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Let The Reign Of Terror Begin
From The Daily Capitalist
Congress has been looking for a scapegoat for the crash. It appears that Goldman Sachs is it. Let the show trials begin.
The government always finds someone who did something rotten, blames them for everything, they are tried and convicted with proper bloodletting, the public is satisfied, and everyone forgets about it. This is what happens after every economic crisis yet the cycles keep coming and no one seems to know why other than the usual answer that "greed" caused it.
Greed has nothing to do with the crises, boom or bust.
Greed is a human trait and as such it always exists. This trait is magnified on Wall Street where legions of young MBAs are turned loose, striving to become another Paulson, Soros, or Buffet. Nothing wrong with making money. Greed is moral issue not a legal one. Yet if greed is always there, why aren't business cycles perpetual?
If you are a follower of J. M. Keynes, then the reason we have business cycles is "animal spirits." Not a very satisfactory answer from such a lauded economist. All of a sudden, for no apparent reason, our animal spirits, greed or whatever, turn loose and we create booms and busts. Keynes just couldn't think it through very well.
Fortunately, Ludwig von Mises did. In 1912 he wrote his famous The Theory of Money and Credit which is a groundbreaking study of money in the Austrian tradition. It looks at individual action rather than "national" economic quantities. Begun by Carl Menger, this Austrian School created what is now known as the Marginal Revolution. It rejects the aggregate approach of looking at the economy such as espoused by Keynes. Keynes was an arrogant technician and liked the idea of manipulating things like national money supply, national demand, national wages, and like. Austrians view the economy as the behavior of billions of individuals (Mises referred to this as "human action" or by the Greek name he invented, "praxeology"). Good luck, the Austrians say, trying to figure out what the multitudes are all up to at any given time.
What creates the business cycle, says Mises, is the inflation of money and credit. Only the Fed can do that. This is the key ingredient that Keynes and many Classical economists missed. Turn lose the money spigot and it will flow where opportunity exists. Flood the economy with money and of course greed will occur. So will a boom and bust.
Yes, I know this is quite technical. But the point is that Mises and the Austrians have discovered something quite extraordinary and it was rejected by Keynesian technocrats, now called econometricians, who like national aggregate concepts because they want to control the economy. The only problem is that they don't know how to do this and their nostrums have never worked in real life. They think that we humans are just some dumb tool to manipulate, sort of a mechanistic, Newtonian view of human behavior. I think we all know that we aren't "units." If there ever was a maxim to capture this it would be "I think therefore I am ... going to do what I damn well please, so piss off!"
Which gets back to the cause of our crisis. Most Congressmen are Keynesians, whether they know it or not. They believe companies like Goldman caused the crisis by their egregious behavior. All members of Congress want to be re-elected and greedy business people are always good vote getters. They are looking for heads to chop.
This is what is called a "show trial" in less free economies. Stalin loved them because no one knew who would be next and the terror it caused was delicious for a dictator. Chávez is doing the same thing now: Let's create new laws today and then arrest people for what they did yesterday even though it wasn't illegal then.
So here is the first trial in a reign of terror on Wall Street:
Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.
The investigation from the Manhattan U.S. Attorney's Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission, these people say. The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group. Goldman and the trader say they have done nothing wrong and are fighting the civil charges. ...
Prosecutors haven't determined whether they will bring charges in the case, say the people familiar with the matter. Many criminal investigations are launched that never result in any charges.
The criminal probe raises the stakes for Goldman, Wall Street's most powerful firm. The investigation is centered on different evidence than the SEC's civil case, the people say. It couldn't be determined which Goldman deals are being scrutinized in the criminal investigation.
Here it comes:
The development comes amid public calls for more Wall Street accountability for the industry's role in the financial crisis. Though there are multiple ongoing criminal and civil investigations, no Wall Street executives connected with the meltdown have been convicted of criminal charges. ...
[I]n the more than two-century history of the U.S. financial markets, no major financial firm has survived criminal charges. Securities firms E.F. Hutton & Co. and Drexel Burnham Lambert Inc. crumbled after being indicted in the 1980s. In 2002 Arthur Andersen LLP went bankrupt after it was convicted of obstruction of justice for its role in covering up an investigation into Enron Corp. The conviction was later overturned by the Supreme Court.
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"It's not the cream, but the sociopathic that rise to the top in capitalism."
