Goldman Sachs: “We Consider Our Size An Asset That We Try Hard To Preserve”

By Simon Johnson

To great fanfare, this week Goldman Sachs unveiled the report of its Business Standards Committee, which makes recommendations regarding changes for the internal structure of what is currently the 5th largest bank holding company in the United States.  Some of the recommended changes are long overdue – particularly as they address perceived conflicts of interest between Goldman and its clients.  

What is most notable about the report, however, is what it does not say.  There is, in fact, no mention of any issues that are of first order importance regarding how Goldman (and other banks of its size and with its leverage) can have big negative effects on the overall economy.   The entire 67 page report reads like an exercise in misdirection.

Goldman Sachs is ignoring the main point of the debate made by – among others – Mervyn King, governor of the Bank of England, regarding why big banks need to be much more financed by equity (and therefore have much less leverage, meaning lower debt relative to equity).  On p.10 of his Bagehot Lecture in October 2010, for example, King was quite blunt:

“Modern financiers are now invoking other dubious claims to resist reforms that might limit the public subsidies they have enjoyed in the past. No one should blame them for that – indeed, we should not expect anything else. They are responding to incentives.  Some claim that reducing leverage and holding more equity capital would be expensive.  But, as economists, such as my colleague David Miles (2010) and Anat Admati and her colleagues (Admati et. al., 2010), have argued, the cost of capital overall is much less sensitive to changes in the amount of debt in a bank’s balance sheet than many bankers claim.”

This King/Miles/Admati critique appears to be gaining a great deal of mainstream traction (see this link for more on the Miles’ view).  At the American Finance Association (AFA) meeting last weekend in Denver, there was much agreement around the main points made by Professor Admati and the leading group of finance thinkers that recently wrote with her to the Financial Times on this issue.  Professor Admati’s slides from Saturday are on the Stanford website (she presented in a Society of Economic Dynamics session, running parallel to the AFA).  The Admati, DeMarzo, Hellwig, and Pfleiderer paper examines in-depth, critically, and in the context of current public policy, the mantra that “equity is expensive” for banks; this is available online – on the same page  you’ll also find related pieces of varying length.  Reviewing any of these materials is an easy way to get up to speed on why Goldman Sachs’ internal reorganization is little more than irrelevant. 

Or perhaps it is a thin smokescreen. The Goldman report does have one revealing statement (on page 1, under their “Business Principles”): “We consider our size an asset that we try hard to preserve.”

As John Cochrane, a University of Chicago professor and frequent contributor to the Wall Street Journal puts it, “The incentive for the banks is to be as big, as systemically dangerous as possible.”

This is how big banks ensure they will be bailed out.

This week’s Goldman Sachs report does not contain the phrase “too big to fail” or any serious acknowledgment that Goldman staff at many levels have the incentive to take on a great deal of risk – through increasing their leverage (debt relative to equity) in one way or another.

On this point there is already perfect alignment of insider interests with what their shareholders want – there is no conflict of interest to be addressed.  As Professor Admati points out, when a bank is too big to fail, adding leverage raises the return on equity in good times (boosting employee bonuses and the return for shareholders) – and in bad times there is a bailout package waiting.

The Obama administration, House Republicans, and banking executives like to frame the discussion about financial reform in conventional political terms, with the “left” supposedly wanting more regulation and the “right” standing for less regulation.

But this is not a left vs. right issue.  John Cochrane is definitely not from the left of the political spectrum; nor is Gene Fama, who signed the Admati et al letter to the Financial Times; nor are numerous other leading finance people who agree with this same position (again, see the list of Admati signatories).  Mervyn King is the ultimate apolitical technocrat – as is Paul Volcker, who has been hammering away at these themes for a while.

The financial sector captured the thinking of our top regulators over the past 30 years.  It continues to exercise a remarkable degree of sway – as demonstrated in the very small increase in capital requirements agreed upon in the recent Basel III accord.

The was some serious pushback last year against the biggest banks from a few members of Congress – including Congressman Paul Kanjorski and Senators Sherrod Brown, Ted Kaufman, Carl Levin, and Jeff Merkley.  (The epilogue to the paperback edition of 13 Bankers reviews the details.)

Now top people in finance are taking broadly similar positions.

Our big banks have too little capital and are too large.  Do not be deceived by the internal alterations and new forms of reporting put forward by Goldman Sachs.  At its heart, the problems in our banking system are about insufficient equity in very big banks.

The case against increasing equity in the financial system is very weak – as King/Miles/Admati explain.  Most of the opposition to greater equity is in the form of unsubstantiated assertions by people paid to represent the interests of bank shareholders (i.e., executives, lobbyists, and the like). 

There is nothing wrong with shareholders having paid representatives – or with those people doing the job they are paid to do.  But allowing such people to make or directly shape public policy on this issue is a huge mistake.

An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

111 responses to “Goldman Sachs: “We Consider Our Size An Asset That We Try Hard To Preserve”

  1. Herbert Wetherby

    We would hate to have to resort to using tools of destruction, or intimidation to see justice come to fruition. But in some instances I don’t comprehend any other options.

  2. The only solutions the our present economic problems would be to break up the six Wall Street, “too big to fail” holding banks, break the power of the Federal Reserve, break up big defense and break up big Government. Otherwise, most US citizens will continued to be ruled by a totalitarian, self-indulgent, elite privileged class.

  3. It is so hard to see these banks continue to put us all at risk. How can we ever forget what they all did? I won’t go for revisionist history. Too Big To Fail means something. They are not just words. Speaking of words, here is something I read this morning. What a great way of saying it:

    http://americaspeaksink.com/2011/01/sarah-palin-hunts-animals-democrats-hunt-muslims/

  4. “most US citizens will continued to be ruled by a totalitarian, self-indulgent, elite privileged class.”

    We need a great big hollywood blockbuster movie to get the message to the masses. I don’t think a playstation game will work, but it could be worth a try. The conventional approaches to change won’t work. There needs to be a genius that will take the message to the masses using a previously unimagined and untried approach. Next, a leader with charisma is needed to purge the country of its tumors. We are not going to slay the dragon thinking inside the box. There is a lot of inspiration to draw from the blogger named attempter. You can google “naked capitalism” and “attempter” to read his views. Or simply go to his blog at: http://attempter.wordpress.com/

  5. This, and the Bill Daley problem, were an inevitable consequence of a monetary system in which banks are indispensible for sustaining the money supply. Any attempt to limit them, which is not accompanied by massive direct efforts to sustain the money supply, results in an asset value shock that triggers an economic implosion.

    We can all psych ourselves up that “this time” the American people will have the guts to suck up a big depression for 10 years to break the power of the banks, but who are we kidding? In any case, there’s no compelling logic that this would result in the “restoration of democracy” rather than the complete disintegration of whatever shred of liberty remains.

    This was my great frustration with all of the calls for shrinking the banks during 2009 – it was a practical impossibility without massive direct support of the money supply (and that meant massive direct monetization of the debt, rather than the indirect monetization we now have in which primary dealers take down huge premiums). The only practical solution, which I have been arguing now for 2 years, was to hike the capital/asset ratios for banks SIMULTANEOUSLY while opening up the monetary and fiscal spigot to support investment spending. The only one in the broad media who seemed to get that was Joe Gagnon.

    It’s too late. We’ve lost.

    Team Obama was unwilling to execute against this. Perhaps unable, or perhaps simply misguided by Larry Summers and the massive” 700 billion dollar “stimulus that was supposed to keep the unemployment rate under 8%.

    From the banks perspective, this was ideal – insufficient fiscal and monetary support accomplished two objectives: 1) It failed to do enough to counteract the massive deleveraging. 2) It was just big enough to “look big” but not actually work, and thus “prove” that it was a failure. Indeed, the “huge Fed purchases” in the end of 2008 were entirely illusory due to sterilization, as James Hamilton noted.

    So the banks won. Was it Team Obama’s incompetence, or total ideological capture? Who knows. I can’t blame the Republicans here, because… well, they’re just doing their job, which is protecting the interests of the moneyed elite.

    Perhaps it all comes down to Health Care – Obama sacrificed everything to get the abomination of the current health reform bill. And of course, this was spearheaded by that champion of integrity and social equity, Peter Orszag…

    And what is Peter Orszag doing now?

    Oh yah, he works at Citigroup.

    http://www.huffingtonpost.com/2010/12/16/peter-orszag-white-house-citigroup-troubling_n_797648.html

    So when SJ writes that we have a “Bill Daley problem”, it’s just the Peter Orszag/Larry Summers problem under new management.

  6. Hope it doesn’t come to that…

    Capability ENABLES Responsibility

    http://culturalengineer.blogspot.com/2008/10/capability-enables-responsibility.html

    “A Citizen’s responsibility in an area is directly proportional to his or her ability to have an effect. Without improvement in mechanisms of meaningful involvement, we will see a continued growth in apathy, frustration and ultimately a resort to less healthy forms of expression.”

    Attend to the ‘Technologies of Citizenship’…

    Re-Igniting the Enlightenment: On Building Landscapes for Decision

    http://culturalengineer.blogspot.com/2010/12/re-igniting-enlightenment-on-building.html

    P.S. My experience over the last 4 years suggests that both political parties and those that finance them have about as much interest in attending to these technologies as they do about fixing gerrymandering, the revolving door or the growing wealth imbalance destroying this republic and tearing the social contract apart.

