“To Blame Wall Street For the Financial Meltdown Is Absurd”

By Simon Johnson

At the heart of the Treasury Department’s strategy for refloating our largest financial institutions is an important assumption – decision-makers at our largest institutions have “learnt their lesson” and will be more careful going forward.

The latest string of pronouncements from the top of Wall Street suggests that this assumption is badly flawed.

In a column now running on Bloomberg, I review the recent statements of Robert Benmosche (AIG) and Bob Diamond (Barclays).  Their views are not encouraging.  They want to run bigger, more global and extremely complex financial institutions.  They also appear to favor a great deal of leverage (high debt relative to equity) wherever possible.

Steve Eckhaus – a top Wall Street compensation lawyer (he will get you your bonus) – articulated the underlying view with great clarity to Saturday’s Wall Street Journal, “To blame Wall Street for the financial meltdown is absurd.” (p.B13 of Feb.5-6 print edition).

The absurdity here is that we have created Too Big To Fail banks (and insurance companies) and that we are allowing them to become Too Big To Save – while our political elite blithely looks the other way.

Direct link to Bloomberg column: http://www.bloomberg.com/news/2011-02-07/wall-street-knows-meltdown-was-just-bad-dream-commentary-by-simon-johnson.html

111 thoughts on ““To Blame Wall Street For the Financial Meltdown Is Absurd”

  1. Ah yes, the “They made me do it” defense. You’d think Wall Street would be as tired of saying it as we are of hearing it. Interestingly, the new White House Chief of staff (a former executive of JP Morgan) seems to think they ARE responsible:

    At a Bloomberg News breakfast last week, Daley said he had heard the complaints from business people who regarded some of the president’s rhetoric as unduly hostile. On the other hand, Daley said, some irresponsible businesspeople had it coming.

    “Sometimes you have to pick on them — the business community — and I was there in the financial services sector,” Daley said. “One would have to be an idiot to think they shouldn’t have been slapped around a little for the excesses and the abuses that went on.”

  2. Interesting question– which tax payee do we prefer, government or global financial institutions? Tough choice as both are quite adept at misallocating resources in order to benefit a small cohort. But I think I’d give the nod to the latter because they don’t build bombs or send young citizens to kill and die in faraway places.

  3. “Steve Eckhaus – a top Wall Street compensation lawyer…”

    At some point it has to be asked why such ‘experts’ are listened to by the populace as a whole. Though it’s easy enough to understand why those that they shill for support these fabrications.

    The tragedy is that these are very old patterns that this planet can no longer afford…

    I wonder if such a well-paid child has any conception of what a cancer he and his fellow fantasists really are?

    Compensation and the Social Network

    Decision Technologies: Currencies and the Social Contract


    (I’m asserting the Commons-dedicated Account Network(s)* form such a fundamentally necessary technology.)

    *A self-supporting , Commons-owned neutral network of accounts for both political, charitable and speech-related monetary participation… which for fundamental reasons of scale must allow a viable micro-transaction (think x-box points for action in the Commons). The resultant network catalyzes additional functionality for co-ordination of other ‘social energy’ utilization. (If desired, It’s also the most neutral and ultimately politically viable method for the public finance of elections.)

  4. WHAT IF?

    What if, at some level, Steve Eckhaus is correct? Then what? I guess, it’s going to be: We’ll see each other on our way down!


    Yes, WS had been instrumental in the near-collapse of the world system, but were they alone? What were we all doing? Re-electing Bush, flipping houses, degrading education, abusing environment, etc.

    No, I am not implying WS is clean or it shuold not be held ACCOUNTABLE, I’m just suggesting we need to start looking beyond WS and demand more and better of all of us. WS crooks should pay and their ways fixed; however, it looks like it won’t happen for a while. We can all wait for the next bigger one (e.g. bankruptcy of local governments), or start cleaning up from our levels. How confident I am in this possibility? Not very, few more monkey wrenches thrown in the way of our focusing attention close to home and it’s all back to normal.

    For the more speculative inclined, I’ll ask, Who’s going to finish the welfare state, a democrat or republican administration?

  5. Whatever budy. Most, if not all small time ‘flippers’ were crushed, as they should be, but are literal peons compared to multiple trillions of deriviatives. Bankers are junkies, and they transfered all their bad ‘junk’ to the US government, which now all of a sudden is in financial difficulty.

    The amount of b.s. coming out of WS is in direct proportion to DC, which is only reasonable, since they are the same people.
    Obama is worse than GW in that he is turning the screws on the last bit on Roosevelt’s legacy, all the while playing world leader and chastising us ‘liberals’.

  6. The problem is that they have leveraged the system greatly in their favor, Law firms, makers and the judicial system need to pay far more in taxes/work done, than they currently do. The real enforcers aren’t paid 1/1000 of their income gathering cohorts.

    And you are correct about one thing, it wont happen for a very long time because these same people are in charge of these issues and will never agree to lessen their stranglehold on the commenor.

  7. So did this AIG guy use blackboards and make multiple references to 1930’s Germany as examples in order to come up with this crap?

  8. I don’t know, you tell me. As for learning lessons, no they have not, and until thert are changes in the law, you will not see any learned lessons from the tresuary or any other gvt agency. This is and has been a well known fact for many decades, and will continue, for that is his way.

  9. “As for learning lessons, no they have not”

    Sure they’ve learned lessons…on how to get away with outright thievery. They continue to improve that.

    I’m currently reading “all the devils are here” by mclean and nocera. I highly highly recommend it as a counterargument to “they screwed up and they promise not to do it again”. They did exactly what they wanted to do.

  10. Global financial institutions do wage war. They can do it through financial instruments or by influencing governments to do it for them. And then there’s the historical examples of colonial times – the British in India and the Dutch in Indonesia are examples of use of force by private companies.

    Ideally, governments represent people and corporations represent shareholders. I argue that today this ideal for both governments and corporations is astonishingly false. The only hope that free people have is for this misrepresentation to change, and it will take government to force that change.
    Government may not be the solution to all problems, but the State (through the criminal part of the legal system) is the only solution I can see to obliterating a corporate oligarchy/kleptocracy. If anyone has a better idea, please post it.

  11. Well you could start by undoing some 1930’s laws that were enacted by a few overnite, and oppressed upon the citizens ever since, the culimination of bad laws and long periods of time is what have contributed to today misunderstandings. Just undo the unjust laws as fast as they were enacted and presto changeo, in a couple generations everything is dandy. Other than that, your posting up the wrong tree.

