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Fraud in Selling Sub-Prime Mortgage-Based Bonds: Beyond Accountability

“In December 2011, the S.E.C. publicized its civil securities fraud charges against top executives from Fannie Mae and Freddie Mac for understating their exposure to subprime mortgages, which resulted in the government taking them over.”[1]Robert Khuzami, then the head of the S.E.C.’s enforcement division, said at the time that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”[2]Pursuing even senior ranks has the air of fairness economically as well as in terms of the dictum, no one is above the law. So much for words; how about the accompanying deeds?


The full essay is at “Fraud in Selling Sub-Prime Bonds.”

1. Peter Henning, “Prosecution of Financial Crisis Fraud Ends With a Whimper,” The New York Times, August 29, 2016.

2. Ibid.

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More Hack Analysis from the IMF

The International Monetary Fund is a left-leaning bureaucracy that was set up to monitor the fixed-exchange-rate monetary system created after World War II. Unsurprisingly, when that system broke down and the world shifted to floating exchange rates, the IMF didn’t go away. Instead, it created a new role for itself as self-styled guardian of economic […]

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A Horrifying Socialist Future for America?

The debate over socialism shouldn’t even exist. Everywhere big government has been tried, it has failed. And we have reams of evidence that free-market economies dramatically out-perform statist economies. Yet the siren song of socialism still appeals to a subsection of the population, either because of naiveté or an unseemly lust to exercise power over […]

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Dodd-Frank: A Wall Street-Supported Law Imposing Heavy Costs, Enabling Future Bailouts

Politicians specialize in bad policy, but they go overboard during election years. It’s especially galling to hear Bernie Sanders and Hillary Clinton compete to see who can make the most inane comments about the financial sector. This is why I felt compelled last month to explain why the recent financial crisis had nothing to do […]

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Glass-Steagall and Financial Mythology

I try to avoid certain issues because they’re simply not that interesting. And I figure if they bore me – even though I’m a policy wonk, then they probably would be even more painful for everyone else. But every so often, I feel compelled to address a topic simply because the alternative is to let […]

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Analysis of Inferences and Assumptions: A Homework Assignment for “We the People”

Thomas Jefferson and John Adams both strongly believed that the continued viability of a republic depends on an educated and virtuous citizenry. Public education and even the practice of some of the professional schools (e.g., medicine and law) since at least the early twentieth century to require a degree in another school (e.g. Liberal Arts and Sciences) before being admitted to the undergraduate program (i.e., the M.D. and J.D. or LLB, respectively). This lateral move is unique to the U.S.; entering medical and law students in the E.U. need not already have a college degree. I submit that the Founding Fathers’ firm political belief in the importance of an educated electorate concerns the value of not only having a broad array of knowledge, but also reason being able to assess its own inferences, or assumptions; for inferences, or leaps of reason, go into political judgments. Ultimately, voters make judgements, whether concerning the worthiness of candidates on a ballot, their policies, or proposals on a referendum. To the extent that subjecting assumptions to the “stress test” of reasoning is not a salient part of secondary education, an electorate is likely to make sub-optimal judgements, resulting in suboptimal elected officials, public policies, and laws.


The full essay is at “A Homework Assignment for ‘We the People’.” 

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The Economist and New York Times Channel Fox Butterfield on Keynesian Policy

Back in 2010, I described the “Butterfield Effect,” which is a term used to mock clueless journalists for being blind to the real story. A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime […]

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New Video Shows Bailouts Are a Recipe for Moral Hazard and Cronyism

When debating and discussing the 2008 financial crisis, there are two big questions. And the answers to these questions are important because the wrong “narrative” could lead to decades of bad policy (much as a mistaken narrative about the Great Depression enabled bad policy in subsequent decades). What caused the crisis to occur? What should […]

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Breaking Up the Biggest Banks: The Impact on Moral Hazard

Citing the “slap on the wrist” culture at the U.S. Federal Reserve and the Securities and Exchange Commission (SEC), U.S. Senator Elizabeth Warren called on Congress in April 2015 to break up the big banks such as Bank of America, Citigroup, JPMorgan Chase, and Goldman Sachs.[1]She coupled the ‘break-up” approach to reducing the systemic risk with limiting the Fed’s ability to bailout individual banks. The synergy in Warren’s approach is worthy of further analysis.


The full essay is at “Breaking Up the Biggest Banks.


1. Reuters, “Elizabeth Warren Calls on Congress to Break Up the Big Banks, Change Tax Rules,” The Huffington Post, April 15, 2015.

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Jamie Dimon: ”There will be another financial crisis’!

