Should We Trust Paid Experts On The Volcker Rule?

By Simon Johnson

On Wednesday morning, two subcommittees of the House Financial Services Committee held a joint hearing on the Volcker Rule.  The Rule, named for former Fed chair Paul Volcker, is aimed at restricting certain kinds of “proprietary trading” activities by big banks – with the goal of making it harder for these institutions to blow themselves up and inflict another deep recession on the rest of us.

The Volcker Rule was passed as part of the Dodd-Frank financial reform legislation (it is Section 619) and regulators are currently in the process of requesting comments on their proposed draft rules to implement.  Part of the issue currently is claims made by some members of the financial services industry that the Volcker Rule will restrict liquidity in markets, pushing up interest rates on corporate debt in particular and therefore slowing economic growth.

This argument rests in part on a report produced by Oliver Wyman, a financial consulting company.  Oliver Wyman has a strong technical reputation and is most definitely capable of producing high quality work.  But their work on this issue is not convincing.  (The points below are adapted from my written testimony and verbal exchanges at the hearing; the testimony is available here.)

The report, “The Volcker Rule: Implications for the US corporate bond market,” was commissioned by the Securities Industry and Financial Markets Association (SIFMA) and it is available on the SIFMA webpage that contains its comment letters to regulators.  On p. 36 of the report, the disclaimer begins, “This report sets forth the information required by the terms of Oliver Wyman’s engagement by SIFMA and is prepared in the form expressly required thereby.”  This does not mean – and I am not implying – that Oliver Wyman was instructed to find a particular kind of result.  But the incentives of SIFMA and its most prominent members are worth further consideration in this context.

The current chair of SIFMA is Jerry del Missier, a top executive at Barclays Capital.  The board also includes executives from Morgan Stanley, Societe General, UBS, BNP Paribas, HSBC, Deutsche Bank, Goldman Sachs, Citigroup, RBS, JP Morgan Chase, Credit Suisse, RBC, and Merrill Lynch.  All of these companies would be affected by the Volcker Rule, in the sense that they would have to give up some of their “proprietary trading” activities and perhaps be subject to other restrictions – this is according to the Oliver Wyman report, p. 11, which lists “the institutions that will be most affected by the Volcker Rule”; more than half of these institutions are on the SIFMA board.

Such very large banks are perceived as “too big to fail”, because their failure would likely cause massive damage to the rest of the financial system.  As a result, the downside risks created by these institutions are borne, in part, by the government and the Federal Reserve – as a way to protect the rest of the economy.  In effect, these banks benefit from unfair, nontransparent and dangerous government subsidies that encourage reckless gambling – most notably in the form of “proprietary trading” (jargon for placing bets on which way markets will move).  When things go well, the benefits of these arrangements are garnered by the executives who run these firms (and perhaps shareholders).  When things go badly, the downside costs are pushed in various ways onto the taxpayers and all citizens.

The Volcker Rule is intended to limit the implicit subsidies received by large banks that also operate proprietary trading at any significant scale – this is clear from the repeated public statements of both Mr. Volcker (who had the original idea) and Senators Carl Levin and Jeff Merkley, who turned it into meaningful legislation as an amendment to Dodd-Frank.  We should therefore expect executives from big banks to oppose removal of these subsidies.  To the extent that such subsidies may be expected to benefit shareholders, it can be argued that these executives also have a fiduciary responsibility to do all they to ensure the subsidies continue (i.e., that the effectiveness of the Volcker Rule be undermined).

SIFMA itself has a clear mission: “On behalf of our members, SIFMA is engaged in conversations throughout the country and across international borders with legislators, regulators, media and industry participants.”  There is nothing in their public materials to suggest the research they sponsor is designed to uncover true social costs and benefits; rather their goal is to advance the interests of their members – this is a lobby group, after all.  SIFMA claims to represent the entire securities industry but more than one-third of its board is drawn from very large banks that would find their implicit subsidies cut and constrained by an effective Volcker Rule.  Given this context, it is not clear why the Olivier Wyman study would be regarded as anything other than – or more convincing than – a relatively sophisticated form of special interest lobbying.

There is also a serious methodological issue.  The Oliver Wyman study draws heavily on a paper by Jens Dick-Nielson, Peter Feldhutter, and David Lando, which looks at the liquidity premia for corporate debt in recent years and which contains plausible results: “Illiquidity premia in US corporate bonds were large during the subprime crisis. Bonds become less liquid when financial distress hits a lead underwriter” (quoted from http://www.feldhutter.com/).  (Disclosure: Until recently I was on the editorial board of the Journal of Financial Economics, where the paper appeared, but I was not involved in the publication of their article.)

However, the Olivier Wyman study goes far beyond those academic authors when it claims that the Volcker Rule will make corporate bonds less actively traded – less “liquid” – and therefore increase interest rates on such securities.  In particular, the Oliver Wyman approach appears to assume the answer – which is not generally an appealing way to conduct research.

Specifically, the Oliver Wyman study assumes that every dollar disallowed in pure proprietary trading by banks will necessarily disappear from the market.  But if money can still be made (without subsidies), the same trading should continue in another form.  For example, the bank could spin off the trading activity and associated capital at a fair market price.  Alternatively, the relevant trader – with valuable skills and experience – can raise outside capital and continue doing an equivalent version of his or her job.  Now, however, these traders will bear more of their own downside risks.

If it turns out that the previous form or extent of trading only existed because of the implicit government subsidies, then we should not mourn its end.

The Oliver Wyman study further assumes that the sensitivity of bond spreads to liquidity will be as in the depth of the financial crisis, 2007-2009.   This is ironic, given that the financial crisis severely disrupted liquidity and credit availability more generally – in fact this is a major implication of the Dick-Nielson, Feldhutter, and Lando paper.  If Oliver Wyman had used instead the pre-crisis period estimates from the authors, covering the period 2004-2007, even giving their own methods the implied effects would be 5-20 times smaller (this adjustment is based on my discussions with Peter Feldhutter.)

And the Oliver Wyman study makes no attempt to estimate the benefits of the Volcker Rule, for example in terms of lower probability for a major financial collapse.

The biggest disaster for the corporate bond market in recent years was a direct result of excessive risk-taking by big financial players.  The Volcker Rule is a step in the direction of making it harder to repeat that awful experience.

Powerful players in the financial sector are entitled to make their arguments against the Rule.  But for-hire “research” that shows the Volcker Rule will hurt the broader economy should not be regarded as convincing evidence.

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

62 responses to “Should We Trust Paid Experts On The Volcker Rule?

  1. Carter opened a can o worms that to this day can not be contained, add a pandora’s box and some paranoia, and were off to the races. That is where the concern for blowing yourself up should have begun. Now after the crisis we start thinking about how to not have it occur again, I think your a day late and a dollar short on rules. He ruled his day by size, and today after having admitted the mistake, Paul is just another word in an alphabet soup.

  2. The SIFMA is a serious lobbying organization. Where will the countervailing political force come from? Legislators? Regulators? Academics? A typical voter probably would not care…

  3. The fact that Dodd-Frank allows trading on Treasuries and Agencies (Fannie/Freddie) to be exempted from the Volcker rule certainly suggests that Dodd and Frank believed it would reduce liquidity, else why the exemption? You can just as easily blow yourself up with fancy trades in treasuries and agencies as you can with corporate debt.