Most correctly stated, Mr. Thoreau, most correctly stated, sir.
Now the econowuss believes that econ operates in a vacuum, most conveniently ignoring all those wash sales to manipulate the prices on oil, energy and commodities on those exchanges.....oh hum...which they just happened to finance and own (please again refer to origins of InterContinental Exchange -- ICE, ICE Futures, ICE Clear, etc., Swaps Wire, Climate Exchange PLC -- and all the climate and insurance exchanges owned by it, ELX Futures, etc. --- evidently Econowimp has never, ever heard of any of these???? Ever heard of Phibro???).
Gee, GS, JPM and Morgan Stanley (with Citi and BofA bringing up the rear) control the largest concentration of credit derivatives, and along with several Swiss banks and one German one own all the exchanges, where they rig, manipulate and super-leveraged speculate on these derivatives and markets, and there's absolutely no recognizable pattern going on??????
Econophile, I only ask that you study a bit of modern finance, sonny.
Sorry, to single you out, but ignorance and stupidity shouts to be heard....and I hear you loud and clear, dood!
"Greed is a human trait and as such it always exists."
This may be true, but not everyone has the money, connections, and influence to act upon that greed. Those that do does cause the boom and bust, hence the conviction of GS and other Wall Street powerhouses. The government is simply the tool used by the rich and powerful to control the masses into obeying the master's will. As the quote goes, he who controls the creation of money controls government. Who controls the printing press, the Fed. Who is the Fed's constituents (aka Masters)? Wall Street. The Fed Reserve is simply another tool in the elite's arsenal.
To say that Goldman is being scapegoated is to suggest that they're just a victim like the rest of us.
"Sexual abuse is a human trait and as such it always exists." so don't hold congressional hearings about child abuse or tapes of Acorn employees apparently condoning child trafficking...
"Violence is a human trait and as such it always exists." so don't hold congressional hearings on gangs and kidnapping in border states..so scapegoaty
"Lying and theiving is a human trait and as such it always exists." so don't hold congressional hearings on massive increase in I.D. theft, that's just scape goating..
False analogy. The point of the article is not that Goldman may or may not have committed civil or criminal wrongs, but that most people believe that greedy behavior caused the business cycle and that greed=capitalism. Further, the fact that Congress is holding hearings has nothing to do with legislation: it's all about re-election. It's political theater. Get a grip.
Econo - I have a grip and I do not disagree with political theater point but I also categorically reject that holding Goldman specifically accountable for their bad acts is just populist pandering. Whenever some thinks justice should not come to someone, or think someone did nothing wrong they think they minimize the moral anger as "political theater". Surely politics is played even when cause is right.
"Greed is a human trait and as such it always exists" so let Congress enable government sponsored entities to enflate giant speculative asset price bubbles
Nice reductio!
Toucan,
See my article, The Washington-Wall Street Economic Complex. Although I don't see it as an evil conspiracy; I think these guys believe this BS.
My comment reflects your article very closely. I too don't believe there's some "evil" conspiracy, but a puffed up head puffs up their ego, and so they can never be wrong. That's the true fallacy of human nature: pride blinds. That's one of the problem with "rich folks", especially those born into riches. They think they know it all because of their priviledge and is better than all because of ancient tradition that those with money wields power over those who don't due to their supposed success in life. But it sure doesn't give them a whole lot of wisdom.
Goldman is very much guilty of being a part of this mess as is a lot of other entities. They alone may not be the root cause, but their common belief system, that only those of status and wealth know what's best, sure is. Been this way since class separation began.
outstanding...please add murray rothbard to your reading list...the fed and only the fed is the cause of booms and bust....
as a member of the fed gs adds an eminence front for the rockefeller / rothschild axis of evil which controls this nation.....
"...which controls this nation....."
Uh, try: most of the world...
I've got the essential Rothbard in my library. But I couldn't list everything. Thanks, Tony.
Goldman is part of the government. The government is staging a show where it prosecutes itself, in order to allay anger of the plebs, just as they continue to plunder the same.
The trick here is to let the plebs think that these are two different, competing entities, both fighting for the public. One on a quest for justice, the other for (market) freedom, just like Democracts and Republicans. The old political game is moving to the financial field, but the script is the same.
Precisely. Classically stated.
