“Wake Up, Gentlemen”

The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved.  Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth.  Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen.  I can only say that your response is inadequate.”

Volcker has three  main points, with which we whole-heartedly agree:

  1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
  2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”

and most important:

     3. “I am probably going to win in the end”.

Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.

This is entirely reasonable – although we can surely argue about details, including whether a very large “regulated” bank would be able to escape the limits placed on its behavior and whether a very large “trading” bank could (without running the payments system) still cause massive damage. 

But how can Mr. Volcker possibly prevail?  Even President Obama was reduced, yesterday, to asking the banks nicely to lend more to small business – against which Jamie Dimon will presumably respond that such firms either (a) are not creditworthy (so give us a subsidy if you want such loans) or (b) don’t want to borrow (so give them a subsidy).  (Some of the bankers, it seems, didn’t even try hard to attend – they just called it in.)

The reason for Volcker’s confidence in his victory is simple - he is moving the consensus.  It’s not radicals against reasonable bankers.  It’s the dean of American banking, with a bigger and better reputation than any other economic policymaker alive – and with a lot of people at his back – saying, very simply: Enough.

He says it plainly, he increasingly says it publicly, and he now says it often.  He waited, on the sidelines, for his moment.  And this is it.

Paul Volcker wants to stop the financial system before it blows up again.  And when he persuades you – and people like you – he will win.  You can help – tell everyone you know to read what Paul Volcker is saying and to pass it on.

By Simon Johnson

120 responses to ““Wake Up, Gentlemen”

  1. I raise my pitchfork in appreciation, Onward Mr. Volcker!

  2. If only Volcker had as much airtime in the US media as he has overseas

  3. Even when the financial system “blows up again” there will still be plenty of advocates defending financial engineering and plenty of policy makers too stupid to know how to argue against them

  4. I dearly love seeing Mr. Volcker’s point #2 in print. In fact, he was being kind. If anything there is plenty of evidence that, concurrent with all this innovation, our real economy has slipped into a coma as our resources and talents have gone into enriching the well-connected. Jobless recoveries tell the story. Hoorah for Mr. Volcker!

  5. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy,” says Mr. Volker.

    My sense is that “innovation” in the financial industry has had a negative effect on productivity because it sucks available investment money from socially productive, job creating sectors of the economy such as manufacturing.

    So called innovation in the financial sector with its high risk, high reward, quick turnaround has become fashionable. Slow steady investments that build the economy over time are passe. Putting money into infrastructure or manufacturing is like not knowing which fork to use.

    China’s economy is still much smaller than ours, but they invest in infrastructure and manufacturing capacity. If we don’t correct, as Volker proposes, we will someday be left behind.

  6. Although I agree with Mr. Volcker, if he gains any traction, any traction I can foresee a “massive heart attack” and then a huge funeral atteneded by leading financiers declaring how brilliant and courageous he was. Then back to business. Is that too pessimistic?

  7. The regulators are incompetent. Another reason to break up the large banks.

  8. Highlighting the deleterious impact on productivity of financial engineering should be done more often & more loudly. Finance is about allocating capital, and it is straightforward that capital allocation was steered in less productive ways because of the way the financial sector was structured.

    On a scale of 1-5, 5-high, take 3 as a baseline productivity of capital. How would the allocation of capital rate for the Naughties (00-). Even the massively misallocated capital of the dot-com boom was more productive than this boom/bust.

  9. Although for the time being we’re stuck with Obama’s cowardice and status quo preference, and therefore there’ll be no leadership coming from him, Volcker is indicative of how the tide is turning.

    It looks like we won’t be able to stop this system from crashing itself again, and far worse, sometime over the next several years.

    But next crash, these criminals won’t be able to bail themselves out again. Nobody outside the thinnest scuzzy film of the government-MSM establishment will ever believe those lies again or allow themselves to be so fleeced again.

  10. Bankers are civil servants, they just don’t know it, and behave as if they owned the place. They don’t. It was lent to them in trust, and that trust ought to be enforced. A deontology ought to be established for bankers, and it’s first rule ough to be: don’t hurt the economy.

    So let it be that Volcker win, and common sense, and common civilization too!

    PA

  11. Volcker may be right, but I doubt he’s changing the minds of the bankers, or the lobbyists they pay, or the members of Congress that they own.

    It’s all well and good to be right, but if you have no power then you will end up being right but ineffectual. Obama and his minions have no desire whatsoever to rein in Wall Street, and Volcker has no power to change that.

    The name of this game is “reinflate a bubble until I’m out of office.” Obama and Congress know that only Wall Street has the power to make a new (or re-make an old) bubble, and they are doing everything they can to enable that.

  12. Another point is the intellectual capital “lost” to financial services. The outsize compensation has moved the best and the brightest of a generation from producing in other fields.

  13. While Mr. Volker may be right, the stark reality is that monetary and fiscal policies were at least as much to blame as “financial innovation”. The banks simply took the rules of the game and maximized profits. The government, on the other hand, repeatedly created rules that pushed the financial institutions to the state of today. How about changing the fat cat congressmen?

  14. Blaming the regulators for the failures in this bank credit monetary system of ours is rather like blaming the dentist for cavities.

    Credit banking creates an elastic credit supply subject to contraction, expansion, uncertainty and misery. To call it then a “money supply” defies common sense. Credit is a claim on money not money itself.

    It astonishes me that the ancient Byzantines established a stable monetary system that lasted for 800 years by simply making the punishment for debasing money so severe that nobody dared to indulge in that crime. Were the ancients smarter than we are? How can monetary stability exist in a credit banking system?

    And yes I am a populist in that I prefer to see the government curtail speculation, issue the money supply and control its quantity, the banks thereby becoming deposit banks only.

    If that makes me a simpleton then so be it. The tines on my pitchfork are sharpened! Many are the uses of a pitchfork!

  15. I am not blaming the regulators. I truly think it’s virtually impossible to regulate complex financial companies. Rather, I think government policies themselves are the root cause of the inequities in our social/economic system. I think part of the populist rage against these financial companies stems from the income inequality across broad swaths of our economy. However, due to the short-term outlook embedded in our political system and the power of lobbyists, it’s very difficult to change those policies. Large financial companies (and many other industries) are able to perpetuate a playing field that continues to benefit few at the expense of many.

  16. Something about Paul Volcker in Matt Taibbi’s latest article, thought you guys might find it interesting:

    http://www.rollingstone.com/politics/story/31234647/obamas_big_sellout

  17. Well, the readers of this blog all understand this stuff, and now it is only necessary to awaken the remaining 260 odd million, who understand money about as well as they understand biology and physics and chemistry.

    What Volker understands is that current go’mint policy cannot prevent another (and vastly bigger) crash. If it could, he would certainly be entirely behind it, since Paul Volker is the last thing from a populist. He is a technocrat’s technocrat and he certainly understands the power of strong medicine, having inflicted the last dose the country received before succumbing entirely to fantasy for the next twenty-eight years.

    His Cassandra act should convince anyone that we are now courting a complete disaster. For those who still believe Obama has a brain, ask yourselves: why is he listening to Summers and not Volker?

  18. I would disagree that they were always the best & brightest. I did read about physicians leaving medicine for finance, which definitely is an example of that opportunity cost.

  19. The retired and blogging are not parties to
    “Buying Obama”
    (and of course reselling hIm to best friends
    at a LARGE profit !)

  20. - Sorry, I forgot to add:

    No “Value Added” for you and me, but
    TREMENDOUS Value Added for themSELVES !!!

