Falling Back On Waterloo

By Simon Johnson, 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

The bank lobbyists have the champagne out – the Brown-Kaufman amendment, which would have capped the size and leverage of our largest banks – was defeated in the Senate last night, 33-61.  Feeling ascendant, the big banks swarm forward to take on their next foe – the Kanjorski amendment (that would greatly strengthen the power of regulators to break up megabanks), which they plan to gut in the backrooms.

This is overconfidence – because the consensus against them is beginning to shift significantly.  Partly this is the result of great efforts by Senator Ted Kaufman, Senator Sherrod Brown, and their colleagues over recent months and weeks.  Partly this is due to all the people who came on board and pushed hard.

But, as in many such cases, it is also a question of luck – and timing.

The European sovereign debt crisis is deepening.  And the picture that is worth many thousands of words is the NYT’s graph of interlocking debt within the eurozone.

As far as anyone can ascertain, this is almost all debt held by banks (often then “repo-ing”, or borrowing against it as collateral, at the European Central Bank.)

In other words, the European megabanks – lauded by Senators Dodd, Corker, Warner and others as a model for us to follow – are up to the eyeballs in bad debt.  Their governance has completely failed.  Their regulatory systems have been gutted – on their way to being turned into ash.

None of this would matter, of course, if the eurozone policy elite had its act together and could terminate its current position with minimal losses.  But it cannot – the deer are in the headlights.

Ask everyone this question:  Which are the huge global banks that Senator Dodd, Jamie Dimon, and Larry Summers think we should be emulating?  Surely not the Chinese – their governance failures are profound and complete; this is state banking run amok.  Surely not the British – after all Mervyn King and Adair Turner, the top authorities on those banks, are globally the most articulate officials on how good finance has gone so deeply wrong.  Surely not the Canadians – those myths have been long exploded (and without dissent, in our conversations with the Bank of Canada).

And surely you are not proposing that the continental European banks are a model of anything other than ineptness, blind herding, and the transition from being “too big to fail” to “so big that even when you save them, you get an economic catastrophe”?

To the victors last night in the Senate: congratulations – your opponents have fallen back.  Your generals are known to be invincible, your forces are the best, and your resources are without limit.

And so we wait for you again, on a gentle slope and behind a ridge – appropriately enough with our backs to Brussels.  Welcome to Waterloo.

92 responses to “Falling Back On Waterloo

  1. Simon, if you have any guts call Canadian PM Stephen Harper and Finance Minister Jim Flaherty out on the carpet as they are the greatest obstacle to global financial reform not people like Larry Summers. Put their picture on the top of Huffingtonpost. Harper is going to veto any attempt to impose a bank tax in the G20 and G8. Harper goes all around the world saying how great Canadian banks are, call him on it. You claim you have sources in Ottawa who disagree with what Harper and Flaherty are saying use them.

  2. Simon, I hear the quaking defiance of the vanquished in your piece rather than the sober tones of the scholar. You’re still young yet. Perhaps there is yet another chance for real reform, but its becoming clear that the final battles will be fought by ravaged liberators against an enemy hollowed out by its own excesses. Pyhrric doesn’t begin to describe the scene.

  3. Patrice Ayme

    The most important word in Simon’s essay is the word “governance”. Big banks GOVERN. They are the government, big, and completely failed.

    Bank managers and other accomplices (see “Grey Wolf” in connection with Goldman Sachs, a “client” of GS made of past GS employees) are the government. They have the power of unsupervised, unelected functionaries, while free to direct the money they have the mandate to create by harnessing the power of the state towards themselves, their friends, their class, and their accomplices and servants in politics.

    PA

    http://patriceayme.wordpress.com/

  4. I’m disappointed. This is one of the first issues that I cared about enough to email and call all of my elected officials (I’m 28). But then, both of my senators voted Yea, so maybe I made a *tiny* difference.

  5. Tom Therramus

    I’m deeply suspicious about the 1000 pt drop in the Dow occurring during the debate of Kaufman-Brown bill to break up the big banks.

    One can not imagine the personal thoughts and emotions of senators as they took in the unsettling news on the stock market from Wall Street.

    I would not put it past our sophisticated and corrupt financial sector to manipulate the market in this manner.

  6. The puppets don’t represent the people. This is about serving the interests that keep you in a job. We will need to have a catastrophic crisis (collapse of the dollar) before reforms are implemented. We narrowly averted disaster last time by throwing funny money at the problem. Whether we succeeded in the long-run is an open question. What happens next is anyone’s guess, but clearly we won’t be able to trick ourselves out of the next emergency by printing trillions in worthless money. The Weimar Republic is a case-in-point. Until meaningful reforms are instituted, I will not be returning any of my assets to Wall Street. To do so would be sheer recklessness.

  7. Considering the FED has been IN the market since the late 80’s, it is the most reasonable ‘suspicion’..

  8. this is NOT the end…this is just the beginning of the END and it is in sight…the NEXT meltdown is already in the works…democracy never responds strongly enough to avert the next BIG crisis…that’s how democracies work…the vested interests (TBTF banks, hedge funds, lobbyists, politicians, greedy investors) who hold the levers of power will NOT give up that power so easily…it will take the next TSUNAMI of financial catastrophe which would then usher the NEXT Great Depression (even bigger than the ’30’s, the world is so eleectronically intertwined now it will make th 1930’s look like a picnic) before ordinary Americans (honest, law abiding, hard working, tax paying, fair minded but too trusting in the current rigged/broken system) will finally have had enough and reach for the pitchforks en masse and take this once great country back from the blood-sucking vampires ruling the land right now!