    It’s a very, very old story…

    “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”
    – Plutarch

  7. Basel III requirements are not different from some supposedly imposed years ago. Swiss banks are satisfying Basel III, now, and doubled up (twice the capital).
    Fact is, banks creates the money through debt, as much as they want (or close to it), to whoever they want, and have so much money already, they capture the hearts and minds of their would be regulators and legislators.

    This public money creation by private banks operating through debt is a new form of slavery; no civilization in the past let private individuals control money creation, independently of the political leadership. In the past, one could accuse the king, but the bankers are faceless. And the money they create is mostly valuable for themselves, it is debt to anyone else.

    http://patriceayme.wordpress.com/

  8. Herbert Wetherby

    And I agree, I have said over and over (not here) that todays people are a slave to money. Many don’t or won’t admit it leading to a multipule of today diagnosis, even the diagnosees can be included with this bunch.

  9. Obama had a chance to reform the big US banks when their share prices were way down and they were financially at or near collapse. I voted for him in the hope and expectation that he would – it didn’t happen becasue of money in politics. This inability of the system to repair itself is a serious symptom.

    I’m in the mode of viewing the US as a business that is in the descent, with the people who recognize it being in a hurry to use their positions to loot what they can while the opportunity exists.

  10. ” Perhaps it all comes down to Health Care – Obama sacrificed everything to get the abomination of the current health reform bill. And of course, this was spearheaded by that champion of integrity and social equity, Peter Orszag…

    And what is Peter Orszag doing now?

    Oh yah, he works at Citigroup. ”

    We couldn’t reform the banks, and we can’t even reform a dysfunctional health care system when examples exist in other countries of systems that work better at 1/2 the cost.

    You don’t need to be adept at the technicalities of economics and finance to understand that the US is a system in the process of collapse, from the inside.

  11. Black Swan has the right notion. Our political and economic systems are working against us and are incapable to undoing the damage. The systemic
    problems facing America — a financial industry now
    designed to rip off investors and the Federal Treasury, continuing offshoring of our jobs and our manufacturing base driving down America’s wage base,
    tax base, economic sovereignty (no debtor nation can call the shots forever), a political system that
    has no sense of responsibility to the common good or America’s long term future. And one more, the agreement by both parties to suspend our basic Constitutional Rights on behalf of the never ending war against terror.

    I hope enough Americans will come to see this and create a movement to fix all this.

    We need a revolution via Constitutional Amendment make this right:

    POLITIC PROCESS FIXES

    1. Break the hold of political parties on our system.
    Forbid candidates to identify themselves with
    parties on the ballot or in campaign advertising.

    2. Make all Federal elections publicly-financed only.
    Make it a felony for candidates to accept any
    money from anybody for any purpose.

    3. Forbid gerrymandering of Congressional districts
    so candidates have to compete for our votes on
    issues, phony geographic boundaries.

    4. Insulate our Federal Civil Service from political
    influence. Not only the regulatory agencies, but
    all agencies. This so politicians can’t design
    Federal programs and appropriations to favor their
    districts. Shut the revolving door between our
    government civil services and their business
    vendors.

    5. Require a zero-based budget assessment of all
    government programs every five years. Require
    all programs to be evaluated on empirical metrics
    available to all citizens.

    6. Constitutionally mandate a firm limit on Federal
    government debt, over a 5 year moving average.
    This so there is some slack for fiscal stimulus
    during recessions.

    7. Banning of public advocacy advertising/direct mail
    whatever during Federal election years. And full
    disclosure to identify who is paying for these
    ads…..not their dummy organizations like
    “Concerned Citizens For American Values”.

    ECONOMIC PROCESS FIXES

    1. A Constitutional amendment to explicitly remove
    corporate personhood.

    2. Federal charters required for every corporation
    doing business with the Federal government. Create
    a level playing field on taxes, environmental
    regulations and other regulations so the
    the corporations can’t play one state or
    municipality off against others to drive down
    local tax bases or wreck local environments.

    3. Massive public investment of capital to rebuild
    our manufacturing base. We save GM. Now lets
    save the rest of our manufacturing base so we
    can maintain a decent standard of living for our
    kids.

    4. Increase payment rates of corporate taxes by
    closing the myriad loopholes that let corporations
    substantially reduce their tax responsibilities
    or not pay US taxes altogether.

    5. Create a national plan to balance our trade
    deficit, including conservation, rebuilding
    our manufacturing base and walking away from
    the globalization treaties responsible for
    our economic decline.

    At the bottom of all this, Americans need to a new vision to regain our democracy and to restore the economy necessary to sustain our national sovereignty and standard of living.

    1. We have the knowledge of best management practices, economics, finance and political science
    to recreate our democracy and restore our economy.

    2. We need to recognize the profit motive and the
    profit margin times product/service velocity model
    unregulated is a perverse incentive, with the negative
    externalities vastly outweighing the benefit.

    I’m not saying we give up decentralized free markets
    as the basis for our economy, I’m saying we need to invent new incentive drivers to undo the damage done
    by massive corporations responsible only to their profits and CEOs who claw out vastly unreasonable
    chunks of those profits to the detriment of the long
    term sustainability of the corporations they manage.

    3. We need to give up our partisan culture wars and
    our sense that government should align itself with the value-systems of special interests.

    4. We need to push for a government with transparent objectives for every nickel its spends, best management practices to make sure our tax money is effectively and efficiently spent on measurable objectives and that the personal profiteering at the expense of the common good is not acceptable.

    5. We need to put an end to defeatist thinking …. you can’t fix our political system. Obama has done
    us a favor by promising government is the solution only to demonstrate it is the problem. Our Constitution allows us to fix it. We just need about
    5 million people to pull together and donating time and energy to make this happen. If the National Rifle
    Association can dictate our gun policies, we can use their tactics to restore our democracy and our economy by forcing politicians into line.

    If you think this is socialism, think again. I’m calling for a decentralized, citizen-driven democracy
    in both the political and economic sense.

  12. Herbert Wetherby

    I remember a camp out back in 1994 where I set off bells and whistles and an entire crowd raced by without hardly a notice. Some of those same concerns are finally being relized today in the form of economics. That is a long time to be off track and suddenly wondering why the political troubles arose so quickly. Call it what ever you like, alot of people missed the train that day.

  13. “The entire 67 page report reads like an exercise in misdirection.”

    What do you mean “like”?

  14. Here’s a q

  15. Herbert Wetherby

    1. A Constitutional amendment to explicitly remove
    corporate personhood.

    Hey Steve, could you expand on this item for me, its way out in left field.

  16. Here’s a question I’ve asked frequently but have never gotten more than puzzled looks in return.

    Just what would have happened if those who were elected to represent us had just let free market, natural laws of economics do their job of removing sick individuals from the herd and the gene pool.

    People who I used to respect just roll their eyes, a clear sign that the Kool-Aid is working. I now mourn them. (Zombies)

    Why has everybody, economists, businessmen, professors, and especially the news media just elevated mega-bank dogma to Holy Writ? Where’s the proof?

    While we are waiting for the mega banks to screw it up again, how about a few of you people in public, academic and private life start doing some “war gaming” now so that the next time the megas come looking for a bailout, say “No.” And make it stick, because you won’t be unprepared and blind-sided again.

  17. No palliatives are possible in the process of terminal, high-speed
    augering-in, to borrow from Chuck Yeager.

    Steve’s prescriptives above would have promise, if and only if: 1. the entire system was not gamed-to-max; 2. we had rational actors, as opposed to the predominant psychos who run this planet.

    It’s way too-far-gone now to expect anything other that foul denouement.

  18. Is there not, in the entire world, even one billionaire altruist/philanthropist willing to put their exploits to genuinely good use by working to defeat the kleptocracy?

  19. black swan: “The only solutions…to break up Wall Street.”

    Why not beat them fair and square with an alternative banking paradigm? They create very little real value in light of the hardship they create for the local citizenry.

  20. Holy haircut, Batman!

  21. The Citizen’s United ruling among others.

  22. Whatever is fair in love and war is also fair in crimefighting.

  23. Keeping all these clowns propped up – HUGE MISTAKE!

  24. Herbert Wetherby

    Yea, they got no wheels for sure.

  25. “Geithner warns of future bailouts
    Government ‘may have to do exceptional things again,’ Treasury secretary says”

    http://www.marketwatch.com/story/geithner-warns-of-future-bailouts-2011-01-13

  26. You can be sure that nothing has changed. Do you hear laughing? It’s Wall Street executives celebrating the return of business as usual, with their outlandish compensation packages and bonuses. Ultra-luxury goods can’t keep up with demand. It’s nice when the world is your oyster.

    http://blogs.forbes.com/robertlenzner/2011/01/12/us-banks-reporting-phantom-income-on-1-4-trillion-delinquent-mortgages/

  27. Herbert Wetherby

    My phone is always open, you won’t here a thing from me until the line gets hooked up.

  28. Hi Herbert

    Left field heh? Hope that wasn’t a bad pun.

    If you’re serious, read Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights
    Thom Hartmann

    The problem is that this legal fiction permits corporations to contribute to political campaigns and political advocacy based on their right of free speech.

    Also check out “Winner Takes All Politics” by Hacker and Pierson. Its about how both political parties are heavily influenced by big money, lots of it corporate.