  4. bobthebayesian

    What I’m seeing is simply that you don’t find the assumptions of the Oliver Wyman study to be very plausible, and hence the outcomes expected from those assumptions shouldn’t be given a lot of credence. I think it’s really important to be clear about that because there is no inherent reason why a “for-hire” research study should be intrinsically regarded as biased or bad. Since it is a research study, the details are plainly there to criticize or defend. The fact that it is “for-hire” should play no part in this, except perhaps to excite your initial suspicions to motivate a clear and unbiased assessment.

    If the assumptions are bad, that is a good reason to reject it. But consider your last sentence, “But for-hire “research” that shows the Volcker Rule will hurt the broader economy should not be regarded as convincing evidence.” This seems very biased to me. A for-hire research study that shows that the Volcker Rule will hurt the broader economy certainly should be regarded as convincing evidence, if indeed the assumptions are reasonable and the evidence is convincing.

    I’m not saying your conclusions is wrong. I’m only familiar with very high frequency prop trading, in which case I do think your conclusion is very wrong. As for prop trading at large, and especially in large banks, I defer to more qualified experts. But either way, an argument is an argument no matter who makes it or who paid for it. Just because the outcome doesn’t match your preferred outcome, that is no reason to reject it.

  5. What a surprise. Paid shills for predatorclass oligarchs brute propaganda, disinformation, fearmongering, and naked lies to advance and shield predatorclass oligarchs interests.

    The entire system is a rotten putrid cancer.

    Burn it all down. Reset!!! It couldn’t be worse for the 99%. We have no other option.

  6. Simon Said: “Specifically, the Oliver Wyman study assumes that every dollar disallowed in pure proprietary trading by banks will necessarily disappear from the market.”

    Reworded:
    “Specifically, the Oliver Wyman study assumes that every dollar ‘allowed’ in pure proprietary trading by banks will necessarily ‘create dollars out of the blue’.

    Why not call all Ponzi Schemes by their real name?

  7. @Dan – certainly a Ponzi Scheme is also an *existential threat* to the 99%….

  8. @bobthebayesian

    I think your post amounts to nothing more than an overly simplistic dismissal of Simons article. Maybe you should give the same advice to the republicans. They are the ones who have discarded honest debate, and any attempt to analyze a competing argument on its merits rather than its source. Simon does give reasons for not accepting some of the conculsions of the paper.
    The reality of our times, thanks largely to the republicans, is that any “analysis” paid for by a lobbying group, or a partisan think tank, is to be regarded as suspect until proven otherwise.
    There are not enough rational, non-right-wing lunatic people in this world to do the fact-checking required for the volume of total BS that the right-wing produces. That is why rational arguments don’t get any traction. Right-wing BS can be produced at a much higher rate than a thorougly researched, intellectually honest analysis because the research isn’t necessary when your free to make up anything you want with the confidence that the willfully ignorant choir to whom you are preaching will accept whatever you say.

  9. My presumption is that any group peddling influence, regardless of how it is done, to support the TBTF banks against any regulation to curb their casino mentality, cannot possibly be trusted in any way. If I were the chair of the committee, I would allow the submission, and then toss it in my circular file. The saddest thing is that in this government, a Plutocracy, it is impossible to trust anyone in any hearing on any side of any issue to tell the truth and make a balanced presentation of factual information for consideration ever. I look at committee hearings the same as the Presidential debates, that is a simple show, kabuki theater for public consumption, essentially no more than any other “reality” show is real. So long as we are willing to abide lies and deception in this, or any other, form, it seems that this is all we can expect. Thanks, Simon, but I don’t think that anyone (who matters) is listening. In the months and years that I have followed these things since Bush occupied the Oval Office, I have yet to see that reason matters, only money. Don’t stop talking though, maybe someday, someone who has some power will see the light.

  10. @bayard – I first saw Prof Johnson when he was a guest – the MAIN issue is not trust, it’s justice.

    http://billmoyers.com/episode/crony-capitalism/

  11. Bruce E. Woych

    http://www.commondreams.org/video/2012/01/21
    Published on Saturday, January 21, 2012 by Moyers & Company
    Moyers & Company: Crony Capitalism

    Bill Moyers and former White House budget director David Stockman on how politics and high finance have turned our economy into a members-only private club.
    http://www.commondreams.org/video/2012/01/21

  12. Certainly I would not “trust” paid experts or any other kind of expert. I would evaluate the facts and the argument for myself. That also goes for an expert writing a NYT-blog op-ed piece or giving Congressional testimony disputing some other experts.

    Within that framework, Simon’s post is light on both facts and argument. 50% of Simon’s argument here, such as it is, consists of pointing out that Oliver Wyman was hired by a non-disinterested party. Well okay, but that only goes so far.

    The main tangible claim disputed seems to be the claim that the Volcker Rule would restrict liquidity. Does Simon dispute this? It doesn’t seem so. There is no argument disputing it. That is presumably because he knows it to be true. One can of course haggle over the size of such an effect, but that would make for a boring rebuttal, leaving (as it does) the main claim intact. Similarly Simon doesn’t like the dollar-for-dollar assumption. How about an x-for-dollar assumption then, for some x less than 1, wouldn’t that make the claim ok and force Simon to drop his objection? What is the point of such an objection then?

    Speaking of assumptions, Simon claims that the Volcker Rule will have “benefits” including a “lower probability for a major financial collapse”. He makes no argument for such a thing. He also says that “The biggest disaster for the corporate bond market in recent years was a direct result of excessive risk-taking by big financial players. The Volcker Rule is a step in the direction of making it harder to repeat that awful experience.” He makes no argument for this either. He seems to assume that the Volcker Rule will have this effect, and “is a step in the right direction”, simply because that’s its intent (=”the goal of making it harder for these institutions to blow themselves up and inflict another deep recession on the rest of us”). But intent does not equal effect. Those of us who didn’t come to this argument with the preconceived notion that banning “prop trading” is the “right direction” are given no further argument to adopt that notion.

    And in the bigger picture, a problem this argument is that the one making it stuck defending a rule that proscribes “prop trading”, and “prop trading” cannot be defined. Worse, the author doesn’t appear to know this, seemingly assuming that “prop trading” is a well-defined and easily-circumscribed activity. To my mind, this casts into doubt anything he has to say on this subject – far more than whoever may sign his paychecks.

    P.S. It is further amusing to note that the argument given for the Volcker Rule above essentially suggests that no market harm will result because a lot of current banking activity can and should just be pushed into the ‘shadow banking’ sector. Kudos to the author for at least realizing, unlike most Volcker Rule proponents I have seen, that what he is arguing for is a greatly expanded ‘shadow banking’ sector….

  13. Bruce E. Woych

    The Consumer Financial Protection Bureau

    Paydays loans may give consumers quick and easy access to cash, especially when they find themselves in a financial pinch. But these loans, with their high fees and requirement of immediate repayment out of the consumer’s next paycheck, can send consumers into a cycle of debt.

    The CFPB wants to know how these small-dollar loans impact consumers. So yesterday, Director Rich Cordray and several members of our leadership team traveled to Birmingham, Ala., to gather with consumer and civil rights groups, industry representatives, and the public. We wanted to listen, learn, and collect information about the multi-billion dollar payday lending business.