Does the JPMorgan Chase CEO know something the rest of us don’t know or is he just a believer in the fact that history tends to repeat itself?Read the article at LI here. Advertisement 

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Wall Street Writing Its Own Laws on Risky Derivative Trading

In just four years, Wall Street got away with weakening a part of the Dodd-Frank financial reform law, which became law in 2010 to protect the financial system from the excesses that led to the financial crisis in 2008. Wall Street bankers and their lo… . . . → Read More: Wall Street Writing Its Own Laws on Risky Derivative Trading

The Obama Administration Wants another Housing Bubble…Plus Final Predictions for the 2014 House and Senate Mid-Term Elections

More than 100 years ago, George Santayana famously warned that, “Those who cannot remember the past are condemned to repeat it.” At the time, he may have been gazing in a crystal ball and looking at what the Obama Administration is doing today.That’s because the White House wants to reinstate the types of housing subsidies that played a huge […]

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Are the PIIGS going to get slaughtered?

Is the huge move down in EU sovereign debt yields over the past two years sustainable or are the cracks forming in Portugal a reminder that in the financial markets the more things change the more that they stay the same!In other words will it be anoth… . . . → Read More: Are the PIIGS going to get slaughtered?

Interactive Chart: Only 11 US state housing markets are doing ‘okay’!

The other 39 plus the District of Columbia are all underperforming although, to watch the MSM tell it, economically all is well in the US and it’s full steam ahead in real estate!At the same time only four of the top fifty metropolitan areas are stable…

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Former Fed Chair Greenspan: How to Break the Back of a Bubble

While being interviewed on CNBC on March 7, 2014, Alan Greenspan spoke a bit on the problem of irrational exuberance in a market. Pointing to the failure of the Federal Reserve under his chairmanship to innocuously dissolve the “dot.com” bubble in the 1990s, Greenspan said he had come to the conclusion that asset-appreciation bubbles cannot be “defused” (for reasons he says are in his new book) “unless you break the back of the actual euphoria that generates the bubbles.”[1]Alas, piercing that wave would involve nothing short of unplugging a basic instinct in human nature; both monetary and fiscal policy would doubtless come up short. However, I suspect that the field of rhetoric may have something to say about how we can deflate societal exuberance, but only on the condition that greater clarity will have been achieved in identifying whether a given market is overvalued due to emotional excess (i.e.g, emotive greed having reached a critical mass) circumventing normal risk-aversion.


Greenspan’s prescription may have more to do with social psychology than economic theory. Even though the former central banker’s expertise or ken does not extend to psychology or sociology, the advice darts right to the central question to be researched. I am not suggesting that the claim be swallowed whole; back in 2008 after Lehman Brothers’s financial collapse and the subsequent  portent of a tsunami so powerful it could take the entire global financial system “by Monday,” Greenspan admitted in Congressional testimony that his mental model of financial economics suffers a fatal flaw he had had not seen coming.


Having held a free market, or laissez faire (let it make or do), theory firmly ensconced in his head, Greenspan suddenly realized that the market mechanism may not “price additional risk” once the market volatility reaches a certain point. Instead of asset-prices plummeting until enough buyers return to the market after having been spooked, the financial markets themselves freeze up. This is why Greenspan’s successor, Ben Bernanke, told Congressional leaders in September 2008 that without a bailout “we might not have an economy by next Monday.”


In other words, Greenspan’s paradigm or theory, which had insisted that markets can always self-correct could not account for the credit-freeze that began in the commercial paper market (over-night inter-bank loans). High volatility in a system combines with the high risk (from anticipations of system risk being actualized) shuts down the market mechanism itself. When he ran the Federal Reserve, Greenspan had been very wrong about the impact of the systemic risk on the ability of markets to keep operating.
As if Greenspan’s admission had been part of some nightmare or some figment of the imagination, Andy Sorkin, a financial markets host at CNBC, welcomed Greenspan on the air five years later with such vaunted praise that viewers could be forgiven for not having remembered that Sorkin had pointed to Greenspan’s fatal flaw as one factor among several in the near collapse of the housing market in the wake of Lehman’s bankruptcy. Surely Sorkin was hardly oblivious to the ex-central-banker’s grave error. Why then did the journalist act as if Greenspan were one of the priests at the Greek oracle? 

Even after admitting the fatal flaw he had held at the Fed, Alan Greenspan still enjoyed considerable respect. (Image Source: The Guardian)

The short answer may be that Sorkin did not want to lose any of the rich and powerful friends on Wall Street he had interviewed in 2008 for his book. For a person to admit the existence of a fatal flaw in his or her ideology and therefore in any supporting theoretical models as well, and then be treated as though infallible on another body of knowledge (i.e., international relations) stretches the mind’s capacity for holding a logical contraction (i.e., cognitive dissidence). Rather than being limited to Sorkin, I suspect that the refusal or inability to put a person’s present statements in the context of his or her past track-record is by now “hard-wired” into American society. The over-valuing of the new at the expense of the past probably enables the denial. 

Regarding Sorkin, his fawning before his notable interviewee, including exclaiming “wow” as Greenspan went on bragging at the beginning of the interview, strikes me as blatant enough to be misleading. Especially in having written a non-fiction book about the financial crisis of 2008, Sorkin should have prepped the television viewers up front, so they would not find themselves back to swallowing wholesale what Greenspan says as the Gospel truth. In fact, Sorkin may have inadvertently opened the door to another systemic bubble hitting us as a complete surprise. 