    My point is that without explicitly removing the “right of free speech in the political arena”, we
    can’t get big money out of politics. And if we don’t do this, we don’t have a prayer of getting our elected representatives to pay attention to voters rather than campaign contributors.

  29. You’re right Bondo. But remember the strength of the NRA. We could change the system if enough people decided to hammer Congress until they make Federal elections financed by public money only. And if we also
    change the doctrine of corporate personhood so Citizens United v FEC becomes unconstitutional.

    If we keep it focused on these two issues, 5 million folks like you and I using NRA tactics have a shot at
    forcing Congress to listen to us.

    Also, keep in mind that if we don’t rectify our trade deficit, we’re on track to big time debtor nation status AND as our wage base falls, our strength as the world’s number one consumer nation will make China and the Saudis and such much less likely to prop up our debtor status. Then what?

  30. Of course their size is an asset worth protecting. The tentacles stretched out over the earth are its life blood where it draws in information and processes it faster than just about any other organization on earth. Talk about efficiency. Furthermore,I dont know why we keep asking these institutions to be more open and to be accountable. They have already spoken loud and clear about where their loyalties lie. Didn’t you get the memo?

  31. Bayard Waterbury

    Fantastic post. This has been building for some time, and, not unlike the time of the great depression, it is tearing the American social fabric to tatters. We had a great cause in WWII which served to reunite the republic and demand unity. Happily, we are not on the brink of global conflict (or so it would seem — fingers crossed), but sadly, there is nothing now available to reunite all of us, rich and poor alike to a common cause. Ergo, collapse of the republic is in the wind. Not a day goes by when I don’t think of our position and what a Russian pundit said a couple of years ago — within five years, America will become four separate countries (look at what Illinios has just announced, an increase in state income tax by an unbelievable 67% — other states will follow — sadly, Tucson may not be an aberration before too long as more and more citizens at the middle and bottom are driven to and beyond the brink). Plutach still holds, and G&S still doesn’t get it.

  32. Bayard Waterbury

    Yes, think 1776 France and 1917 Russia. The American proletariat is getting very itchy.

  33. Bayard Waterbury

    Simon, cheers. I know that this dialogue and the ones which we discuss are essential. But, sometimes I just feel like we are screaming into a vacuum, or spitting into a gale. No matter how much sanity is available here and at lots of other blogs and a few other places (Huffington, Dylan Ratigan, et al), we just don’t have any real power or the millions to buy it. With the media nearly fully coopted and a card carrying member of the American Plutocracy, who, of import, listens. Daley and his powerful cronies are going to just get on with getting on, unfettered and unimpeded, and now, fully unleashed.

  34. Bayard Waterbury

    I heard this yesterday, that the banks were, under the “new accounting practice standards” were allowed to accrue interest on non-performing debt. It’s like Lewis Carroll on LSD. Alfred E. Newman would be proud and should surely consider running for president again with Pat Paulson. This is where bravery and manipulation turn into abject insanity.

  35. Bayard Waterbury

    It’s kind of like the words of the famous Stephen Sondheim song from A Little Night Music, “send in the clowns, don’t bother they’re here.”

  36. Professor Johnson, is 13 Bankers being translated into Chinese yet?

  37. “sometimes I just feel like we are screaming into a vacuum.”

  38. Herbert Wetherby

    You can tell that to the 3 of us in the room.

  39. American bond rating agencies imply U.S. must eliminate entitlements like social security and medicare to retain AAA rating. NO MENTION ABOUT CUTS TO WAR MACHINE. This is the same AAA rating that China has repeatedly stated is fraudulent. Does China give U.S. bonds even one A? Or do Chinese rating agencies simply call them worthless? Here’s something to consider:

    http://www.rawstory.com/rs/2011/01/america-has-reached-the-point-of-no-return-reagan-budget-director-warns/

  40. Ukay, if being big is important to them, let them do it with their own mooney and without recourse to the Fed. Let the Fed do its due diligence and let the public know that (a) no bailout and (b) no access to the dicount window. Vut the link and let them take the risks of the marketplace. Perhaps with a lower stock price, but that’s capitalism.

  41. With all due respect to some of the nice sentiments here, catalyzing real change in this country requires taking a page from the playbook that’s worked so well for right-wing America over the past 30 years. Our nice 10-point plan for restoring Democracy (and economic sanity) is, regardless of its merits, no match for the mind-numbing ideological consistency of “blame anything and everything that ails us on the government.”

    Coherence matters; it matters a hell of a lot. It doesn’t have to be rational, mind you, to be highly effective. This is how generations of Americans have been taught to have a knee-jerk disdain for anything that isn’t directly serving private enterprise, even when the enterprise is blatantly ripping people off and strangling the real economy. To true believers, the worst train wrecks of the “free market” pale in comparison to the evils of government meddling. Like a virus, it’s become part of their DNA.

    So what am I suggesting? How about this: Wealth. One single word. Period. Who is really creating it, and who is siphoning it away. Every discussion, every policy decision can be cast in terms of its impact on wealth creation. Relentlessly. Incessantly. Everybody on message; everyone sniffing the same glue. Month-after-month, for years on end.

    This is the only way to ultimately convince the Silicon Valley entrepreneur and, say, the South Georgia contractor that they have much more in common with each other than they do with Wall Street and K street parasites. The gloves really need to come off: it’s time to separate those who actually make us better off from those who just make a fat paycheck.

  42. Who are “we”?

  43. Would some of you possibly consider joining us, several followers of this and several similar blogs, to make plans for some actual political activism? It seems to me the next logical step. Please check in with Brenda at lets.start.a.grassroots.party@gmail.com if you feel at all inclined that way.

    Carla’s been posting invitations for a little while on this board. It looks like she’s mostly been politely ignored. I don’t understand it. Hundreds, thousands of blog postings: “Aach! The bad guys have taken over.”
    Carla, Brenda, even me: “Well, let’s get together and DO SOMETHING! Join us HERE: lets.start.a.grassroots.party@gmail.com
    {{Crickets chirping}}
    Come on y’all! Put up…
    …Unless someone can suggest a better, more further advanced group that we can join. People, let’s DO something.

  44. Chris F “So what am I suggesting? How about this: Wealth. One single word. Period. Who is really creating it, and who is siphoning it away. Every discussion, every policy decision can be cast in terms of its impact on wealth creation. Relentlessly. Incessantly. Everybody on message; everyone sniffing the same glue. Month-after-month, for years on end.”

    ‘Wealth’ is indeed a great word. Like all words, the phenomena being identified by a word tells a story made up of subject|predicate relationships. It is story’s duality, as subject-value versus predicate rights that is the basis of a proper double-entry book-keeping.

    When double-entry book-keeping identifies ‘wealth’ as ‘real value’, to remain a balanced story the book-keeper must simultaneously identify ‘rights’ to value’s ownership. When one trades artifacts of value in the marketplace, one simultaneously exchanges rights to value’s ownership. What is gained or lost in a trade is balanced by what is gained or lost in the exchange of ownership rights.

    If any one of the big three –Bernanke, Geithner, and Summers — understood double-entry book-keeping, The United States of America would have been focusing ‘clawback’ when it was focusing bank mergers that have become a remedy that is worse than the disease.

  45. Bankers should believe they can master quite adequately default risks. Who would want to deal with a banker who does not believe so?

    The regulators should always answer the bankers “No you can’t… and besides there are so many other risks to be considered than just avoiding the defaults of your clients and the defaults of yourselves”

    It is bad enough when regulators fall for the sales pitch of bankers and believe too much in their ability, but so much worse when the regulators arrogantly decide what is the risk that should be regulated and take it upon themselves to be the masters of that risk, with or without the help of credit rating agencies.

    Currently the regulators, who failed conquering some simple risks of defaults when foolishly playing around with their capital requirements based on perceived risks, ignoring that systemic crisis never ever result from timely perceived risks, are now tackling more God-like events like pro-cyclicality. God help us!

  46. It looks like we have at least until 2012 before IT hits the fan.

    http://the-tap.blogspot.com/2011/01/professor-kerber-euro-will-fail.html

  47. Sorry but IT already hit the fan… just that they keep hiding it away with QEs and other similar postponement tools favored by those who live under the motto “Never care if it gets worse… as long as it is not discovered under your watch”

  48. Stephen A. Boyko

    “What is most notable about the report, however, is what it does not say.”

    Agreed, but the problem is not scale as in too-big-to-fail (TBTF)

    “There is, in fact, no mention of any issues that are of first order importance regarding how Goldman (and other banks of its size and with its leverage) can have big negative effects on the overall economy”

    Rather, the problem is too-random-to-regulate (TRTR). The legacy governance system for the US capital market is broke. As soon as Dr. Johnson et.al., settled for improving the flawed legacy construct, the status quo prevailed.

    If there is complexity, there is uncertainty. To achieve real regulatory reform, policymakers have to move beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions. Unfortunately, the degree of reform undertaken tactically addresses the symptomatic problems rather than strategically trying to fix the causal market flaw by segmenting randomness in terms of predictable, probable, and uncertain governance regimes. Trying to govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime is analogous to having one set of driving instructions for both the U.S. and U.K. The result is larger and more frequent boom-bust cycles.