  12. The insousiance of senior xecutives on both sides of the Atlantic is staggering. When the Chairman of the UK Independent Commission On Banking warned that the issue of a bnak break up was still on the cards and made some reasone and reasonable remarks about seperating investment and retail banking there was immediate sniping and veiled threats from the banks’ senior executives. Whilst no one dounts that there was a multiple series of failures, over borrowing , lousy even criminally negligent underwiting standards, what has not gone away is the assumption that we have to carry on as usual. This has to stop before the super overpaid and overleveraged banks cause another multiple train wreck that we cannot sort out. The sheer inequalities that show up now in even developed socities are unsustainable and those made to pay for it the middle and working class folks are entitled to their real anger. These elites or over mighty barons tread a very fine line between a spillover into public disorder. It is a real test of Government to rein in this monster, just as union power had to be curtailed in the 1980s. Every attempt at reasoning, to get agreement to restart lending and at curtailing the wild excess pay has met wth resistance, half-truths and outright defiance. Legislate that is what anti-trust laws are for.

  13. They did exactly what they wanted to do.

    And not only that, you went along with it. And you can keep reading too, for mathematics is the great equalizer. And they unfortunitly (for you) still have some time, I’ll let ya know when the scales start to balance, even a nano gram. I mean what de heck.

  14. Dam Herbert,
    Do we have to keep responding to you ‘free-for-all’ers’? ‘Misunderstands’, please.. Yeah, the 1940s-1980 were really ‘tough’ times for Americans-just the greatest era of prosperity for all ever in the history of man.

    By the way, move your a.. to China.

  15. Now don’t me started you part-time renting Earthling, should nothing change in the way of laws, the full brunt of the law will rest on your carcass, so that when show time actually does arrive, there are NO misunderstandings. I mean I don’t the law to mistakenly make another mistake, and have that mistake cost everyone’s future, if you know what I mean, and I’m certain you DON’T. As for China, I think they are movin here. Too bad for you.

  16. Simon, yeah, “they’ve learned their lesson” all right.

    here’s the lesson: 1. rake-in massive profits while the betting is good, and we all know where these profits go; 2. mix in “near total collapse of the world’s financial system”, and not go to jail for obvious crimes of fraud, perjury, usury, and assorted other ills; 3. get your buddies in the gubmint to bail your butt out of a sling, created by your bad bets; 4. keep hiding real liabilities from plain view, and perpetuate the charade; 5. more profits from free money supplied by the boys at the Fed; 6. bigger and bigger bonuses, because everyone is owned and controlled.

    Meanwhile, you’re still insolvent, and your toxic sludge hasn’t gone away.

    RICO was designed to defeat this kind of mafiosi.

  17. Even more reason to abolish the Fed, reform tax laws, and more, so your sludge is not so toxic. And you and RICO are on the wrong side of nature here. Troubling aint it?

  18. Won’t let me respond to you above. You must be ‘tuetonic’ in that ‘part-time-renting-Earthling’ is something you think is funny. Will give a bit for the poetry though..

    Am not for ‘abolishing the FED’, but putting someone with the best interests of the USA in mind, not the upper 1/2%. And we don’t need China to move here, our own people are giving it away to their cronies, foreign and domestic, before the Chinese put step one onto their new Navy Carriers.

    Finally, don’t be so stinking cryptic. What tax laws should be ‘reformed’?

  19. “One would have to be an idiot to think they shouldn’t have been slapped around a little for the excesses and the abuses that went on,” according to Bill Daley.

    Actually, Mr. Daley and Philip H., “slapped around a little” really doesn’t cover it. Criminal prosecutions, criminal convictions and jail sentences would be more in order.

  20. “Am not for ‘abolishing the FED’, but putting someone with the best interests of the USA in mind, not the upper 1/2%.”

    1 Kings, I don’t think we can put someone into power who has the best interests of the country in mind as long as the FED, which is a private institution that represents exclusively the upper 1/2%, is running the money system.

    The banks, the power of the corporations, the corruption of the Supreme Court, and of course the capture of the Congress and the Executive Branch–all of these are daunting issues that will have to be addressed by changing the Constitution. See http://www.MoveToAmend.org.

  21. You had time to respond, Navy Carriers? Don’t mean nothin to me. And boy, I sure would like to think that ANY Govt employie, espicially congress, should be able to do their OWN taxes, or simplify the tax laws so the Einstiens that make laws, can also do their own taxes. You can start there, its not much to ask from citizens who have long since been forgotten. And She lives to be a stinkin cryptic, I’m only backin her UP.

  22. Hey King, hows about we stop writing bills altogether? Just write Earmarks instead, then insert your bill if you think its up to par. That simple idea alone would send a message to Capital Hill to do a one eighty easy. Then the bus driver sticks their nose in all the right books so they better understand the actual law, and that way know no has any more skin in the game than before, and life is good.

    Too easy you say, well perhaps, if they don’t go along just send in the army or marines to straighten um out. No extra bucks, their already on the payroll. No sweat AA

  23. Hey Herbie, all I’m calling for is for some USA Attorney’s to apply an effective federal statute to curtail criminal conduct by bankers, on the USA public, and for people around the globe.

    If that’s on the wrong side of nature, what side are you really on here?

  24. Carla I agree,
    In today’s environment, with the level of corruption off the charts, it’s probably not a realisitc goal. However, say what you want about Volcker, and the ‘men’ before him during the 40-60’s, they worried about the USA, not stock prices, government ‘spending'(read Social Security and Medicare), and other clearly ideological rants. Listening to Greenspan(former stock broker and Neo-Con hack) any time during the 90’s it was clear whose side he was on. Just like old Bernie on 60 Minutes last month-disgusting to hear him say employment won’t come back for years, and Scott Pelly not able, or willing to challenge him on it. That’s one of his mandates, for crying out loud. Then he had the ba..s to say, ‘Well unemployment for college educated is 5-6%’..Hey genius, if ‘real’ unemployment is around 9%, that means non-college educated people(which is the majority-read manufacturing workers) has gotta be pushing 20 plus. You don’t see that as a problem Ben?.. Oh forgot, you’re in Basel, or Colorado, or Martha’s Vineyard making the turn after lunch…

  25. What makes you think Main Street listens to these so-called experts? We just look around at all the for sale signs, empty stores, and friends and family who can’t make ends meet. The conservatives are furious? Well, so are the liberals. Now if we could just get together and pitch in for the guillotine….

  26. “They want to run bigger, more global and extremely complex financial institutions.”

    So they can hide more fraud! “while our political elite blithely looks the other way” for their usual rake-off.

  27. I’ve said it before, and it’ll come around many many times before we experience GFC II … always back a horse called ‘Self-Interest’. Self regulation just doesn’t work, period.

  28. “complaints from business people who regarded some of the president’s rhetoric as unduly hostile.”

    LOL! So, the generational decay in spine stiffness isn’t limited to the “little people” huh? Big shots suffer from it: It is obvious these asshats weren’t around during FDR tenure.

    “Unduly hostile”…These criminals have had it so good for so long they can’t even being talked mean for 2 minutes. This is nano-thin skin big time.


  29. My nature comes from God, and not those that consider Administrating Money their god. That’s my side. And yours again?