  21. ‘While Rubin’s allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles. Kornbluh was rewarded for being the chief policy architect of Obama’s meteoric rise by being outfitted with a pith helmet and booted across the ocean to Paris, where she now serves as America’s never-again-to-be-seen-on-TV ambassador to the Organization for Economic Cooperation and Development. Goolsbee, meanwhile, was appointed as staff director of the President’s Economic Recovery Advisory Board, a kind of dumping ground for Wall Street critics who had assisted Obama during the campaign; one top Democrat calls the panel “Siberia.”

    Joining Goolsbee as chairman of the PERAB gulag is former Fed chief Paul Volcker, who back in March 2008 helped candidate Obama write a speech declaring that the deregulatory efforts of the Eighties and Nineties had “excused and even embraced an ethic of greed, corner-cutting, insider dealing, things that have always threatened the long-term stability of our economic system.” That speech met with rapturous applause, but the commission Obama gave Volcker to manage is so toothless that it didn’t even meet for the first time until last May.’

  22. Bankers value to socihttp://www.neweconomics.org/sites/neweconomics.org/files/A_Bit_Rich.pdfety is negative says this study:

  23. I beg to disagree with Mike, the banks wrote the rules they didn’t apply them. Who to blame for the lobbyists? The Banks that employ them, or Congress members to whom they give money?

  24. How can a Government for the people conceivably tolerate
    that Banks create credit/money via credit cards charging
    more than 2% per month when these banks pay almost no interest to depositors on their savings which those very banks use as a base to make credit available.
    This is pure exploitation of human beings by other so-called human beings and smacks of slavery…….
    Mr Volker is definitely a wise man and I hope that his
    advice will be taken seriously so that there is less suffering and less GREED!

  25. What I did not understand from that article is whether Paul Volcker believes that cross-border resolution authority is workable.

    I believe you and James have argued, forcefully, that it won’t work, so if you could clarify any differences in Volcker’s views and your own, that would be helpful.

  26. I’m also fascinated by the idea that populism is bad. Why is is bad to acknowledge that elites do not have the interest of the non-elites at heart? Or more importantly, that if the populace is angry about banking that is by definition populism. It’s a label that’s not useful and gives a pass to the behavior the elites.

  27. Volcker is a leader in a world full of followers and groupthink.

  28. “We Need Bankers More Than They Need Us”

    Be prepared to be bombarded with strawman arguments:

    http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6952307.ece

  29. Were the regulators in France, e.g., as incompentent as our regulators or is their system superior?

  30. Exactly. This is all about rent-seeking and prop trading, not banking as financial intermediation that facilitates commerce and capital investment. Look at the ascendancy of FIRE (rent-seeking) in percentage of GDP in relation to actual productivity that increases real assets in the economy instead of moving the chairs on the Titanic.

  31. The problem with a lot of populism is that it is based on emotion instead of reason, and belief instead of evidence. If the teabaggers got their way and the outmoded Austrian school ideas that they are advocating were implemented, the country would be descending into spiraling deflation right now.

    What needs to happen is stimulation of nominal aggregate demand in the direction of closing the real output gap. This can only be accomplished through appropriate fiscal policy. Basically, the difference between current nominal AD and real capacity has to be added by increasing net financial assets, and only the government can do that, either by spending more, reducing taxes, or a combination of both.

    Then the massive private debt needs to be addressed soberly, It is not possible to just liquidate it under present circumstances without incurring more deflation. But it cannot be left to fester, or worse, grow, either, as the government is now encouraging. The longer it takes to wind down the toxic debt, the slower the recovery will be.

  32. Couldn’t agree more. But, absent substantial public pressure, our congressional leaders are likely to continue to kowtow to the monied interests of Wall Street rather than enact meaningful regulation. I wrote about this topic recently on my blog MoneySexandPolitics.com.

    http://moneysexandpolitics.com/2009/10/23/rage-against-the-street/

    I’m sending links to Mr. Johnson’s post to all of my elected representatives but, sadly, I do not believe they care.

    Thanks to both Mr. Volcker and Mr. Johnson.

  33. Hillbilly Daryl

    Yep. Agreed. And you need look no further than the current $140 Billion US “financial institution” bonus pool. Which, by the way, is larger than the entire 2008 annual GDP generated by all economic activity of the 31,228,981 people who live in the 55th-57th largest economy on the planet-Morrocco, depending on whether you use CIA, World Bank, or IMF numbers. In 2009, the ENTIRE US GDP did not grow by a POSITIVE $140 Billion. In fact, this $140 Billion itself exceeds actual US GDP growth by a factor of multiples.

    Yet, $140 Billion in “rent” is being extracted from the economy for the benefit of “financial institution” executives. These same executives engineered and caused this calamity. Not a single one of these institutions should, by all rights and reason, even exist today-the should have failed, been nationalized, and been broken up using existing “prompt corrective action” mechanisms that have been around since the S+L crisis in the most commercially reasonable manner possible for the benefit of the 300,000,000 + U.S. taxpayers.

    Paul Volcker is right. The last “innovation” was the ATM. This is about “extraction”. And, the U.S. has created an environment where this type of astronomically insane extraction takes place.

  34. Finally — some common sense — from a wise elder. Perhaps the battle has begun to shift against the shameless rent-seekers.

  35. I think you misinterpreted the meaning behind the statement: “I am probably going to win in the end”.

    I believe the true intent is the upcoming vindication after the next crisis. I currently do not see the political ability to fix the fundamental problems this time around.

  36. Hillbilly Daryl

    Furthermore, having spent the bulk of my life with P+L responsibility-i.e. I eat what I kill, and I am bonused if I kill more than I’m expected to, and keep the expenses below budget, just how exactly does one get a job wherein one can “earn” an astronomical “bonus” by failing, losing Trillions of dollars, crashing the global economy, and doing a terrible job? What precisely are these bonuses calculated on? I’d love to read the comp plans…..

  37. Paul Volcker is simply correct in his conclusions. We in industry have understood that financial innovation has long concentrated outside the ” real economy”. Innovation like the Yen Carry Trade of recent years comes to mind. Certainly the Yen Carry Trade helped finance new Treasury issuance. But, where financial innovation did concentrate in the real economy the effects were disasters like the residential building boom via very lax mortgage banking.

    At base what was what what caused the financial implosion based on failed financial products? As I see it the base cause was not the concept of the financial products but the incompetence involved in creating the financial assets that underlie the financial product itself. If the underlying retail debt behind these financial products were sound enough to perform to the financial product parameters sold as concepts to buyers there would be no need to discuss the issue.

    At base, the product specifications sold to buyers has proven impossible to create. Starry eyed perfect theory quant’s tried to apply perfection to the messy real world and failed. Finance is always a real world endeavor.

    The even bigger conundrum is why highly trained and experienced financial people bought these products?

  38. Engineers too.

  39. When rent-seeking behavior drives a significant part of GDP, it’s no longer a bug, it’s a feature.

    Legislators will never enact meaningful reform unless they are convinced that the “rented” GDP is not only illusory but harmful. That won’t happen without a larger crisis.

  40. Elected officials won’t enact meaningful reform as long as they see themselves among the beneficiaries of the rents. Those benefits range from the direct suitcase-of-cash varieties to the nebulous “we get credit for doing what was necessary to save the economy” varieties.

  41. The problem with a lot of populism is that it is based on emotion instead of reason, and belief instead of evidence.

    It sure is a good thing neoclassical economics has been based on evidence and not belief.

  42. My kid asks me if she can do something with her friends. I listen carefully to the proposal. If I understand it fully AND it is not insane, I say yes.

    If it is insane I say no.

    And if I cannot UNDERSTAND what she is proposing, I also say no. This on the assumption that it might be insane (is even probably insane, if I don’t understand it at all) and my responsibility is to defend her from insane things even if she wants to do them. Period.