  49. “As soon as Dr. Johnson et.al., settled for improving the flawed legacy construct, the status quo prevailed.”

    This is right on the dot! The problem is twofold: First in their agenda the culpability of the big bad bankers should not be diluted with any culpability of regulators and second, as wannabe regulators they do not want to mention the mistakes as this can impose limits on their regulatory inventiveness of tomorrow.

  50. We need to get over looking at Goldman like it was freaking South Korea or Germany, or even Greece — they matter. Goldman is just a freaking bank — a business that either succeeds or fails, and if the latter — are there no bankruptcy courts?

  51. Stephen A. Boyko

    @ Per

    We have made numerous similar statements for a year now. Conflating risk with uncertainty suboptimize regulation (codified best practices) by institutionalizing bureaucratic rent-seeking through rule-writing (proscriptive description of an adverse problems, p 50-51 “We’re All Screwed).

    This results in policymakers having difficulty differentiating bad regulation (Basel, SOX, Dodd-Frank etc.) from bad enforcement banksters, Fannie Mae, and rating agencies. Unfortunately most bloggers would rather argue political nuances than address the context of capital market problem. It is a simple question, is the governance system ineffective (broke in need of a new construct) or merely inefficient (difficulties that require administrative adjustments)?

  52. Not just banks, corporations that are too big to wield disproportional amount of influence on our politicians. Our government doesn’t serve the people, it serves the corporations.

  53. Good idea. However, after going all out in all ways supporting my good friend the president, and getting mostly dust all over, inside out, in reward, I will concentrate on the philosophical-theoretical part.

    Notwithstanding, I think this is the most important part: see Paul Krugman struggling with morality and economics, and progressing a bit, week after week (I have another 6,000 words essay on that subject incoming). I am happy to see that StatGuy got on board of the conceptual ship…

    Clearly the idea that the present financial system is a grave assault against democracy needs elaboration, and a vast hearing throughout the West. Only then could a correct political debate rise. Barack really was at sea; he went to the experts the democratic party had, and followed advice. He needs better advice.
    PA

    http://patriceayme.wordpress.com/

  54. CBS from the West

    You have posted this request for people to join up by e-mailing Brenda on several occasions now.

    I think this audience is eager to see something along the lines you propose happen. But remember that none of knows who you, Brenda or Carla, are. Nor do you provide any specifics about what this grass roots party will stand for or do. Sending an e-mail entails loss of privacy, and sending an e-mail to someone you don’t actually know seems even more risky.

    Don’t you have a website that provides some confidence-buildling information?

  55. Not only has the Basel Committee imposed on us who need and want the banks to be useful the silliest and most regressive regulations ever but they also operate in total isolation and simply ignore the many questions out there… I want to see the regulators parading down 5th Avenue wearing cones of shame… after that we might see some good things happening.

    http://subprimeregulations.blogspot.com/2010/10/members-of-basel-committee-consider.html

  56. markets.aurelius

    Excellent comment, StatsGuy. Your diagnosis of the failure to promote and enforce a prudent deleveraging at the tbtf banks — and countering the contraction it would induce with a combination of fiscal and monetary stimulus — is spot on. Again, it speaks to the vested interests at work here. Far better for the tbtf banks that actually control fiscal and monetary policy to keep the credit flowing thru their
    highly levered balance sheets — the few, the proud and the engorged — than to disperse the credit flow thru the far less levered balance sheets of many financial institutions (including, even, members of the shadow banking network). That is the triumph of extraordinarily powerful special interests, with their people in place to control all of the policy levers at multiple levels and within multiple institutions.

    We are seeing a new evolution of the political economics of leverage, and the power and control massively levered firms exert on fiscal and monetary policy in the U.S. and other “advanced economies.” My sense is it’s always been a subtext in the discussions of fiscal and monetary policy, but now the effectiveness of these massively levered tbtf institutions is starkly demonstrated. There isn’t even an attempt to disguise the drive to acquire such status and defend it, as GS’s remarks (highlighted in Simon’s post here) demonstrate.

    What an amazing time we live in, huh?

  57. Seems to be a slightly wacko site (mercury in vaccine to curb population?). The euro will not fail , because the European Union cannot afford to fail. Besides, it’s a plutocracy crisis, not a currency crisis. The euro is a red herring brandished by the plutocracy, because it:
    1) divert attention from themselves
    2) they hate Europe, as the street is strong there, hence the potential of revolt against their masters.
    3) European right wing leaders feel that American plutocracy is over the top, and they are determined to lower the euro (reading Sarko yesterday). So the “euro crisis’ will hopefully last much longer.
    4) Europeans can borrow inside Europe, they don’t have go around the planet, to beg the communists for cash.

    http://patriceayme.wordpress.com/

  58. Even if money was booted out of politics, as it ought to be, corporations would still have a huge influence… One more reason to crack down…
    PA

  59. 1932 Germany is also dangerously an option. We be needing to provide an alternative to some of the Tea Party-type rhetoric. That’s what was horrifying to me about the assassination attempt on the Congressman in light of some of the right wing violent political rhetoric that’s been circulating.

    Also, the American public, for the most part, does not know real suffering the way that the public in the scenarios that both you and I mentioned did. I’m not sure what-all the implications of that might be, but I wonder if it’s telling that a lot of the policy espoused in the Tea Party movement goes against the economic interests of many of at least the middle to lower middle-class enthusiasts. I wonder if the followers of the popular movements we’ve mentioned above who actually did know hunger would have made the same mistake.

  60. Gee whiz, when I read the comments on many of the notable blogs, I get the sense that the commenters are dislodged extremists. The administration is sending strong signals that extremism will not be tolerated in any form. Sometimes, the best you can hope for is a chance to work in the basement for someone named Timmy who answers to someone named Obama, who answers to Wall Street. Eat what you’re given, and be thankful what you get.

  61. 1932 Germany should serve as a warning, as it came after severe austerity measures implemented by Bruening in 1931.

  62. US Constitution Article 5 – Amendment by Convention.

  63. financial incentives aside, the status quo has so much momentum because people don’t like to admit that their concept of how things work is wrong.

  64. Dan Palanza, you say: “Why not beat them fair and square with an alternative banking paradigm?”

    Are you familiar with Ellen Brown and her work on Public Banking? A state bank, the Bank of North Dakota, has been operating very successfully since 1918. One down, only 49 to go.

  65. In the case of banks we might have gotten another type of crisis but never this one which resulted from the regulators playing risk-managers with the help of credit rating agencies plus capital requirements based on perceived risk, as if perceived risk was something dangerous. The consequence was that banks leveraged 30-50 times and drowned themselves in triple-A rated waters were they went with almost no capital at all.

    And compare this to those “evil” unregulated hedge funds out there. Very rarely can they leverage more than 10 to 1 and taxpayers have not been asked for money because of them.

  66. No Carla, I had not heard of it; I will look it up. What I do have in mind is a second FED that goes back to the FED model of the 1970s. The federal commercial banking system then only allowed commercial banks to set up shop in a local county.

    I say leave the present FED in the mess that they have made of whatever one wants to call that banking system. Then allow the alternative and see just where America’s great productivity came from. And don’t think that the present day local banks are anything close to the banks of the 1970s because they are not. They too are using depositor money to bet the stock and bond market.

    Locally, we need banks that recycle the local pool of money in support of the local, small-business community. Perhaps with Ron Paul in a position of more power relative to the FED he could become a force in such a paradigm shift back to common sense.

  67. Uuuhh, Actually we’re pretty… I guess I’d say unformed, unconstituted, undeveloped, on that, as yet. Only five of us have met up so far. I believe that all have been posters on this board. We’re beginning to hash out what we have in common philosophically/politically, what our strategy should be, and how to proceed from here. Right now, if you email Brenda, you get put in our email “club”. Basically at the moment we send all of our missives to every member. Primitive, I know, but we’ve only been together about a week. Brenda’s working on getting a website going. Perhaps we’ll have to wait on that before we can attract new members.

    I have been wondering for awhile how we can all get to working on actual political activity in some kind of unison without endangering our privacy. At some point one has to take a risk with the people one plans to work with, but how do you reach that point and still feel safe when, no matter how much conversation we have on blogs, we’re still just anonymous “handles” with ideas to one another?

    I can completely respect the wishes of some who might otherwise be inclined to make a unified voice to wait until we have an actual web/blog-site going to join up. Meanwhile, for those who care to join our still somewhat inchoate cause, please email Brenda at the address I posted above. Thanks, “CBS from the West” for expressing your legitimate concern.

  68. Success their would be dubious at best, considering the need to rob Paul to feed Peter. Nice attempt at juggling though.

  69. No, Statsguy, it’s not too late. We haven’t lost nothin’, yet, but the initial battle. We got pummelled in the first round. It probably was a great opportunity to be had, what with the banks on the ropes for a second, but most of America had no idea at that time that we were even supposed to be in a fight. Nearly all the pressure that was put on the government from outside was probably by the so-called “Banksters” who did know the situation. It’s taken till now, and 3 years of discussion, for many to begin to understand what some of the problems are. Even now, after 3 years of studying America’s financial (public and private) dilemma, mostly by following blogs and columns posted on the web, I feel that if I were to engage someone in debate about issues involving banking I would almost immediately reach a point where I didn’t know what I was talking about, and I think I understand these things now better than any of my friends or family.

