MARK MARTINEZ' BLOG

WHAT FREE MARKET? UNCLE SAM WANTS YOU TO SPEND ...

2012-01-30T12:35:00.000-08:00

In my classes I always make the case that we don't have a free market. The very visible hand of the state is involved in subsidizing and encouraging purchases and other activities that many of us simply take for granted. Uncle Sam wants you to spend, and to spend on things that are supposed to make us all better off (at least that's the way the programs are sold to us).

Let's take employer provided health insurance, for example. I'm sure most of you look for jobs with employer provided health insurance, and are thankful when you find a job that can provide it, right? Well, guess what? Your employer doesn't actually pay for your health insurance. You do. And so does your neighbor.

Your employer might pay the insurance provider, but your employer then gets reimbursed by the federal government (i.e. the American taxpayer) for the expense. While the process is called a tax deduction, it's also the essence of fiscal policy; i.e. when congress creates legislation that encourages certain economic activities over others. Over the next four years the medical plan your employer "provides" will cost the U.S. taxpayer over $1 trillion.

Below I've attached a brief list of several major tax deductions designed to encourage spending & investment, and what they will cost the U.S. taxpayer this year (over $600 billion) and a few years down the road.

One thing should be clear from this list. The federal government - at the request of industry lobbyists - is doing a lot to keep our "free market" afloat (just ask Mitt Romney). Whether you agree with the long list of write-offs and deductions is another matter.

- Mark

YEAH, LET'S TAX THE POOR ...

2012-01-26T14:29:00.000-08:00

Responding to President Obama's call for a fairer tax code, Fox News is demanding that the poor pay more in taxes. A couple of points here.

First, as I've pointed out elsewhere, President Ronald Reagan was on board with revising the tax code so that millionaires paid a greater share than bus drivers.

Second, even if we turned the poorest Americans into paupers and industrial slaves and taxed and confiscated everything the poorest 50% of Americans own today (about 2.5% of our nation's wealth), this would amount to roughly $1.2 trillion (give or take a few hundred billion).

While $1.2 trillion is a lot of money this amount still wouldn't pay for the first installment of the Wall Street bailout (well above $4 trillion, to date), let alone for the amount that that we, as taxpayers, are now responsible for (between $9-14 trillion).

Third, Adam Smith, the intellectual godfather of capitalism, believed that higher tolls on luxury carriages should be charged. Why? Because the "indolence and vanity of the rich" should be made to pay for the public good.

Fox News ... clueless, again.

- Mark

THE "HORRIBLE GIFT FROM GOD"

2012-01-25T11:47:00.000-08:00

If you're OK with torture ... support a "qualified" death penalty ... oppose euthanasia for the terminally ill ... and believe over 100,000 civilians killed in a reckless war of choice is justified ... how can your support for the "dignity of every human life" be your rationale for denying women, who have been raped, the option to choose what they want to do with their bodies?

I'm asking this because Rick Santorum believes that women who've been raped should welcome their "horrible gift from God" by making the "best out of a bad situation." Hence his opposition to abortion as an option for women.

Seriously, can someone explain how torture, lethal injection, living with a cancer ridden body, and supporting reckless wars of choice helps to uphold and defend the dignity of every human life? Where's the spiritual and philosophical symmetry here?

Anyone?

- Mark

HISTORY: "ON HOOVER'S ATTEMPTS TO RESCUE THE BANKS"

2012-01-25T05:32:00.000-08:00

Bloomberg.com has a regular "Echoes" column that covers economic history. The articles are not long, are informative, and provide insight into who we are today. Below I've posted the opening to Phillip Scranton's article "On Hoover's Attempts to Rescue the Banks." If you see similarities to what's happening today you're not alone.

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In 1929, there were nearly 25,000 banks in the U.S. Many European nations had fewer than 100. More than 90 percent of U.S. banks served small towns and rural districts, held state charters and hadn't joined the Federal Reserve System (which was mandatory for nationally chartered banks). Thus they couldn't seek loans from the Fed to support liquidity.