  9. Oh, one more thing.

    While our Bank Lords fiddle and play ‘cover their a..’, China is building a huge navy. Might want to visit the 49th and 50th state in the next several years-the best case scenerio, if you will, is losing said via debt, rather than Midway II.

  10. Tom Therramus wrote:

    “I’m deeply suspicious about the 1000 pt drop in the Dow..”

    May 7, 2010: 11:12 AM ET

    “296 ‘funked up’ stocks — trades canceled”

    http://tinyurl.com/26o838t

    Seems like a new wrinkle from the Plunge Patrol Team.

  11. b. nimble wrote:

    “this is NOT the end…this is just the beginning of the END and it is in sight…the NEXT meltdown is already in the works…democracy…”

    Capitulation – It Is A Possibility?

    Friday, May 7, 2010 – excerpt

    “Capitulation – I wanted to be one of the first to say it. Me and a few others believe that the market never truly capitulated in the ’08 fall. This means we never truly had panic selling. It was all orderly for the most part. Very heavy, but orderly.

    This time I believe we will have a capitulation moment if not two. Not now or today, but at some time. I do believe there is a possibility the first leg of this fall will be more severe than the end…..

    No one that held thru the last fall will stay for this one. Many more are ready to get out than last time. I think the rush for the gates has the potential to be tremendous and thus we get true market capitulation. ”

    http://shankystechblog.blogspot.com/

    Sounds like a financial Waterloo for some.

  12. Don’t feel too bad, there are so many scurrying roaches and embedded disasters that this backslide will probably boomerang when the next mess is cued up.

  13. The (Almost) Crash of Wall Street

    May 7, 2010 09:42 AM – Huff Post – excerpt

    Robert ReichFormer Secretary of Labor, Professor at Berkeley

    “Regardless of why it happened, it’s further evidence that the nation’s and the world’s capital markets have become a vast out-of-control casino in which fortunes can be made or lost in an instant — which would be fine except for the fact that most of us have put our life savings there.

    Pension funds, mutual funds, school endowments — the value of all of this depends on a mechanism that can lose a trillion dollars in minutes without anyone having a clear idea why.”

    http://tinyurl.com/2adz8o5

  14. In our nation’s history, there is probably no more maligned piece of economic legislation than the Smoot Hawley Tariff Act. Among others, Jude Wanniski has attributed the 1929 Crash to the breakdown in the Senate of the opposition.

    http://www.thefreemanonline.org/featured/a-tale-of-two-tariffs/#

    My nominee for the second worst piece of economic legislation is the Commodity Futures Modernization Act of 2000, which ushered in the free-for-all with derivatives, CDOs and credit default swaps. The top six banks now control over 95% of the derivatives market, generating large chunks of their net incomes.
    How ironic it is that the stock market plunges as the Senate votes on the Brown-Kaufman amendment to break up the big banks.
    I am afraid that yesterday is the beginning of the double dip and that this one will be even more painful than what we have gone through since 2007.

  15. Around the time of the last meltdown, I didn’t exit the market. I resolved not to panic and to stay the course, focussing on the long-term eventual rebound. But now is different. Investors are not reacting to Greece or the ECB’s tepid response. They are reacting belatedly to the realization that the global economy is going to tank soon because there is an unacceptable amount of socialized debt. When did Wall Street insiders smell blood? Here’s a hint:

    http://www.marketwatch.com/story/the-insiders-pick-up-their-selling-2010-04-14

  16. you mean “manipulate the Senate in this manner”

  17. Just read this piece and the Canadian fallacy piece and its 1 of the first times I have to disagree completely with what you’re saying.

    For the average consumer I’d much rather pay any (minor) fees that may just be going into the bank’s pockets knowing that that’s how they’re making their dime than cheering at the $15/mth I’ve saved only to have my entire economy meltdown.

    Too big to fail is a MYTH that seems to have been pimped as the latest magic pill.

    Better regulation and more transparency & oversight on regulatory bodies. Disincentives to consumers to overextend (e.g. mortgage insurance at > 80% leverage is expensive to the borrower). Disincentives & restrictions on banks trying to squeeze every penny out of their capital.

    Those are the hallmarks on why our system with its “implicit guarantees” has never had to do an explicit bailout while the rest of the world went boots up. Who cares if Canadian banks have a paper trail of high leverage.

    At the end of the day, the reality of Canada’s stable finance sector trumps the academic nose-turning, in my opinion, at least for the lowly tax payer. Saying that this is too hard to implement in the US is another way of not admitting the US system is fundamentally screwy. “Too big to fail” is just another moniker.

  18. One gets the impression that the people in the corridors of power have become so enamoured with themselves, so corrupted by self-righteousness and a lust for power that they fail to understand that what the little people need is a narrative. Something to believe in. A clear sense of beginning, middle and end as a guiding principle of how to live one’s life. Obama seemed to grasp this notion with his “Hope we can believe in” campaign but it would now appear, that like everything else about the modern world, it was nothing more than a slick excercise in branding and the product itself is that same old thing with nothing more than a change of packaging with the words “new and improved” added to the box. Granted this is a cycnical view.