    Changes take time. They’re effected by those with patience, persistence, and the willingness to keep putting in effort regardless of immediate results. Those who opened the way for the rich to pillage as they’ve done have shown that kind of patience. It’s somewhat easy for the very rich, maybe. They just have to keep paying others to work on their behalf. They can co-opt a grass-roots movement like the Tea Party of which maybe few of the members have any clear idea what the real issues are by greasing the wheels and by installing their paid lackies (Beck, Palin, etc.) as “intellectual” leadership.

    We have to get organized if we’re to have any good effect, but it’s far from too late for anything, unless we convince ourselves that it is. I think that through these discussions a rough consensus of opinion has developed on several related issues. One is that the banks have to shrink and have less leverage. Do away with the Fed, bring it more under the control of Congress, stuff like that, I’m WAY fuzzy on, myself. I’m desperate to find intellectual leadership in any group I join up with. I’m hoping really badly that we can persuade a few of you that appear to be pretty educated on these matters to join up with us. You’ve all had a lot to say, so far. Your leadership and knowledge will help us to avoid co-option ourselves.

    It’s not too late, IMO, but organization is key, now.

  70. CBS from the West

    Wasn’t Long Term Capital Management a hedge fund? They got a taxpayer bailout in, I think, 1998.

  71. Yes it was and before in entered into the final crisis mode it was not that much leveraged and NO the taxpayers did not put in money… though the New York Fed did pressure some major players to do so.

  72. I heard somewhere 80% of the (new?) jobs in the United States are in the service industry. Could this actually be true? Misinformation?

  73. Didn’t Elizabeth Warren recently accept a job in the service industry?

  74. You miss my point completely. What is happening now is robbing local cultures in order to reward central banks, who, in fact, are contributing no benefit at all to any meaningful cultural group.

    You cannot legislate the present FED system beneficiaries out of power because its banks control the legislation process. This is Ponzi or Madoff as president of Our Nation.

    A banking alternative that supports local the creativity and its initiative can easily beat the present Ponzi Schemes that central banks are presently running. If you have been listening to the above blog comments you have heard savvy persons tell that the present financial system is already in failure mode.

    Where can we hope to go if we don’t go back to the citizenry for the needed stimulus?

  75. You are gonna need a sweeping majority to accomplish your tasks. Don’t hold your breath.

  76. You’re right, Steve. I also believe it’s possible to have a marked influence on the direction of government if we’re focussed, determined, and use good strategy. Personally, I’m afraid of a Constitutional Convention, as I fear it may be co-opted for a horrible purpose. Annie posts sometimes promoting one, but I haven’t been able to follow her clearly. I can be convinced, I’m sure. I’m definitely all in favor of campaign finance reform as one of the first steps.

    Keep up the good discussion.

  77. Bayard Waterbury: “…we just don’t have any real power…”

    Yes we have. Stop saying that unless you wish it to be so. We just have to have the persistence and willingness to act in some kind of unison. See Steve’s comments regarding the effectiveness of the NRA. I believe the Tea Party has been very misguided in terms of their remedies, but they have shown how the frustrations of the mass can be directed to a purpose. It’s up to us to somehow make popular the right purpose.

    You’re right when you say we don’t have the millions. So what? It just means we have to do a lot of work ourselves.

  78. Great idea, Chris F. Splendid Now email Brenda: lets.start.a.grassroots.party@gmail.com and join us. It’s time to get this party started.

  79. Mr. Boyko, Frankly, for me, it’s because you’re talking way over my head. I don’t have the background to understand what you mean. What the heck is “predictable randomness” for example? And what is the difference you keep making between risk and uncertainty? I felt I was comprehending Mr. Kurowski a little (probably very slightly) in his discussion of the fundamental flaws of how the agencies rate, but I didn’t have the discipline to keep following it before being swept away by the political discussion. It’s my own fault, I’m sure.

  80. Stephen A. Boyko

    @ jonboinAR

    Guilty as charged. The good news about Kurowski and myself is that we have significant unique financial industry experience, the bad news is that we have significant unique financial industry experience. While we suffer from inside baseball comments, we also provide comments that are different than most. Consequently, I try to limit my comments accordingly.

    The majority of my employment history has been in the financial services industry experience that include formulating regulatory policy for the National Association of Securities Dealers (“NASD”), managing regional brokerage operations for retail, institutional, and corporate clients, and providing a practitioner’s perspective for the privatization of the former Soviet Union in the areas of corporate governance and regulatory development of the Ukrainian Capital Market.

    I am the author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System,” but before stereotyping me, please read Brenda Jubin’s book review http://readingthemarkets.blogspot.com/2009/10/boyko-were-all-screwed.html

    FYI from a forthcoming white paper—the dictionary defines risk as the chance of loss. Risk deals with and is synonymous with probability. Risk presents foreseeable consequences, unlike uncertainty which is indeterminate and characterized by unforeseeable consequences. This distinction between risk and uncertainty was made famous by economist Frank H. Knight in his seminal book, “Risk, Uncertainty, and Profit” (1921). Knight argued that uncertainty is not a linear extension of a “riskier form of risk,” but a separate and distinct concept. Planned change is when uncertainty becomes risk. The consequence of learning or innovation provides greater control over the underlying economic environment. On the other hand, unplanned change is when risk becomes uncertainty. Then there is either confusion from too much information, or ambiguity from too little information. Should the uncertainty become unstable as in New Orleans when the levees broke, chaos happens (Boyko, 2009).

    As said earlier, it is a simple question, is the governance system ineffective (broke in need of a new construct) or merely inefficient (difficulties that require administrative adjustments)? Without informational correlation or a normative distribution, the less robust variance measure of randomness is used instead of the standard deviation. The standard deviation is a very useful measure of dispersion for symmetrical distributions with no outliers, but this does not comport with a key market characteristic of non-linearity. This means that you can neither cross-sell CDs and bonds as Citigroup tried to do in its financial supermarket, hedge tranches of MBS as financial engineers tried to do, nor regulate risk and uncertainty with one-size-fits-all governance metrics as policymakers have tried to do. Attempting to cross-manage non-correlative assets minimizes the value of both resources as the reliability of price information is corrupted. For effective and efficient governance, randomness components must be recognized as separate factors to be segmented into predictable, risky, and uncertain regimes. It is Too-Random-To-Regulate (TRTR) not Too-Big-To-Fail (TBTF) that has resulted in a discontinuous governance function thwarting change.

  81. Herbert: see http://www.MoveToAmend.org. Also see http://www.CallAConvention.org.

    LOTS of people are working on this.

  82. Stephen A. Boyko: “It is Too-Random-To-Regulate (TRTR) not Too-Big-To-Fail (TBTF) that has resulted in a discontinuous governance function thwarting change.”

    Thank you for this clarification of risk versus uncertainty. I’m reminded of a proper double-entry book-keeping where the “double” in “double-entry” is (1) the value of work in trade versus (2) the rights to ownership in exchange. In every commercial trade something of value is being exchanged for rights to that value’s ownership. In thirty years of studying this topic, I have not seen a software driven book-keeping framework that maintains this fundamental balance between these archetypal aspects of commercial trade. Such paper driven frameworks did exist when I first learned the now 670 years old book-keeping framework of rules.

    If my life’s experience is correct, how can we ever fix the corrupt practices in the financial industry if we don’t first program a book-keeping framework of rules that can enforce book-keeping’s proven art of double-entry?

    Through the ages book-keeping has proven time and again that its framework of rules can indeed distinguish fact from fiction, when value is set equivalent to rights. When one buys into a Ponzi Scheme, the only value in trade available is to get your payment out before the probability of a loss becomes the certainty of loss that you have defined. It seems to me, taking your fine distinction of risk versus uncertainty into account, that we must, as a cultural group, turn to a tool that is more powerful than the problem, if we are to bring the Ponzi Schemes of the past thirty years back into a culture that trades goods and services within reasonable risks.

    Only a proper double-entry book-keeping framework rules will generate the data history that makes it a simple task to go back into the data and audit a history that goes sour. Book-keeping alone can distinguish the legitimate risk you have defined, from the illegitimate foolishness that we know is now taking place.

  83. @ StatsGuy___Just caught my breath…absolutely spot-on!

    President Obama in my opinion is very savvy, and shrewd…with a dark side that gets very little sunshine? Reminiscence of the 1972 film “The Candidate” starring Robert (what do I do now?) Redford.

    Kinda reminds ya of Nero starting the fires in Rome while watching it burn from a distance – “What Me Worry”? (One year plus wasted while the countries proletariat sinks into squalor!) and comes back as the unsung hero?
    http://www.kpbs.org/news/2000/oct/28/film-feature-politics-film/
    :-) JMHO

  84. @ PA

    “said the apologist remora to the fattened, and buoyant squid”

  85. @ JAR

    This is not a recruiting forum…Thankyou!

  86. Hold it there. I do not have “significant unique financial industry experience” and I have never worked as a financial regulator.

    But that did not stop from knowing that when I do not see the regulators defining a purpose for whomever they are regulating, then something is most definitely wrong.

    And that did not stop me from knowing that concentrating so much power in so few credit rating agencies must doom the banks to sooner or later invest excessively in something not so good.

    And that did not stop me from knowing that authorizing leverages of 60 to 1, which meant that for each dollar of capital a bank could pick up margins from 60 dollars of operations, was pure and unabridged madness.