I believe the sleight of hand between the Obama Administration and Wall Street, because of the severity of the economic problems, is awakening the public to the true center of these problems: the big banks. In this election year, the propaganda from the politicians is clearly getting away from them and more and more people see banks and government as the same thing. The antics of Dodd, Barney Frank, and Obama’s Bob Rubin team in Treasury and the Fed, are beginning to convince citizens that they are fighting a single entity.
Bush left with the image of bought politician and Obama is submerged in bank bought-out like no president in history. And because the suffering public is now listening and watching, I believe the financial events of 2010 are finally leading to the truth. It seems to me this is one case where the politicians and their regulators can’t just slap a few fingers and then simply walk away. The public mood is for handcuffs and true decomposition of the bankers’ stranglehold on America.
They are all pigs feeding at the same trough....
Got bacon?
There is no one, singular cause of the crisis. Goldman, the government, you and I, everyone shares in the blame. Some people had a much more direct hand than others (Carter, Clinton, Frank, Dodd, Greenspan), but nobody is innocent.
I don't know if this whole affair, or just the timing of the charges, is merely for show; only time will tell. What I do know is this: Everyone that doesn't vote, that doesnt take the time to educate at least one person about economics/politics, should be ashamed. The death of this country is being fueled by willful ignorance and inaction. We can all piss and moan behind a computer screen, but how many amongst us are really trying to bring change about?
-1000.
Yup, there is a most definite timeline: Group of Thirty promotes adoption of credit derivatives in the early '90s. JPMorgan backs them and comes out with their internal report: Glass-Steagall: Overdue for Repeal.
The Usual Suspects form the Derivatives Policy Group promoting the adoption of legislation for unregulated credit derivatives and the repeal of Glass-Steagall and removal of "legal risk" mentioned by the Group of Thirty as an obstacle in their '90s report (Private Securities Litigation Reform Act of 1995, Gramm-Leach-Bliley Financial Services Modernization Act of 1999, and Commodity Futures Modernization Act of 2000 ensues....).
InterContinental Exchange (ICE and its various flavors) is financed by Goldman, Morgan Stanley, JPMorgan and the oil cartel. Markit Group financed by GS, JPM, Citi and BofA to "price" the derivatives.
Etc.
Etc.
Etc.
While all these parties are guilty, the master IMO is still the FED. Don't forget who the chairman of the board of trustees of G30 is, none other than Paul Volker. Plus a long list of central bankers as members. Who shut down derivitives regulation proposals in 98 before the Modernization Act of 1999 and Commodity Futures Modernization Act of 2000. Just to be clear I agree with you both but who is the real mastermind.
I agree, 100 percent. The Fed, IMO, is an instrument of totalitarianism. Fiat money created by a central bank leads to government debt, which causes inflation which destroys the economy which impoverishes the people which increases the power of the government which ends in totalitarianism.
The Answer: We must not turn to the government for the cure; we must abolish, not audit, the Fed. The Fed is nothing more than a cartel of bankers protected by Federal law. Some of the greatest fortunes in the world have been made through the booms, busts and crashes executed by the Fed.
As FDR's son-in-law, Curtis Dall, wrote: "It (the 1929 Crash) was the calculated 'shearing' of the public by the World Money Powers."
Has anything changed?
sgt_doom, your store of knowledge is matchless. a plus $23.7 trillion for Zero Hedge! glad you're aboard.
For the last year I have attempted time and again among several different groups of folk to bring up the Constitution. The Markets. the Bamster. Economics. You name it, to gauge the level of knowledge the indviduals possess, to get a dialog going.
Only one in 50 knew the price of gold. Two were proud of gathering all their gold jewelry and sending it off in solicitations for a fraction of its worth.
Trying to educate my neighbor's Golden Doodle would have been more fruitful.
+1. Except the ignorance isn't willful. Its drilled into us by a dumbed-down educational system and by having legitimate criticism immediately tarred with unfair motivations. What we have lost most of all is the freedom of expression and the ability to think for ourselves.
+262 Mitchman
Or as they say, Bingo and on the spot.
Education, or what goes for it nowadays, especially in most of the western world is one of the key problems.
Train the lemmings early, train them long (train: stays on track, worth thinking about next time you sign up for training of any sort, is useless if loses track! Don't lose track!).
Also agree with some of the posters above that Greed is pervasive, entrenched and maybe in dem bones, dem bones. No point blaming good old-style greed.