    Watch Director Cordray’s introduction to the hearing and tell us what you’re seeing in your community about payday loans.
    http://www.consumerfinance.gov/getting-a-complete-picture-of-the-payday-market/

    Payday loans typically allow consumers to receive funds very quickly, but they can also present potential harm. For example, repayment is often due within two weeks at a hefty price. The annual percentage rate (APR) sometimes reaches more than 400 percent. A consumer who can’t pay on time may take on more debt to cover the previous loan that has now come due. This can spiral quickly into an ongoing cycle of debt.

    We are just beginning our nonbank supervision program, which includes payday lenders. We want to hear more about how the payday loan market is operating throughout the country. What can you tell us?

    Check out the speech, and let us know what you’re seeing.
    http://www.consumerfinance.gov/getting-a-complete-picture-of-the-payday-market/

    Thank you,
    The Consumer Financial Protection Bureau

  14. Bruce E. Woych

    Why quibble over details; check this out:
    http://www.thesolutionsjournal.com/node/1039
    Volume 3 | Issue 1 | Jan 2012

    Open-Market Sustainability

    By Patrick Doherty

    Deputy director of the National Security Studies Program and director of the Smart Strategy Initiative at New America Foundation.
    http://www.thesolutionsjournal.com/node/1039

  15. “…the Oliver Wyman approach appears to assume the answer – which is not generally an appealing way to conduct research.” A bit of an understatement there…

    Thanks for the excellent point at the end which brought it home for me. Get the big banks out of the business of huge bets on proprietary trades, and if the business still has legs it will still be out there to make money for someone. If not it existed only with government guarantees. Isn’t that supposed to be what this capitalism stuff is all about?

  16. bobthebayesian

    @Sonic Charmer — well said.

  17. Ten thousand thanks for an outstanding link Bruce E. Woych. Read the entire article and though thick – here is a real solutionsbased proposal that could actually give hope to even the most cynical doubters of America’s future. As one of this crowd – I challenge all the esteemed comentarians here and our humble hosts Mr. Simon and Mr. Kwak to peruse and analyse this work and share these ideas in every possible forum.

    Then pray that the spaniels posing as our leaders muster the courage to adopt these policies and restore America to her former greatness.

    “The three core components of open-market sustainability—smart growth, regenerative agriculture, and a tax shift—individually represent significant gains to prosperity, well-being, and sustainability. Working together, however, they become the world’s most powerful engine of innovation, aligning market prices with our global objectives.”

  18. @Norm Cimon: “Isn’t that supposed to be what this capitalism stuff is all about?”

    When a word ends in ‘ism’, Norm, that word is tells only half of the complete story, which is why bookkeeper’s use a double-entry pattern-language in order to tell the complete story.

  19. @Norm Cimon

    Get the big banks out of the business of huge bets on proprietary trades

    What is a ‘huge bet’ and what is a ‘proprietary trade’? You did not define these concepts. You seem to assume there is an easy and sharp line to be drawn between huge and non-huge, proprietary and non-proprietary. I am here to tell you that this is not the case.

    More curiously, the implication of you (and Simon) is that you don’t want banks doing ‘proprietary trades’ because (you imagine) that is what instigated the financial crisis. But the financial crisis was instigated by mortgage lending – bread-and-butter banking. Not ‘prop trading’. Where is anyone’s evidence that ‘prop trading’ as such was a huge problem and instigated the crisis? Where is the argument for that?

    Unless of course you all count mortgages as ‘prop trades’? Well why not? Mortgages are loans given to individuals. Loans are risky because they might not be paid back, they have interest-rate risk, prepay risk, etc. All of those risks are embedded bets on various market forces. So actually it’s perfectly true that a mortgage is a ‘bet’, and (if they were consistent in applying what they claim they want, i.e. for banks not to take ‘bets’) Volcker Rule proponents would indeed have to ban mortgage-lending, along with small-business lending, lines of credit, and indeed almost any sort of transaction that does not leave a bank 100% risk-flat (including just counterparty risk).

    In other words, to consistently ban ‘bets’ you would have to ban banking, period. Either that or draw some (totally arbitrary, artificial, and internally-inconsistent) line under this or that activity, call it ‘prop trading’, and ban that. This is what the current draft Volcker Rule does.

  20. Prof. Johnson, Thank you for making yourself available to the House. I watched the hearings last night – definitely more entertaining, and far more informative than the Republican Debate, which, curiously?, has yet to address the topic of TBTF.

    Thanks again,

    kc

  21. @Sonic Charmer: “In other words, to consistently ban ‘bets’ you would have to ban banking, period.”

    You too need a lesson in double-entry bookkeeping :)

    Bookkeeping, since the middle-ages, distinguishes ‘value’ from ‘rights’. That is the meaning of ‘double-entry’. For every traded ‘value’, there is a complementary exchange of ‘rights’, to the ownership of that ‘value’. What is killing our civil culture is trades that have no intrinsic value, but that do have a false representation of ‘rights’–created out of the blue, for the sole purpose of disguising a Ponzi Scheme. One can call them ‘bubbles’, or whatever. There is a great advantage, though, in calling them a ‘Ponzi Scheme’ because Ponzi alone did a thorough job of making his scheme that robs Peter to pay Paul into a household name. Madoff serving four life sentences for running a Ponzi Scheme also helps.

    If we need lessons in legitimate gambling, one need only to look at a Las Vegas casino. They sell the bettor chips. The bettor plays games designed to favor the house. What the gambler loses the house wins in order to pay their bills. Betting in today’s world is banks, hedge-funds, and the rest of what is loosely called the ‘financial industry’ using dollars, as their risk-free gambling chips.

    Here’s how that works:
    The bank-betting industry creates betting games where the gambler easily wins. They in turn hire house gamblers to share in the gambling profits. These rights to dollars are created with no compensatory value in exchange, as they are created out of the blue. Any failed bets, are insured to be paid off by the citizenry who happen to have no voice in governing their own nation’s dollars. There is no present cure for this ailment because software developers have made no attempt to create proper bookkeeping programs that would easily detect this colossal Ponzi Scheme.

    And so we have what we have. Every citizen, in their heart of hearts, knows something is wrong. Bookkeeping in most minds, unfortunately, is bean-counting that could not possibly rein in the problem. But in fact bookkeeping is the only solution powerful enough to rein in this global Ponzi Scheme. We the people can begin working toward a solution by simply calling it by Ponzi’s true bank-betting name.

  22. @Dan: boiling it down, then, it seems that what you’re arguing against is the fractional banking system. If the system creates money from debt (promises) rather than from tangibles there is no evidentiary trail that can be used to audit accounting. If the money creators are private for-profit institutions, there is no ethical control.

  23. @Dan P – It’s not just the bookkeeping – it’s the whole kit and kaboodle, “…..We wouldn’t have today’s robber barons – bankers – if we had an honest money system that didn’t allow them to create ALL our money as interest-bearing debt owed to themselves. We can’t help but be debt-slaves in this fraudulent system….”

    An *existential* threat if there ever was one….and worse….this monkey-brain made-up crap ensures that the self-proclaimed elite devil ass kissing nihilists get to SKIN EVERYONE ALIVE….this monetary system IS genocide because of the psychopaths who *own* it….