    And that did not stop me from knowing that inventing capital requirements for banks based on perceived risk when the risks that are truly dangerous are those not perceived is something stupid.

    And that did not stop me from knowing there are much more serious risks out there than having some banks fail… and that trying to stop any bank from failing could cause them all to fail.

    And that did not stop me from knowing that risk-taking is the oxygen of any development which justifies a prayer that ends with “God make us daring”.

    And that did not stop me from knowing that if you allow the best experts to enter and discuss among themselves without any outsider able to opine, these experts will, sooner or later, through incest, breed stupid ideas.

    And that did not stop me from knowing that discriminating so openly against the “risky” and favoring so much those who were already favored by being perceived as not risky… was dumb, dumb and dumb.

  87. Bruce E. Woych

    http://www.youtube.com/watch?v=pJAhnc8VuDo&feature=related ; ( gaming corruption) Repeated games: cheating, punishment, and outsourcing (YALE lecture)

    Worth viewing…it’s worth its weight in Gold/men.

  88. Bruce E. Woych

    sorry for that link (asymmetrical information is also worth noting, but the sequential progression to cheating and corruption…) is here:

    http://www.youtube.com/watch?v=NBKr-wK-TEQ&feature=channel (Yale Lecture)

  89. Many here want to call themselves progressives… but when bank regulators create capital requirements for banks that greatly benefit all those who already made it and therefore have better chances to be perceived as less risky, and as a result will pay lower interest than what they would be paying without any regulatory interference , while at the same time “risky” small businesses and entrepreneurs will need to pay higher interests than what they would be paying without any regulatory interference… and these progressives don’t say a word about it, then I must conclude in “what a sad bunch of progressive we have”

    Others here want to call themselves defenders of the free market… but when bank regulators playing risk-managers arbitrarily interfere with the free market, by means of the capital requirements based on perceived risks, and as perceived by some few officially appointed risk-sentries… and these market defenders don’t say a word about it, then I must conclude in “what a sad bunch of free-market defenders we have”

  90. Bruce E. Woych

    The Banker

    RobinHoodTax

  91. Bruce E. Woych

    why is it that the same old rhetoric never gets down to real physical people, countries and names? Boyko and Kurowski are playing redundancy games with regulatory constraints. It is undoubtedly true that every regulation made to correct a problem will become outdated by the people who needed regulating in the first place. It is all too easy then, to forget the original context and formal cause and misdirect the victims into seeing consequences as causal. this is a blatant attempt to push an agenda that has more to do with status quo and laissez faire finance (rigging the system over regulating it) and that is just plain historic fact.
    Here’s a caption model of proofs:

    A system of ideas supporting a global governance among nations and transnational actors was revived by the United Nations in the last decade to facilitate cooperation and guidance within the spectrum of transnational responsibility and global governance. The policy foundation of primary principles represented by the UN’s “Global Compact” is generally accepted as a best practice guide to conduct, but it does not measure up to a consolidated authority that can investigate, sanction and enforce specific rules of order or decisively resolve disputes in the global community among sovereign nations. The question of how to regulate deregulation is a perennial dilemma
    among oppositional levels of interest that prefer open borders but want to retain controlling autonomy at the same time. Global governance, meanwhile, exists primarily in the context of globalization. Globalization calls for a world governance itself as a formal body of centralized controls over variable single nations as well as a host of transnational actors that require legal boundaries and rules where national boundaries are no longer recognized as barriers to open exchange. The regulation by a fully functioning set of rules are required to not only direct the flow of technology and production globally, but to protect the flow of capital and resources from distortion and fraudulent abuses in the massive flow of competitive and technological advantages. Without central restraints against abuses and widely distorted excesses of risk taking, the question of systemic risk to the entire process has proven to be at stake in recent years. The Financial global crisis of 2007 to 2011 has demonstrated an unfortunate proof of potential how the scale and scope of globalization can be a threat to entire networks of nations and indeed to everyone. Globalization, therefore poses a difficult balance between regulating fair trading rules and maintaining the political order of national sovereignty that legitimately seek to defend themselves against unfair results.

    In the early 1990s Iceland began free market reforms and in 2001 their banking system was deregulated. The globalization of finance in Iceland initially provided a great boom to their economy. In 2006 – 2007 Iceland scored highest on the UN’s Human Development Index with a mixed economy with high levels of international free trade and a booming financial sector. Subsequently and in short order, the banks found themselves seriously overextended beyond Iceland’s GDP itself and a financial crisis ensued that literally crashed the entire economy itself. It is said that relative to its size and economy, the financial crisis of Iceland and the collapse of its banks is “…the largest suffered by any country in economic history (http://en.wikipedia.org/wiki/2008%E2%80%932010_Icelandic_financial_crisis).”
    The results, consequences and effects of this crisis is of a magnitude that has yet to be entirely determined. The entire financial world was impacted in one way or another. Unemployment grew dramatically, the currency was devalued, importation businesses suffered tremendous declines, pensions lost as much as 25% of their value and had to be cut to lower levels as well in the following years. Political disputes between the UK and Iceland grew unfriendly and, of course, the three major commercial banks were shut down. Ultimately the international community had to lend billions to cover the costs of this financial disaster and Iceland became the microcosm for both fear and constraints in the overall context of the global crisis.

    While Iceland was enticed into the easy money of the international financial markets, it also had a reluctance to sacrifice its autonomy and independence. As such it retained a reluctance, if not an outright adverse reaction to joining into the European Union (EU). The financial crisis and its catastrophic impact on the economy changed many people’s minds in Iceland about such an association.
    Iceland applied to join the European Union on 16 July 2009. The application was accepted by the European Council on 27 July 2009.
    It is still in dispute, however, and a very shaken Icelandic community is having some second thoughts about the outside world of globalization.
    “The collapse of the financial system initially led to a major shift in opinion in favor of joining the EU and adopting the euro, although support has dropped substantially because of concern about losing control of their fishing resources and reaction to measures taken by EU partners following the financial crisis (http://www.theodora.com/wfbcurrent/iceland/iceland_economy.html).”
    In a recent NY Times interview, Arsaell Valfells a professor of business and finance at the University of Iceland stated Retail spending was still shrinking but …“Excluding the financial system, the real economy is doing well.”

    http://www.nytimes.com/2010/12/08/business/global/08icecon.html?_r=1.

    Iceland had let the Banks fail but concentrated upon the basic domestic infrastructure and it seemed to be working.

    The question of the European Union, however, is still in process. It seems that items and issues particularly about, open capital flow, hunting whales and other fishing concerns are primary snags, and are still holding Iceland from another venture into the globalization process. It seems that Iceland, in this regard, might well consider the virtues of cooperating in a trading block as part of a larger system over the vice of financial gluttony in the free trade of open water finance. The position here is that capital flow certainly requires regulatory constraints, but that the whale hunting should not be an impediment to its assession into the European Union.

    Should we outline Ireland next guys?

  92. “It is all too easy then, to forget the original context and formal cause and misdirect the victims into seeing consequences as causal. this is a blatant attempt to push an agenda that has more to do with status quo and laissez faire finance (rigging the system over regulating it) and that is just plain historic fact.”

    That might be correct with most Monday morning quarter backing but, in my case, while I was an Executive Director in the World Bank 2002-2004 and while Basel II was negotiated (it was approved in June 2004), I openly and loudly and rightly criticized what they were thinking of doing in way of regulations as sheer lunacy. As just one small example of my criticism please read what I told hundred of regulators in May 2003… and then tell me what is not applicable to bank regulations?

    http://subprimeregulations.blogspot.com/2007/06/some-comments-made-at-risk-management.html

    Why did it happen? Exactly because of what you describe when saying “Globalization calls for a world governance itself as a formal body of centralized controls” The Basel Committee is a small mutual admiration club that answers to no one and is therefore prone to degenerate by incestuous thinking. If we are going to have global authorities that can impact the whole globe then it is utterly important for that group to be very diversified (not only geographically but in ways of thinking) and extremely open to the world so that questions and answers can be debated all the time. Basel III is a product of the same Basel cocoon that produced the tragic Basel II and with it I am absolutely sure, 100%, they will dig us even deeper in the hole they placed us in.

  93. Hello
    I would like to contact Simon Johnson, but can’t find his email. Can you please send me some contact details?
    Regards,
    Eytan Avriel, managing editor, Ha’aretz-TheMarker, Israel

  94. Bruce E. Woych

    If Ireland walks away, what does that say to Greek voters? Or to the Portuguese? Is it a one-off —Ireland just not wanting to back their bank debt — or could it be the first domino of a general debt restructuring?

    regulations are essential administrative governance and should be a part of a managerial coalition that brokers reality not power agency that can be corrupted, distorted and otherwise bought and sold on a (wink-wink) insider market. The realities are the foundation not your speculative claims that have proven to weak circular arguments based on partial claims of efficiency…that ignore the universal costs and dismiss the absolute relationship between assets we are willing to risk and those that you sell out by creating debt beyond the ability to pay…
    …now proven failures in a world that is setting itself up for either total default or absolute political collapse into a nightmare scenario of global proportion and unfathomable misery for masses of real people you are selling out with your narrow minded profit driven designs.