    The financial system just needed better parenting.

    cougar

  43. It was a sad day when President Obama decided to set aside Volcker and Goolsbee and promoted Summers and Geithner.

  44. “Is that too pessimistic?”

    No.

  45. “The even bigger conundrum is why highly trained and experienced financial people bought these products?”

    The bigger fool principal. Flip and then take the money and run before the roof falls in.

  46. Paul Volcker is one of my monetary policy heroes, but I think he is wrong here. The problem was not financial innovation per se, which I think can yield some marginal benefits through increased flexibility and variety (eg CDSs and CDOs). In my opinion, the problem was that repeated easing in response to nascent financial crises (eg 1998) generated a lack of care over detail and complacency about risk. If a few of these crises had been allowed to run on a bit further, the more cautious investment managers might have had their day, and investment bankers might have found it more difficult to sell opaque or dangerous products at inflated prices. I would prefer it if Paul Volcker used his authority to reiterate the importance of monetary discipline, credibility and independence. And no, I am not and never have been, an investment banker.

  47. RIGHT ON !!!

  48. The pragmatist

    If the next crash comes in time you may be right, but if it is in another 50 years it will all be forgotten again

  49. I look to the media to see the exposure/non-exposure of Volcker’s message. Since media is owned by 3 giants who control the message sent out, it will be fashioned in such a way as to make viewers switch channels and continue their semi-comatose presence vaguely described as reality.
    For foreign observers what USA has to do to correct its economic position would inflict damage world-wide. But to not correct its present trajectory presents the world with the worst of all possible outcomes, ie: the banksters will be backsoon enough for TARP II.

  50. The pragmatist

    There is only one real source of investment income, and that is the profits made by manufacturing firms and companies that provide inherently valuable services. All this “financial inovation” does is create ways to redistribute these earnings into the hands of the wealthy and away from the rest of us. We do not need, and do not want financial innovation. Simple is fair, innovation is another way of concentrating the wealth into fewer and fewer hands.

  51. The issues are connected. Loose monetary policy promotes excessive liquidity and low short-term interest rates. Ultra low interest rates fuels speculative investing; asset prices rise and collateral values increase, which encourages additional borrowing, investing and speculation.

    The speculative investing is magnified by the bank’s levered trading strategies (derivative innovations).

  52. Oh, hadn’t you noticed that neoclassical economics is a religion? It’s beliefs are called “assumptions.” They aren’t evidenced-based. They are designed to make really neat models work. And we are all going to heaven if we just follow them.

  53. If this were the case all the big holding institutions that lost money would not have held these products except as a very short term inventory. Perhaps thirty days worth, maybe a bit more. Even then they would dump the moment they knew they would have to fold the con. Instead, a huge plurality of sellers sold product recourse. That says delusional too if sellers understood the bottlenecks to collecting the debt contracted cash flow.

    Those that sold the products with no recourse under the greater fool theory are not those in trouble. I know a few people that bought this junk and every one has been in finance for a lifetime. Really, how careless can people making big bucks get? Every one I knew that bought this junk thought that the product was wrapped so as to be riskless to them. They bought the worst tranches in the belief that the insurance wrap on the product made them riskless. They still are if you run off the contract and are able to collect the credit default swap. Of course, the CDS will probably terminate before the run off of the asset cash flow terminates and not be economically renewable.

    We have mass willing suspension of disbelief being demonstrated. For years my experience has been that those that will not set aside disbelief are not ” On Board”. Not being ” On Board” is highly detrimental to your personal cash flow.

  54. I’m of the pitchfork population, and I’m more concerned about a real horrorshow backlash Berlesconi style. And the people will get stomped down, or painrayed in retaliation by the predatorclass and the handmaidens and benefactors in the socalled government, – and the people will strike back, and on and on and the frakus escalates. It could get real horrorshow ugly.

    But it is encouraging to see such an esteemed and trusted voice, speaking so boldly in public, calling for real reform in the finance sector, and the obliteration of the twisted and false idea of TBTF. Failed managements of FAILED institutions, bruting FAILED models and PONZI SCHEMES are accountable. Some government backed trust must be chartered to act with legal authority to audit, sieze and dismantle the failed toxic financial institutions. That trust will then sell off the useful enterprizes and set up and orderly liquidation, and recognize the alltooreal losses, or drawdowns. FAILED management must be replaced, their bonuses nullified. Equity, bond, and board participants all take severe haircuts when institutions, models, and management FAILS. (This eliminates the dreaded Moral Hazard, by attaching hard costs, and skin in the game for grotesque negligence or outright thievery.) There must be a disincentive and an adequate price to pay for LYING, DECIEVING, THIEVING, ROBBING, PILLAGING, and BRIBING!!!!

    If there is no price to pay for wanton crimes and abuses, – then in effect – there are no laws. In a world where their are no laws, – there are no laws for anyone predators.

  55. If only our president had the courage to address the bankers with the harsh and necessary words of the ghost or presidents past.

    “Gentlemen.
    “Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out.” ”

    Quote by: Andrew Jackson
    (1767-1845) 7th US President
    Source: in 1836, Jackson forced the closing of the Second Bank of the U.S. by revoking its charter

    Alas all our leaders today lack this righteous and necessary courage.

  56. I really like what Volcker said at the end.

    —–
    In a crisis, everybody runs back to the commercial banks. They, after all, run the payment system. We cannot have this global economy without commercial banks operating an efficient payment system globally as well as nationally. They provide a depository outlet for individuals and businesses, and they are still big credit providers for small and medium-size businesses, but they backstop most of the big borrowers as well. The commercial-paper market is totally dependent on the commercial banking market. They are an essential financial institution that has historically been protected. It has been protected on one side and regulated on the other side.

    I think that fundamental is going to remain. People are going to think it is important, it is important, it needs regulation and in extremis it needs protection—deposit insurance, lender of last resort and so forth.

    I think that it is extraneous to that function that they do hedge funds, equity funds and that they trade in commodities and securities, and a lot of other stuff, which is secondary in terms of direct responsibilities for lenders, borrowers, depositors and all the rest.

    There is nothing wrong with any of those activities, but let you nonbank people do it and you can provide fluidity in markets and flexibility. If you fail, you’re going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.
    ——

  57. Far-fetched, Wall Street and Washington Still Sending Toxic Messages…

    This concern was voiced by Joseph Stiglitz back in July of 2009 in an article that appeared in the Vanityfair. In this article, it holds the Far-fetched theme for challenge placed against all who have lost touch of the pure math of how the theorems are becoming weighted to question the current crisis. Stiglitz stated, “The reputation of American-style capitalism will have taken a beating—not least because of the gap between what Washington practices and what it preaches. Disillusioned developing nations may turn their backs on the free market, posing new threats to global stability and U.S. security” (Stiglitz).

    The article pointed out that “nowhere is the battle raging more hotly than the Third World, among the 80 percent of the world’s population that lives in Asia, Latin America, and Africa, 1.4 billion of whom subsist on less than $1.25 a day” (Stiglitz).

    Stiglitz went on further; with his thoughts on the economic debates taking place by the many economists and pundits from around the world. He stated, “These economic debates take on particular potency in the developing worlds. Although we in the West tend to forget, 190 years ago one-third of the world’s gross domestic product was in China. Nevertheless, then–rather suddenly, colonial exploitation and unfair trade agreements, combined with a technological revolution in Europe and America, left the developing countries far behind, to the point where, by 1950, China’s economy constituted less than 5 percent of the world’s G.D.P. In the mid–19th century, the United Kingdom and France actually waged a war to open China to global trade. This was the Second Opium War, so named because the West had little of value to sell to China other than drugs, which it had been dumping into Chinese markets, with the collateral effect of causing widespread addiction. It was an early attempt by the West to correct a balance-of-payments problem” (Stiglitz).