    TONS and TONS of marketing, psychology, MRI cellular brain probes – and to what end? Still demanding we bend a knee to recognized PSYCHOS (War Lords, Drug Lords, Slave Lords) and their cheerful ass-kissing sociopaths….and they are asking this of people who have PROVEN that they can live an entirely different way with MUCH MORE SUCCESS.

    This IS a war – has been since that stick up note Paulson laid on USA taxpayer….only the sociopath neighbors (busybody babuschkas of Homeland Insecurity) are still carrying some DELUSIONAL moral banner – a banner steeped in BLOOD all the way back to the Czar and HIS FAMILY’s blood….

    Occupy Town Hall….dismantle their networks and get their lists….

  24. bobthebayesian

    The variance of views held by commenters is something to behold. Opinions aside, the most relevant thing mentioned was Sonic Charmer’s comment about shadow banking. If big banks have to get “the behest of clients” (e.g. permission) to engage in prop trading (where there is money to be made) they’ll easily get it. Adding this extra stipulation that prop trading by bank-holding institutions can only be engaged in specifically when clients call for it is just going to shift the issue. Banks will create financial instruments that offer statistically enticing reasons for clients to grant permission for general purpose prop trading.

    Eventually, at some point down the line, if you favor the Volcker Rule, then you are saying that someone who “represents the public interest” should police every transaction as effectively as possible. What defines “unacceptably risky behavior” in one set of market circumstances might be extremely successful, best-interest-of-clients behavior in other market conditions. Either the banks are free to formulate their assessment of that based on their statistical knowledge (in which some fail, some don’t fail) or they aren’t. If they aren’t, you’re effectively saying that a business that makes money by having more successful statistically determined strategies is not allowed to implement those strategies unless you have a look at it first, see if you’re okay with how successfully they’ll take advantage of market inefficiencies, and approve their request to conduct business. This is the logical conclusion of Volcker-like arguments. As a computational scientist, my immediate reaction is to get real. That’s outrageously intractable in the first place, will lead to shadow banking, and it’s not at all clear that the outcome would be positive.

    No one knows what science doesn’t know, and anyone who says different is trying to manipulate you.

  25. Modern finance is an excuse to extract wealth. The argument for modern finance is: If you regulate modern finance you will ruin the economy. Now, for most people that’s where it ends. Ok its modern, and I don’t understand it, and I wouldn’t want to ruin the economy because I am ignorant(or I am making money off the status quoi) so I’ll leave to the, educated that know how “modern” finance works.

    The consensus seems to be the following: As long as I have my I-pad who cares how it got there. If my company needs to ship jobs overseas so I can keep mine who cares about the long term implications. As long as I can drive home in the car I like and watch my show on my TV than who cares how modern finance works. Or who cares if the financial institution I invest with use destructive practices, I just made 20% ( or I got a big bonus).

    The problem is it’s not just big business it’s a cultural thing where “how much” matters more than “how” and what that boils down to (yes I just used it) is sustainability.

  26. http://www.msnbc.msn.com/id/37560195/#46121049

    Heck, I’ll post ALL my tax returns, ALL my financial records from my entire lifetime – and you tell me where I, personally, committed the kind of MORAL HAZARD with my HONEST WORK pay

    the kind of MORAL HAZARD where 40-60 million former *middle class* fellow USA citizens are now PENNILESS and will be penniless for the foreseeable future…please, I wanna know what I did wrong with my $$$$….

  27. @Annie wrote:
    “@Dan P – It’s not just the bookkeeping – it’s the whole kit and kaboodle, “…..We wouldn’t have today’s robber barons – bankers – if we had an honest money system that didn’t allow them to create ALL our money as interest-bearing debt owed to themselves.”

    Annie, your desire to have an honest monetary system IS the ‘bookkeeping’. Bookkeeping was refined into practice in the middle-ages to support monetary systems, whose integrity a nation of persons must hold in common. To understand today’s problem you must consider a proper Book-of-Accounts as being to social science what mathematics is to a physical sciences, such as physics.

    The mathematical proof of a physical pattern of axioms and their arithmetic is accomplished by a logically proven theorem. What the mathematical theorem proves for the physical-scientist, the bookkeeper proves for the science of economics, which is a SOCIAL-SCIENCE.

    Bookkeeping supports the cultural groups that must preserve the integrity of a monetary system that the group must hold in common. And that is a SOCIAL-SCIENCE, not a physical science. Our leadership today is confused by the word ‘bookkeeping’, which the would-be social-scientist that studies economic theory today assumes to be ‘bean-counting’.

    Quick-books, I’m told, controls 94% of today’s ‘bookkeeping’ market. Quick-books is not doing a ‘bookkeeping-proof’ according to the 670 year-old tradition of proving the Book-of-Accounts ‘balance;. Quick-books is little more than a checkbook organizer. If you are running a flower shop you can create a good enough summary to report you taxes and such. But this process is not a proof of the validity of the social-system that has taken place by ‘doing business in a commercial market that the citizens must ‘hold in common’.

    @Annie Wrote:
    “We can’t help but be debt-slaves in this fraudulent system….” An *existential* threat if there ever was one….and worse….this monkey-brain made-up crap ensures that the self-proclaimed elite devil ass kissing nihilists get to SKIN EVERYONE ALIVE….this monetary system IS genocide because of the psychopaths who *own* it…. TONS and TONS of marketing, psychology, MRI cellular brain probes – and to what end? Still demanding we bend a knee to recognized PSYCHOS (War Lords, Drug Lords, Slave Lords) and their cheerful ass-kissing sociopaths….and they are asking this of people who have PROVEN that they can live an entirely different way with MUCH MORE SUCCESS. This IS a war – has been since that stick up note Paulson laid on USA taxpayer….only the sociopath neighbors (busybody babuschkas of Homeland Insecurity) are still carrying some DELUSIONAL moral banner – a banner steeped in BLOOD all the way back to the Czar and HIS FAMILY’s blood…. Occupy Town Hall….dismantle their networks and get their lists….”

    Annie, I sympathize with your frustration, but you must look in the mirror and acknowledge that if the integrity of our monetary system is to be, it is up to you and me. The Romneys of the world are not going to let go of their ‘venture-capitalist’ strangle hold over the local cultural groups that are suffering the consequences of today’s social-science travesty brought upon by runaway, half-baked, accounting software software programs. The damage will only be repaired at the local cultural level if we are to win approval of a correct Book-of-Accounts that each and every fair and equitable SOCIAL-SCIENCE community must have.

  28. @oregano wrote:
    “@Dan: boiling it down, then, it seems that what you’re arguing against is the fractional banking system. If the system creates money from debt (promises) rather than from tangibles there is no evidentiary trail that can be used to audit accounting. If the money creators are private for-profit institutions, there is no ethical control.”

    I’m not familiar with the term ‘fractional banking system’. I spent my life as a craft-person. So let me answer you from my world:

    Every person of craft creates money by creating value, as their ‘work’. This is reflected in the double-entry Book-of-Accounts that balances ‘value-created’ with ‘rights-to-ownership exchanged’. If a bank’s economic activity, such as granting a mortgage in exchange for a note on the property, or on a business loan that is creating value by its more efficient operations, then the transaction meets with approval in The Book-of-Accounts that is kept by each of the two parties.

