isn't right on about the extent of fraud in the system. Like most things a person can be correct on somethings and wong about others.

since the fraudsters are still in charge nothing will be done. the proof of that was the elevation and geithner, Dudley, and bernanke. clearly the purpose of these appointments was to continue the cover up. it is much harder to control the cover up when the fraudsters have left the building.

the banking insudtry is also paying both parties to look the other way. to catch the fraud may decrease their lobby money. can't bite the horse that feeds you.

what do you do when the government itself is a cosponsor to the fraud.

Sun, 05/16/2010 - 22:44 | Link to Comment snowball777
snowball777's picture

what do you do when the government itself is a cosponsor to the fraud?

When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another...

Mon, 05/17/2010 - 00:06 | Link to Comment akak
akak's picture

dcb, the problem is that it is precisely those same statist, pro-central planning, pro-cronyist, anti-market Keynesian economic "theories" that Galbraith has been espousing for years that have inevitably resulted in the very situation which he now decries.  He is so beholden to his corrupt and corrupting statist propaganda-cum-"theories" that have enabled and abetted the present widespread financial fraud and manipulation to arise that he refuses to see the obvious connections between the two.

Galbraith is just flailing here, unable to face the daunting internal contradictions that are the actual and inevitable product of his (and his father's) half-baked economic dogmas and prescriptions.

Mon, 05/17/2010 - 03:23 | Link to Comment Fraud-Esq
Fraud-Esq's picture

Well said. Jeez, he's an economist that has worked hard to get a good deal for the poorer of Americans all his life. You may think he's a hypocrite or an idiot, but he's earned his bones fighting for the little guy for a long time. I don't understand how all this animosity toward him can be just Austrian driven. I have questions about the absolute certainty of the Austrians in their convictions. I'm not that sure about things half as complex!

Sun, 05/16/2010 - 22:24 | Link to Comment P-K4
P-K4's picture

If we didn't have a con game with low interest rates (Fed) and officials (GSE's and senators) pushing homeownership as a right, none of the other shit would have followed. Once enabled, criminals will always steal when a.) its legal to do so b.)  when the risk of getting caught is extremely low or c.) when punishment is likely to consist of a hand slap. 

Sun, 05/16/2010 - 22:41 | Link to Comment snowball777
snowball777's picture

a) CountryWide would still have provided an avenue for signing up suckers in the secondary market even in the absence of Fannie and Freddie

b) They would've come up with the CDOs even if not for the Greenspan Put

 

Sun, 05/16/2010 - 22:51 | Link to Comment contagiousNY
contagiousNY's picture

crimes of opprtunity create criminals out of normal folk. Given the opp, most will succumb. Why would they choose honesty over perpetuation of the existing financial hierarchy? The sheep need to be fleeced. That should be expected. Who walks away from a fool & his money?

Mon, 05/17/2010 - 03:27 | Link to Comment Fraud-Esq
Fraud-Esq's picture

It certainly would have followed. I've seen the raw numbers of the shit they were originating. Upwards of 60% didn't even meet Fannie and Freddie minimums, totally bypassed. GSE's didn't help, but this would have still happened without them. I thought the same thing until I saw the evidence.

The bankers didn't need .gov to originate, CDO and sell. They needed regulation at all points along the line 

Sun, 05/16/2010 - 22:40 | Link to Comment Crab Cake
Crab Cake's picture

Awesome article.

"Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble."

Fraud, at least someone is calling it what it is.  Fraud is perpetrated by criminals, felons on par with those who rape and rob.  The American people are being defrauded and corrupted out of their just representation of interest/enfranchisement, and their right to have a national monetary policy that works in their favor.  We have the right to vote in somebody that will advocate on our behalf in good faith, and we have the right to create an economic/currency system not run by power brokers and fraudsters who look only to their own interest by any means necessary.

"At its heart, therefore, the financial crisis was a breakdown in the rule of law in America."

The financial crisis IS, AS IN STILL IS, a breakdown in the rule of law in America.  Have the FASB guidelines changed back to mark to market, and the insolvencies recognized?  Are the ratings agencies working for the security purchaser now?  Has one person been put behind bars?  Do you find good government, common sense practical result oriented policy, anywhere you look?  Every which way I look I see hypocrisy, fraud, failure of practical result, and corruption.  I would venture to say, using my two eyes and a couple of braincells, that nothing works when a government is corrupt.  What has the US done in the last 10 years that has worked, really?  We have a government taken hostage by private monied interests, that is superseding the will of the people, and the consequences are bleeding out in the system everywhere you look.

"Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion."

Translation.  If you the Peoples' representatives do what is necessary, your lawful duty, you will tear off the siding to find nothing but rot that must be replaced; you will find a house nearing the point of condemnation.  We must tear off the bandage, and when we do we will go straight to the ER.  It's that bad, and the alternative would be death at the national level.  EVERYTHING IS NOT OK.

"The true alternative is a failure extending over time from the economic to the political system."