    Obama’s ambitions might very well have been honest but then even he could not have imagined the complexity of wrestling the U.S. Oligarchy to it’s knees.. It just doesn’t fit the narrative that we’ve come to believe that democracy gives the population the fairest outcome. Democracy has always been messy but clearly governments of the West need to be reformed in a way that is congruent with the technical and social needs of the 21st Century which have become so intertwined that political systems designed hundreds of years ago can no longer keep up. But there is no time to think anymore. When startups such as YouTube and Facebook can become globally relevant mega corporations in a matter of a few years , how are we supposed to absorb what that means for society, especially how social media is proving to be such a huge game changer in all aspects of life both “in” and “out” of the Internet?

    More and more, we are feeling disenfranchised simply because the world doesn’t make sense to them in any way that would be recognizable to our ancestors. The ever increasing “spread” in income distribution is a leading indicator of the social unrest that will invariably follow. But the ever widening gap that no amount of hopium can ever expect to make whole at this point is one of credibility. The world is getting far too complex for the ken of most mortals and this plays into the hands of extremism: particularily Islamism. It is quite remarkable how Iraq barely registers in the news anymore as if the U.S. Army had successfully withdrawn and while Pakistan and Afghanistan are still in play in the MSM they have become but a backdrop to the ongoing crisis of the West. Yet military over-reach is at the heart of the problem. The Financial Crisis and how to deal with the Middle and Near East are interllocking pieces of the puzzle and it all boils down to ENERGY and CLEAN WATER.

    Climate change aside, we are running out of cheap energy and clean water and something needs to be done about it fast. Yet the market mechanisms that are our best hope at dealing with that crisis, which is the REAL crisis, are so hopelessly marred by recurring faillure that the trust necessary to grease the wheels is evaporating before our very eyes. Trust equals liquidity. The latter will not return to markets until the former is rehabilitated. If we continue to be shackled by market paralysis than no solution to the world’s sustainability crisis will be forthcoming leading to an unsurpassed outbreak of human depravity.

    This is a very dangerous situation that exposes our system to being further infiltrated and taken over by those who have much stronger narratives that give meaning to people’s lives in times of economic and political turmoil. If the Oligarchy doesn’t get serious about living up to its responsiblities to humanity the populace of the Americas and Europe would be best advised to seek out a Revolution that they can believe in lest they succumb to those who already have.

  19. Jackrabbit

    The bad debts of the big European banks are instructive, but the way that they have used their political power to influence public policy is just as instructive. The banks do not want to take a haircut on their loans – they expect the entire adjustment to come from the Greek people.

    This revolt of the Greek people strikes me as similar to US homeowners that are forced to walk away from their mortgage. In each case people were lured people into living beyond their means but banks political power means that they can force an outcome that nominally limits their losses and maximizes their gains.

    Bank political power leads to worse outcomes for everyone because the bankers can not see beyond their greed. Its in their DNA. And politicians can’t lead because they’re compromised.

  20. My two senators from NY ( Schumer and Gillibrand ) also voted no on the brown – Kaufman amendment and now hold a prominent spot in the pits of hell. That will have to do for now until either come up for re-election.
    Many politicians feel their little play things have short memories which they count on while banking on the wonderful bacon they bring home year after year to their states. Not this time. There will hopefully be a political price to pay no matter how much corporate money washes over them.

  21. I think Senator Kaufman was a political ploy by the neoliberal democrats. Their hope is that the two candidates running for his spot can run on a platform of “we won’t be mean to the banks like he was; we will be tough on them”. They can paint each other as out of touch like he was; not in touch with economic elite. basically scaring people by swinging the political pendulum that far left. I hope it backfires on them because most people support Senator Kaufman

  22. Wonder why the UK wasn’t on that NY Times pictorial. They could have the biggest debt problem of all. I notice they get a huge pass in US press except from Bill Gross

  23. Schumer lives in that pit daily! ;) Think…he wants to be leader in the Senate. He’s using the banks to put him there and knock Durbin out. The fight is Durbin v. Schu

    Support Dick Durbin. He’s progressive

  24. Guys and Gals- You got to break it to fix it,soon the whole banking system will fold and go under. The bankers will be reveled for what they are and then maybe reasonable bank reform can be put in place.

  25. “Luck and Timing”, truly symbolic words describing today at 4pm when the markets close – forcing/crushing the hands of the Obigarchy? I’m going out on a limb here,so please be kind? The market will get “Shorted (Big Time)after 3pm too numbers we hadn’t seen since yesterdays near thousand point drop” – it will shake DC! Please don’t beat me up if I’m wrong,…;^)?

  26. Brown-Kaufman amendment defeated in the Senate last night, 33-61. === ANOTHEDR OUTRAGE !!!

    WHEN THIS HAPPENS IT WOULD HELP IF YOU’D GIVE US THE VOTE — STATE BY STATE — SENATOR BY SENATOR
    HCHASJ —

  27. Daryl, thanks for the the Market Watch insider story, it provides another valuable metric, I’d love to see some stochastic charts. Forward to the Past. ;-)

  28. Barbara wrote:

    “My two senators from NY ( Schumer and Gillibrand ) also voted no on the brown – Kaufman amendment and now hold a prominent spot in the pits of hell. That will have to do for now until either come up for re-election.”

    They count on you being part of the short-attention-span theatre audience. Time is relative :-)

  29. ‘If we continue to be shackled by market paralysis than no solution to the world’s sustainability crisis will be forthcoming leading to an unsurpassed outbreak of human depravity.’

    …an unsurpassed outbreak of human depravity…

    Jeremy Jackson: How we wrecked the ocean

    http://www.youtube.com/ted#p/u/2/u0VHC1-DO_8

  30. Kimo wrote:

    “Guys and Gals- You got to break it to fix it…”

    How can you fix a system if you refuse to acknowledge that it is broken?

