Dean
29th May 2010, 19:43
The late 2000s recession has adversely affected employment, working-class buying power and housing, currency value, as well as investment products like CDOs and ABSes. The recession was precipitated by one of the most profitable methods of investment “fraud” we have seen – this involved the sale of “top priority” mortgage securitizations which the selling firm was also in the process of short-selling (in crude terms, “betting” that the product will lose value).1,2 The uniform character of these finance products insured that they would default around the same time, creating a so-called “perfect storm” for an international recession (In fact, Jon Stewart did a great piece on this topic earlier this month, pointing out that the media frequently uses the “perfect storm” excuse – he was apparently attacking the mystification of economic systems so rampant in mainstream media.3 The bad (subprime) mortgages in these securitizations were largely attributed to risky lending and variable rate loans.
The result was a wide-spread housing bubble which popped, a massive over-night transfer of federal funds to banking firms (executed by the “left leaning” Democrats!), fundamental changes to asset management regulations which allowed financial institutions to subjectively asses their assets (rather than the market assessment – the former standard - which would have left most firms insolvent), and a trickle-down effect of the compromised profit line (financial firms channel their losses to their consumer and laborer constituents to stay competitive).
The “trickle-down” of these losses is a familiar experience to the working class, whose real wages have consistently shrank in the last 30 years.4 In this case, inflation has continued, but the U.S. has been incredibly lucky in this regard. It has primarily been developing nations which have experienced this burden,5,6 though Chinese attempts to develop western-style currency protectionism were met with criticism in the US legislature, and the nation appears to be bowing to the pressure.7
Inflation, reduced labor expenditures (layoffs and demotions), foreclosures, nationally prejudiced inflation, liquidation and collapse of firms, S&P value downgrades, the reduction of investor confidence and bank seizure of assets due to default all occurred as a result of the aforementioned economic tactics. In fact, just a week ago, Evans-Prichard quoted Larry Summers, Obama’s “top economic advisor”:
"We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on"8
I don’t believe that “fraud” played any serious role – at least, not unique or unconventional fraud, but if it is fraud, it is a rather mundane one, akin to the contract buyouts companies use to unburden themselves with laborers who have seniority benefits. This “fraud” has proven to be rather lucrative, since the guilty firms have enjoyed massive taxpayer support, decreased regulation (where it matters to their profit margin, that is), and the history of fraud – notably Koch Industries’ massive oil fraud and comparably negligible fines9,10 which left it the largest privately-held firm in the 90s – indicates that there will be no disincentive for banks to participate in this “fraud.”
Perhaps things might be different if Robert Khuzami, the SEC’s chief investigator, wasn’t also responsible for the same “fraud” committed at Deutsche Bank AG.11 Maybe things would be different if fines for pharmaceutical fraud paid by Pfizer amounted to more than 14% of the revenue from “fraudulent sales.”12
But I don’t think so. I think it’s laughable to call these highly-profitable, effective methods of capital acquisition “fraud.” If it is fraud, then the “captains of industry” are heavily engaged in it, and it may as well be a legal requirement for them to do so in the same way that “publically-held” corporations are required to perform profitable ventures.
The fact is that this is nothing more than capitalism. It just turns out – unsurprisingly to anyone who has ever read Karl Marx, Al Jazeera or even The Economist – that the most efficient methods of holding, acquiring and expanding capital consistently disempower “marginal players:” the working class, consumers, and the like, that is stake-holders who are not share-holders. It’s the law of market economies – capitalism is the only sensible policy in a market economy, and it always transfers economic power to the ruling class.
If we don’t want this to happen again, we have to dismantle finance capitalism (a short-term solution, since it will quickly rebuild itself) or liquidate the autocratic economic system and transfer its power to the global masses. All economic stimuli (another 200bn one is in the works!8) will result in more inflation, further disempowering the working class (if only once the stimulus runs dry) and global populations reliant on US markets.