  30. I posted this over at 14th’s blog to wish him well on his transition. He’s quit his day time bank job to find a new and better vocation. May be force be with Simon, James and every thoughtful commentator here at Baseline.

    14th, may the Haka force be with you and your fellow travelers:

    All Blacks Haka vs British & Irish Lions

    Chalk it up to the French to post this great video! Somehow I think the Maori may have got it right. They must have had an incredibly rich culture and communal life on those beautiful islands. Then Captain Cook sailed through the South Pacific. Savages they said. But who are the primitives? The Maori may have been way ahead of the great white force whose heirs have destroyed the great coral reefs and built a McDonald’s on every street corner.

    Here are words in English of the Haka chant. Very poetic.

    I die, I die
    I live, I live
    I die, I die,
    I live, I live,
    This is the fierce, powerful man
    Who caused the sun to shine again for me
    Up the ladder, Up the ladder
    Up to the top
    The sun shines!

  31. Does someone have access to Steve Eckhaus’ WSJ article and could they post it here??


  32. Dr. Simon: your article “To Blame Wall Street …” argues from a false construct that conflates risk and uncertainty.

    If there are (and I agree) “extremely complex financial institutions,” then there is uncertainty (see Complexity, Melanie Mitchell). How do you govern determinate risk and indeterminate uncertainty with one-size-fits-all governance metrics? If one-size-fits-all governance is ineffective as recent history of larger and more frequent crashes suggests, then what are the bright lines to demarcate the component segments to be proposed.

    Policy has to move beyond risk management to randomness governance. The independent regulatory variable needs to address a process that is too-random-to-regulate (TRTR) not too-big-to-save scale. Trying to linearly govern a dynamical, non-linear system approximates the failed Gosplan efforts (Ellman and Kontorovich).

  33. Let’s see…we’ve had Enron, WorldCom, Dot-Com, and the Financial Crises, all within the last fifteen years or so. It’s time for a long (breather /JMHO?) break before the next debacle in America, at least until we get are sea-legs back, and I’m only talking about employment for the middle class only? Sounds harsh, but the unemployment of the poor will never go back to normalcy, rather remain high in the 10pc +/+ range for the next twenty years or longer. China, India, Brazil, and even Russia {(energy rich/ Blue-Gold) *(BRIC’s)} will be “Masters of the Universe” with Europe, and the United States bottom-feeder’s…feeding off the crumbs that fall from their table. America, Europe, and others, have had their run? The financial tidal waves have crested for “Imperialistic Capitalism”! Yes, the earth’s polarity has flipped-flopped in this cyclically perpendicular turnstile…this natural nourished and predictable rotation whereas our bounties, and infinite resource fortunes would have best befriended nature’s own Cassandras’ freedom pleas, but rather nurture avarice!

    Indeed, this Mare’s-nest of an incestuous democracy is a litmus test of what’s to come? This paradox…this unspeakable travesty that all fail to see, even though it’s staring us straight in the eyes that even a blind man would sense! The poor have been obliterated, or better said relegated to the trash-bin! We have only a skeleton of middle class that will survive until the next “Too Big to Fail” bubble occurs which will seal America’s fate because of gross egoism.

    It’s easy to point fingers but if everyone’s ox had not been gored this time around, absolutely nothing would have come of this! Think deeply about what’s been going on for the last decade or so in America, and yet no one noticed because “I” got mine selfish attitude that would shame the founders!

  34. @sharonsj: I’m with you…read below, I think some others, including Woop and 1 Kings, may be on the same page, too.

  35. The gvt should simply tell these guys: give up your banking charter or act responsibly. There is no public interest in gvt supporting your business. Besides, Barclays is a foreign bank. Where is the US public interest in facilitating risk taking by a British hedge fund dressed up as a bank?. Too much for mr Diamond I guess!

  36. Does nausea count as an intellectual response? Who is Benmosche trying to convince. Or maybe he just thinks that we don’t understand, or maybe he doesn’t. Either way, it makes him look unforgivingly stupid. After all, why was AIG bailed out at all? Am I somehow missing how Wall Street made horrible bets and hedged them with the AIG CDS’s? Am I somehow mistaken that he wouldn’t have a job I our government had abandoned AIG and Wall Street (as perhaps they should have, or at least hammered out a much tougher deal). This is kind of like the Bush, Cheney and Rumsfelds books, that is, revisionist history that just won’t work. Once we know the truth about what happened, and most of us do, how do you get that genie back in its bottle? You don’t.

    And, now, folks, Treasury, Congress and the FED are building a brand new bubble. And, when this one pops, it will simply be over. I don’t think that Congress will engage in a new bailout, ever, and the FED simply won’t be able to print enough money to fill a galaxy sized hole.

  37. by a British hedge fund dressed up as a bank?.

    With all the right, or wrong, tools I might add. And that alone would answer if there is a US public risk, or a financial percieved risk by others British fund or not.

  38. In some ways I respectfully disagree, as far as engaging in new bailouts is concerned. Is not a raise of the debt limit ( or QE2, QE3, ect) essencially a bailout to keep gvt, and therefore its citizens, working. And we are certain that the trust of the people, (ie. congress) is in debt to the tune of $14 T. So I am more inclined to believe that bailouts are the new norm and can only wonder when exactly is the best time to tighen the reigns.

    Once M2 passes into the realm of No Insurance, it’s a free for all, espicially among the crowd you mentioned building the brand new bubble. And you might as well ask them, what they would do if the genie did strike it rich.

  39. Mr. Boyko has a good point. Perhaps he will elucidate further?

    Prof. Johnson’s basic conclusion that nothing has really changed at the top is not at all surprising to me. What incentives exist for the financial industry, lobbying industry, domestic and foreign government “industries” to change?

    French President Nicolas Sarkozy is the only head of state that has quite clearly “called out” the banking industry via his exchange with Mr. Jamie Dimon at Davos. And, nothing came of it. Mr. Dimon brushed him off. Status Quo at Davos. Status Quo at the top.

    Nothing has changed, nothing will change without massive protest in the US which is quite unlikely to occur until the next crisis.

    In my metro area, the restaurants and theatres are near capacity, the shopping plaza parking lots have significantly more vehicles than last year, car sales are way up in my area and so on. New and existing housing sales are still in the drink but clearly, quite a number of average Americans in my area are not as concerned as one year ago. Where is the motivation to collectively voice an opinion to our legislature?

    Behavioral modification is intricately woven with punishment/reward. Reward is the name of the game for the above-named industries. It appears lack of punishment, even sans reward, is the name of the game for many in the general public. The perverse incentives are in place.

    The propoganda opiate appears to be effective.