    I acknowledged that the financial system was broken a couple of years ago and since then made my financial decisions, based on that assumption. So far no regrets. Not everyone agrees.

  31. Poof, it’s gone.

  32. Tom Therramus

    True!

  33. Panic And Loathing From The S&P 500 Pits – Audio

    05/07/2010 04:24 -0500 – Zero Hedge

    “Guys this is probably the craziest I have seen it down here ever.”

    Here it is, memorialized for the generations and away from the now openly ridiculous disinformation propaganda of the mainstream media, just what a full market meltdown panic sounds like: straight from the epicenter, the S&P 500 pits. Luckily open ouctry still exists, if at least for shock value….a first hand account of the most shocking 15 minutes in recent market history. Fat finger my axs.

    [audio src="http://www.zerohedge.com/sites/default/files/Market%20Crash.mp3" /]

    * Contains mature content

  34. When hell full will the dead walk the earth?

  35. Agreed. Phil Graham now works for UBS too.

  36. Kimo- No. It’s not going to break alone. That’s the problem. If it breaks and goes under, that means we did. They have tied their liabilities to us. This is the whole problem. The bill doesn’t end it. Mark my words, the big 6 banks do not fail ALONE. The US sovereign goes down in the same sink

  37. Max Keiser: gulag casino economy

  38. You have in New York what is SUPPOSED to be, a “bastion of liberalism”. And yet every time we have a crucial vote on finance/bank reform we have the 2 Democrat Senators of New York (Schumer and Gillibrand) bought, paid for, and owned by the 6 large banks and the ABA. Until New York Democrats (and Democrats in other congressional districts) start voting these folks out for other Dems who show they want to protect the small depositor and small saver, the abuses will continue.

  39. It does not look good based on the four primaries last Tuesday. There was not a glimmer of anti incumbent voting from what I could see. Very low turnouts. So, we will see what happens on Super Tuesday. I wonder if even the political cranks bothered to vote in the four states with primaries last Tuesday?

    Frankly, the vast majority of voters seem quite happy with things arranged as they are. Do they love corporate life and big bankers?

    Is all the angst and gnashing of the teeth on the internet and in the media just the blowhards ? The noise of the perpetually dissatisfied with everything?

  40. President Wilson, when Governor, declared in 1911:

    “The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men, who, even if their actions be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily, by every reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all; and to this, statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men.”

  41. Brad Thrasher

    I guess this means Paul Volker is just another pretty face in the GS, whoops, I mean Obama Administration.

  42. Bayard Waterbury

    Simon, wow, I have never seen you write with such bitterness and distain. So much so that I could have written your very message. I am not more disgusted that before about the power of the plutocrats, since it is one of history’s greatest examples now of black humor. So, what constructive measures can we really expect. This vote surely has begun some fairly nasty momentum, and now our only hope is that the Lincoln and Sander’s amendments are passed (seemingly not much chance), and that the CFPA remains intact. And, of course, we can hope that enough will realize what is happening in the Senate that public demonstrations (ala Greece) will begin when this potential debacle goes through reconciliation.

    But, I have resigned myself, long ago, to the idea that until the plutocrats drive us over the cliff, we will not take away their driving permit. Shame on us.

  43. Funny, not one of you talks about the other shoe of our financial debacle, that of outsourcing. When the stock market crashes anew and employment once again goes into a freefall, we will still be forced to buy low-quality products from China. Why? Because we have eliminated most of our manufacturing capacity. Virtually all clothing, furniture, computer products, and audio/video equipment arrive from overseas, not to mention cars and parts. If you ignore Boeing and agricultural products, you are left with very little that we export. We import twice as much as we export; no country has ever imported its way to prosperity. Obama has promised to build a high-speed railway network; too bad he will buy Chinese trains (see http://saucymugwump.blogspot.com/2010/05/made-in-usa-high-speed-railway-network.html).

  44. Does anyone know what to do with 401K money until after the coming crash (besides buying overpriced gold, that is)? Help!

  45. I just fired off an email to Sen. Amy Klobuchar, D-MN, the one of my two Senators who voted against Brown-Kaufman:

    Sen. Klobuchar, you will lose in 2012 because of your vote against Brown-Kaufman. I am ashamed that you would vote to keep the Too Big To Fail megabanks from being broken up by voting “Nay” on the Brown-Kaufman amendment. Our government’s misguided actions to support Bear Stearns, AIG, Goldman, GMAC, and all TARPed banks only increased the probability that risk-seeking traders will make ever-bigger speculations, knowing the taxpayers will bail them out if they are wrong, while keeping all the upside if their speculations are correct. Only by breaking up these behemoths, a la Teddy Roosevelt, can unlock the power of entrepreneurship without rent-seeking and deliberate hiding of information for profit. At least vote for the Kanjorski amendment to give regulators some power to break up the megabanks.

  46. Jeff, there is NO evidence that a cartel of 5 big banks is safer or has a higher Return On Equity than a more decentralized market of thousands of smaller banks.

    Re: “stable Canadian finance sector,” Canadian money manager Eric Sprott has been all over the bailout of Canadian banks, do a Google search.

    Re: mortgage insurance. FHA loans require only 3% down for first-time homebuyers. If you think repeat homebuyers shouldn’t have to scrape together 20% down on their next house, you are just asking for another housing bust.