1 Wall Street Journal: “The Making of a Mortgage CDO”
http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=true&settings=false
2Goldstein, Jacob: “The SEC’s Case Against Goldman Sachs, Explained” via NPR (April 16, 2010)
http://www.npr.org/blogs/money/2010/04/sec_accuses_goldman_sachs_of_f.html
3The Daily Show with John Stewart via The Huffington Post (May 11, 2010)
http://www.huffingtonpost.com/2010/05/11/stewart-slams-wall-street_n_571345.html
4Yates, Michael D: A Statistical Portrait of the U.S. Working Class (April 2005)
http://www.monthlyreview.org/0405yates.htm
5Aslam, Abid: Global Woes Hit Developing Countries (June 10, 2008)
http://ipsnews.net/news.asp?idnews=42735
6Chinn, Menzie: Prospects for Inflation outside America via Jeff Frankel (June 28, 2008)
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/06/26/prospects-for-inflation-outside-america-guest-post-from-menzie-chinn/
7Ali, Abid: China’s Fury at “Avatar” Attack via Al Jazeera English (March 18, 2010)
http://blogs.aljazeera.net/business/2010/03/18/chinas-fury-avatar-attack
8Evans-Prichard, Ambrose: US Money Supply Plunges at 1930s pace as Obama eyes fresh stimulus (May 26, 2010)
http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html
9All Business: “Koch Industries Charged with Plotting to Steal Oil From Federal and Indian Lands”
http://www.allbusiness.com/legal/legal-services-litigation/6901163-1.html
10Levine, Yasha: A People’s History of Koch Industries: How Stalin Funded the Tea Party Movement via The Exiled (April 17, 2010)
http://exiledonline.com/a-peoples-history-of-koch-industries-how-stalin-funded-the-tea-party-movement/
11Lucchetti, Aaron: SEC’s Top Cop Oversaw Deutsche CDOs (April 23, 2010)
http://online.wsj.com/article/SB10001424052748704388304575202562283283500.html?m od=WSJ_hpp_MIDDLETopStories
12Evans, David: Pfizer Broke the Law by Promoting Drugs for Unapproved Uses (November 9, 2009)
http://www.bloomberg.com/apps/news?pid=20601109&sid=a4yV1nYxCGoA&pos=10
The result was a wide-spread housing bubble which popped, a massive over-night transfer of federal funds to banking firms (executed by the “left leaning” Democrats!), fundamental changes to asset management regulations which allowed financial institutions to subjectively asses their assets (rather than the market assessment – the former standard - which would have left most firms insolvent), and a trickle-down effect of the compromised profit line (financial firms channel their losses to their consumer and laborer constituents to stay competitive).
The “trickle-down” of these losses is a familiar experience to the working class, whose real wages have consistently shrank in the last 30 years.4 In this case, inflation has continued, but the U.S. has been incredibly lucky in this regard. It has primarily been developing nations which have experienced this burden,5,6 though Chinese attempts to develop western-style currency protectionism were met with criticism in the US legislature, and the nation appears to be bowing to the pressure.7
Inflation, reduced labor expenditures (layoffs and demotions), foreclosures, nationally prejudiced inflation, liquidation and collapse of firms, S&P value downgrades, the reduction of investor confidence and bank seizure of assets due to default all occurred as a result of the aforementioned economic tactics. In fact, just a week ago, Evans-Prichard quoted Larry Summers, Obama’s “top economic advisor”:
"We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on"8
I don’t believe that “fraud” played any serious role – at least, not unique or unconventional fraud, but if it is fraud, it is a rather mundane one, akin to the contract buyouts companies use to unburden themselves with laborers who have seniority benefits. This “fraud” has proven to be rather lucrative, since the guilty firms have enjoyed massive taxpayer support, decreased regulation (where it matters to their profit margin, that is), and the history of fraud – notably Koch Industries’ massive oil fraud and comparably negligible fines9,10 which left it the largest privately-held firm in the 90s – indicates that there will be no disincentive for banks to participate in this “fraud.”