  95. Bruce E. Woych

    Sorry: for some reason my material was cut: here’s the full text of the argument;

    http://seekingalpha.com/article/246779-thinking-the-unthinkable-the-threat-of-the-irish?source=email_watchlist

    “Italy, Spain, Belgium, and Portugal will need to raise over $800 billion this year to cover rollover debt and new borrowing. Add in Greece, Ireland, and a few other countries and it quickly gets to a trillion or so. Doable. But is does add a lot of debt.”

    “Belgium’s total debt is pushing 100% of GDP and, given its fiscal deficits, probably will push through that level soon. This is a country of just 10 million people, and a deeply divided one at that, unable to elect a government.”

    “The Threat of the Irish
    In the midst of the credit crisis last year, the Irish government guaranteed not only the deposits of Irish banks but their bonds. Irish banks, like Icelandic banks, were larger than the GDP of the country. As it turns out, those guarantees are going to cost a great deal of money, about 30% of GDP. That would be the equivalent of over $4 trillion for the US, just for some perspective. And many of those guarantees are to German, French, and British banks. Irish taxpayers are in effect bailing out not only their own banks but banks all across Europe.
    The “bailout” engineered by the ECB and European authorities will require that the Irish pay around 10% of their national income in a few years just to service the debt, according to Barry Eichengreen, professor at U Cal Berkeley. How can you take 30-50% of your government taxes and pay down such high debt loads at 6% interest? That doesn’t leave much for actual government services.”

    “As Eichengreen writes: “This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable.”

  96. There is a chance that others are acting on information you currently do not have. And I personally would suggest you have a pace maker handy, when they release that information to you.

  97. Bruce E. Woych

    Per Kurowski: With all due respect to your previous status with the world Banking System I did not find your letter compelling. The lack of definition of terms leaves your letter completely open to interpretation, and even lends itself to misinterpretation for a profit sector only mentality.

    I don’t know where you fit into this history, but I have seen your appeals and would like you to address this real sequence (keeping in mind that Venezuela is not exactly in a favored Nation status with the global financial system extante):

    http://www.nationsencyclopedia.com/Americas/Venezuela-ECONOMIC-DEVELOPMENT.html

    Development policy from the 1950s through the late 1970s stressed import substitution, industrialization, and foreign investment. A new policy, inaugurated in 1979 and formulated in detail in the sixth national development plan (1981–85), was intended to eliminate price controls and reduce protectionism. The government also sought to reduce Venezuela’s dependence on oil by industrial diversification, to pay more attention to agriculture, and to devote greater resources to social development, particularly housing, education, public services, and health. The economic crisis of the early 1980s led to a partial abandonment of the new policy. An economic adjustment program aimed at decreasing inflation, limiting imports, and cutting government spending was announced in 1983, and further austerity measures were imposed in 1984. In late 1986, the Lusinchi government announced a three-year plan to stimulate the economy through government spending.

    Venezuela’s economic reform program, initiated in 1989, focused on transforming the country from a traditionally state-dominated, oil-driven economy, toward a more market-oriented, diversified, and export-oriented economy. However, the financial crisis persisted and the administration assumed direct control over the banking system. Much of the liquidity created by the support for the financial sector was soaked up by the Central Bank. The government confirmed its commitment to selling off state enterprises. The bolivar was in free-fall before the government announced exchanged controls.

    In 1996, the Caldera administration adopted an economic stabilization program with the backing of the International Monetary Fund (IMF). The fundamental goal of the plan was to reduce inflation by maintaining a surplus in consolidated public sector finances. The program also encouraged real growth in the non-oil economy. Deficit reduction through fiscal policy was also defined as a goal. The government increased general sales taxes, improved tax administration, and increased fuel prices. The program also called for the elimination of price controls on most goods and services.

    The 1999–2000 economic plan called for reduced inflation, increased privatization, and higher taxes on foreign operations in Venezuela. An increase of the public budget was supposed to reduce inflation, as in the 1996 plan, but the traditional overspending of the government (one report claimed $24,000 per month for pension plans in the state-run oil company) might undermine this plan. The dividends tax on foreign investment in Venezuela offsets any privatization plans by reducing the flow of capital from other countries

    Read more: Economic development – Venezuela – tax, import, export, growth, system, power, policy, sector http://www.nationsencyclopedia.com/Americas/Venezuela-ECONOMIC-DEVELOPMENT.html#ixzz1BDTm87rz

    Venezuela is not Greece

    Given the Venezuelan government’s low public and foreign debt, the idea the country is facing an ‘economic crisis’ is plain wrong

    http://www.guardian.co.uk/commentisfree/cifamerica/2010/may/06/venezuela-greece-economic-crisis

    *
    o Mark Weisbrot
    o guardian.co.uk, Thursday 6 May 2010 18.00 BST

    With Venezuela’s economy having contracted last year (as did the vast majority of economies in the Western Hemisphere), the economy suffering from electricity shortages, and the value of domestic currency having recently fallen sharply in the parallel market, stories of Venezuela’s economic ruin are again making headlines.

    The Washington Post, in a news article that reads more like an editorial, reports that Venezuela is “gripped by an economic crisis,” and that “years of state interventions in the economy are taking a brutal toll on private business.”

    There is one important fact that is almost never mentioned in news articles about Venezuela, because it does not fit in with the narrative of a country that has spent wildly throughout the boom years, and will soon, like Greece, face its day of reckoning. That is the government’s debt level: currently about 20% of GDP. In other words, even as it was tripling real social spending per person, increasing access to healthcare and education, and loaning or giving billions of dollars to other Latin American countries, Venezuela was reducing its debt burden during the oil price run-up. Venezuela’s public debt fell from 47.5% of GDP in 2003 to 13.8% in 2008. In 2009, as the economy shrank, public debt picked up to 19.9% of GDP. Even if we include the debt of the state oil company, PDVSA, Venezuela’s public debt is 26% of GDP. The foreign part of this debt is less than half of the total.

    Compare this to Greece, where public debt is 115% of GDP and currently projected to rise to 149% in 2013. (The European Union average is about 79%.)

    Given the Venezuelan government’s very low public and foreign debt, the idea the country is facing an “economic crisis” is simply wrong.

    http://www.bancomercantil.com/mercprod/site/tools/info_economica/reportes/ing/mensual/monthly_economic_bulletin_march2010.pdf

    THE VENEZUELAN ECONOMY AFTER THE
    GLOBAL ECONOMIC CRISIS
    LEONARDO VERA AZAF*
    lvera@bancomercantil.com
    CONTENT
    1. Introduction
    2. How does the Global Crisis affect Emerging Economies?
    3. Performance of the Venezuelan Economy in 2009: A
    Comparative View
    4. The Global Recession Affects the Venezuelan Economy –
    External Disturbances and Policy Reactions
    5. Conclusions
    Bibliographic References
    NEW LESGILATION
    ECONOMIC INDICATORS

  98. Bruce E. Woych

    For anyone interested in following this discussion and wishing background information (neutral) here is the wikipedia coverage for the history of Venezuelan Economy with additional links embedded:

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

  99. @ Bruce E. Woych

    It was not a letter but a speech… but if you find bank regulations that do not begin with stating and agreeing on the purpose of banks then I guess we are not really on the same wave-length. Tell me where in all the writing by the Basel Committee has someone said a word about the purpose of banks?

    The banks are there to take calculated risks, not there to avoid risks and to be given those huge incentives that make go and drown themselves in triple-A rated waters with no capital at all.

    In October 2004 in a formal statement at the World Bank I wrote “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.” If I said it many much more knowledgeable must have warned about it… what hinders people and regulators from listening?

    With respect to Venezuela I have not been back there since March 2003, though I still publish a weekly Op-Ed in its major paper El Universal. If you wonder, except for a 2 week stint in 1974, as the first Diversification Manager of the Investment Fund that Venezuela set up to manage the flows resulting from the exploding oil prices, and from where I ran after seeing the political pressures for their use, I have never ever had anything to do with the public sector in Venezuela.

    Mr. Weisbrot is far from being an objective source of information on Venezuela. In fact he has completely surrendered himself to defending the current Venezuelan government.

    Personally with respect to Venezuela I do not believe it stands a chance before one can limit the amount of oil revenues the government can lay their hand of… as is the government is independently wealthy and basically sees the citizens mostly as a nuisance… as beggars of favors.

  100. http://en.wikipedia.org/wiki/Economy_of_Venezuela

    The description above does not even mention that currently gas is “sold” in Venezuela for US$ 8 cents per gallon and with that a government that calls itself “socialist” takes about 10% of GDP from those who have nothing of nothing and hands it to the owners of cars.