    Re: you want disincentives on squeezing every penny out of bank capital. You just don’t get it. The big banks have plenty of capital — taxpayer capital! So they can take outrageous risks with citizens’ money. You should *want* banks that have good capital RATIOs, but would need to raise additional capital if they wanted to grow or take larger risks. A hungry bank will be a better steward of capital than a fat, dumb, bailed-out bank.

  47. readerOfTeaLeaves

    Ah. ‘Emperors’ are often overrated, so per this post, I’ll keep me wellies handy and a sharp eye out for the soft underbelly of Banking Empires Gone Completely Rotten and Corrupt.

    Those celebrating lobbyists should enjoy themselves while they can. It’s simply not human nature to fork over 22% interest rates once people have begun to see that the MOTU have feet of clay, and are parasites on the small employers, pension funds, and municipalities that used to trust them.

    This skirmish has the appearance of a win for the banksters, but what I think it really did was open a lot of eyes.

    One thing it showed: the banksters are fools. Smarter banksters would have cut a deal and appeared to be ‘statesman’ taking a hit for the nation and thereby joining the unemployed, the foreclosed, and the desperate school boards and city councils.

    I predict a fair uptick in wellies** sales going forward.

    —————————-
    As my favorite history prof told the tale, good, waterproof boots that kept the feet dry were an essential element leading up to the battle. The feet of more than one soldier in northern Europe had developed infections (and even gangrene) from ‘foot rot’ from being in marshy, damp soils for extended periods shorn in dreadful footwear. Apparently, Wellington advocated on behalf of his foot soldiers and somehow managed to get some better, more water-resistent footwear and thicker woolen socks for his troops. So when waterproof boots were passed round to the Brits, they fondly called them ‘wellies’. Some Americans call them ‘galoshes’.

  48. Me thinks you mean Phil GRAMM, former U.S. Senator from Texas. Authored the CFMA, ran for Prez and damned if Enron didn’t blow smack dab up in his face. And liberal application of the benes of the CFMA helped Enron flush itself down the crapper. And with the wifey-pooh on Enron’s BOARD! Made deniability and spin as difficult as making a fortune on WS without the fix being in. Shoot, he was making such a large signature on the ole radar that he had to “resign” from the Senate and lay low for a while in the profitable financial sector. Thought his rep was ready for the radar again (whispers of McCain’s Treasury Sec), but alas, such thoughts were premature:”The US has become a nation of whiners!”

    Wow! Got carried away. Just meant to point out that Phil can’t spell his own last name right, but he knows what to do when his electorate gives him the keys to the hen house…and what nest to feather when they start flying!

  49. They are each up for re-election this year (Gillibrand for the remainder of Sec. Clinton’s term whch expires in 2012), they’re each getting a pass from the Republicans (as in Pataki not running) and they’ll each be easily elected (Gillibrand) or re-elected (Schumer) as the case may be.

  50. Sorry…should read “[t]hey are each on the ballot this year….

  51. trouserman

    I applaud your efforts.

  52. trouserman

    The financial sector banipulate?

  53. trouserman

    Oops! That should be “manipulate”. I typed a “b” instead of an “m”.

  54. Tom Therramus

    I think the word you’re looking for is BINIPULATE….

    …as the manipulation targeted 2 parties- the market and the sentate.

  55. “not the Chinese – their governance failures are profound and complete; this is state banking run amok”
    a side point perhaps

    but china’s production system appears to co exist with this amok system quite nicely

    perhaps paper loses are not really a good registration of social loses
    unless the red ink freaks out the credit system

    maybe amok is the new prudent

  56. riverdaughter

    You’re scaring me, Simon..

  57. Just a point of information: If you look to see who sits ON the CFPA…who’ll be making decisions…and who gets potential exemptions…

    COMPOSITION OF THE BOARD.—The management of the CFPA shall be vested in a board of directors that is composed of 5 members—
    (1) 4 of whom shall be appointed by the President, by and with the advice and consent of the Senate—
    (A) from among individuals who are citizens of the United States; and
    (B) who have strong competencies and experiences related to consumer financial products or services; and
    (2) the Director of FIRA. (We’ll get to this later.)
    (b) DIRECTOR OF THE CFPA.—From among the appointed Board members, the President shall designate 1
    member of the Board to serve as the Director. The Director shall be the chief executive of the CFPA.
    (pages somewhere around 860-870 of the bill)

    Translate: Four of the five CFPA members…are appointed by the president, with senate rubber stamp…whose “qualifications” show “competencies and experiences related to consumer financial products or services.”

    (Anyone wanna make a bet who’ll end up on this agency? More than likely dudes and dudettes who make it their business to sell financial crap to the public.)

    And what kinds of impact can this CFPA have?
    (1) IN GENERAL.—The CFPA may prescribe
    rules and issue orders and guidance, as may be necessary or appropriate to enable the CFPA to administer and carry out the purposes and objectives of this title, the authorities transferred under subtitles F and H, and the enumerated consumer laws, and to prevent evasions thereof. (page 886)

    Hmm. Prescribe rules and issue orders and guidance. Well, that sounds pretty good (even though remember: who sits on the CFPA is determined…by the president and senate based on their “experience” with “consumer financial products and services”). But wait!!! Ahhhh, yet ANOTHER loophole…

    (A) IN GENERAL.—The CFPA, by rule,
    may conditionally or unconditionally exempt
    any covered person, service provider, or any
    consumer financial product or service or any
    class of covered persons, class of service providers, or consumer financial products or services, from any provision of this title, any enumerated consumer law, or from any rule thereunder, as the CFPA determines necessary or appropriate to carry out the purposes and objectives of this title, taking into consideration the factors in subparagraph (B). (p. 887)

    And what are those factors?