Given that deposits were uninsured, "runs" commenced when rumors circulated that a bank was having difficulty collecting mortgage and loan payments. Accountholders lined up hoping to recover their savings or liquidate their checking accounts. Banks often responded by limiting payouts or requiring, say, 30 days' notice for withdrawals. Fears of being "wiped out" spread and deepened, credit dried up, closures multiplied.

About 800 banks closed their doors in late 1930, and more than 1,500 in 1931 ...

Read the rest here.

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- Mark

STUFF THAT I SHARED WITH OTHERS

2012-01-23T17:06:00.000-08:00

What happens when the states' rights argument goes rogue? A pictoral account of marriage and race in the 1960s via Loving v. Virginia ...

Mitt Romney has more baggage than vision: Check it out here (hat tip to Brian) ...

From PCMag.com we have the top five reasons to oppose SOPA &PIPA.

How SOPA might affect television commentators: Check what Jon Stewart has to say about SOPA.

- Mark

CORPORATE PERSONHOOD ... STILL A FLAWED IDEA

2012-01-23T11:53:00.000-08:00

Two years ago this week, on January 21, the Supreme Court lost it's head. Specifically, in Citizens United v. Federal Elections Commission a split Supreme Court ruled that corporations could dump as much money as they wanted on political campaigns. No joke. Five members of the Supreme Court think it's a good idea to give corporations unlimited voice in America's democratic experience.

Below is an op-ed article - "Corporate personhood: A flawed construct that undermines democracy" - that I penned for the Bakersfield Californian last month. It explains why the Citizens United decision is both flawed, and needs to be reversed. I'm posting it again not only because it's the anniversary week of Citizens United, but because it's one of the most important issues of our time.

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"If you can't vote, you can't contribute." This was part of a conversation I had about political campaigns awhile back. And it stopped me in my tracks. With this simple comment, my friend Larry Moxley summarized how to deal with the influence money has on our political system. And I agreed.

So you know -- and I want to be clear on this -- Larry Moxley and I are on opposite sides of the political spectrum. There's very little we agree on. We've had strong debates that literally have turned heads in restaurants over the years. But we're friends who can agree on the things that undermine our national priorities.

When it comes to the influence of money in our political system, Mr. Moxley and I agree on this: It's undermining our political system.

Most of us understand the influence money has on our politics. Simply put, to become legitimate candidates, office seekers spend so much time chasing large donations and corporate money that they lose sight of what's good for our communities and our nation.

This shouldn't be a surprise. When asked why he did what he did, famed bank robber Willie Sutton replied, "That's where the money is." Candidates go where the money is too. This means going to large corporations and groups with deep pockets. More on this later. But first, some background.

Candidates for office are forced to pursue money in part because of two legal developments. The most recent allows corporations to give almost unlimited amounts to political campaigns. The earlier, and most important, development granted corporations personhood status. GOP presidential candidate Mitt Romney acknowledged this when he shot back at a heckler: "Corporations are people, my friend."

What Romney didn't discuss was how corporations became people. If he had, he would've had to explain how corporate personhood came about.

The key here is an 1886 U.S. Supreme Court decision on taxes, Santa Clara County v. Southern Pacific Railroad Co. While the Supreme Court ruled in the railroad's favor -- arguing corporations are entitled to 14th Amendment protections -- it said nothing about corporate "personhood." A court reporter did.

Specifically, a court reporter -- not a Supreme Court justice -- wrote in the Santa Clara summary head notes that corporations enjoy the same rights as a U.S. citizen. Corporate America has been running with this ruling ever since (yes, I've deliberately oversimplified the primary issues here). And just like that -- and with no birth certificate -- corporations now have the same rights and protections as any U.S. citizen.

Later, the Supreme Court ruled in Buckley v. Valeo (1976) that spending money on elections is a form of constitutionally protected free speech.

This was followed with a 5-4 decision in Citizens United v. Federal Elections Commission (2010), which effectively allows corporations to spend what they want on political campaigns.