    Today’s ‘financial-industry’, as they like to name themselves, makes no attempt to equate money with its created value-in-exchanged. Electronic money has made the timing of markets way more lucrative than sitting by and waiting for value to be created by craftworkers like me. A Nation can get away with ill-gained market timing for awhile, but like all Ponzi Schemes, the missing value in trade forms as a game of musical chairs that makes for a social-science disaster.

  29. @Dan P

    No argument from me :-) – just want to add that there is a whole other fractal (what IS) that exists that makes “value-created” possible. “What-IS” (Planet Earth, if you will) was constructed to exist exclusively for life-maintenance. How people interact and access resources is of increasing value only if it is a superior way to maintain life – ie. having reserve grains to cover a bad season and having control over the deliver of water, etc. Which means that there really isn’t any scientific or social reason why there should be a organization of “currency” (symbolic $$$$) that produces *working poor* (people who produce the value are not allowed to *own* the fruits of their labor.

    A man-made social-science disaster is indicative of an abnormal response to life itself, a complete breakdown of intellect, imo. Scientists were allowed to identify *psychosis* and use force to contain the psychotic (rule of law) because of the damage inflicted on *what-IS*

    http://monthlyreview.org/2004/04/01/disposable-workers-todays-reserve-army-of-labor

    The eugenics of economists is questionable, isn’t it? It’s based on the assumption that there is a uniformity among the workers based on their self-serving theory that no human being is capable of contributing something unique to the value of life itself. And even if the human being does contribute something unique, they don’t have the *political* right to be valued for it or to enjoy the fruits of their own labor (ownership).

    As Tony F keeps noting – there will be blood…

  30. bobthebayesian

    @ Dan P. — I work in computational social science. Behavioral economics is much more neuroscience and physics based than you might realize, and it’s only becoming increasingly more so. There’s actually been a huge push in recent years to get computational social science lumped in with the “hard” sciences, and I think that’s the right move, especially in economics policy.

  31. @bob – “….No one knows what science doesn’t know, and anyone who says different is trying to manipulate you….”

    Produce the neuroscience data that is proof that people can be genetically altered to enjoy being skinned alive.

  32. bobthebayesian

    @ Annie — It’s like you didn’t even read the post that I linked to. The absence of that neuroscience proof only suggests we haven’t discovered it. It doesn’t suggest that such a thing is implausible. In fact, given what I know about connectome research, I would say that’s not a wild or unreasonable thing to believe could be possible. Taking certain drugs induces such a strong addiction that people hurt themselves in order to obtain more. With enough pain killers and a powerful enough hallucinogen, it might be possible to cause a person to temporarily be so demented as to enjoy being skinned alive. It’s weird, perhaps even unlikely, but suggested by what we know of brain chemistry and how manipulable people’s minds are.

    But you’re missing the whole point. Much of this thread is focused on saying that finance is an unwieldy, social beast that no analysis can tame. But the problem with that is that no one knows what science doesn’t know. If some conclusion (say about what financial policy to enact) isn’t demonstrable with quantitative evidence, then no one can claim to know what it will do, what its side effects will be. This is similar to overconfidence bias and narrative fallacy discussed by Kahneman and Tversky. But, on the other hand, if such a policy has quantifiably demonstrable outcomes, then it’s precisely because it is predictable with data science that we trust it.

    My only real point here was that Simon’s original post seemed to say “Volcker Rule opponents are wrong, bad, stupid, and evil because they accept money from wrong, bad, stupid evil bankers. So don’t ever trust reports from Volcker Rule opponents.” Some of the assumptions that he listed from the Oliver Wyman report are not so easily dismissed, and some assumptions for pro-Volcker studies can be just as easily attacked. So it boils down to Simon’s opinion, which is fine, but just as no one should automatically drink the Oliver Wyman Kool Aid, so also no one should drink Simon’s Kool Aid about why specific prop trading regulation is a step in the right direction.

    This whole thread is another good example of why politics is the mind-killer.

  33. @bob – Restore Glass-Steagall

  34. @bobthebayesian I’m curious, does computational social science get into the history of double-entry bookkeeping?

  35. @Dan – the answer is *no* – and I know you didn’t ask me…

    Here’s an article reporting on the need for a “conceptual model” with which to rule the universe :-)) I think it is within our rights as sane human beings to ask that they launch their concepts on a small experimental scale, first, to PROVE to us it’s not going to blow up:

    http://www.cbc.ca/news/world/story/2012/01/25/pol-vp-milewski-davos-harper.html

    quote – “Here’s a typically Schwabian sentence from the official program: “the necessary conceptual models do not exist from which to develop a systemic understanding of the great transformations taking place now and in the future.”

  36. @Annie, Thank you. That is helpful. There is one simple fact relative to a proper Book-of-Accounts. It records a real-time model of the entity whose books are being kept. What the entity gets in return for the recording of its history is valid picture of — as Reverend Leroy would say: “What is happening now.”

    What we do with knowing our economical present-state, and its history of change, year after year, is our choice. The question then becomes are we better off for knowing our history, or are we not? There has been no decent recording of business histories since the refinement of the microprocessor. Since 1980, software coded programs sold to millions of subscribers has been the code that is writing the legislative rules for trading goods and services. Hence the “financial Industry” is our de facto government today, and not the D.C. crew that is struggling with what to do next D.C.

    Naturally, the more entity’s that record a real-time model of their history the more accurate will be our model of what is really going on with Mother Earth.

  37. bobthebayesian

    @ Dan — It appears to me like you’re simultaneously complaining about several unrelated things. One is that you think only certain goods or services meet your personal criterion for adding value, and your opinion is that modern financial products don’t do this. That’s a fine opinion to have, but many people (in fact almost anyone who has a retirement fund of any kind) implicitly disagree with you. Value is relative to what people are willing to pay and what opportunities for profit they see. It doesn’t have to occur in the form a tangible good. Many artists make tangible paintings that have little or no value beyond the price of the materials used to construct it, for example. Meanwhile, merely the option to buy a stock at a guaranteed price might itself have a large value to someone who believes they can leverage it for profit. Those are just default attributes of the natural world.

    The other thing you’re complaining about is double-entry bookkeeping. After re-reading your comments, I do not understand what your complaint is. Are you saying that companies do not represent their equity as assets subtract liabilities? If so, they are defrauding investors and it is not legal. But, as per the Volcker rule, when a bank-holding institution engages in proprietary trading, this is not at all like an omission in the liabilities column. The risks associated with floating that money to earn profit from it are clearly represented. This was what the comment about fractional banking meant — every bank, even your local bank that grants small mortgages to upstanding community members, takes some fraction of the deposits of its customers and invests it, etc. That’s how we even have credit systems in the first place. Nothing about that violates double-entry bookkeeping.

    I respect your opinion, but it seems to me like you have philosophical issues that go back to the root of investment theory; most people do not share these views even if they verbally say that they do and we’re long past a point in history where it would be beneficial to base banking theory upon antiquated preferences for craft value.

  38. @Bob wrote, “…After re-reading your comments, I do not understand what your complaint is…”

    But you did a fine job of making your lack of understanding be the structure for your argument that it does not matter that you don’t understand it. Kind of snotty, no?

    The philosophical case is whether there is a theoretical *absolute* value. Considering that the entire material world exists, solely, to support life, there is an *absolute* value to the material world.