  40. Another big Simon Johnson Lie: “The proponents and recipients of bailouts include leading bankers such as Hank Paulson, a Republican and former head of Goldman Sachs Group Inc. and U.S. Treasury secretary, and Jamie Dimon, the CEO of JPMorgan Chase & Co., the country’s second largest banking company, who leans Democrat.”

    1) Dimon has always been in the anti-bailout camp. He has always maintained that Banks should be allowed to fail
    2) JP Morgan was forced to take $25B to make the optics of TARP look good
    3) JP Morgan’s size allowed it to absorb Bear Stearns and Wamu

    Johnson’s supreme sense of ignorance is not allowing him to discern logical arguments from illogical arguments. MIT should allow tenured professors to be fired for knowingly making false statements and to support their personal views.

  41. I’d be careful about whom I support these days, I understand that JP Morgan co. is in some hot water somewhere. Pants aren’t on fire yet, but it’s gettin hot in the kitchen no doubt.

  42. @cedar

    In keeping with transparency and full disclosure, I have spent my entire career in the financial services industry (40+ years) as a regulator, practitioner, and consultant. I am the author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361, if you want the Cliffs Notes version see the book review written by Brenda Jubin, Ph.D Thursday, October 8, 2009

    To achieve real regulatory reform, policymakers have to move beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions. While the jury is still out as to what I propose is correct, what Dr. Johnson advocates is conceptually wrong. To grasp the knowledge that you seek requires abandoning conventional wisdom by asking three fundamental questions.

    First, is the capital market OK as is? If so, then why troubling trend of larger and more frequent crashes. 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. I argue that this underlying trend is caused by the conflation of risk and uncertainty resulting in non-correlative information. Bottom line is that bad data mined by bad tools result in bad policy.

    Second, is the market inefficient indicating that reform is a matter of degree to know what to do better? This is the position from which Dr. Johnson argues. The one-size-fits-all, deterministic governance regime remains in force with smaller sized and less leveraged financial firms. This requires ignoring systemic complexity. For if there is complexity as acknowledged in the article, there is uncertainty. Deterministic risk is measurable with foreseeable consequences, while indeterminate uncertainty is not measurable with unforeseen consequences. Flawed constructs that conflate risk and uncertainty result in faulty non-correlative information (Taleb). How can one-size-fits-all, deterministic metrics govern both deterministic risk and indeterminate uncertainty? It would be like having a single policy for governing driving in the US and the UK?

    Lastly, is the capital market ineffective (broke) needing fundamental restructuring in a matter of knowing what to do differently? I argue for the need to segment too-random-to-regulate (TRTR not TBTF) into predictable, risky, and uncertain regimes. If Citigroup’s one-size-fits-all financial supermarket could not cross-sell, then policymakers cannot cross-regulate non-correlative information. To paraphrase Mr. Einstein, the consistent applications of inefficient metrics in an attempt to remedy an ineffective system is insane.

  43. Herbie, for starters, zzzzzzzzzzzzzzz.

    Anyway, Carla, i’m there! :)

    And Bayard, whatever you do, don’t stop posting here.

  44. The problem is not black or white but grey. The causes of the crisis was fraud (especially mortgagae brokers nd speculators), risk model failures (using prime and near prime data (well analyzed subprime) as basis for sub-prime), regulator failure (especially accepting markets self-regulate and fraud is rooted out), failure of legal enforcement system (where were the state’s attorney generals and FBI), capitalism greed (the normal driving state of nature), flawed governance oversight systems, and unethical individuals (free lunch grabbers) that are always there to try to capture value at the expense of others. The financial system will always be integrated if yu want vibrant faster growing economies. Size is a necessity given the scale of borrowers and the preference for privacy. Massive syndication is not always optimal. Blame everyone. Try to assure rules are followed. Be diligent for new methods that lead to a crisis. We live in an ever changing world and therefore oversight and laws have to evolve. Lastly, sometimes things happen because we simply like to keep things the change but the unethical are always changing.

  45. Since the 1980’s we have created a class of people, a den of thieves, in business schools who believe that the only important thing is their own bottom line. They actually believe that they deserve to be able to aquire as much wealth by any means possible, and they should be able to keep all of it. They wrap themselves up in the American flag and equate being patriotic to being cravenly capitalistic.

    Thank you Milton Friedman, and the Chicago School, for your contribution to the destruction of the middle class and the rise of plutocratic rule in America.

  46. Oh please Ann, shirley you could not have missed little jack horner and his plum in a corner, and not asked yourself WHY? Nooo, you went to your favorite bottom line ignoring the past before you. Nobody gets it like they want it, no one hands you any, guarantees. Nodody, but the boulevard. WOOPPY!

  47. Let me make my knowledge base clear before I ask what may be a stupid question..I have no backround in economics, and have little understanding of how things work. So basically I am an average American.

    Are you suggesting that the sandbox that the TBTRs play in be kept separate(ie the money they play with)from other lines of business in the same corporation? So if Citigroup has a line of business(I don’t know the proper terminology) that is considered to be TBTR then the capital behind it and the potential loss has to exist separately from other lines of business so the the potential loss would be isolated?

    I am sorry if I sound silly, but I would like to understand what you are saying and I am a layman…so please talk down, I don’t mind.

  48. Rien, apparently you don’t realize that the government is the banks, and the banks are the government. This is a single entity, not two.

  49. I’ll be more than happy to pull the cord,switch,lever, whatever. And I’ll sleep very well thank you.

  50. The Commodities Futures Modernization Act(deriviatives) essentially circumvented anti-gambling laws in the states, and is the one thing ‘bankers’ fought the hardest to keep. Just look at the chart of the explosion of said ‘innovation’ since the late 90’s-it’s no coincidence that our problems started there.

  51. The act clearly enabled the use of certain derivatives to be used without SEC or CFTC regulation. It did not exclude state insurance oversight (e.g. AIG) or the other listed problems. Securitization was not the problem. It was only the vehicle (e.g. truck used for Oklahoma City bombing). How they were used is the problem. The loans that were included were the problem.

  52. Kings, you decide to selectively focus only on the “flippers,” yet I draw one’s attention to a whole host of issues of which flipping is only one. For all intents and purposes, DC&WS run the show, for we co-conspired to this state of affairs in effect…

    Herbert, I take your points to the effect that: 1) WS is that much more destructive than what meets the eye due to the enormous leverage, and 2) taxation could reduce the incentive to mess up. Neither leverage not taxation has been put into serious conversation so back to the status qvo ante!

  53. Cause the other points were flipping obvious:Bush being ‘re-elected'(probably not);degrading education(4x college tuition in the last 15 years and forgetting to mention Strikes from 1890-1950 doesn’t help); abusing the environment-yes every time I get in my car, but only now are there alternatives); etc.

    “Flipping” houses has nothing to do with a ‘deriviative’ bet on a mortgage. That is the big difference between pre-2000 and today.
    And if some dips..t want’s to buy ‘low’ to sell later that’s his business-but the banks gave him the mortgage, not Carla, Anne, Simon, me…you?