    Why bring this economist and others in this article post are critical to drive home the nature of tides showing cracking at the seams of the fault lines of sustainable recoveries. The academia should join in the support or the refuting of the message this is going to deliver.

    The simple for these assumptions are base for all to sharpen their pencils and get out their calculators is based on bringing two theorems of Welfare and the Traditional neoclassical economics.

    The theory of neoclassical economics literature assumes that markets are always efficient except for some limited and well-defined market failures. There are more studies being produced by the likes of Stiglitz and others. These studies bring supports for reversing their presumption too: It is only under exceptional circumstances that markets are efficient by the high degree of transparency of the financial markets, as regulated through governments and their abilities of their countries through the intervention and policies of their central banks in creating an engineered efficient market from failure. This presumption theory is based upon the measurable tolerances of two theorems. One is that of the “Welfare stress formula” as the recent departed Paul Samuelson along with Bergson was recognized contributors to this fundamentally accepted theorems and the other is the “Information Economics” developed by Stiglitz.

    These conditions can measure the accuracy of a failing recovery and/or the pressures to cause the signal of a double dip recessions or that of a larger balloon-busts of debt to liquidity imbalances as failures to repay debt issues keep rising.

    The amazing accuracy coming within the future as these calculations can forecast the current environments as has been used to reveal the eventual looming debt collapses looming on the not too distant future of this recent recession and to be suspect if we have entered true recovery that does not invite the larger debt collapse factors.

    This central theme of convergence too divergences in showing what pressures are coming out to support the metric used to determine recovery of economical sustainability. A further debt of looming collapses are seen mounting by the verifiable supplies of bailout welfare stressors as recently provided to Dubai World from Abu Dhabi.

    Even the fact that the warning of Abu Dhabi to demand control over the emirates of Dhabi World and other holders of large debts coming up for defaults was well published in an article out of Bloomberg news.

    These mounting concerns are spreading throughout the Asian rim and other countries struggling with the real fundamentals of how to dry up liquidity induced into the market place. This use of free flow stimulus and the push of the falling dollar have brought to the brink of the abyss, the near hoarding of cash as seen by many banks that have driven treasurers to record Bond-Market sales. This has caused the inverse for stocks to lose yield advantages as Share Buybacks dwindle and the issuance of diluted shareholder values has become the common place by the financial banking and investment firms clearing themselves from TARP.

    This does not mean they have not stopped their high-risk bets of forging the “Carry-Trade” to bring back the eventual “Too-Big to fail” (TBTF).

    These conditions are further aggravated by the recent announcements of Federal Reserve, The Treasury Secretary, and the President of the United States for further developments of welfare stressors in America.

    These stressors are through excessive problems seen through drying up of liquidity and the continued arrogance of the free market running amuck with the “Carry-trade” at play. Further stress is seen worldwide with the theme of a severe Jobless recovery metric playing out with increasing the profound effect of the Welfare economics theory and its critical importance.

    All these concerns of liquidity infusions still not under a cohesive and verifiable control of stringent regulations adopted around the world over the financial banking and investment sectors. Even the recurrent calls made by Paul Volker still seem to be ignored, but the warning siren is sounding louder now than ever before. Volker pleas to Fix Too-Big Banks Ignored as read in an exclusive article out of Bloomberg today.

    Stiglitz has shown (together with Bruce Greenwald) that “whenever markets are incomplete and /or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient”. In other words, there usually exist schemes of government intervention that can induce Pareto superior outcomes, thus making everyone better off. Although these conclusions and the pervasiveness of market failures do not necessarily warrant the state intervening broadly in the economy, it makes clear that the “optimal” range of government recommendable interventions is definitely much larger than the traditional “market failure” school recognizes For Stiglitz there is no such thing as an “invisible hand”.

    The hope from this article post brings all to take the journey and review the late professor and Doctor of Economic, Paul Samuelson. There are many others still kicking the tires of new accepted theorems of economic tools for all to use. Like Stiglitz that continue to develop the frame work of mathematics and sound theories derived from these math formulas to assist in the sustained balancing of the ever changes ongoing with the polarized Globalization that is now more than ever interdependent of the success and not failure of one another.

    This still is not being seen, as the sure greed of the advanced “Carry-trade” needs to come to an end and the supports of an increase support of the Greenback along with the strength of the Asian rim to measure the YUAN to keep in step not to sink their surrounding emerging growth partners.

    Until real true regulatory measures are past, and not the water down version that is emerging out of the House of Representatives as filed last week. Paul Volker and others still need to be taken for what they are conveying not only to the United States but also to the World now…

    http://www.bloomberg.com/news/exclusive/

    James Gornick Far-fetched continued Theme

    http://www.google.com/search?q=james+gornick+far-fetched&rls=com.microsoft:en-us&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1

  58. “There is nothing wrong with any of those activities, but let you nonbank people do it and you can provide fluidity in markets and flexibility. If you fail, you’re going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.”

    ——

    ditto :-p

    if the commercial bank sector is so important, keep the amount of investing it does to levels it can afford to ‘fail’ – or keep the investing seperate so if that goes ‘mega-fail’ the commercial banks don’t go down with it as well.

  59. Btw, it did not escape notice that he is echoing the most virulent anti-innovation hellions in blogtown.

    Volcker: We’re watching you Wazowski.

  60. Looks like McCain is siding with Volcker:

    “McCain Wants to Reinstate Glass-Steagall”

    http://www.thedailybeast.com/cheat-sheet/item/mccain-wants-to-reinstate-glass-steagall/

  61. It is unfortunate that we get through these problems so quickly that all is forgotten until the next crisis. More and more of these economic issues are having smaller “downtimes” before the next crisis. I guess one side can say that you must commend those that are doing everything possible to bring back stability but I am on the other side where a little more pain must be felt up top before we move on. I just hate that the ones being affected the most are those that do not have a say in any of these govt/exec level decisions. I know this country was built on this credo but without serious change (and probable labels of socialism) we are just going to continue to keep making the same mistakes. Due to the advent of technology, more access is available to info that was not available before, unfortunately, all its doing is causing more opinions with very little action. I’m an open pessimist therefore biased but reality is reality, and there’s only a few that understand, and even fewer that are not suffering…

  62. No, they’re very competent. They’re competent at looting.

  63. I think as long as Volcker doesn’t go up in small planes, he’ll be fine. No doubt he employs a food taster already.

  64. Well, when the banks borrow money from us at 0% and then either use it to buy up other banks or lend it back to us at 30%, that does tend to raise the general level of irritation in the populace.

  65. Serious question (and Godwin can go stuff himself temporarily):

    Were Volcker’s parents fans of national socialism, Nazism? Is it significant his middle name is Adolph? Or was the name Adolph already in use in his family? The first Nuremburg rally — the “Day of Awakening” — was held August 20, 1927. He was born September 5, 1927. Coincidental, or worthy of closer inspection?

    He is one of the glowing elders of the globalist movement, or whatever it is. Stiglitz, another, the papal advisor, is often mentioned in the same breath as Volcker.

    In other news, google, facebook, and twitter, the ISP’s themselves, the telephone companies which have giant digital taps on them, allow supergranular monitoring of the public, and along with MSM for the stupid people, and the “independent” blogosphere, are also excellent vectors for viral propaganda and general influence — a fascist dream. Forget the ubiquitous cameras, the infrastructure for astroturfed influence peddling is in place.

    Paranoid? You’d better believe it. Justifiably so? Investigate for yourself.

    Pay more attention to the conspiracy theorists. They are rapidly gaining credibility.