1.Greenspan Revisits ‘Irrational Exuberance,” CNBC, March 7, 2014 (accessed same date).

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Banking can apparently be hazardous to your health!

As the 5th banker in a month died under mysterious circumstances is it coincidence or conspiracy?From Intellihub:Last week we reported on the suspicious string of apparent suicides that has hit the financial industry. Multiple bankers have been found d… . . . → Read More: Banking can apparently be hazardous to your health!

Are foreclosures about to sink the US housing market?

There may be some dark economic storm clouds on the horizon in the form of the number of pre-foreclosure notices that have been sent to delinquent owners of property nationally and in New York City and the two counties of Long Island.Read at The Hallma… . . . → Read More: Are foreclosures about to sink the US housing market?

Obama and Goldman Sachs: A Quid Pro Quo?

Obama nominated Timothy Geithner to be Secretary of the Treasury. While president of the New York Federal Reserve Bank, he had played a key role in forcing AIG to pay Goldman Sachs’ claims dollar for dollar. Put another way, Geithner, as well as Henry Paulson, Goldman’s ex-CEO serving as Secretary of the Treasury as the financial crisis unfolded, stopped AIG from using the leverage in its bankrupt condition to pay claimants much less than full value. At Treasury, Mark Patterson was Geithner’s chief of staff. Patterson had been a lobbyist for Goldman Sachs.

To head the Commodity Futures Trading Commission—the regulatory agency that Born had headed during the previous administration—Obama picked Gary Gensler, a former Goldman Sachs executive who had helped ban the regulation of derivatives in 1999. Born had pushed for the securities to be regulated, only to be bullied by Alan Greenspan (Chairman of the Federal Revere) and Larry Summers, whom Obama would have as his chief economic advisor. To head the SEC, Obama nominated Mary Shapiro, the former CEO of FINRA, the financial industry’s self-regulatory body.

In short, Obama stacked his financial appointees during his first term with people who had played a role in or at least benefitted financially from financial bubble that came crashing down in September 2008. Put another way, Obama selected people who had taken down the barriers to spreading systemic risk to fix the problem. Why would he have done so? Could it have been part of the quid pro quothe president had agreed to when he accepted the $1 million campaign contribution from Goldman Sachs (the largest contribution to Obama in 2007)? Might Goldman’s executives have wanted to hedge their bets in case the Democrat wins. Getting Goldman alums in high positions of government would essentially make the U.S. Government a Wall Street Government—that is, a plutocracy with the outward look of a democracy. It is no accident, we can conclude, that the spiraling economic inequality increased during the Democrat’s first term of office.

Source:

Inside Job, directed by Charles Ferguson

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Pope Francis Urges an Ethical Basis for Markets: Taking on the Prosperity Gospel?

Going after the “profit-at-all-cost mentality . . . behind Europe’s economic crisis,” Pope Francis told reporters travelling with him to the Church’s Youth Day 2011that morals and ethics must play a greater role in future regulatory policies. “The economy doesn’t function with market self-regulation,” the Pope claimed. Like Adam Smith who had situated his own theory of perfect competitive on a foundation of moral sentiments to keep markets from going to excess and thus self-destructing, Pope Francis asserted that a market needs “an ethical reason to work for mankind.” He added that the moral dimension is “interior and fundamental” to economic problems.
The Pope’s appeal to the ethical dimension as the foundation of a market begs the question: What would a theological, or distinctly Christian, basis look like? The prosperity gospel would not stand a very good chance of being chosen, for it holds that God rewards true believers with earthly wealth rather than only with salvation. The basis for this interpretation is well represented in the Old Testament. During the years leading up to the financial crisis of 2008, a significant number of subprime mortgage borrowers were convinced that their Christological belief qualifies as true belief and, furthermore, that God would provide, even miraculously if necessary, so said borrowers would be able to make even the higher (ARM) mortgage payments on houses beyond the borrowers’ own financial means. Viewing God as the font of earthly treasure is to leave Christianity impotent in acting as a constraint against greed and wealth.

Facing the headwinds of deregulation and a Wall Street government, religious Americans weary of the excesses of uninhibited greed in the financial sector may want to press the Roman Catholic Pope to provide a constraining theologically-based ethic capable of counterpoising the hegemony of the prosperity gospel. Historically, the first three or four centuries of Christianity sported many anti-wealth theologians whose arguments could be appropriated to fill the gap left open by insufficient regulation.

Source:

David Roman, “Pope Visits Spain, Says Ethics Should Guide Economics,” The Wall Street Journal, August 19, 2011.

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Easy Money Is Creating the Conditions for a Bigger European Economic Crisis

At the beginning of the year, I was asked whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?” But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a […] . . . → Read More: Easy Money Is Creating the Conditions for a Bigger European Economic Crisis . . . → Read More: Easy Money Is Creating the Conditions for a Bigger European Economic Crisis