  54. Oh, I forgot Securitization is ‘innovation’. Read what Volcker had to say about it.

    Get off the innovation ‘juice’ my man, go out and work for a living.

  55. Securitization has been going on since the 1930s. Volcher’s point was if taken to an extreme it can create problems. A knife cuts vegetables and can also be used to kill someone. Risk is to be managed and regulated. It cannot be eliminated. We outlaw murder. Does it stop it? A reality check for individuals who would limit risk taking and innovation. You give up long-term economic growth, lower employment and lower standards of living. We could also eliminate banks or further restrict lending to only low risk investments and borrowers and watch the economy grow so slowly that unemployment remains high. Is that the outcome you are willing to accept? If not then how do you provide suppliers of risk a chance of obtaining acceptable returns?

  56. Dimon was happy enough to take taxpayers money to fund the gifts given to them by the Fed of Bear and WAMU. Ever heard of Maiden Lane I and II? What he didn’t want were the fetters that were attached to TARP.

    Who can blame him, when he can make money all day flipping Treasuries to the Fed and shorting silver with no margin calls?

  57. @Ann –

    If TBTR stands for “Too-Big” as in scale, it is an inefficient and ineffective governance criterion. Regulatory scale is linear metric and is ill-equipped to govern the capital market which is a dynamical, non-linear system. Regardless whether framed in terms TBTF, TBTR or TBTS, as long as the terms of engagement are scale driven (“BIG”), the status quo ex ante will prevail.

    I argue that capital market policy has to move past risk management to randomness governance. To illustrate and get away from the inside baseball jargon, let’s change Dr. Johnson from a Ph.D. to an MD. If MD Johnson found a tumor in your breast, would you care to know more about the size (i.e. scale) of the tumor or (1) whether the tumor was malignant (risk), and (2) if malignant whether the tumor had metastasized (uncertainty)? Treating the tumor with a deterministic, one-size-fits-all metric (mastectomy) is far from medical best-practice.

    If you want change, then advocate for real change—not more or less of the same. Accordingly, I argue that until market governance is segmented to conform to the underlying economic randomness of predictable, risky, and uncertain regulatory regimes, the unsatisfactory trend of larger and more frequent economic boom-bust cycles will continue. MBSes comprised of no-money down, NINJA loans that are marked-to-model are uncertain. Would you rate an uncertain investment as AAA?

    I trust the above is responsive to your question and would welcome any follow-up.

  58. They may be obvious, but then why not piece them together? The result is likely to be a composite picture whose characters include the whole of us.

    I posit that seeing ourselves for what we are creates the premise for real change (and truth in advertising ;-).

    No, I have not been on either side of the whole housing business.

  59. A reality check for you, Robert. This current economic/monetary/capitalistic system is not working for most people.

    Do you want to be part of the problem, or part of the solution?

  60. @ DG
    Bear Stearns was a gift to J.P.Morgan Chase, period! The only obstacle in the way was convincing various agencies, and tweaking various anti-trust laws that the price paid wasn’t pennies on the $$$’s, so to say? J.P.Morgan actually *{eg. Barclay’s Global Investors (BGI) Robert Diamond’s purchase of Lehman Brothers NA/ Brokerage&Trading behemoth for a couple of billion dollars for a Investment House that was valued at $350bn./$450bn. just six months earlier is strikingly similar?} had upped the price as not to create **(Note: BS’s was priced at $60/share 12/07?- aka. vicious rumor/mythology?) suspicion. Think deeply about what you just said: Bear Sterns – the 5th largest investment bank in the U.S. was to be sold as a weakened/humbled market [?] stock swap worth $2.00/share (3/16/08) for a grand total of $240 million, and received the usual blessing from the Fed, Treasury, and FDIC. Fortunately, or just some (me paranoid,…?) well thought out choreographed chicanery, some disgruntled shareholders belched at the low ball figure/offer, thusly JPM upped the ante to $10.00/share in a stock swap for a whopping $2.3 billion!

    Next we migrate to Washington Mutual? Coincidently, they too come under the microscope of “The” rumor mill…exactly the same time JP Morgan’s buying “Fire-Sale” binge gets a steamrolling along. Jamie Dimon offers WaMu the same week after closing the deal with Bear Stearns a whopping $8/share in another weakened market stock swap deal du`jour! Surprisingly another mirror image scenario comes into focus – Whoa Nellie! Listen up…by 8/08 WaMu was worth $2/share on paper, whereas one year earlier it was worth $30/share, and worth as much as $45/share in Jan/07.

    Once again led by the Fed,Treasury, FDIC, and Office of Thrift {(OTS) yea, you heard me right?} it was agreed to be purchased (given-away?) to JPM for $1.9bn. Just to add insult to injury, they (JPM) didn’t have to acquire WaMu’s equity obligation!
    Think about the rumor mill that brought a $45/share bank in 2007 to a net worth of “16 pennies” on 9/08.

    Once again with the backing of Tiny (FED) Tim, Hank (Treasury Sec.) the Shank, and Alan (lateral king of the FED) the Econoclast via Ben (the prodigal son?) from the past living amongst, and in the Bushes?

    PS. Ironically Dimon, and Diamond aren’t very friendly/fond towards one another that a large cross border merger couldn’t make them rekindle a long, long ,lost love of convenient acquaintance?

    Oh, let us not forget Jamie baby’s “RACER’s” shan’t we? Oh DG your such a dolt:-))

    Thankyou, Simon and James

    God Bless You, Julian Assange!

  61. Carla, I have no idea what you are implying. Most people do have jobs. The collapse of the construction industry (the outcome of the financial buble-crisis) is a major reason the unemployment rate is too high. This sector will take time to find its equalibrium (1.2M starts). The solution is a middle of the road – compromise policy. Free markets with appropriate regulation and oversight. Investment in basic R&D, education, infrastructure (communications, energy transmission, roads and bridges, etc.), incentives for developing market driven alternative energy, incentives for advanced manufacturing and a national energy/defense policy to reduce our dependence on imported oil (Boone Picken;s plan for use of natural gas, advanced clean coal technology, nuclear energy, regulated off-shore drilling and manufacturing energy efficiency incentives). The financial crisis is yesterday’s news and will not solve the problems of todayor the future. It is being addressed with new regulations and oversight and continuing to beat the dead horse is not the solution.

  62. Stephen,

    You are right within your own terms of reference.