    (B) FACTORS.—In issuing an exemption
    by rule or order, as permitted under subparagraph (A), the CFPA shall, as appropriate, take
    into consideration—
    (i) the total assets of the covered person;
    (ii) the volume of transactions involving consumer financial products or services in which the covered person engages;
    (iii) the extent to which the covered person engages in one or more financial activities; and
    (iv) existing provisions of law which are applicable to the consumer financial product or service and the extent to which such provisions provide consumers with adequate protections.” (p. 888)

    Note the sleight-of-hand wording: Under the (B) paragraph exemptions section, the only thing referred to is “covered person.” Me, reading it as an individual person, assumes, hey, they must be talkin’ about ME! Which makes me think, in my mind…this must have something to do with protecting the average guy or gal.

    Yet actually…the writers left out the rest of those exempted listed in (A) paragraph: “…service provider[s], or any consumer financial product or service or any class of covered persons, class of service providers, or consumer financial products or services…” (just take a look at Section (A) where all the rest of these are listed).

    Note: THE ENTIRE BILL READS LIKE THIS. Exemptions, exceptions, sleight-of-hand legalese manueverings.

    Oh, and as for the fifth person on this “consumer” agency: director of FIRA. What the heck is FIRA, anyway? Well, it stands for “Financial Institutions Regulatory Administration.” Yep, another agency “made up” by Dodd in this bill, supposedly to take the power out of the Fed’s hand re: overseeing banks. I’ve been trying to find info re: who exactly would be heading/serving on this “Administration”…forget it. I’ve been at this for a couple of hours now, and keep going in circles.

    But me thinks that’s the ultimate intent: thousands of pages, exceptions to the rules hidden within, more layers of bureaucratic language that serve to confuse and obfuscate…until people just give up trying to understand it.

    Absolutely disgusting. And fraudulent.

  58. Mr. Johnson wrote”

    “The European sovereign debt crisis is deepening.

    In other words, the European megabanks – lauded by Senators Dodd, Corker, Warner and others as a model for us to follow – are up to the eyeballs in bad debt. Their governance has completely failed. Their regulatory systems have been gutted – on their way to being turned into ash.”

    EU to Set Up Fund to Prevent Spread of Greek Crisis (Update 3)

    May 8 (Bloomberg) — “European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro. Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before Asian markets open late tomorrow European time.

    “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels…

    The spreading contagion also drew the attention of President Barack Obama, who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back.”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a4jFzDH.E7uc&pos=1

    “…..there is a reasonable chance of a major announcement this weekend. Earlier today there were rumors of a €600 billion loan facility for European banks. One key analyst thinks the Fed might re-open the dollar swap lines for Europe – one, or both, or something else could be announced on Sunday.”

    http://www.calculatedriskblog.com/

  59. No real banking reform?

    Not break up the big banks?

    Too bad – not much thinking ahead by the banksters or the Senator representing the Bankster party.

    Now, we’ll all be Greece.

  60. silver? check out the move this week and the CFTC’s statement about intraday shorts. coincidence?

  61. I agree with every word you said.James Fallows wrote a futuristic article in The Atlantic a few years ago which described a post-Meltdown society.The Federal government supplied motor homes to the foreclosed so they could travel the U.S. looking for work.Is the economy big enough to employ everyone with a living wage?Do we need a different kind of economic system?It seems to me to be a treadmill society which keeps us running like Hamsters on the Debt treadmill for 50 or more years.The only answer to me looks like a lower standard of living for a great many Americans.Thoughts?

  62. Great post b nimble!As Tony Judt’s new book title says:Ill Fares The Land.

  63. These are dangerous times–are we already doomed?
    Professor Johnson and Dr Boone: The next financial crisis could lead to economic disaster.

    http://cep.lse.ac.uk/_new/publications/abstract.asp?index=3542

  64. It seems a little silly, that people believe they can stop corruption by passing new laws. The laws that already exist are regularly broken by the very people who are supposed to enforce them – that’s what corruption is. Laws don’t have any effect on who’s rich and who’s not, unless you have a real Bolshevik revolution. Otherwise, it will still be the same people calling the shots.

  65. Rachel,
    At least you tried. And you can look yourself in the mirror and be proud. That’s one better than Dick Shelby or Charles E. Schumer can say.

  66. If they have a fill-in ballot (where you can write the name) you can write in Andrew Cuomo’s name, or some other person who is an advocate for small depositors and savers. Or maybe just scribble the name in large black magic marker. If enough people did it they would get the idea. Charles Schumer is a non-choice and if there’s no other Dem with the courage to run, F_ck’em.

  67. LOL….thanks for posting this one!

  68. Ray Wright

    I thought the Waterloo post was one of your best, Professor Johnson. Eloquent and refined. I don’t know how anyone could not ‘get that.’

  69. Bingo! The only way to have checks and balances is to allow people to get rich off of catching thieves and frauds. That incentive is stolen by federal law protecting them from juries and private rights of action and an SEC who gets paid nothing and no bonus for wins

  70. We cannot get our government back except by a clean sweep of incumbents. “Our” reps gave banksters trillions of our money, some of which is generously funneled back to our reps. We cannot compete with that circle. The only way to break the gridlock on our reps is to get new ones at every election and every time they fail to vote for true reform, the first step of which is to audit the fed and begin stripping it of power.
    TARP started the snowball down the road toward the cliff rewarding the criminals at the expense of the innocents.