  39. bobthebayesian

    That’s a weird premise to me. I don’t think the material world exists specifically to support life, nor that there is any intrinsic reason why the material world exists. Life is a chance event that happened and could easily un-happen, and in the limit of high entropy indeed must un-happen. I do find it interesting that we’re going all the way down to intrinsic value philosophy to decide if bank-holding institutions should be allowed to engage in prop trading though.

  40. @bobthebayesian – “…I don’t think the material world exists specifically to support life, nor that there is any intrinsic reason why the material world exists….”

    Scientifically, it does. The entire construct of Planet Earth is arranged to support LIFE.

    You have mistakenly layered a personal philosophy over the facts.

    So now that you know that you are a bona-fide Nihilist – note the inconsistency in your assignment of value to what you say is essentially valueless.

  41. All this chitterchatter on accounting rules are irrelevant, ideological, theoretical debates. Physical products and materials and services will be the valued currency of the next generation. Can you design, construct, or fix plumbing, HVAC, construction, electrical, and digital systems and services; physical gold, silver, water, foodstuffs, batteries, tools, guns, and ammo, et al, survivalist products and services will be the valued currencies.

    All your paper, digital worth exists in the airy regions of the cloud – and goodluck hoping to claim those paper and digital assets should things go pearshaped – and the will.

    The global financial system is a putrid systemically corrupt, malignancy. It is far beyond fixing or repair!

    Burn it all down – reset!

  42. You Annie, make it sound as if the same ones who parted the Earthly seas to make them two, suddenly abandoned the joint —- and left some 7 billion inhabitants swinging in the breeze and not knowing their fate. Perhaps you are actually lucky they have not shown themselves, and from such get to live another day. No, you’d rather hold them and anyone else, not up to your particular standards of accounting, and whip lash them in the name of the Earth and all its resources. The Earth was once a faded sun, after adding water its candle was extinguished and used to support life, life that would one day be judged by the same ones responsible for bringing it here in the first place. Which by the way, I doubt is you.

  43. The only reason I respond to your ad hominem vitriol, Madame Mousy, is because the sadistic Bush Cabal Religious Inquisition years, complete with torture, are OVER. I already agreed to meet you in person to settle in on a *material* level that coincides with my values about *containment*….

    I was having a conversation with *Bob* who said, ” I don’t think the material world exists specifically to support life, nor that there is any intrinsic reason why the material world exists.”

    The Earth was never a faded sun with water added – nice lie to tell kids, though, when you don’t know the real reason…

    and now go talk to Bob who doesn’t believe that there is any intrinsic reason why the material world exists…

    I have absolutely no concern about being judged by COMPETENT judges. Lucifer, Caligastia and Daligastia are the trinity that twisted humanity – the CARETAKERS were the Iniquitors – go figure.

    Now go listen to the voices in your head telling you to keep hating Annie….yes, there you go, take the meds…

  44. @bobthebayesian said: “@ Dan — It appears to me like you’re simultaneously complaining about several unrelated things. One is that you think only certain goods or services meet your personal criterion for adding value, and your opinion is that modern financial products don’t do this.”

    Not quite Bob. In a proper double-entry Book-of-Accounts economic value is recorded in ‘real-numbers’ that are set equivalent to the double-entry that is recorded in ‘ordinal-numbers’. Where real numbers measure the value of artifacts traded in the marketplace, ordinal numbers are ‘words’ that look like ‘numbers’, but are used to create a grammatically told history of the changes that occur in the physical states of products sold in marketplace trades: which the bookkeeper models using the real-number system. In this way a proper double-entry is distinguishing categories of data that differentiate ‘value’ versus the ‘rights’ to that ‘value’s’ ownership.

    @bobthebayesian said:”That’s a fine opinion to have, but many people (in fact almost anyone who has a retirement fund of any kind) implicitly disagree with you. Value is relative to what people are willing to pay and what opportunities for profit they see. It doesn’t have to occur in the form a tangible good.”

    The bookkeeper makes no distinction between ‘tangible’ versus ‘intangible’ opinions, relative to market-value. The bookkeeper is interested in market-price, as the proving ground for ‘value-in-trade’ in maintaining a proper reporting of historical facts. If a buyer pays $100.00 for a piece of blue-sky, then in the bookkeeper’s books that trade is a legitimate piece of history.

    @bobthebayesian said: “Many artists make tangible paintings that have little or no value beyond the price of the materials used to construct it, for example. Meanwhile, merely the option to buy a stock at a guaranteed price might itself have a large value to someone who believes they can leverage it for profit.”

    No problem for the bookkeeper here either. But if the stock proves to have been fraudulent, then the bookkeeper’s history of trades becomes a valuable resource in making victims of the fraud whole.

    @bobthebayesian said: “Those are just default attributes of the natural world.”

    We are still in agreement.

    @bobthebayesian said: “The other thing you’re complaining about is double-entry bookkeeping. After re-reading your comments, I do not understand what your complaint is. Are you saying that companies do not represent their equity as assets subtract liabilities? If so, they are defrauding investors and it is not legal.”

    I’m not ‘complaining’ about ‘double-entry bookkeeping’, I’m arguing that if the proper double-entry history had been recorded for the past thirty years, getting America back on track as a sensible society of cultures, would be a lot simpler than it is going to be, because we don’t have the advantage of being able to audit that history, in order to correct a number fraudulent practices that clearly have taken place.

    @bobthebayesian said: “But, as per the Volcker rule, when a bank-holding institution engages in proprietary trading, this is not at all like an omission in the liabilities column. The risks associated with floating that money to earn profit from it are clearly represented. This was what the comment about fractional banking meant — every bank, even your local bank that grants small mortgages to upstanding community members, takes some fraction of the deposits of its customers and invests it, etc.”

    Now we have shifted the argument considerably. Less that perfect bookkeeping in the broad trading of goods and services has a self-correcting nature in that those who keep a more complete history tend to benefit and those that do not, tend to lose.

    Banking is different in that its bookkeeping has no reason whatsoever to be less than a near perfect history of the facts. What’s more I would consider a corporation to be in the same category as the banks. Clearly in the recent case of MF Global, like at Enron, and like WorldCom, the books were being fudged and the managers and auditors had their arms in the fudge up to their elbows. This was also the case with AIG, and with the banks that did their betting of depositor funds at AIG. Had the U.S. government not come to the aid of these questionable practices, all hell would have broken loose. And we would have no idea as to who should take the blame.

    Now the real travesty here is that we see no signs whatsoever that anyone who is in charge at the FED, The Treasury, The Whitehouse, or the broader financial services group, lifting one finger to repair their inability to record a proper history, as ‘their’ auditable Book-of-Accounts.

    @bobthebayesian said: “That’s how we even have credit systems in the first place. Nothing about that violates double-entry bookkeeping.”

    Bob, are you suggesting here that AIG, MF Global, and the banks involved ran a legitimate set of books?

    @bobthebayesian said: “I respect your opinion, but it seems to me like you have philosophical issues that go back to the root of investment theory; most people do not share these views even if they verbally say that they do and we’re long past a point in history where it would be beneficial to base banking theory upon antiquated preferences for craft value.”