    However one may ask if the technical possibilities in modern finance (combined with an invasion of irresponsible/fraudulent but very well educated individuals) should be regulated at all. As I see it, no regulation that allows the sector to innovate will ever be properly under the control of htose regulators, for the simple reason that the innovators will be structurally ahead. The onus of proof is on the regulators, not the other way around. The regulatory philosophy that used to drive “bank” (the old “commercial bank”) regulation was that banks could do only the things that were explicitly permitted (product powers) and those would be things that could qualify as a “proper incident to banking”. Bank managers, trying to develop shareholder value (as they were incentivized by those shareholders) pushed against those things and lobbied because they were out-innovated by “investment banks”. Ideally they wanted the earnings dynamics of an investment bank (and part of the culture) combined with the low cost of funding of a commercial bank. And the had examples abroad, and were outcompeted in the large corporate market by the investment banks and the foreigners. Thirty years ago there were more than a dozen of “Moneycenter banks”, most of which would also be members of the most clearinghouse, and be primary dealers in gvt securities. But they had no advantageous deposit base outside their own states, and exacly those states were the least attractive for High Street banking. That is how it happened.

    Today, there is no public interest in regulating such a vast range of activities WITH THE EFFECT that those firms are effectively subsidized over other traders, fund managers, corporate advisors and speculators. Every specialized firm not beinmg a bank is treated unfairly by the new regulation.

    So I have a very simple point of view, regulate just waht you can with certainty and the least amount of externalities. Let the market do the rest, and throw in a bit of consumer protection as well as safety nets for the truly disadvantaged (access to accounts, cheap mortgages etc). And concentrate your efforts on regulating pensions…The time-bomb that nobody likes to handle.

  63. Changing history and saying ‘oh, that’s all behind us’ is just the biggest piece of.. And judging by your ‘solutions’ it’s obvious you’re probably one of those ‘Government is bad, but I’ll take the Government check though’…types.
    Yeah, we all agree ‘infrastructure’ is important(though the Pickens gas-plan will probably destroy water supplies if that means anything to ya), but where is your discussion of ‘free’ trade, which is why all the jobs are gone. What is it, 46,000 FACTORIES gone since 2000. Not too shocking that you are silent on that.
    And the ‘financial’ crisis is not yesterday’s news, of course unless you like the fact that we have monopoly banks, insurance, airlines, drugs etc. all interwoven with Government.
    Am pretty sure I know where you fall on that..

  64. No his quote was the only ‘Innovation in the last 20 years for banks was the ATM Card”.

  65. “Tis a silver tongue not tarnished by its brazen inequities aloud
    metaphorically simply polished by a chameleon’s layer deception within
    this alchemist gated chamber throated by silence and stealthy deafness to speech
    beckoning hunger pains its prey very existence the comfort of solace and that of a quick death
    for only a scream of light could enlighten its tenure
    such a lethargically manicured laurel procrastinator is of a hidden silver tongue
    slurring this morphing vocal paradox ostracizing a pinion-less pawl
    again overtly hardened this precious once organ not worth its spit on dung
    preaching the requiem of silence but twice
    the slivery silver tongue was not worth a silent salient thought
    for its masters eyes were just the gateway for the chameleon’s piranha post scripted carrion escape

    where the polished glistening tongue of trojan hinged silver preaches to destinies hollowed parasitic fate”

    as the chameleon’s polish their tongue’s on edges of silver shaded by the darkness of security within

    their life is numbered thrice shortened by the dullness of the once mighty silver tongue”

    so to do they

  66. @ Rien Huizer

    I am in agreement with much of your comment. We seem to have similar points of view that are said differently.

    Three points for further reference and analysis.

    1. Regulation is defined as codified best practices where stakeholder rights must be proportionate to stakeholder responsibilities (see footnote 7, Comments on Release No. 34-49695, File No. S7-22-04 (June 9, 2004) http://sec.gov/rules/policy/s72204/saboyko060904.pdf. What passes today for regulation or the more robust form of governance is “Rulewriting.” Rule-writing is the proscriptive description of an undesirable situation. It does not necessarily produce a net benefit and should not to be confused as the same as governance. Rule-writing is ad hoc policymaking that Band-Aids over the current problem. It expects buy-in from society by describing the undesirable situation and prefacing it by saying “don’t do this.” Former SEC Secretary Jonathan G. Katz commented, that when “the SEC adopts a rule, it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach (Boyko, We’re All Screwed).”

    2. Recognize that markets are complex, dynamic systems. If there is complexity, then there is uncertainty. It is randomness and its component parts of predictability, risky, and uncertain regimes that should be the governance focus NOT scale as in some vapor target of scale’s Too-Big that preserves the ex ante status quo.

    3. Qualify customers and / or there designate representatives so they have an awareness of the different segments of randomness. Regulation is operational insurance. Much as drivers’ education reduces cost, I argue similarly for qualifying investors. Removing unsophisticated noise traders would go along way to dampening opportunism (See Coase).

  67. I find your characterizations of me quite funny and also sad. Your positions are as stiff-necked as the pure free marketers to oppose. Both of you want your perfect worlds but neither have a feasible plan to do it. Pure free marketers assume away the negatives of risk on individuals and an economy as well as what happens when other participants play by different rules (e.g. China). You want to minimize return for risk taking or eliminate risk taking and then expect an economy will grow as fast. Both also paint everyone who disagrees or proposes a middle ground as representing your polar opposites. Risk/uncertainty will always exist. Wealth creation with risk taking is needed for an economy and individuals to prosper. The economy must grow to raise standards of living and to provide a safety net for the less fortunate. One can argue about the safety net support level but significant economic growth is necessary to pay for it. Lastly, other countries in this world are moving forward and investing significantly in the items I previously discussed. They do not care about who is to blame about the financial crisis and would prefer we not undertake competititve investments. England less than a century ago was the premier economic power. Today it is best a 3rd rate country. There is an old saying – “you either make dust or eat it.”
    Natural gas is a less polluting energy than oil and coal. Its extraction, in general, can be made to be environmentally sound. Is the perfect solution, probably not. But does it improve our environment and reduce our dependency on imported oil – absolutely. Continuous positive movement is better than doing nothing and waiting for the perfect solution. your view of a government/business world of monopoly is just not true if you use any generally accepted economic analysis. The U.S. political system is messy but what is your alternative. Personally, the real problem we face in America are the polarized idealogues of both the left and the right who prevent pragmatic solutions being implemented to make America a better country. A better future doesn’t instantly occur but takes time. Today is a better place than the 1910s, 1930s, 1950, 1970s and 1990s. So far, this century has been dominated by idealogues and we have not made much progress. It is time to move on and get back on track to assure the world will be a better place forever into the future.

  68. So, Robert, I’m wondering if you read the Baker piece, and if so, what you thought specifically about the points he made.