  71. “the transition from being “too big to fail” to “so big that even when you save them, you get an economic catastrophe””

    What disturbs me is that we bailed out TBTF and STILL got a deep recession that approached 20% unemployment by the same metrics used during the Great Depression. We’re already at the point where saving them guts our economy while they run off with massive bonuses in the night.

    I think those senators don’t realize that they might get re-elected next cycle, but when the real crash happens and anybody tries to figure out why, they might not just be out on their asses… they might very well be killed in a violent uprising. I would put this one question to them if they would answer it directly: is it really worth losing your life to blatantly steal from your fellow Americans that put you in power? Is it wise?

  72. The American originated economic blogs certainly bring home the “vox populi vox dei” angst of Boobus Americani. If the evil banksters are the group battled it behooves the warrior of the vox populi to understand the bankster competances far better than wailing against their contrived evils defined by tens of millions of utterances of personal righteousness. Achilles cared only to know how to kill Hector in personal combat. That is Achilles must have placed priority on using Hector’s strength against him.

    Some competance is showing up at the Federal Reserve Bank of NY that shows that FRBNY knew its stuff in taking over the Bear Stearns and AIG bad assets. They were stuck practically in taking this paper under the circumstances amid bigger issue problems. So they had to work it out to get their money out of the junk.

    The 2009 audited statements of all three Maiden Lane entities of the FRBNY were issued a couple of weeks ago. Deloitte was the auditor

    I combined a number of aspects of all three entities. First, these entities had marked down values on their balance sheet of $63.555 bn. Original cost was $75.675 bn

    During 2009, the three entities had Operating Cash flow of $5.292 bn. Loan payments during the year were $9.591 bn. They sold loans of $4.856 bn. Virtually all of these loan sales were on Maiden Lane I. They also had a pittance of net swaps funds in arriving at total cash flow generated of $19.869 bn
    That is a massive collection effortfor 2009 treating the numbers as a liquidation effort over time.

    Maiden Lane I bought investments of $11.286 bn which must be added to assets they were forced to take over as result of their “Jamie Deal” during 2009. Obviously, MLI had to sell assets to buy these assets. Jamie Deal wind up? Any write down of these assets would be buried in the carry value on the 2009 Balance Sheet.

    There were no asset purchases for Maiden Lane’s II and III.

    A 2010 liquidation of 2009 carry values of the investment assets using 19.869 bn would be a recover of 2009 carry values of 31 % Three years plus and they are down to dregs in value in simplistic terms. But these dregs would have been performing contracted cash flows for that same three year period. Thus, what is left is getting better and better in general terms. It would seem that the worst losses of generated cash flows from liquidating these assets would have been netted in the 2009 results. Certainly, they have already been provided for in impairments in collection values of the difference between cost value and carrying value of $12.120 bn. On a lquidating basis any mark down to market functions as an impairment reserve. After all, the object is to get as much money back by run off or sale whichever presents the most opportunity.

    All in all , as of the end of 2009, total cash flows should recover the investment and maybe even some income.

    That they could generate liquidation efforts of nearly $20 bn in the first full year after starting with a debacle is impressive. Barring a new collapse outside the realm of those liquidating the Maiden Lane’s, future collections should be better over all.

  73. “The Fourth Turning (1997) is the third book by William Strauss and Neil Howe. It expands the theory they presented in their first book Generations by examining the generations in Anglo-American history since the War of the Roses (1459-1487).

    It classifies every generation into an archetype explaining the function, motivation and course of each. The second half of the book specifically looks at the five most recent generations (G.I., Silent, Boomers, 13th, and Millennial).[1]

    Turnings last about 20 years and always arrive in the same order. Four of them make up the cycle of history, which is about the length of a long human life. The first turning is a High, a period of confident expansion as a new order becomes established after the old has been dismantled. Next comes an Awakening, a time of rebellion against the now-established order, when spiritual exploration becomes the norm. Then comes an Unraveling, an increasingly troubled era of strong individualism that surmounts increasingly fragmented institutions. Last comes the Fourth Turning, an era of upheaval, a Crisis in which society redefines its very nature and purpose.[1]”

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

    Neil Howe and William Strauss on The Fourth Turning in 1997 CSpan – video

    “Beginning about 10-years from now, America is going… to enter an era of crisis… political …. and social upheaval that will last 20-years or so…. we call this era the Fourth Turning….we think it’s going to be a big threshold for the history of our nation…. it’s going to be something on par with World War II and the Great Depression….the Civil War…the American Revolution…. it could be a time of tragedy or great opportunity…historically these eras of crisis, these eras of reconstruction allow us to raise our civilization to a new level.”

  74. “Alas, in our age of professional specialization, one must look outside the academy for works of true originality and breadth. One such is The Fourth Turning by William Strauss and Neil Howe… If they are right, they will take their place among the great American prophets.”

    Boston Globe

    “The Fourth Turning is an alarm clock for America. Maintaining the historical rigor that characterized their seminal Generations, Strauss and Howe are issuing more than just a wake-up call; this is a call to action, before we reach the inevitable crisis point.”