The result? Because of the functional equivalent of a typo (1886), corporations are considered people who can speak (1976) as loudly and brashly as they want (2010).

Conversely, citizens in the streets of America are given strict limits (time, place, voice) as to how they can exercise their constitutional rights. And it's distorting our political picture.

If you don't see the picture, here's what's wrong:

* Corporations are legal abstracts, created by the state. Per the Enlightenment, constitutional protections were designed for citizens whose rights were historically abused by large corporate entities and the state.

* Corporate "personhood" status was a legal accident. No claim to citizen rights should rest on the functional equivalent of a typo.

* If we can't yell "fire" in a crowded theater, corporations shouldn't be able to set fire to political campaigns. The Citizens United ruling went too far.

* Unlike most citizens, corporations can directly lobby and get favorable legislation, regular bailouts, subsidies, generous tax write-offs, legal exemptions, limited liability, and can live on indefinitely.

* Foreign subsidiaries can access Madison Avenue, which can distort and elevate their foreign "voice" above most U.S. citizens.

* Corporations find legal cover under proprietary rights (trade secrets) and legal settlements (or fines). This allows corporations to distort and hide their voice.

Our Constitution was created to protect citizens from corporate and state abuses. One way to address the trend of corporate money swamping broader national priorities is to consider what Mr. Moxley has suggested for some time now: "If you can't vote, you can't contribute."

It won't solve all our problems, but it's a start.

Mark A. Martinez, Ph.D., author of "The Myth of the Free Market," is a professor of political science at Cal State Bakersfield.

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Long story short? Citizens United needs to be reversed.

- Mark

FAMILY VALUES CROWD STRUGGLES WITH THEIR HYPOCRISY

2012-01-22T20:56:00.000-08:00

This past week I read through a thread on one of my conservative friends FB site. The thread focused on Newt Gingrich's ex-wife, and whether she revealed anything new in her most recent interview (she didn't).

The comments on the FB site were dominated by the conservative Christian crowd, so there was much said about media conspiracies (against conservatives), comments akin to "why doesn't the media look at Democrats who cheat?" (ignoring how Eliot Spitzer, Anthony Weiner, etc. got pushed out of their jobs), and a whole bunch of "nobodies perfect" commentary that smelled a whole lot like "God doesn't want us to judge." In a few words, they pretty much wanted to white wash Newt, while dancing around the larger elephant in the room ... i.e. conservative family values hypocrisy.

In an effort to set the record straight - and because I wanted to have a little fun - I decided to participate. I also decided to share my comments with you. Here's what I wrote ...

God wants me to speak out here ... At the end of the day I'd like to say who cares about any of this stuff. Seriously. The problem is that conservative politicians and the family values crowd have a tendency to tear down and demonize anyone who disagrees with their moral imperatives on their way up the political ladder. But then we learn about people like Ken Mehlman (gay), David Vitter (whore mongerer), Larry Craig (bathroom enthusiast), Mark Sanford ("I'll spend Father's Day with my mistress in Argentina"), John Ensign ("I do staffer's wives"), Newt Gingrich (serial cheater), Ted Haggard ("Spank me, I'm cured of the gay"), et al. I think most of us are not too concerned about what politicians do with their love lives. It's between them and their significant others (and God). But the moral posturing on the way up suggests that they deserve to be politically isolated and singled out when they get caught. If you want to have an affair? Fine. But be sure you don't build your political profile around family values. There's no conspiracy or evil ploys here. Think it through ...

Funny thing, though. While the thread was full of lively commentary, no one found it necessary to comment on my post. I wonder why ...

- Mark

LIBERTY UNDER FIRE? (AGAIN)

2012-01-21T10:45:00.000-08:00

Original post got jostled in the roll out. Here it is again ...
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Take a look at this proposal working it's way through congress ...

(d) AUTHORITIES. — Nothing in this section shall be construed to affect the existing criminal enforcement and national security authorities of the Federal Bureau of Investigation or any other domestic law enforcement agency with regard to a covered person, regardless whether such covered person is held in military custody.