    Just for fun: Volcker was Chairman of J. Rothschild, Wolfensohn & Co. Also:

    “He has had a long association with the Rockefeller family, not only with his positions at Chase Bank and the Trilateral Commission, but also through membership of the Trust Committee of Rockefeller Group, Inc. (RGI), which he joined in 1987. That entity managed, at one time, the Rockefeller Center on behalf of the numerous members of the Rockefeller clan. He currently serves as Chairman of the Board of Trustees of the International House in Manhattan, NY. He was a founding member of the Trilateral Commission and is a long time member of the Bilderberg Group.
    In January 2008, he endorsed Democratic Presidential Candidate Barack Obama for President.”

    My skeptical friends… you’ve been had. I used to think Naomi Wolf was a little off base. No longer.

  66. Update: His grandfather was named Adolph.

  67. Frank D. Graham was his mentor at Princeton.

    http://homepage.newschool.edu/het//profiles/fgraham.htm

    Interests: international trade, general equilibrium, German Hyperinflation (favorite of those wacky Austrians):

    http://mises.org/literature.aspx?action=author&Id=118

    http://www.princeton.edu/~ies/graham.htm

  68. Young Economist

    There is sign of high inflation now from the massive speculation in food price. For example, in China, garlic is up by 200% in less than one year from Chinese speculation on physical inventory for expectation on the price increase. Surely, if the food price speculation spread, the global economy would face at least to stagflation or at most to hyperinflation.

    Loosening policy and low interest worldwide are the main reason of speculation in every price including stock prices, real estate prices, commodities prices, etc. I think all central banks will fail to control inflation and the global economy will end with stagflation or hyperinflation in 2010. Now all central banks must tighten monetary policy now.

  69. To Volker, I say, AMEN. On every count, he has them covered. I just saw Eric Cantor today once again using the Republican (really this is a non-partisan fight, of course) standard line. The new regulation will stand in the way of recovery. I felt so sorry for him. I really don’t think he has the foggiest notion whence he speaks, but goes on babbling the “party line” anyway. And then there’s the Health Care discussion, which I wouldn’t even mention, except that happened with Lieberman is so completely emblematic of what all of Capital Hill represents. Who was it who held up the lantern looking for an honest man. He’d have quite a search on the Hill. And, as to our well-meaning, but ill guided President, his timidity has been so evident, failing to take real advantage of what the election said about the taxpayers and what they want. He has moved from one end of the political spectrum to the other, never settling, and leaving us all wondering if he has any real guts, or if he is so afraid of speaking his mind (the main reason why he is polling so poorly) because of the media war that he confuses the idea of the astute pedantic with taking a real stance on issues and going with what you truly believe (we are wondering if he actually believes the ideas that got him into the White House).

    Volker is one of the very few good things going on with his administration at this moment, but that’s at least one more than what Congress has (note that neither party in Congress is polling well at all, both being south of the President).

    Volker seems to be stepping into a real vacuum of leadership, and, maybe he will start some real momentum. Maybe he can even convince Ben and Tim, if not Larry (who has hopelessly sold his soul to the Demon of Greed).

  70. As was wondered about earlier though, who steps into the Volcker vacuum if he kicks the bucket? Are there magi on their way to bethlehem as we type?

  71. I recently read — forget where — that someone said the bankers are going to bring down capitalism quicker than Karl Marx ever could have.

  72. The wikipedia entry on Volcker’s bosom buddy has filled out very nicely. A sample:

    “He possesses a famous Rolodex in his office in Room 5600, which he started in the 1940s. It is described as a unique, massive four-foot-by-five-foot gold wheel contraption, containing up to 150,000 entries of the most powerful people in the world”

    Friend of the Nazis McCloy comes up frequently in the article. Jamie Dimon’s JPM, you know, the Teflon Bank, comes up a lot too.

    And of course we all know that he is/was a director at Simon Johnson’s Peterson Institute, along with a Rothschild and nice chunk of his rolodex:

    http://www.iie.com/institute/board.cfm

    Professor Simon, just what are you guys selling? Can you lay it out? The engineers worked hard on it, and the PR machine has run with the ball. Hint at the endgame please. It seems easy enough… burn everything down, then rebuild. Will it be done this time without sending millions to their death? If not, there really are better ways. Think about it?

  73. I was waiting for your comments on the WSJ article, thank you sir.

  74. I can prove having been one of the very few vociferous skeptical of some now so called “financial innovations” while these “financial innovations” were the toast of the town and so I feel I have earned the right to protest when so many born-again Monday morning coaches now have an orgy criticizing them without caring too much for the truth.

    For instance to write “The journalist Michael Lewis recently argued that the credit default swaps sold by A.I.G. brought down the entire global financial system—and found that the A.I.G. traders he talked to completely agreed”, is completely misleading since what created the problems of the credit default swaps and A.I.G. had very little to do with financial innovations and all to do with regulatory innovations.

    It was the regulators who stated that if the seller of a credit default instrument was AAA rated, like A.I.G. was, then, implicitly, there were no counterparty risk and, explicitly, the buyer, if a bank, could use it to dramatically reduce its capital requirements.

    Without those regulations, the credit default swaps, if you still want to consider them innovations, be my guest, could never ever have been sold by A.I.G. in such amounts so as cause its implosion.

    Also when the authors here write, “The losses were borne by the companies that underpriced the credit default swaps, such as A.I.G., and by the government, which had to bail out A.I.G.”, it causes the impression of a generalized problem, it was not! It was very specifically related to A.I.G. which had been given by the regulators and the credit rating agencies all the goodies that made it go crazy.

    There is a lot of good writing done in the Baseline Scenario but it has a fundamental flaw and that is its steadfast pursue of putting as much blame as possible on the bankers and to exculpate the regulator as much as possible. If we are to find our way out of this mess, we do not need that kind of interference.

    And by the way, just in case, this comment has nothing to do with criticizing Paul Volcker, far from it!

  75. Well Per, I must say it was quite the feat to formulate a 1:62 capital ratio as prudent.

  76. Will do, Simon. Thanks as always for keeping the discussion on track…

  77. Yes bit for those newcomers who are still in blissful ignorance, when regulators ordered only 1.6 percent in capital requirements for a bank to hold an AAA rated asset, they were actually authorizing a 62.5:1 leverage (100/1.6)

    Question: What is the authorized leverage for a bank that only lends to the government and that therefore has a zero percent capital requirement? One clue… the sky!

  78. Final thought for the night: Beware of the people that say all the right things, the things you want to hear. And especially beware of them when things are darkest. If we descend over the next years into economic and social darkness, we will be looking for the strong leader with the plan. It’s really sounding as if the plan is ready to go. With any luck, the common enemy needed to consolidate masses of people will not be other people. This time it’s “global warming”?

  79. Why discard the other pieces of the puzzle? Your capital ratios, the free-market deregulation propaganda, the toxic financial products, the accounting failure, the sheer leverage of greed, the bursting of the bubble with truth, the continued use of fear… all one. Feel free to focus on ratios, they are key, but to emphasize them over everything else, I think, is counterproductive.

  80. Look, even if you assume no venality is involved, when the mantra in everybody’s head right now has to be “It’s the economy, stupid!” legislators are going to have a hard time looking at GDP numbers and justifying reforms that can plausibly harm them. The fact is that everybody in the U.S. is the beneficiary of an artificially inflated GDP number.

    Think of the U.S. dollar as a single share of the U.S. government. As with public corporations, the share price of the U.S. government can be indexed to expected earnings growth via a P/E ratio that is set/validated by expected earnings growth. In this case, earnings growth equals GDP growth.

    So, what happens when you are asked to implement reforms that result in negative GDP growth and have no way to make up for the shortfall in expected growth? You reject it because the only alternative is to watch the economy collapse and the dollar with it.