Perhaps my perspective is a little more Main St/TX/customer service for TBTF, but in my mind the bubble is already in the blood stream.  People are desperate, scared, and angry.  An avalanche waiting for a trigger.  As a student of History, my verdict is that the real chances to take our lumps and limp off wounded, but not too worse for wear are already past.  This is going to hurt, we have a cancer run wild, and survival will be challenged no matter the path chosen.  At the very least we are looking at social upheaval on par with the civil rights era, but my feeling is that we could see something rhyming with the French Revolution and American Revolution coming.  The French Revolution, btw, set up the stage for the first "world war" (Napoleonic/7years/French-Indian). 

"In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case."

I concur this nation faces an existential threat.  You suggest that the cops make themselves apparent, post haste, before the public at large sees to clearly that the cop, the mayor, and the banker are all circle jerking the whole town down the river to third world status.  I agree with that suggestion. 

My question to the author, and those who read this post, is, what is the public at large to do if no action is taken?  What is the citizenry to do if your suggestions ring on the deaf ears of corrupted institutions?  How long do you suggest that the electorate to eat shit and smile, one more catastrophe, one more good fiscal/monetary raping?  Mr. Galbraith, how long do we wait for the cops to prove they aren't in bed with the criminals, and if they are would you expect them to trumpet the finding?  How long?  What then?

Sun, 05/16/2010 - 22:45 | Link to Comment Hulk
Hulk's picture

"Mr Obama, tear down that siding"   Ghost of Ronald Reagan as heard at a financial seance

Sun, 05/16/2010 - 23:25 | Link to Comment Mitchman
Mitchman's picture

People do not change unless they are in sufficient pain.  Our dumbed down electorate will not do ANYTHING despite the outrages that were perpetrated and continue to be perpetrated with government sanction and financial support.

While I often have in the past scoffed at some of the more dire predictions of the effects of the coming collapse by some of the ZH readers, I am afraid that nothing short of such a dire situation will bring the rule of law back to this country.  But getting there will not be half the fun.  Thanks for a great post.

Mon, 05/17/2010 - 01:08 | Link to Comment scaleindependent
scaleindependent's picture

 

Thank you for your summary and questions.

I fear that the revolution you and others speak of will only lead to further loss of freedoms and more power grabs by the abiding fascists. Yes, fascists with an American style and make up that the name "fascism" will not fully describe them and a new name will have to be invented. These populist American "fascists" will at the end of this revolution appeal for what made America great.

 

In a great American revulsion to the greed, fraud, and corruption of our age the winners of the future revolution will appeal to God, FREEDOM, prayer in schools, loyalty, patriotism, etc. These values are not wrong but imo in the end our freedoms will be taken away.

Mon, 05/17/2010 - 01:18 | Link to Comment Crab Cake
Crab Cake's picture

When facism comes to America it will be wrapped in the flag and carrying a cross.”  - Sinclair Lewis

Mon, 05/17/2010 - 03:30 | Link to Comment Fraud-Esq
Fraud-Esq's picture

You asked and answered!

My question to the author, and those who read this post, is, what is the public at large to do if no action is taken?  What is the citizenry to do if your suggestions ring on the deaf ears of corrupted institutions?  

my feeling is that we could see something rhyming with the French Revolution and American Revolution coming

Sun, 05/16/2010 - 22:35 | Link to Comment PenGun
PenGun's picture

 Let the fools fail and put the thieves in jail.

 

 Just common sense.

Sun, 05/16/2010 - 22:45 | Link to Comment Crab Cake
Crab Cake's picture

How about if not, what if justice is not done?  What do you suggest then?  How long do you wait for the cops and politicians to do the common sense thing?

In my view common sense, practical good governance, has already been fully aborted in the favor of private monied interests. 

Sun, 05/16/2010 - 22:48 | Link to Comment PenGun
PenGun's picture

 I don't expect it to be. I'm just offering advice that rhymes.

 

 I expect an economic catastophe when the levers they now use all break off in their hands. Then I expect long term misery for almost everybody.

Sun, 05/16/2010 - 23:05 | Link to Comment contagiousNY
contagiousNY's picture

Totally. Act as if justice will not be done. What then? How will we respond accordingly? Most on this site have it right. Buying gold takes the doelears out of the system. Its the least we can do to combat the dolar flush

Sun, 05/16/2010 - 23:49 | Link to Comment Implicit simplicit
Implicit simplicit's picture

I don't know if someone has already mentioned this, but just in case: The SEC does not have even one forensic white colar crime specialist on its staff, according to an article I read or heard recently (sorry can't remember where. Maybe King World News).

The FBI has many. How is an organization like the SEC supposed to get to through the maze of financial accounting antics to get convictions without a white collar forensic crime specialist on its staff?

 

Sun, 05/16/2010 - 23:51 | Link to Comment Dr. Acula
Dr. Acula's picture

I agree with Galbraith. Peddling fallacious, pseudoscientific economic theories is indeed a disgrace.

Mises FTW

Mon, 05/17/2010 - 00:10 | Link to Comment Implicit simplicit
Implicit simplicit's picture

"Try to make it real, compared to what" For some reason the words of this old rock song came to mind while reading this article; don't remeber the musician.

Galbraith has balls.

 Most of the politicians are just performing a derivative of reality like infomercial actors saying what they think people want to hear.