  101. Bruce E. Woych

    I think seeking advice openly is certainly legitimate as a starting point. Google social movements:

    http://search.aol.com/aol/search?invocationType=webmail-hawaii1-standardaol&query=social%20movements

    political movements:

    http://search.aol.com/aol/search?invocationType=webmail-hawaii1-standardaol&query=political%20movements

    ESPECIALLY SEE:

    http://jwsr.ucr.edu/archive/vol10/number1/

    Vol. X
    Number 2

    Winter 2004
    Special Issue: Global Social Movements Before and After 9-11
    View the entire issue as a single PDF file. (3.1 MB) Alternate Download Site
    Front Material (Cover, Table of Contents, Masthead)
    Articles
    Bruce Podobnik & Thomas Ehrlich Reifer The Globalization Protest Movement in Comparative Perspective
    Jeffrey M. Ayres Framing Collective Action Against Neoliberalism: The Case of the “Anti-Globalization” Movement
    Abstract
    Frederick H. Buttel & Kenneth A. Gould Global Social Movement(s) at the Crossroads: Some Observations on the Trajectory of the Anti-Corporate Globalization Movement
    Abstract
    Lesley J. Wood Breaking the Bank & Taking to the Streets: How Protesters Target Neoliberalism
    Abstract
    Kenneth A. Gould, Tammy L. Lewis, &
    J. Timmons Roberts Blue-Green Coalitions: Constraints and Possibilities in the Post 9-11 Political Environment
    Abstract
    Amory Starr How Can Anti-Imperialism Not Be Anti-Racist? The North American Anti-Globalization Movement
    Abstract
    Thomas D. Hall &
    James V. Fenelon The Futures of Indigenous Peoples: 9-11 and the Trajectory of Indigenous Survival and Resistance
    Abstract
    Gianpaolo Baiocchi The Party and the Multitude: Brazil’s Workers’ Party (PT) and the Challenges of building a Just Social Order in a Globalizing Context
    Abstract
    Peter Waterman Adventures of Emancipatory Labour Strategy as the New Global Movement Challenges
    Abstract
    Jackie Smith Exploring Connections Between Global Integration and Political Mobilization
    Abstract
    Robert J.S. Ross From Antisweatshop to Global Justice to Antiwar: How the new New Left is the Same and Different From the old New Left
    Abstract

    You might also consider that any grassroots movement will involve
    1: aggregate agreement with some form of a social contract to take to the political arena

    2. A systems approach; continuous learning and correction system (communication & logistics)

    3. Systemic place: with administrative methodology to operationalize mobility and provide guidance and/or boundaries to maintain a goal oriented purpose.

    4. The everpresent sustainable fctor which typically involves some degree of finance or support network.

    Good Luck: Keep it moving!

  102. Bruce E. Woych

    It may seem simplistic but every organizational format has a:

    1) VISION STATEMENT (what you see as possible)

    2) MISSION STATEMENT (how you intend to get there)

  103. Bruce E. Woych

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

    A competition regulator is a government agency, typically a statutory authority, sometimes called an economic regulator, which regulates and enforces competition laws, and may sometimes also enforce consumer protection laws. In addition to such agencies there is often another body responsible for formulating competition policy.
    Many nations implement competition laws, and there is general agreement on acceptable standards of behavior. The degree to which countries enforce their competition policy does vary substantially, with the United States generally regarded as having the most strict competition laws and enforcement.[citation needed]
    Competition regulators may also regulate certain aspects of mergers and acquisitions and business alliances and regulate or prohibit cartels and monopolies. Other government agencies may have responsibilities in relation to aspects of competition law which affect companies (e.g. the registrar of companies).
    The Blood Bankers: Tales from the Global Underground Economy [Paperback]
    James S. Henry
    James S. Henry (Author)
    › Visit Amazon’s James S. Henry Page
    Find all the books, read about the author, and more.
    See search results for this author
    Are you an author? Learn about Author Central
    (Author), Bill Bradley (Foreword)

    Editorial Reviews
    Product Description
    Like tentacles on a vast octopus, the firsthand investigations in The Blood Bankers all lead to one core. A financial detective of sorts, investigative journalist Jim Henry analyzes a range of scandals, including the looting of the Philippines by the Marcos family and the financial collapse of nations throughout the developing world.
    A rogues’ gallery of international criminals owes its existence to the dramatic growth of the underground global economy over the last two decades. Our world is being reshaped, often in sinister fashion, by wide open capital markets and an international banking network that exists to launder hundreds of billions of dollars in ill-gotten gains.
    Here is an inside look at globalization’s dark side—the new high growth global markets for influence-peddling, capital flight, money laundering, weapons, drugs, tax evasion, child labor, illegal immigration, and other forms of transnational crime.
    About the Author
    Former Chief Economist for McKinsey & Co. and VP Strategy for IBM/Lotus, James S. Henry has written for many publications, including The New York Times, The Washington Post, and U.S. News & World Report. One of the original “Nader’s Raiders,” he is founder and managing director of the Sag Harbor Group, a strategy consulting firm with a special focus on technology strategy and business development. He has managed projects on a wide variety of competitive strategy issues for many prominent global companies. His clients have included AT&T, Chase Manhattan, GE, GM, IBM, Lucent, Merrill Lynch, the Samsung Group (Korea), Xerox, the Joint Caribbean Task Force for Scotland Yard and the FBI, the Rockefeller Foundation, the Swedish Power Board, and the government of Extremadura (Spain). –

  104. It may seem simplistic but every organizational format has a:

    1) VISION STATEMENT (what you see as possible)

    2) MISSION STATEMENT (how you intend to get there)

    That’s just it, parts of organizational formats are anything but simplistic. As a matter of fact, some parts have yet to arrive due to global considerations.

  105. FROM RECENT INTERVIEW PUBLIC TELEVISION- INTERVIEWED M. SOLIMAN

    . . . Securitization accounting is based upon the “transfer of control” when determining a right to foreclose. This approach for bank transfer of risk or rewards eliminates foreclosure from the question of standing. The buyer is not foreclosing it’s the seller who is alleged to have lost control of the subject loan.
    Transfer of control would mean the assets have gone out of the reach of the transferor, whereby the transferor cannot re-acquire the same, except at market price, and the transferee is free to deal with the assets and make a profit on the assets. The only means for a repurchase is in an open market fair bid or auction and that’s what the lenders are doing. Buying your home at Trustee or Sherriff’s sale. But you do not get the money – you the fee title holder allows the lender to buy back you r home a credit bid.
    The underlying basis is: if the bank has sold the loans the buyer is free to hold or dispose of the assets further and make a profit, or suffer a loss. The bank therefore has transferred the reward to the buyer.
    But the buyer is not foreclosing is it? And if it were as we are led to believe then MERS is the bridge used to break the law. THIS IS CRIMINAL conduct by bank officials.
    The reward of making a profit on selling loans at a market price prohibits the bank from also mitigating risk whereby its is obligated to buy back the loan from the Buyer, something we already said it cannot do anyway. This is twilight zone mentality that makes a mockery of the US and international accounting rules. This government knows this. The pooling and servicing agreements are hurting you not helping you while looking for gibberish clues as to proper compliance and conveyances. The loan was sold and that is that – Get it?
    expert.witness@live.com

  106. Stephen A. Boyko

    @ Bruce E. Woych

    Would you describe the present condition of capital market governance as being inefficient in need of reform by amending the deterministic, one-size-fits-all, legacy system, or would you describe the present condition of capital market governance as ineffective requiring fundamental structural repair such as market segmentation.

    If the former, what proposed global change is different as compared to a change of degree of the legacy system’s “scale and scope?” Furthermore, how does this square with the troubling, non-linear trend of larger and more frequent boom-bust cycles. To illustrate, the Crash of 1987 experienced a $1trillion decline of wealth. Fourteen years later, in 2001, the Dot-com Crash witnessed a decline of wealth of $4 trillion. Seven years later, in 2008, the Subprime Crash saw an $8 trillion decline of wealth.

    If the latter, how do you govern risk and uncertainty with one-size-fits-all, deterministic metrics? If you have complexity, you have uncertainty (see “Complexity” by Melanie Mitchell and ) http://www.federalreserve.gov/SECRS/2004/June/20040610/OP-1189/OP-1189_1_1.pdf In a world of financial complexity, innovation, and bubbles, the main focus of managing randomness should be the segmentation of predictable, risky, and uncertain underlying economic domains.

  107. That’s really fascinating stuff, Mr. Boyko. I would have to study finance for quite awhile before I could formulate an opinion. In the meanwhile I read your and other’s little columns on these boards hoping to glean some knowledge. Thank You.

  108. Or 2011 Tunisia.

  109. You’re right about Krugman. It’s interesting to see someone like him doing economics under the full political/moral pressure of a bi-weekly column in the Times.

  110. Bruce E. Woych

    Try here for an activist group WELL ESTABLISHED

    CODEPINK is not exclusively women — we invite men to join us — -but we are particularly eager to see mothers, grandmothers, sisters, and daughters, female workers, students, teachers, healers, artists, writers, singers, poets and all outraged woman rise up and oppose the war in Iraq. Women have been the guardians of life — not because we are better or purer or more innately nurturing than men, but because the men have busied themselves making war. Because of our responsibility to the next generation, because of our own love for our families and communities, it is time we women devote ourselves — wholeheartedly — to the business of making peace.

    http://codepinkalert.org/ (articles & alerts)

    Home site identity: CODEPINK:

    http://codepinkalert.org/article.php?list=type&type=3

    What is our mission?

    CODEPINK is a women-initiated grassroots peace and social justice movement working to end the wars in Iraq and Afghanistan, stop new wars, and redirect our resources into healthcare, education, green jobs and other life-affirming activities. CODEPINK rejects foreign policies based on domination and aggression, and instead calls for policies based on diplomacy, compassion and a commitment to international law. With an emphasis on joy and humor, CODEPINK women and men seek to activate, amplify and inspire a community of peacemakers through creative campaigns and a commitment to non-violence.