This is the language that was inserted into the proposed National Defense Authorization Act (NDAA) in the Senate. In plain speak it permits the U.S. government to detain indefinitely, without trial, anyone who “substantially supported al Qaeda, the Taliban, or associated forces that are engaged in hostilities against the United States.”

There are several problems here:

* The proposed legislation allows the United States government to imprison anyone without charge or trial, even if they are U.S. citizens.

* The Bush adminsitration detained, and kept detained, many prisoners after they learned of their innocence because they did not want them on the streets speaking about their unlawful detention (sort of like, "How can we be wrong when there's no one to claim we did anything wrong"?).

* In arguing that the President has almost unlimited powers in times of war, a Working Group Report for President Bush cited Hamilton v. Dillin, 88 U.S. (21 Wall.) 73, 87 (1874) cited a Supreme Court decision which held (unanimously) that it's “the President alone who is constitutionally invested with the entire charge of hostile operations.”

* Current FISA statutes provide enough leeway for the U.S. government to make arrests - and to make their case for the arrest - when it comes to terrorism.

And just in case you want to claim that you can't be held indefinitely because you're a U.S. citizen, Senator Joe Lieberman has introduced legislation (the Enemy Expatriation Act) which would remove U.S. citizenship from anyone accused of supporting “hostilities against the United States.”

And, yes, the language is murky enough to be interpreted loosely.

Yeah, yeah, I know ... al Qaeda, worse than the Nazis, "greatest threat of all time," terrorism, be afraid, etc. But does this mean you neuter constitutional protections in the process? Should we start granting this type of authority to any president because a tactically successful, but largely fringe, terrorist group says "Boo"? Think about it. At the time that this nation was founded, there were far greater threats than what we face today. Britain, Spain, France, Russia, and the indigenous nations on the continent, among other threats, didn't subscribe to Geneva-like conventions either. And they were all around us, literally.

It seems to me that more than a few members of congress need to read about America's history (again). Fortunately, Rep. Ron Paul has introduced legislation to cut this language out of the NDAA.

Sigh ...

- Mark

GOD TOLD ME TO POST THIS ...

2012-01-19T12:30:00.000-08:00

- Mark

WALL STREET'S DOING IT AGAIN (PART II): Our Daisy Chain of Debt

2012-01-18T23:52:00.000-08:00

Last week I wrote in a post that Wall Street was "doing it again." Specifically, in the post I discussed how broker-dealers in the 1960s had "borrowed" assets from client accounts and used them as collateral to secure loans from banks (i.e. repo borrowing). They then used the money to make investments elsewhere, which they (or the firm) pocketed when the gambles paid off. Problems developed, however, because numerous broker-dealer deals failed, which led to over $100 million in losses for their clients.

As you can imagine, investors were furious. Congress acted and we ended up with new regulations through Rule 15c 3-3. To be sure, broker-dealers in the United States still retained the authority to borrow against client accounts. But they would not be able to operate as loosely as they did in the late 1960s (securities accounts were segregated, new net capital rules were implemented, reserve requirements were imposed, etc.). This is precisely why this article by Money Morning's Keith Fitz-Gerald is an eye opener.

In "How Banks Are Using Your Money to Create the Next Crash" Fitz-Gerald makes it clear that market players are not only using client accounts to borrow money and make trades elsewhere, but they're now borrowing and gambling at record levels.

How is this happening, you ask? Check it out.

Let's say you have a portfolio valued at $5,000. Most of what you have is invested in stocks, securities and other market instruments. Suddenly, you find yourself in need of cash (for whatever reason) and dip into your investment fund. You borrow $2,000 against your $5,000 portfolio. Legally you have to pay the $2,000 back or suffer serious early withdrawal tax penalties. But you're fine with this because you're actually paying yourself back.

Good so far? Great. This is where it starts to get good.

According to SEC Rule 15c3-3, the broker-dealers who run your portfolio can take what you owe to yourself - in this case $2,000 - and use that amount as a source of credit for their own use. Loosely speaking, your broker-dealer can use your promise to repay yourself as if it were a promise to pay the firm. The idea is that since you're going to return the $2,000 to your fund, you're actually paying your broker-dealer because they're the ones who manage the account.