Like Greenspan, they believe the people they serve are stupid.

Mon, 05/17/2010 - 09:59 | Link to Comment RF
RF's picture

Les McCann & Eddie Harris.

Mon, 05/17/2010 - 00:33 | Link to Comment chindit13
chindit13's picture

Back in the days of the Cold War, a group of scientists used to keep a "Nuclear Clock", which showcased their view on how close the world was to nuclear confrontation.  It was always a minute or so before midnight, which I always found a little melodramatic. 

Today, I keep a sort of Mad Max Clock, which is my own estimate of how close the world is to living big like in that movie.  I've had to adjust it tonight (though if I am honest I still have it set about 3PM).  I'm not an optimist, but as one who lives in a land where per capita income is less than a dollar a day, I see that people adjust and come to accept most anything without resorting to the kind of wanton savagery in that movie.  Transition might be a battle, but long term I expect even the worst of circumstances to result in a generally settled society.

My Woody Guthrie Clock, on the other hand (Dustbowl and Depression) is at 11PM.

(Maybe we can have a ZH Poll where everyone casts a vote on where they think the hands of the clock are, either TEOTWAWKI Clock or Depression.  Might be interesting to see the general view in graphic form.)

Mon, 05/17/2010 - 03:31 | Link to Comment Fraud-Esq
Fraud-Esq's picture

Quarter till Midnight

Mon, 05/17/2010 - 05:24 | Link to Comment theprofromdover
theprofromdover's picture

2 hours after midnight (EST)

Mon, 05/17/2010 - 06:31 | Link to Comment snowball777
snowball777's picture

TEOTWAWKI: 7:30p

Brother Can You Spare a Fiatsco: 11:15p

http://www.youtube.com/watch?v=CMaCg4fpJKg

Mon, 05/17/2010 - 01:00 | Link to Comment Nigaz
Nigaz's picture

In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

Might as well see this (can skip to 1:20)  - http://www.youtube.com/watch?v=saYy2u2RxHs

Mon, 05/17/2010 - 01:53 | Link to Comment Fraud-Esq
Fraud-Esq's picture

I know most hate JG, but don't throw the control fraud baby out with the Erza Klien bathwater! 

Yeah, he's a Keynesian. Yeah, even that interview was hard to read for people who can deal with Keynes. 

But, he's on target here. 

Control fraud is a huge issue worth your time. regulatory bodies need criminologists and Bill Black working together like they are now. No reason to kick someone when they finally do something worthwhile. 

OK, kick him, but read Bill Black and know control fraud!

Mon, 05/17/2010 - 15:16 | Link to Comment hooligan2009
hooligan2009's picture

I agree...I have learned a lot of "truths" from people whose other thinking I consider flawed. In this case I back the "prosecute and be damned" economic school of thought. Of course, politics can't do this. They are conflicted to extend the welfare system which after all simply extends tax payer funds to those who commit the economic crime of not contributing taxes.

Mon, 05/17/2010 - 02:51 | Link to Comment AnAnonymous
AnAnonymous's picture

Funny how fraud only kicks in when unconvenient people are hit.

A break in the rule of law? Djeeee, the US has a long history in breaking the rule of law. Has it fared well? Yep.

What is happening now is simply looping back.

Not enough Indians, too many chiefs.

Once again, this guy has to speak and only speak to feed an audience. None of his arguments could stand if asked inquisitive questions.

Mon, 05/17/2010 - 04:08 | Link to Comment carbonmutant
carbonmutant's picture

Economists are like climatologists. They base their forecasts on prevailing political agendas

Mon, 05/17/2010 - 06:51 | Link to Comment Miramanee
Miramanee's picture

Just an observation here. Part of the dialog.

JG is more in the MMT, post-Keynesian camp. In his iteration of quasi-Keynesian thinking, the FINANCIAL SECTOR and WALL STREET need to be eviscerated. However, he does believe that the operational realities of our floating system of fiat currency gives the government the ability to shift digits around in computers in a manner that would be productive of less-unemployment and near-term financial stability.

I do not entirely agree with MMT. I believe that it ignores many social and political realities as it claims to be able to conjure economic health through manipulations of reserve accounts at the FED and so forth.

HOWEVER...one thing that I do agree with is that our states---Californai leading the way---are on the precipice of engaging in austerity-driven races-to-the-bottom, and the middle class is gonna get hammered.

YEs yes yes...I know that we have to clear the debt from the system. I understand. I am simply pointing out that JG is not a self-serving Keynesian clown, looking to line his own pockets through the employment of such fiscal theories. AND, while I disagree with many of the premises of MMT, there are some measure that at least in the near term could serve some public good.

Mon, 05/17/2010 - 07:16 | Link to Comment exportbank
exportbank's picture

A government that allows half the population to defraud the other half can always count of the full support of the fraudsters.

Mon, 05/17/2010 - 10:21 | Link to Comment mikla
mikla's picture

+1, Wow, that's a great quote.

Mon, 05/31/2010 - 12:22 | Link to Comment No More Bubbles
No More Bubbles's picture

Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

 

They know where it will lead - TOTAL COLLAPSE!  Thus, they prefer not to talk about it......

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