    Important point: every occupation is a relationship between a ‘craft’ and an ‘administration’ of that craft. It is this natural, social phenomena of two categories forming the one ‘life-force’. What the financial services group is doing today is to ignore their responsibility to ‘craft’, because there is money to be made by getting their ‘administrative’ fingers into the ’til’ undetected. This works today for the dishonest craft-person, as banker, because there is no audit trail to easily reveal their dishonesty. That such an audit trail will only come with a proper bookkeeping is ‘my opinion’ as to the ‘philosophical issues’ at stake. I have taken the time to write computer programs that prove that the software that we need can be written. But completing that level of bookkeeping software is more than I can do alone. Hence my comments to this list-server, where I suspect their are persons who want to be helpful to the solution of such travesty.

    This problem today is one that just about every person I know is aware of, but that does not know what to do about it because understanding a proper Book-of-Accounts is hidden in abstract software code. What’s more, the software development community has yet to figure out what bookkeeping is, and how a programmer would write bookkeeping’s 670 year-old tradition of checks, balances, and audit trails into software code.

  45. What if some terrorists infiltrated our bank regulations and imposed capital requirements for banks which would guarantee the dangerous overcrowding of all the officially perceived safe financial havens, like triple-A rated securities and infallible sovereigns; and that those officially perceived as risky, like the small businesses the and entrepreneurs, would find their access to bank credit much more difficult and much more expensive than usual.

    Should not Homeland Security look into this?

    Well, I do not believe that any financial terrorists did it, for purposes of terrorism, but it happened, and that should be what really matters.

  46. @Dan P – I mean, c’mon – check this story out:

    http://www.huffingtonpost.com/social/dzieczko/foreclosure-crisis-old-mortgages-most-egregious-manifestation_n_1233256_131300257.html

    If you paid for it, shouldn’t you be able to *own* it…? So all the people who put down cash for down payments are the *collateral* they were always after to leverage with…schessh round and round and round the BULLSH_T goes – and they’re going to make a deal real soon:

    http://www.huffingtonpost.com/2012/01/27/obama-administration-mortgage-fraud-settlement_n_1236708.html

    @Tony – You are absolutely correct about the bs never ending – however, the bs had to be examined under a microscope to reveal it’s *existential* origins :-) – the INTENT (massive theft). So now we know and next step is up to the people of the *new economy* that you identified as:

    “…Physical products and materials and services will be the valued currency of the next generation. Can you design, construct, or fix plumbing, HVAC, construction, electrical, and digital systems and services; physical gold, silver, water, foodstuffs, batteries, tools, guns, and ammo, et al, survivalist products and services will be the valued currencies….”

    Occupy Town Hall. They DID drill down to the local level and embedded themselves into newly created layers of bs such as *commissions in charge of light bulb replacements* staffed with *volunteers* who are – surprise! – the local agents sent to do the bookkeeping the way Dan P illuminates for us because that is the data that they used to LEVERAGE – aka *THEFT* of ownership rights – everything in YOUR material world to create all the *financial instruments*. I feel crazy just saying the truth because it is so crazy…but it’s getting easier to believe how crazy it IS…

    Now, the Commission in Charge of Light Bulb Replacements was formed – supposedly legally – because they were ALSO going to keep track of *natural resources* in the area and whether the man to land ratio was being breached…but what happened there is that they stopped producing the report – ie. no testing done for the 5 years since the commission was formed on how much radioactive isotopes are in the water…you get the picture, it’s going to be different from town to town what they are NOT doing – which is generating the data on which the public welfare depends.

    So everybody who is still interacting with the REAL material world (after water and power outages happening after every nor’easter, we SAW you – I can confirm that you are REAL)

    you have to go to City Hall meetings (and all the other LOCAL levels – especially *education*)

    and collect the data on the condition of the MATERIAL world in your ‘hood. It never does get away from *survival* – so good luck and BE NICE :-)) when you attend the meetings. Don’t select a hot head communicator to speak for the TRUTH – get a sweet grandma or tiny teacher to box the ears with the TRUTH of the matter as to the INCOMPETENCY of that light bulb commission who have not done their job for 5 years! (or whatever your local issue is going to be – but their collective purpose (The Wrecking Crew) was the same schtick – to STEAL it all to fund EXISTENTIAL WARS in messupotamia).

    *THAT’s* just NUTZ.

    Here’s where they will continue to go – Senator Hatch believes the poor can afford to pay more to HIM so that he can afford to implement an *Austerity Program* for the poor…

    right – feeling crazy just LOOKING at THE TRUTH – hey, don’t shoot the messenger :-)

    that’s all for now – no comment on the *moral hazard* of letting them take away all ownership rights and then giving them the trillions in bail out $$$$ on top of that…

  47. Gregs Gas and Light Company

    If you are north of DC, best wishes to you and yours in the near future.

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

  48. bobthebaysian

    “What defines “unacceptably risky behavior” in one set of market circumstances might be extremely successful, best-interest-of-clients behavior in other market conditions. Either the banks are free to formulate their assessment of that based on their statistical knowledge (in which some fail, some don’t fail) or they aren’t. If they aren’t, you’re effectively saying that a business that makes money by having more successful statistically determined strategies is not allowed to implement those strategies unless you have a look at it first, see if you’re okay with how successfully they’ll take advantage of market inefficiencies, and approve their request to conduct business.”

    Hard to know where to start here. First of all I’m also a “computation scientist” though I’m not sure we’re in the same room on this let along the same ballpark. Black-Scholes does nothing more in my view than guesstimate the variation on one wing of an attractor for what is an iterated non-linear discrete dynamical system. That’s what the market for derived instruments is, though one on steroids given the automation that’s been introduced. And that’s not a guess. It’s a statement of fact, a simple taxonomy of the actual dynamical process.

    Such systems are also called chaotic though that’s entirely misleading. The variation they show on one wing of the attractor can look playable, with marginal wins (and losses of course) as you use statistics to project where the trajectory, called an orbit, is taking you. The problem is that the process, is fractal. In between any given pair of orbits, there can be an infinity of other orbits. Some of those orbits can slip onto another wing of the attractor, where the system behaves completely differently. Statistics are useless in such an event. The so-called “tail” of the distribution where the black swan lives barely captures the reality here. The swan flies away to a different part of the state-space and lives there for a while.

    In short, this is not about statistics and it never has been. It’s about a lack of understanding on the part of investors about the transitions these systems can undergo. The so-called professionals don’t have a damned clue about what they’re dealing with. Even if they do, they can’t possibly prevent it from happening again. It’s built into this sort of dynmical system. And given the previously mentioned automation of the markets, it can and will happen at an even faster clip.

    The result from this crash was predictable: 16+ trillion in money needed to re-float the system so that it can limp along again, for a while, maybe, if we’re lucky. I don’t know what you call this stuff but it isn’t capitalism.

    You know it was just a few short years ago there was loose talk about awarding some sort of prize, maybe even a Nobel, for the adaptation of the idea behind the copula to these and other market investments. I don’t think we’ll be hearing any of that sort of stuff for a while.

  49. @Annie: “@Dan P – I mean, c’mon – check this story out:”

    I have been aware of these stories and other like them for years. I knew it was coming in 1980 when I experience software bookkeeping programs that had no idea of how the double-entry pattern does its proof of a valid history of accounts. What is most sad of all is that 40 years ago bookkeepers served jail time for knowingly practicing false bookkeeping for far less egregiousness than that reported in this story. The most direct criminals in these cases are accounting firms that allowed these practices to take place within the corporations that they are being paid to audit.