Perhaps things might be different if Robert Khuzami, the SEC’s chief investigator, wasn’t also responsible for the same “fraud” committed at Deutsche Bank AG.11 Maybe things would be different if fines for pharmaceutical fraud paid by Pfizer amounted to more than 14% of the revenue from “fraudulent sales.”12
But I don’t think so. I think it’s laughable to call these highly-profitable, effective methods of capital acquisition “fraud.” If it is fraud, then the “captains of industry” are heavily engaged in it, and it may as well be a legal requirement for them to do so in the same way that “publically-held” corporations are required to perform profitable ventures.
The fact is that this is nothing more than capitalism. It just turns out – unsurprisingly to anyone who has ever read Karl Marx, Al Jazeera or even The Economist – that the most efficient methods of holding, acquiring and expanding capital consistently disempower “marginal players:” the working class, consumers, and the like, that is stake-holders who are not share-holders. It’s the law of market economies – capitalism is the only sensible policy in a market economy, and it always transfers economic power to the ruling class.
If we don’t want this to happen again, we have to dismantle finance capitalism (a short-term solution, since it will quickly rebuild itself) or liquidate the autocratic economic system and transfer its power to the global masses. All economic stimuli (another 200bn one is in the works!8) will result in more inflation, further disempowering the working class (if only once the stimulus runs dry) and global populations reliant on US markets.
1 Wall Street Journal: “The Making of a Mortgage CDO”
http://online.wsj.com/public/resources/documents/info-flash07.html?project=normaSubprime0712&h=530&w=980&hasAd=true&settings=false
2Goldstein, Jacob: “The SEC’s Case Against Goldman Sachs, Explained” via NPR (April 16, 2010)
http://www.npr.org/blogs/money/2010/04/sec_accuses_goldman_sachs_of_f.html
3The Daily Show with John Stewart via The Huffington Post (May 11, 2010)
http://www.huffingtonpost.com/2010/05/11/stewart-slams-wall-street_n_571345.html
4Yates, Michael D: A Statistical Portrait of the U.S. Working Class (April 2005)
http://www.monthlyreview.org/0405yates.htm
5Aslam, Abid: Global Woes Hit Developing Countries (June 10, 2008)
http://ipsnews.net/news.asp?idnews=42735
6Chinn, Menzie: Prospects for Inflation outside America via Jeff Frankel (June 28, 2008)
http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/06/26/prospects-for-inflation-outside-america-guest-post-from-menzie-chinn/
7Ali, Abid: China’s Fury at “Avatar” Attack via Al Jazeera English (March 18, 2010)
http://blogs.aljazeera.net/business/2010/03/18/chinas-fury-avatar-attack
8Evans-Prichard, Ambrose: US Money Supply Plunges at 1930s pace as Obama eyes fresh stimulus (May 26, 2010)
http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html
9All Business: “Koch Industries Charged with Plotting to Steal Oil From Federal and Indian Lands”
http://www.allbusiness.com/legal/legal-services-litigation/6901163-1.html
10Levine, Yasha: A People’s History of Koch Industries: How Stalin Funded the Tea Party Movement via The Exiled (April 17, 2010)
http://exiledonline.com/a-peoples-history-of-koch-industries-how-stalin-funded-the-tea-party-movement/
11Lucchetti, Aaron: SEC’s Top Cop Oversaw Deutsche CDOs (April 23, 2010)
http://online.wsj.com/article/SB10001424052748704388304575202562283283500.html?m od=WSJ_hpp_MIDDLETopStories
12Evans, David: Pfizer Broke the Law by Promoting Drugs for Unapproved Uses (November 9, 2009)
http://www.bloomberg.com/apps/news?pid=20601109&sid=a4yV1nYxCGoA&pos=10