    The financial reform issue is part of a much bigger economic reform problem. In the absence of a bigger crisis, a comprehensive solution is required that entails a lot more than just financial reform.

  81. I’m not a big fan of Volcker, at least historically. His policies as Fed chief killed manufacturing in the U.S. By that metric, he is more responsible for our current mess than Greenspan is: if the banksters were not such an important part of GDP growth as they are today, they would not have had the power to succeed in their silent coup.

    I’m a big fan of what Tall Paul is saying these days, though. Still, I don’t think he would be saying these things if he did not feel responsible, though.

  82. The explanation for the perceived “flaw” is the recognition of the existence of regulatory capture. That is, the regulators were captured by the very businesses they were required to regulate. The regulators were puppets on a string dancing to the tune of the financial innovators. There was no separate regulatory innovation. It was lock-step by design.

    Now, let’s assume there was no regulatory capture. What was the motivation for “regulatory innovation?” The answer is GDP growth.

    There’s an argument that “It’s the economy, stupid!” the meme spawned by the first Clinton campaign, has had adverse consequences on the long term health of the economy by focusing government officials and regulators on an arbitrarily short cycle (e.g., 2 to 4 years) just as public corporations are. Again, extending the analogy (started above) of U.S. government as corporation, the voters are shareholders and they vote based on earnings growth. If you recognize that a lot of members of government have been involved in managing public corporations, it is easy to see how they can get caught up in this mentality.

    Of course, one might argue correctly that this short-term focus existed long before Clinton.

  83. Digging into the realm of cognitive science and behavioral economics, we have Prospect Theory, which tells us that people are much more concerned about what they might lose than what they might gain. Loss aversion dominates thinking and renders utility analysis non-operative.

    Just being an incumbent gives one a huge edge in staying an incumbent. That’s why states enacted term limits. The only way to lose your job as an incumbent is to lose for your constituents. That’s why incumbents care more about not being blamed for screwing up a good thing than they do for traking credit that they saved the economy.

  84. On reflection, I might have been a little gullible. Can anyone come up with multiple credible sources (*not* including Volcker himself) that confirm that his grandfather was indeed named Adolph? I got it from this:

    http://books.google.com/books?id=NvpUBgfZur4C&pg=PT92&lpg=PT92&dq=volcker+grandfather+adolph&source=bl&ots=mJMiJuVxe9&sig=BMdmaC0yy5dgFq8GfOS6giNg_R0&hl=en&ei=XYAoS5byL5L2sQPZvY25DA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CAgQ6AEwAA#v=onepage&q=volcker%20grandfather%20adolph&f=false

    …which would hardly be the source of anything that might cast our hero in a negative light.

    The biographer came out of Columbia, btw, ground zero for the vast Stiglitzian/Sachsian global conspiracy.

    Oh hang on. This is too much. Guess who wrote the foreward? Arthur Levitt, the soul of Wall Street.

    http://en.wikipedia.org/wiki/Arthur_Levitt

    Bullet Points

    * “the twenty-fifth and longest-serving Chairman of the United States Securities and Exchange Commission (SEC) from 1993 to 2001. Widely hailed as a champion of the individual investor, he has been criticized for not pushing for tougher accounting rules. Since May 2001 he has been employed as a senior adviser at the Carlyle Group

    * Father was “sole trustee of the largest pension fund in America”

    * “Sold cattle and ranches as tax shelters”

    * Chairman of Amex, New York City Economic Development Corporation, owner of Roll Call

    (Roll Call… which is now owned by the Economist Group. Wasn’t it owned originally by Atlantic Media? In any case, the current publisher is Peter Cherukuri, who got his start with the National Journal, which *is* and Atlantic Media publication, and has roots going back to friend-of-the-nazis and Rockefeller confidante John “Chase Bank” McCloy and the whole 50′s-60′s establishment.

    http://en.wikipedia.org/wiki/John_J._McCloy

    Beware of anything “Atlantic” -related. (Calomiris’ “Atlantic” bank just got owned by the FDIC, btw.))

    * Chairman of the SEC

    * Together with Joe Lieberman, exerted pressure to kill rule that would have forced companies to record stock options on income statements (“expensing stock options would have reduced profits among leading high-tech companies by 60% on average”) In other words… facilitator of the tech bubble. Yes, he later called it his big mistake. Greenspan anyone? “SHAAAAWY”?

    * “In 1997, the SEC under Levitt’s leadership approved the exemption of some Enron partnerships from the tight accounting controls…” “Without this exemption, critics maintain, the company would have been constrained by strict rules… …that would have prohibited certain foreign investments and the shifting of debt to its foreign subsidiary shell companies.”

    * “…he has come under criticism for failing to act against 1990′s bull market abuses and not uncovering the Madoff ponzi disaster.”

    * Currently on board of RiskMetrics group. Brilliant.

    * “In 2005, Levitt was named a special advisor to [AIG's] board of directors and the board’s nominating and corporate governance committee.

    * “Levitt oversaw an audit published in August 2006, by Kroll Inc. (mob?) — where he is a consultant—describing how the City of San Diego had allowed a pension deficit of $1.43 billion. The report blamed around 30 city officials, including five incumbent council members. According to the San Diego Union Tribune [1], Kroll charged the City of San Diego $21 million for the report, with Leavitt’s time billed at $900 per hour.”

    * “Levitt is also a Director of Bloomberg LP, parent of Bloomberg News”

    JK: “In January 2001, Levitt received the “Award for Distinguished Leadership in Global Capital Markets” from the Yale School of Management.”

    In short, the fellow who wrote the foreword to the big fancy biography of our towering, sweet-talking, laureled grandfader, is at the heart of our implosion. Possibly a clue?

    Volcker may be bigger, smarter, and better looking than most of us, but does he share our values? And if he does “win,” what will this mean, ultimately?

  85. “What we’re seeing here is the test of a new financial system. Used to be the banks were the center of the financial system. Well, maybe they still are in a sense, but they’re much smaller [smirk] relative to the rest of the system than they used to be. [smirk] And that rest of the system is much smaller than it used to be. [smirk]

    (watch the end of this video… was his actual response edited out and replaced, or was this just a bad editing job?

    “Given the history, the past, the strength, actual and potential, of the american economy, we can and still provide a kind of indespensable element of leadership here, but (laughing) it’s not going to be dictatorial, I’ll tell you that…”

    “I think they certainly made the right decisions in terms of preventing a collapse that could have been more severe in terms of the economy. [Looks down, chuckles] You know, after this, more or less fatal days, late September, early October, [serious look] the economy did decline despite the fact [rubbing eye] that these financial institutions were bolstered up. The economy declined at the most rapid rate I have ever seen in the 4th Q of last year, 1st Q of this year, pretty much paralleled around the world. So looking at that experience [smirk, eyes opening] I think you would have to say they were right in providing massive support.”

    (The smirk says: “ha ha, didn’t have much of a choice, did they”)

    Charlie Rose, PBS/Bloomberg 9/09

  86. Ack..”And that rest of the system…” is supposed to read “And that rest of that system is highly engineered…”

  87. It has already been forgotten–and was forgotten in October 2008 by two parties, two Presidents, and the losing presidential candidate. TBTF has been writ in stone–and WS knows it.

  88. A wonderful quote.

  89. I do not discard anything but I do indeed make special emphasis on the crazy capital requirement based on risk and the empowerment of the credit rating agencies, and that were introduced as regulatory innovations never used before, because they are the true culprits in the story and because so few point at these as they busy themselves attacking their favorite foe or, as regulators or pseudo-regulators hiding their own responsibility.