Dem Bones-men too! Ugh!
System is shaking from the foundations up now, all wiseacring aside!
Best stay away from the un-controllable demolition to follow. The public will really awake at some point ne? Another march to Capitola Hill!
Imagine the power of a million voices gathered in the Illumi-symbolic whatchamacallit and intoning deeply: Shame on you! Shame on you! Shame on you!
Maybe the Fed building will crumble!
The thought gives me the shivers!
In my bones!
Other than the credit given to von Mises, I think this column is bunk. The Feds went after Drexel although they also went after CSFB and Goldman for that matter, and others who played the same junk bond game that Drexel did. They had to take Drexel down first because Drexel gamed the system better than all the others combined.
Goldman is the poster child this time around for the same reason. But it's waaaay too early in the game to call this a "show" trial and waaaay too early to write off the elixirs of greed and power.
Agreed. GS stock $99 unless Reggie thinks I forgot a decimal place somewhere.
Drexel did more than just game the system. They were brought down by guilty pleas to extensive and pervasive insider trading and fraud and finally a RICO indictment. If the Feds have that kind of dirt on Goldman now they should come out with it. Pushing for conviction and punishment "just 'cuz" will come back to bite us all.
i think what he means is that greed is a constant, so something else must cause the booms and busts.
PERVASIVE UNCHECKED GREED!
Hey, there's an idea -- lick every criminal anus that walks by, to prove how smart and philosophical you can be. Might work.
I agree that Goldman is getting singled out. Hopefully they'll be joined by others soon to make it more fair.
"Greed has nothing to do with the crises, boom or bust."
Uh, the boom had nothing to do with greed? That's a stretch.
The guy is a good rehetorician. He says Goldman didn't cause the crisis. True. But what Goldman and their alumni did do was ensure that the reaction to the crisi would benefit themselves over the national interest ond for this not causing the crisis they are deserving of punsihment.
"He says Goldman didn't cause the crisis. True."
Maybe you want to learn a bit about finance, forensic economics, and computer science prior to making such fruitcake assertions.
And read up on "bear runs" and a couple of thousand of financial and economics history texts, dood!
Nope, the preponderance of data says they designed it, they profited from it.
End of story, dood!
Econophile,
I'm starting to think that you are one of the only contributors on this site that knows what the fuck he's talking about...
Yeah. Like capitalism is government choosing who fails and who doesn't.
You two should get a room.
Definitely, anony, I believe I get the same address when I ping those two....
It is now.
My goodness, one sensible Goldman-related article after another. Is Tyler out of the country or something?
If we are going to fiddle in the past while Rome burns maybe we can at least become re-acquainted with the fact that without the federal government bending the mechanisms that price credit and risk there would have been no mortgage credit nightmare.
I can't point to a better, succient outline of the problem than what a certain wise woman has earlier penned here:
http://equityprivate.typepad.com/ep/2009/02/dare-ye-inquire-concerning-s...
Everyone should take the time to read the link provided by Mercury
http://equityprivate.typepad.com/ep/2009/02/dare-ye-inquire-concerning-such-a-wretch.html
Must be the evil captialists again..lol
+10000000000
Mercury,
I'll check her out later. Seems very interesting. But, there is a lot of controversy about the CRA program as a contributing factor and the Fed wrote a paper on it discrediting calls of blame. I think it obviously had something to do with the problem. I've written extensively on the causes of the boom and the bust and there is enough blame to go around. But, the cause is clearly the Fed. Where the money went was clearly the government. The risk models used was clearly the fault of the Street and I've made that very clear on my blog.
You already know her.
CRA didn't break the camel's back all by itself. As the article I linked to points out there are (and have been for a while) a staggering amount of regulations surrounding the mortgage business in terms of who gets how much when and under what conditions. At the very least this disproves the 'failure of the 'free' market' thesis that some put forth.
For many years race and ethnicity undoubtedly served as a too easy, too simple proxy for credit quality assessment resulting in some people unfairly being denied mortgages when others with similar credentials got loans. Obama himself was a lawyer on a landmark case in 1994 that successfully prosecuted a geographical "redlining" (a derivative of ethnic profiling) case (Buycks-Roberson v. Citibank Fed. Sav. Bank).