    I knew that these practices were out of control in the 1990s. Surely the corporate accountants and auditors knew the same, even if they had to learn these truths from anecdotal stories being passed around by the friends and relatives of these accountants. So how is it that professionals today audit the books without sampling practices that they know to be corrupt, if it is their job to certify that the state of the corporation, whose books they are auditing, are in truth, what is being reported on the corporation’s annual report?

    The answer to that question is simple. What passes for bookkeeping today is not bookkeeping in the sense of how bookkeeping, accounting, and auditing was practiced 40 years ago, hence there is no audit-trail. Without an audit trail, there is no accountability. We have become a ‘mob-culture’. As we listen to the news, as well as to the presidential debates, why is this new form of ‘mob-society’ not a topic of political discussion? How bad will it have to get before it becomes a topic of political discourse?

    This quote taken from the story tells it all:
    “We see a lot of cases like this, where they are trying to collect even though there is no mortgage,” said Wilson’s lawyer, Jennifer Schultz. “Once the system has marked you as delinquent, there’s just this massive machinery that takes over. There are people whose lives are destroyed by the system, and there’s no way to fix it.”

    The way to fix the problem is not to occupy Wall Street. It is for the citizenry to form study-groups that sit down and learn the 670 year old pattern language that enables a proper double-entry Book-of-Accounts. If the USA is to be a constitutionally governed nation, the citizenry at large must get some elbow suspenders and green visor and learn how double-entry bookkeeping works. Only with that war on corruption will the flow of events be set in motion to write bookkeeping software that proves the validity of its accounting statements. If there was a better way, someone would have found it. There is no other way than to move the paper driven system that had been in place for over six centuries to a computer driven system that in fact gets the job done correctly.

    Today’s problem is in the software that is not coded correctly.

  50. Desi Girl - Doing Gods Work

    There is no proof that unpaid research is better than paid research.

    Simon Johnson and Admati are two classic examples of shoddy researchers paid for by fleecing students at MIT and Stanford.

  51. Sonic Charmer
    “Get the big banks out of the business of huge bets on proprietary trades

    What is a ‘huge bet’ and what is a ‘proprietary trade’? You did not define these concepts. You seem to assume there is an easy and sharp line to be drawn between huge and non-huge, proprietary and non-proprietary. I am here to tell you that this is not the case.”

    Let me get my knife out here… First of all, definitions. The banking function is a utility, and should be treated as such. Most – not all but most – of the brick and mortar banking outlets are, like newspapers, magazines, store-bought music, much of book publishing, and any other enterprise whose processes or products can be digitized and automatically transacted or delivered, the walking dead. They’re gone they just don’t know it yet. The Internet is nothing if not a giant exclamation mark. This process is inexorable, with only the details left to work out.

    The basic banking function shouldn’t be tied into any sort of proprietary trading, period. The two should be disconnected completely as they were before the political toadies in Congress did away with Glass-Steagall. It can and should be completely automated, including credit checks using PGP for secure authentication. All of that can, should and will be done.

    Now, once that seperation is complete, the actual trading arm stands out there naked, or not so naked in the case of the shadow “bankers”. I don’t have a clue how to deal with that except to say this: if any of them got any of my money during this outrageous fiasco, then there should be no banks in the shadows, period. If they can’t fail on there own, they can dance in public. That’s my bottom line.

  52. @ Dan P – For consideration – perhaps it’s a new version of The Inquisition…?

    http://www.msnbc.msn.com/id/31510813/#46162232

    Burn the Patriot Act…

  53. @Norm – “…I don’t know what you call this stuff, but it’s not capitalism…”

    I believe *bob* called it *connectome research* – I guess they thought that they had found the mathematical nexus on the fractal of life between ejaculation and a juicy pump and dump transaction – thereby doubling their pleasure. Instead they produced the *flash crash* – go figure :-))

  54. Inquisitions are part of life. They go on for years; they are rebalanced in days. Solutions are magical; magic belongs to believers. In I Ching lore, to begin, is to be a blade of grass pushing its way up through the soil and into the sunlight. When the budding life is as small and as weak as it will ever be, it pushes aside stones and soil many times greater than itself, to live a life in the sun’s warm glow.

  55. Tax policies = INQUISITION

    1.2 quadrillion in derivatives – exactly HOW does that translate into needing to garnish 35% of people’s working wages as *tithes* to support MASSIVE surveillance and censorship…and the endless pre-emptive wars that come with 24/7 manufacturing of enemies?!

    Occupy Town Hall.

  56. Norm Cimon,

    Sorry for noticing your reply late.

    I notice that in it, you still didn’t define the “proprietary trading” you are so sure that banks should not do. Is that because you (like the OP) think that it is an obvious and well-defined concept that can be easily separated from other banking activity? If so then you, too, are mistaken.

    Best,

  57. You misunderstood what I wrote. The banks need to be returned to their original function, and completely disconnected from the insanely risky higher end stuff. It’s a long way from stocking up on treasuries to naked default swaps.

    Now, there’s a bit of room to work with, don’t you think? The banking function should be automated. They can work the margin on the very blandest investments for their profits. Sell the trading desk. There should be buyers out there.

  58. “insanely risky higher end stuff” = what, precisely?

    “original function”, does that include mortgages? Mortgages were at the center of the problem we are supposedly fixing with our new regulation cleverness.

    I also disagree with the supposed huge dichotomy between stocking up on treasuries and selling “naked” CDS. It is perfectly possible to lose tons of money on the former and be ok on the latter. Unfortunately the current regulatory mindset agrees with you that sovereigns ought to be preferentially treated as riskless, but you may notice that is not working out so hot for holders of Greek, Italian, Portuguese or Spanish debt.

    Basically you still haven’t defined the “prop trading” you say you want banned (why not?), you haven’t given a reason to do so, and you haven’t noticed that the banking you seem to implicitly say is a-ok (mortgages, treasuries) have actually been at the center of the crises you’re supposedly addressing. So: I don’t get it.

    But don’t worry, “sell the trading desk” may indeed be an outcome of our current direction; there’s a chance at least some trading desks will be “sold” (spun off) into quasi-separate shadow-banking units in response to idiocies like the Volcker Rule. Progress?

  59. Norm could be a gvt narc lookin to bust anything that does not agree with him. Naked shorts scare the deputy’s to death because they are then exposed and have to step up their insanity in the name of the law. Which by the way includes a hugh number of “Booker T’s” pumped up on anything it takes to get the job done. If their ignorance goes unchecked this increases their confidence that what they are up to good for all and so they expand operation breakdown and make more laws to control society as their power expands.

  60. Yo Sonic… You’re joking, right? If you can’t tell the difference between the gambling hall and the church collection plate, there’s nothing I can do for you. The idea of any sort of equivalence between US Treasuries and Greek debt is about as far out there as you can get. If that’s what torques your bone, and you really believe it, Goldman Sachs has a bunch of slightly used CDSs it would like to sell you. They only have a few feta stains on them.

    The high-rollers leveraged themselves either out of existence, or onto the public dole. The “settlement” with the banks over fraudulent contracts is more proof of that – if we needed any. When I survey this landscape, I see only a bombed-out hulk where capitalism used to stand. And I see you in the smoking ruins proclaiming everyone’s innocence.

  61. The result from this crash was predictable, so true The “settlement” with the banks over fraudulent contracts is more proof of that – if we needed any.