    Without the crazy capital requirement based on risk and the empowerment of the credit rating agencies there would not have been an iota of demand for CDOs collateralized with subprime mortgages, ergo, no crisis, of the type we are enduring now.

    That there are ample number of causes for other type of crisis, currency reforms, energy scarcity, climate change, uncontrolled greed, sheer stupidity and many more, pile it on…that I fully agree with… but this particular crisis has its undisputed owner.

  90. Wake up! Because of the risk discriminating capital requirements even at this moment, or especially at this moment when bank-equity is scarce and expensive, the regulators are pushing the banks to lend to government and AAA rated companies instead of lending to those small businesses and entrepreneurs that can help us out….and here we are wasting time.

  91. James Kwak, I do love you. my Korean brother, but why would I even do that, after all the posts I made here, Why would I even do THAT!?!?!?!?! My JU AZ brother, My Ju Az Brother. I could have gotten around that many times IF I WANTED TO!!!!!! but I didn’t, see. Because I’m NOT a razist redneck. And I could have put a filtering word here for ennnnfesis of how much I didn’t car, but I didn’t.

  92. I mean U didn’t care CARE, Fuk you

  93. Ted K:

    These last comments you made; and a few others only reduce what anyone coming to this web-blog will see and discount all your prior and somewhat spot on thoughts. These kind of prior posts reduce truly, your value!

    The idea is to keep it clean and use your wit to bring home your stance or comments on your position on the topic subject or others who are posting additional posed questions to the topic.

    Basically, keep it clean with rebutal or supportive comments that allow for a healthy bantar of discussions…

    I send many to this web-site for education from Simon Johnson and the ones with the witty and well versed stimulative thoughts that hammer home further learning or thoughts on the topic subject.

    Please, try to turn anger into reason and bring back a professional attitude to your future posting comments.

    I thank you in advance in what these requests are asking for..

    James

  94. Federal Reserve officials would say that regulation should be viewed though the lens of promoting economic growth.

    Policy-makers “kick the can down the road”, adopt increasingly risky strategies, and hope for the best.

    Desperate For Economic Growth: The More Things Change, The More They Stay The Same

    Obama on the economy:

    “We’ve got a long-term structural deficit that is primarily being driven by health care costs, and our long-term entitlement programs. All right? So that’s the baseline. Now, if we can’t grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who’ve got jobs are paying taxes and businesses that are making profits have taxes – are paying taxes. That’s the most important thing we can do.”

    http://news.firedoglake.com/2009/12/04/obama-rejects-immediate-deficit-reduction

  95. It isn’t that Volker is a good guy; the fact is he understands this stuff and is really SCARED!

  96. I don’t think he’s scared. I think he wants us to be scared. He came to my attention last year when he was interviewed leaving some sort of conference (wish I had the video). Fear was at new heights, and they approached him like a child would approach a grown-up during a disaster, asking him what we should do. He wiped his nose and said approximately: “I really don’t know.”
    Hilarious panic ensues.

  97. andrew benington

    This is not a recession it is a depression.
    Depressions happen when the old trading area expands and the equalising of the costs of producing across the new economic area break through the strategies the more developed economies pursued to maintain their illusion of growth.
    We have to chose between smart tariffs that don’t choke off the developing economies but slow them and encourage them to grow home markets, or the developed world competes on costs with the developing world.
    At the moment the later is the course the developed world is following. Printing money will contine, cuts in govt services will continue, until costs equalise. The developed nations are about to become a cruel place to be poor.
    People will point to GDP growth and say look our economy grew.
    GDP growth is a flawed statistic. If the US was really growing since 1971 then where are all the exports or fall in imports, why does a middle class lifstyle require more hours worked now than in 1971.
    What we’ve had is technological innovation and collective myopia.

  98. Why didn’t Steve ? – on CBS’ 60 Minutes -, ask the obvious follow up question after hearing Obama’s ‘fatcat bankers’ remark : Why did you appoint Summers and Geithner in the first place ? Taibbi in Rolling Stone raises the same point .

  99. Update: Levitt is not listed on the RiskMetrics list of board members. Did he get embarassing?

    What a successful company though, and “The Center For The Financial Community.” Just look at their PR. All these graphs with delightful upward trends.

    http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTU4NjZ8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

    They are a spinoff of JPM, so the Levitt-Volcker connection makes a lot of sense here. HQ is located at One Chase Manhattan plaza.

    How come we rarely hear about their CEO Ethan Berman? He’s a very important person.

    Their list of board members is fascinating, as usual. And look, there’s that word, “Atlantic,” again.

    http://www.riskmetrics.com/bod

    Rene Kern, of “General Atlantic”

    http://www.generalatlantic.com/en/companies/overview

    In short, RiskMetrics functions as a ratings agency, performing the modern alchemy of distilling poop into gold.

    RiskMetrics Group is composed of RiskMetrics, and ISS Governance Services, which is “The standard in setting corporate governance best practices.”

    Would it be civil and decorous to VOM at this point?

    http://en.wikipedia.org/wiki/RiskMetrics

  100. The media – one more thing that should never have been deregulated

  101. I’ll add (I mean ADD), a (long) quote from another President:

    “The prime need today is to face the fact that we are now in the midst of a great economic evolution. There is urgent necessity of applying both common sense and the highest ethical standard to this movement for better economic conditions among the mass of our people if we are to make it one of healthy evolution and not one of revolution. It is, from the standpoint of our country, wicked as well as foolish longer to refuse to face the real issues of the day. Only by so facing them can we go forward; and to do this we must break up the old party organizations and obliterate the old cleavage lines on the dead issues inherited from fifty years ago. Our fight is a fundamental fight against both of the old corrupt party machines, for both are under the dominion of the plunder league of the professional politicians who are controlled and sustained by the great beneficiaries of privilege and reaction. How close is the alliance between the two machines is shown by the attitude of that portion of those Northeastern newspapers, including the majority of the great dailies in all the Northeastern cities–Boston, Buffalo, Springfield, Hartford, Philadelphia, and, above all, New York–which are controlled by or representative of the interests which, in popular phrase, are conveniently grouped together as the Wall Street interests.”

    … …

    “The present conditions of business cannot be accepted as satisfactory. There are too many who do not prosper enough, and of the few who prosper greatly there are certainly some whose prosperity does not mean well for the country. Rational Progressives, no matter how radical, are well aware that nothing the Government can do will make some men prosper, and we heartily approve the prosperity, no matter how great, of any man, if it comes as an incident to rendering service to the community; but we wish to shape conditions so that a greater number of the small men who are decent, industrious and energetic shall be able to succeed, and so that the big man who is dishonest shall not be allowed to succeed at all.”…

    …”Unfortunately, those dealing with the subject have tended to divide into two camps, each as unwise as the other. One camp has fixed its eyes only on the need of prosperity, loudly announcing that our attention must be confined to securing it in bulk, and that the division must be left to take care of itself. This is merely the plan, already tested and found wanting, of giving prosperity to the big men on top, and trusting to their mercy to let something leak through to the mass of their countrymen below–which, in effect, means that there shall be no attempt to regulate the ferocious scramble in which greed and cunning reap the largest rewards. The other set has fixed its eyes purely on the injustices of distribution, omitting all consideration of the need of having something to distribute, and advocates action which, it is true, would abolish most of the inequalities of the distribution of prosperity, but only by the unfortunately simple process of abolishing the prosperity itself. This means merely that conditions are to be evened, not up, but down, so that all shall stand on a common level, where nobody has any prosperity at all. The task of the wise radical must be to refuse to be misled by either set of false advisers; he must both favor and promote the agencies that make for prosperity, and at the same time see to it that these agencies are so used as to be primarily of service to the average man.”