  69. Yes. The economic role of government is to create and maintain an environment where individuals will have economic mobility and can prosper. It creates rules and protections for individuals but at the same time protect the right for an individual to make their own choices (obviously within some narrow limits. The authors discussion of central banks is distorted. The goal is to maintain price levels and the lowering or raising rates has nothing to do with redistributions of income (it is a by-product but not the greater good). Patents/copyrights are yes monopolies but also a reward to intellectual property. If every invention/drug/ etc. cannot receive a return then economic growth would be retricted. It costs $1B to bring a drug to market. Would you invest $1B to find a drug to fight cancer or some other disease if you would get zero return? One can argue about what is the appropriate length of a patent/copyright etc. but not whether they should exist. His article and our discussions really make my point. Pragmatism, compromise, balance, etc. are not bad as long as continuously win-win outcomes are the hoped for outcomes. It also demonstrates his understanding the assumptions and principles of various theories are not well understood. Otherwise his comments would not be so wrong.

  70. Carla, I heartily agree, and have said so many times here and elsewhere. Our President doesn’t want to do that, so we keep “looking forward.” You’d think, of course, that the Chamber folks would be bright enough to understand that a little political theater is nothing compared to actually grand jury investigations, indictments, and convictions, but they are too used to not being called to the carpet at all.

  71. Robert, you say: “The economic role of government is to create and maintain an environment where individuals will have economic mobility and can prosper. It creates rules and protections for individuals but at the same time protect the right for an individual to make their own choices.”

    I completely concur.

    In an earlier post, you mentioned that “most people are working.” Maybe this means “most people you know.” Or perhaps it means, “although they can barely sustain themselves and their families,” most people are working.

    Let me share just a small part of my experience: I have friends and loved ones in California, Ohio and Maryland who are unable to find work at all, let alone positions in their fields.

    My own suburb and neighborhood, which I happen to love, have been decimated by the mortgage fraud crisis. Although my house is fully paid for, it has lost more than half of its value and that value is unlikely to come back within my lifetime. Some small-time local mortgage brokers are in prison, but the TBTF banks remain untouched by prosecution so far, and in fact, they have only gotten bigger and more profitable.

    I’ll just stop there for the moment and say that I do not see the “rules and protections for individuals” working.

  72. You are correct the protections failed and you personally. The individuals, such as yourself, have been devastated by this event. I previously listed the many that failed to do their job or were unethical and/or fraudulent. The system failed and we got the crisis. 90%+ of the people are working. Too high, some under-employed, and some not even trying to work. This does not mean we throw out the system. It means we need to improve it so it will not occur again. The outrage is understandable since too many innocent lives were economically destroyed. This was an avoidable event but too many could not think outside the box nor did ones who should have known better understand how risk management should be used.

  73. Unbelievable, yeah the ‘left’ has so much power at the moment..holding up ‘pragmatic’ reforms. Your delusion at the way things really work in D.C. at the moment is astounding.
    If they don’t care about the Commodit.F.Modern act and Glass Steagall then why do they lobby beyond drunken-sailor levels to keep/kill them?
    Um, we can do all your ‘continuous movement’ without the banks controlling our political process. Were you not alive pre-2000?
    The point is they were allowed to get even bigger during the ‘crisis’, the FED now gives them free money, and they ‘invest’ said money in more bank ‘innovation’, rather than the infrastructure you talk about.

  74. You do need to understand how the economy and political system works. Banks are intermediaries. They do little to zero direct investment. They try to lend to credit-worthy borrowers. Intermediation is critical to the success of an economy. Regulation and oversight is absolutely necessary to avoid fraud and excessive risk taking given the importance of intermediation. The financial crisis was a failure of the system to regulate and root out fraud. Size of banks are not the problem – maangement and oversight will be the problem. Our political system is based on minority rights and slow change (sometimes too slow but sometimes too fast). The Senate has institutionalized it to pass a bill you need a super majority (60 votes). This means most of the time you need to develop pragmatic legislation for things to pass. Your “left” or the “right” to pass something either compromise or nothing good gets passed. Well the “left” rammed through legislation without any sense of compromise and then lost the House and weakened itself in the Senate. Instead of a lasting majority it now has to refind its message to the populace. The “right” did it to itself in the early part of the first decade. The net result is the major problems facing America do not get solved. Outrage against the financial crisis is okay but we are facing bigger problems to be solved.

  75. I can agree with a lot of what you are writing. We need realistic solutions and stop-gap measures in order to move forward. We can’t get off of oil, etc. right now and we need energy while new technologies and improvements to old technologies are being developed. We need to responsibly use all available alternatives, including nuclear power, oil, and coal.

    I do not believe that “fast growth” is always desired. Look at what happens in communities that allow fast growth without proper controls and planning. Ultimately the short term financial gains for the few(usually only for the land owners and developers)ends up being a long term disaster for the community as a whole. Growth in the economy needs to be managed too. Also, when the “risk” is not just taken by those directly involved then that “risk” needs to be seriously managed(regulated). I did not participate in the risky bahavior of the banks, yet I was deeply affected by the fall out when the crash came, as were millions of others who did not get subprime loans or invest in the CDSs or CDOs. We all have a huge stake in the behavior of financial institutions, they do not operate in a vacuum.

    I am writing as an average person. Most of us are not finacial experts, or economists, we are people who have checking accounts, some money in a savings account, maybe a CD, retirement in 401ks and IRAs…just average people. I depend on the government to regulate an industry that is at the core of ALL Americans day to day financial health.

  76. Robert, with all due respect, I do not think you understand how the economy and political system work.

    The “left” did not ram the Dodd-Frank Bill through. There IS no “left.” There is no “right.” Financial industry lobbyists wrote Dodd-Frank, and Chris Dodd and Barney Frank, along with the rest of Congress AND the White House, simply do their bidding. Because after all, it’s the campaign cash that makes the whole thing GO.

    In your response to my comments above, you acknowledged that individuals were harmed during the financial crisis….no, entire communities have been decimated.

    Maybe not YOUR community, Robert. Perhaps you are insulated from the pain, but tens of millions of Americans are not.

    And what for? So that we can make sure the big-shots at Goldman Sachs and JP Morgan Chase get even bigger bonuses than ever before?

    Are they lending? OF COURSE NOT. Are major corporations with huge stockpiles of cash HIRING? No, they are not.

    Somehow, I don’t think “refining the message to the populace” is going to do it.

  77. So I went to a Walfart to buy a sled to help me move some stuff easily, and they sent me to the garden area where a woman from India was the sales clerk…that didn’t go well. When I asked where the sleds were she sneered at me as if I was a member of one of the unclean caste in India, and yipped at me “We have no sleds”. So I asked her if she knew what a sled was, in a calm, teaching manner…she stammered and did not answer so I explained to her what it was. Now all this happened in a town that dates back to the American Revolution when it was the main manufacturer center of the iron balls that they fired out of the canons. The town is historic and a walk around town is interesting – one can even see the small hydroelectric dam that was built at one point where the River flows fast into the waterfall a few yards downstream.

    Being politically correct about other people’s culture is something that others are demanding and quite unable to give.

    So “poverty” breeds all sorts of strange bedfellows, doesn’t it?