Besides what became strictly legal or illegal the Feds ultimately twisted arms and used soft force (and outright quotas) to make sure loan making institutions' portfolios had the right amount of loans in specific social categories. One can get lost in chicken-or-the-egg arguments about whether crappy loans begat crappier mortgage derivatives or vice-versa but in a very short amount of time the same banks that were being accused of redlining were being accused of handing out mortgages to anyone with a pulse.
I believe that Angelo Mozilo believes that he was playing ball with the government and was "making the American Dream a reality for millions of Americans" - especially as he was playing on a field where FNM and FRE's low cost of capital enabled them to pick most of the low hanging, good credit risk fruit. The government didn't enforce fairness it enforced favorable outcomes and many people continue to believe these two things are synonymous. Even without legal punishment Wall St. has learned it's lesson regarding the limited ability of financial alchemy to turn (this particular kind of) shit into shine. The government however still has yet to address whether it intends to (continue to) make "affordable" mortgage debt an effective civil right and if so to outline exactly who is to bear the associated risks and under what conditions.
I agree that risk modeling was completely ineffective although this is neither isolated to Wall St. nor mortgage securities. Conventional and academic statistics simply don't work well with high impact, outlier events and our hyper-connected, leveraged world makes us more vulnerable to these events than ever. As far as I can tell Taleb (Black Swan) is exactly right in this area.
Please don't forget, the subprime market is but a drop in the ocean given all the securitizations, and securized credit derivatives out there: credit derivatives, hedge funds, PE leveraged buyouts, public-private partnerships, it all be the same, buckaroos!
This short paper below neatly sums up the scheme, applicable to all of the above:
http://people.arch.usyd.edu.au/web/staff/homepages/pdf/johngoldberg_ATRF06_summary.pdf
This is a very succienct history of CRA and loans if you had a pluse. Then it followed that people were going to tke advantage of it.
But remember, a scrapecoat is just the window dressing to re-direct the sheeple from the true causators - CONGRESS and it many flamboyant personnel - BF, CD, NP, SH, etc.
Until they are tried, convicted, and most executed (The Pierrepoint method) and some serving 25 to life at hard labor and all of their misgotten gains expunged, this will not be solved.
Hmmm, Sophocles, Mozilo, Taleb. Me like.
Aristotle, Locke, Mises?
Well said!
Yes, all this focus on the "evils of Wall Street", although such evils are massive and undeniable, is just a sideshow to the much greater and more central crimes of the federal government and most of all, the "Federal" Reserve, which very few are willing or brave enough to acknowledge for what it truly is: our own home-grown version of the Soviet-style central planning Central Committee.
Why is it that something as fundamental to a supposedly free-market (hah!) economy as the price of money, i.e., the rate of interest, is blindly accepted by virtually all the supposed defenders of "capitalism" in the USA to be rightfully controlled NOT by the market, but by an unaccountable and self-serving elite? We might just as easily argue that the selection of our political leaders is too important an issue to be left to "the market" (the voting public), and instead would be much more rationally left in the hands of an "independent" board consisting of a handle of men who meet in secret and whose choices and actions are unassailable and unalterable.
Indeed. A fundamental lack of understanding of money pervades. Free markets, and the monopoly control of the money supply, are mutually exclusive.
As If. As if Goldamn Sucks didn't front load the federal government with its ex and future employees.
+1 akak. I remind you of William Buckley's famous aphorism that went something to the effect of "I would rather be governed by the first 500 names in the Boston telephone book than by the faculty of Harvard University."
Yes, yes and yes!
But this is just the part in the prisoner's dilemma where one of the prisoners decides it is no longer in his interest to co-operate. We will see how that works out.
Or it could just be kabuki theater.
Nothing heroic to cheer here, that's for sure.
If those congress critters were about the truth, they would quit reframing it to "casinos" and "bets" and plainly state how Goldman Sachs, JPMorgan Chase, Morgan Stanley and the bankster cartel financed and owns ALL the frigging exchanges (ICE, ICE Futures, ICE Clear, DTCC, Climate Exchange PLC, ELX Futures, etc., etc., etc.)
End of story....
I'm confused. You are saying on the one hand that atomistic behavior of multitudes is the end all-be all. Yet at the same time you are saying that the Fed is the gorilla in the room to blame for the entire business cycle.
I'm sure this is a misunderstanding on my part.