    Theodore Roosevelt, Address to the Progressive Convention, August 1912

    History Rhymes…

  102. Despite all of your attempts to make us uncomfortable w/ PV, he would be a vast improvement over any of the clowns currently holding a seat at the table.

  103. I think that’s the point of his role. He’s one of the “grownups” that is coming to re-establish order after the kids have burned the house down. Unfortunately, just going by his associations, it looks like he and the other grownups belong to a long line of grownups that have little regard for human life, and tend to favor rule by a greedy sociopathic elite. Unfortunately, you cannot both trust *and* verify the intents of these folks, you can only trust because the verification is nigh impossible. You want to trust, go for it. We’ll compare notes in 5, 10, 20 years. I think you’ll find this a very different place (country, and globe) and possibly not the sort of place you would have voted to create.

  104. This is truly a timely quotation. Unbelievable, almost 100 years ago… seems like we’re just trampling waters. Thanks. Let us now pray for that at the very least we will still be able to keep on trampling water.

  105. I didn’t say I trusted him, I just said “he would be a vast improvement over…”

  106. Absolutely – anyone who’s had a leadership role at GS!

  107. I remember bursting out in uproarious laughter, the when Giethner was chosen by Obama, and the socalled “street” lept 700 plus points in gleeful greedy irrational exuberance, – knowing then that all was forgiven, and the taxpayer tap would be opened, and no one was going to jail. “Rejoice! Rejoice! Emmanuel. Shall come to thee, O Israel

    O come, O come, Emmanuel
    And ransom captive Israel”

    You guys may dismiss the conspiracy theories, – but there are conflicting religious implications in all our policy decisions. While we must all recognize the inconvenient truth, that most of our policy decision globally and domestically are “all about the oil”, – there exist also fundamental and tribal religous beliefs that more often then not, – lead to conflict, – not peace. So one can, and many do, – question the validity of the socalled churches, all of them drenched in oceans of innocent blood, and the purchased governments shielding and advancing the predatorclass, and dominating and depriving the peoples lives, and the peoples former rights, protections, priveliges, and freedoms. – and the corporate world teeming, seething with packs wolves, and dens of vipers and thieves.

    The complicit parrots, and the purchased message-force multipliers in the socalled MSM will never stand with the people. They are owned and controlled by megacorps that employ contractors to prosecute and subdue wetwork critics and conflicts.

    Our only hope is something external. Some voice or force, outside the corporatemedia perceptionmanagement informationdomination wingnut PR firms, (Rendon Group, Baker Botts.. et al.) that own and control the government and most media horizontally, and vertically.

    The government cannot be trusted.
    The media cannot be trusted.
    The socalled churches cannot be trusted.
    The megacorps cannot be trusted.
    The oil, pharmecuetical, HMO, insurance, private intelligence, private military, intelligence, military, and finance OLIGARCHS -
    cannot be trusted.
    The purchased regulators cannot be trusted.

    Who do we trust???

    This is the epic question all Americans must entertain. Do we live by universal codes and the rule of law, – or not? That alone is the critical question. Do we abide by the rule of law….. or not? If we do,.. then the predatorclass and the finance oligarchs specifically, – should prepare for some period of internment. If not? Then we in fact inhabit a world where there are no laws, and in that world – predators – there are no laws for anyone. Please fasten your seatbelts, and put your trays in the upright, and fixed position – we’re about to enter some turbulence.

  108. Don’t know if you caught my posts about “The Phenix City Story”

    What did they need to do to cleanup Phenix City, get rid of the mobsters and the seething corruption of everyone around them? Martial law and the national guard.

    If the giant squid(s) have their tentacles around the nation, it would require intervention from some sort of white-capped international force. Instafail on that avenue.

    But it’s really worse, isn’t it. It’s global. The only things that could intervene are aliens, or god. The good folks at RiskMetrics would tell us that this is not too likely, so it has to come from within. When the bad guys, though, have control not only of the MSM, but blogs like this one as well, that pretends, and somehow succeeds in being perceived as, independent, what’s left? In addition to the need for vetting individuals we put in administrative positions in government, we need a way to vet blogs, and all the rest of the social media. Facebook funded by In-Q-Tel, the CIA’s venture capital proxy, and now even an evil Russian Oligarch… twitter, all the rest. They have a complete stranglehold on the levers of perception. How do we break through?

    The world has gone completely topsy turvy (and that seems to be baked in the cake) — The Sandlers fund Pro Publica, Minkow of ZZZZ Best fame is going after companies with investigators, ostensibly to “expose” the truth, but most likely just to short and torpedo them.

    The solutions must come from within whether you’re a die-hard patriot, or an enlightened globalist with egalitarian ideals.

    So? Vet away…

  109. (Yes, “stanglehold on levers” is particularly bad, I know)

  110. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness. Prudence, indeed, will dictate that governments long established should not be changed for light and transient causes; and accordingly all experience hath shown that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security. –Such has been the patient sufferance of these colonies; and such is now the necessity which constrains them to alter their former systems of government.”

    I encourage all of my sister and brothers to revisit the “Declaration of Independence” http://www.earlyamerica.com/earlyamerica/freedom/doi/text.html

    Somehow we have forgotten that this nation is founded upon and rooted in the these epic documents, and the grand principles articulateded. Any breach of these principles is a grotesque assault on the very foundation of America. We either return to abiding by, and honoring that “…goddamn piece of paper” we like to call the Constitution, and the spirit of the rule of law, – or – we are a lawless thieving, deceptive, and insatialble people, and – we very well may deserve whatever fiery pit and hell our socalled leaders hurl us into.

    There are solutions. Leadership is critical. If our leaders are puchased, owned and controlled by Oligarchs, – the people are doomed.

    Last I heard, a democracy is a government, wherein the authority of the government is derived from the consent of the governed.

    Either the people stand up, and take back our government and force our socalled politicians to advance and protect the peoples bests interests, and not the predator class, – or the predatorclass will devour us. Devour us!!

    America is once again ushered to a threshold. We either return to our core principles and that thing we call the Constitution, – or the Amerika we define and will inhabit – will be a much different nation, – and the noble principles we all once honored and defended, – will be tossed to the heap.

    If we do not abide by our own laws and principles, – how then can we expect any other entity to abide by any law, or principle?

    We will have shapeshifted into everything we repudiate. Then what are we? What are we as a people and nation?

    America is at a crossroads. Now it would seem that the darkside is winning, that the lawless predatorclass is dominating Amerika. We either accept this evil, – or we don’t!

    Look around you Americans. Are you proud of what our nation has become???

  111. We have learned nothing. The financial oligarchy is in total control. The administration and Congress are all pawns. The spending and rising debt is insane. There will be no meaningful reform.
    The only hope is that enough of us are sickened about the destruction of our country that we join together as voters to cleanse the system, reduce the size of government and put meaningful safeguards in place that allow capitalism to survive without oversight by bafoons like Barney Frank.
    Washington, as is, is incapable of doing it.

  112. Regarding the value added by financial innovations: See the Oxford-style debate held at the Buttonwood Gathering in October (buttonwood.economist.com/content/video). The propositions was: Financial innovation boosts global growth. Before the debate, 80% of the voting attendees agreed, 20% disagreed. Robert Reynols (Putnam) and Myron Scholes took the pro position; Robert Bookstaber (A Demon of Our Own Design) and Jeremy Grantham took the con side. Little more than 20 minutes later, only 20% of the voting audience agreed with the proposition and 80% disagreed.

  113. Corrections: Robert Reynolds (Putnam CEO), Richard Bookstaber
    Link to Buttonwood: http://buttonwood.economist.com/content/video
    You’ll need to select the video of the debate.