    Newt Gingrich

    Speaker, U.S. House of Representatives

    ”The book is incredible… a well-founded analysis of history… This hits me right where it counts, with me and my children.“

    ”Since Strauss and Howe first got together to write Generations, they have demonstrated uncanny insight into American culture… it will transform your view of the world and your life. Do yourself and others you care about a favor and read it.“

    Readers Reviews
    Amazon Books

  75. Not to change the subject completely, but…

    I was rather surprised by this observation from Professor Hudson:

    MH: He’s [Simon Johnson] trying to promote monetarism with a friendly face. A lot of the things he writes are correct so he’s sort of the good cop setting things up for the bad cop. But he’s a Senior Fellow at the Peterson Institute, which carefully excludes economists whose idea do not make lobbying points for high finance.

    http://michael-hudson.com/2010/05/trouble-in-europe-china/

    I was… surprised. Certainly I’m not as well educated on these subjects as either Professor, but I’ve been reading this blog since Johnson and Kwak set it up… and that hasn’t been my impression.

    Maybe that impression has been skewed by the response here in the comment section?

    I’m curious to what other readers think..

  76. It really looks like the pressure is being put on the banksters to force the Obama vetted version of financial reform.

    According to Business Insider, The New York Post is carrying an article that JPM is under civil and criminal investigation for naked shorting silver for some time in the past.

    A trend is emerging to apply pressure to the bankstyers to lay off and accept financial reform. The aricle links the Wells Notice to Moody’s, the GS charges and now JPM.

    If JPM naked shorted it will really get ugly as they say in financial circles.

  77. You mean to say we are SUPPOSED to listen to the “Obama administration that cried REFORM” this time? NO thanks.

    Fool me once, shame on you.

    Fool me twice…

  78. Over ten years ago, the writing was on the wall. Lasting roughly 20-years? Wow–bleak.

    “Beginning about 10-years from now, America is going… to enter an era of crisis… political …. and social upheaval that will last 20-years or so…. we call this era the Fourth Turning….we think it’s going to be a big threshold for the history of our nation…. it’s going to be something on par with World War II and the Great Depression….the Civil War…the American Revolution…. it could be a time of tragedy or great opportunity…historically these eras of crisis, these eras of reconstruction allow us to raise our civilization to a new level.”

  79. Just you wait till Europe finds out that their fancy Basel Committee has allowed their banks to leverage up 62.5 to one when stocking on public debts like Greece’s, only because some human fallible credit rating agencies rates Greece as good, while, when lending to the small businesses and entrepreneurs, on whom they depend so much on for jobs, but who cannot afford being rated by the raters, they imposed a leverage ceiling five times lower, 12.5 to one.

    This crisis was provoked by very subprime financial regulations. To understand it don’t follow the money… follow the AAAs. In case you missed “The Financial Crisis explained to dummies, non-experts and financial regulators” you can read it here: http://bit.ly/bniNuD

    I have been screaming bloody murder about these regulations since 1997, even as an Executive Director at the World Bank 2002-2004. http://bit.ly/9WrAE0.

  80. The symptoms can be seen everywhere as the world seems to be spinning out of control.
    The common denominator cause and solutions have actually been known for very longtime, they can be found here:

    http://publiccreditorbust.blog.com/2010/05/07/private-credit-v-public-credit-centuries-old-struggle/

  81. I do not really understand the title of your blog “Public Credit Or Bust” precisely when we are close to going bust because of public credit. Do you know for instance that the bank you deposit your money in, is allowed to relend that money to a Sovereign with zero, yes zero capital requirement and if, it is rated A+ to A then it must only have 1.6 percent of capital? Now have you heard about a Joe Stiglitz or a Simon Johnson complaining about this? No, you wouldn’t.

  82. Watt DeFark

    Write in Spitzer. Yeah, I know he’s a horndog, but could he be any worse than the other choices?

  83. Watt DeFark

    Both mine (Michigan) voted YEA!

    Consider what states get your money when you buy “American made” foreign nameplate cars…Southern right to work states. Stop giving them more economic power.

  84. Andrew Cuomo shares as much blame as almost anyone else in this crisis as it was under his leadership at HUD that FHA, fannie and freddie got into the subprime market and derivatives. I recomend you google “Cuomo, HUD and fraud”. I hope you have a couple free days. And if you think he he gives a crap about the little guy you are delusional. He does great press conferences stating his intentions and the when it comes down to getting convictions he settles for pennies. No convictions, nobody named as guilty just a settlement that amounts to pennies to the crooks. He knows who is going to fund his next political run.

    His most classic case of face over legislating is his HVCC, Home valuation code of conduct, which requires all loan appraisals that go through fannie and freddie be performed by Appraisal management companies as opposed to individual appraisers. His complaint was against eappraise it, an AMC, and WAMU for utilizing inflated appraisals. Andrews settlement required that fannie and freddie agree that all future appraisals be performed by AMC’s the defendant. He actually steered the entire industry towards his defendant completing the control fraud circle as most AMC’s are in fact owned by the large banks. Not one appraiser lost their license just a financial settlement. This is equivalent to placing michael jackson in charge of a daycare and requiring sleepovers. He has completed the control fraud model for his bankster financiers. Look at what he does not what he says he is going to do. Mr. Cuomo actually sold subprime mortgages as housing oppurtunities for the under privileged. We all know how that worked out.

  85. Please Per Kurowski,
    To better unsderstand the very clear difference between private issued created credit and that of true public created credit, please read my posts on this thread of the blog linked below where I explain in detail the answer to the same question as yours:

    http://www.interest.co.nz/ratesblog/index.php/2010/05/14/have-your-say-productivity-pandas-win-alternative-budget-competition-propose-fuel-tax-as-rbnz-lever/comment-page-3/#comment-77448