    After the oil rig blew up in the gulf, aren’t a lot of people living in poverty now from THAT series of “bad choices”?

    And what about cheap cars? Who made the “bad choices” that ended up in the creation of the existence of that mechanical nightmare of mediocrity in 2011 – the “cheap” car?

    We all should start walking away from any topic that conjures up the original thought about the “thesis” as being so badly flawed that we don’t know from what direction to start to prove, logically, all the ways it is flawed.

    After this year’s navel-gazing Davos summit and this volley of PSYCHbabble passing off as “deep thoughts” post-Davos about $$$, I think Davos is finished as a credible happening.

    There are some hard facts and figures that pinpoint the demise of pharmaceutical research at the release of the business model that accompanied that blockbuster profit making “medicine” – Viagra….same can be pinpointed to what happened when “oil” was promoted as “cheap” and something we still “need” (to be “happy”?)…

    like Putin quipped about the “tome” of commercials selling “medicine” in Russia – basically, you will DIE unless you start taking this medicine – Putin said, “Get over yourselves, already.”

    Repeat after me, people, “They are NUTZ.”

    Constitutional Convention and BURN The Patriot Act.

    And until then, keep the hardball “threat” on the table – sing it “burning down the house”….everyone who was fired because they actually knew how to make the good stuff at J and J – shouldn’t someone “invest” in getting those people back into the factory making the good stuff the right way again?

    Cheap plastic sleds were there at Wallyfart in the toy department (nice normal young USA black man helped me) but at a ridiculously high price for the quality – some “marketer” had that priced all wrong for “fun”…

  78. That’s some good time jugglin there too, Annie dear. Could you teach my 12 year old the same tricks? Or maybe even lease me some tools in your tool kit. Your kit is just so full of tools, I could spend all day playin around.

  79. @ Carla

    Progressives see government as a means to go on making mistakes. Conversely, conservatives see government as a means for keeping mistakes from being prevented.

    G.K. Chesterton.

    Imitation is the highest form of flattery. Insert market for government and reverse the roles of progressive and conservatives.

  80. Loans were given by small fries at retail banks whom have no idea what they’re doing. They basically gave loans to people who were not qualified an could not afford to pay there loans. Poor judgement on loan officers at your local bank. Not Wall Street.

  81. No-money down, NINJA mortgages gave property rights to renters (no skin tin the game). Packaging such “mortgages” as AAA MBSes appears to be violative acts of transparency.

  82. @ Stephen Boyko: “Progressives see government as a means to go on making mistakes. Conversely, conservatives see government as a means for keeping mistakes from being prevented.”

    Clever. But all this partisan nonsense is silly and false.

    Of course, it is doing exactly what it was designed to do: distract the populace from the fact that multinational corporations (including banks) own everything and run everything. Government exists to support these entities. Usually the support is somewhat covert; sometimes corporate welfare breaks out into the open in a blaze of glory as with the TARP.

    Now in Eqypt, the population has gotten the right idea, and all the power brokers in the world are bursting their brain cells trying to figure out: how do we keep a lid on this and our fingers on the levers of power?

    It is comical watching the Obama administration and the U.S. foreign policy establishment attempt to grapple with this. Every move they make seems to be just too little, just too late.

    The Eqyptian people are becoming giants, and world leaders are being revealed as Emperors without clothes. It is quite the peep show.

  83. I don’t think the international banks respect or adhere to national borders. Governments are just for show; the banks RUN the show. This is possible of course only with the tacit approval of the people; or their suppression by brutal means; or some combination of both.

  84. @ Carla

    I would like to elaborate upon the earlier post.

    First, the comparative quote to Dean Baker’s

    “the central divide between progressives and conservatives is that progressives trust the government to make key decisions on production and distribution, while conservatives trust the market”

    is from British author G.K. Chesterton (1874-1936).

    Now for what I believe to be of some importance is the premise that we live in a multifaceted, integrated economy. This requires reflexive market-government analyses. Whenever one group’s analysis exclusively uses either market or government, it creates errors of conflation (treating different components as though they were the same). You cannot use monolithic metrics to govern a multifaceted economy.

    This is my trouble with the one-size-fits-all TBTF approach advocated by Dr. Johnson and others. TBTF becomes TRTR as it conflates risk and uncertainty.

    As mentioned earlier by way of illustration and to get away from the inside baseball jargon, let’s change Dr. Johnson from a Ph.D. to an MD. If MD Johnson found a tumor in your breast, would you care to know more about the size (i.e. scale) of the tumor or (1) whether the tumor was malignant (risk), and (2) if malignant whether the tumor had metastasized (uncertainty)? Treating the tumor with a deterministic, one-size-fits-all metric (mastectomy) is far from medical best-practice.

  85. I am deeply skeptical of Simon Johnson’s conclusion that the financial crisis is due solely or even primarily to the misbehavior of the leadership of the largest banks. I do not buy such facile scapegoating.

    Now, the so-called evidence he provides is largely “true” info, that is, it is accurate information, BUT this accurate info does not really support his somewhat extreme conclusions.

    Big Banks should have behaved differently in 2005-2008. Ok, I buy that much,… but this does not mean that the major banks caused the meltdown all by their lonesome selves,…they did not.

    Who else am I blaming ? Robert Rubin, Larry Sommers, Alan Greenspan, and perhaps 20-50 other policy makers, including some former senators, such as Chris Dodd.

    Much of the trouble did not stem from Big Banks. AIG’s indemnification of CMO incited a bigger mess, and it is wrong to blame BIG BANKS alone as the heart of the problem.

    AIG is of course not a bank, and most of the AIG organization had no knowledge and absolutely nothing to do with this rash type (Default Swaps) of risky action.

    Fanny and Freddy are not banks either, and they certainly had a hand in flooding markets with weak CDO paper. As did thousands of loan originators wielding below-standard quals, doing business on Main street, all over the country.

    The ratings agencies played a key role, too. Investors counted on these firms to measure the risks accurately—and they failed to do so.

    Also remember, A number of large banks did go under (were not rescued) including Bears, Lynch, Lehman, and others (WAMU). If the leadership of these banks were counting on too big to fail, they were total fools. Any bank that counts on Too Big to Fail is acting recklessly, not just then, but NOW TOO. Ask Fuld.

    Honestly, trying to blame the leadership of large banks alone, to me, sounds deeply skewed. The notion feels like the kind of politically loaded bogus charge coming from the ranks of the British Labour Party elite.

    To compete effectively in world financial markets, America needs to have banks that are as large and strong as their international competitors.

  86. The Financial Crisis – Not Fannie and Freddie This argument is well laid out and backed by clear evidence. It puts the main cause of the Financial crisis on the shadow banking system; unregulated derivatives


    Ritholtz – The Big Picture – Politics Most Blatant: Conservative Ideas Can’t Escape Blame for the Financial Crisis by David M. Abromowitz, David Min

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