It makes perfect sense, doesn't it? I mean, since you owe your account money, it's actually a credit for the broker-dealers who manage your funds, right?

But wait. It gets better ... for the broker-dealers that is.

According to the rules broker-dealers can add 40% of what you owe to "their" credit accounts. So, for example, if you borrow $2,000 from your account your $2,000 debt magically turns into a $2,800 credit (or borrowing limit) for the broker-dealers. Once your broker-dealer borrows $2,800 and then deposits it in a bank the $2,800 (less reserve requirements) can then be invested or lent out elsewhere. This money can then be deposited, and then used again (again, less reserve requirements), then deposited and lent again, then ... well, you get the point.

This daisy chain of debt is one of the primary reasons that the size and volume traded in our financial markets has exploded (computers, deregulation, etc. have also contributed to its growth).

In effect, your debt contract enables broker-dealers to borrow and gamble in other areas that they might never had done, were it not for your account. And while it's been going on since the 1960s, it really exploded with computers, deregulation, and the creation of new security products (repo borrowing surged past $1 trillion before the 2008 market collapse).

The explosion in financial trading has been phenomenal. Consider the following.

While our national economy produced approximately $14 trillion in goods and services in 2011, the total value (i.e. "notional value") that our financial market players have gambled on various market instruments, or now claim some kind of control over, has grown to well over $300 trillion (commercial banks contribute about $120 trillion to this amount).

To put this in perspective, this is akin to your debt-laden neighbor making $60,000 a year and your bank allowing him borrow $1.2 million to ~~invest~~ gamble as they want.Try asking your bank if they'll let you borrow 20 times the value of your assets & income.

But wait. It gets even better. On a global level, if we throw in what market players in the G-10 nations are doing, the total value (i.e. notional value) that our market players now control or claim some kind of authority over now hovers around $600 trillion, or 40 times what America produces in a year. Nice.

At the end of the day, this financial daisy chain is built on your hard work. It derives it's entire value from your financial accounts (and your debt). But here's the kicker. Whatever paper trail of wealth that's created won't be shared with you (have you ever seen a note in your monthly portfolio statement that reads "Here's an extra $20,000, which represents a small part that I earned from using your account to make bets elsewhere"? Neither have I).

According to Larry Fitz-Gerald, not only is this wealth extracting daisy chain legal, but "it's common practice specified in the fine print of most brokerage agreements." And it's called rehypothecation.

I think I'll leave it that for now.

- Mark

ADDENDUM: All of this is only the beginning. The legal use of your account (i.e. rehypothecation) has created a murky world where activities derived from your account (i.e. pledged collateral rights tied to rehypothecated instruments) can be used by several entities at once (p. 9). This is one of the reasons that the size of our shadow banking system (which is largely unregulated) now reaches into the multiples of trillions (p. 9), while the size of our real economy pales in comparison to our symbolic economy by a ratio of at least 20: 1.

NEWSWEEK: WHY ARE OBAMA'S CRITICS SO DUMB?

2012-01-17T16:39:00.000-08:00

OK, unless you're living under a rock, most of us understand how President Obama's policies helped prevent our nation from sliding into a 1930s like Depression. We're not out of the woods yet, but the snowball effect of the Bush economy has been slowed, and even reversed when it comes to adding jobs to the economy.

To be sure, we're still dealing the aftermath of President Bush's decisions to not pay for Medicare Part "D," to not pay for two wars, and to not pay for tax cuts. All of these (and more) have left us at the borrowing mercy of the Chinese, which has added hundreds of billions to our national debt. But at least we've turned the tide, of sorts. The situation is still bad, and we're heading for another Wall Street led collapse, but we can thank the GOP's obstructionism for not getting more done.

This is why I especially like this Newsweek piece - "Why Are Obama's Critics So Dumb?" - from Andrew Sullivan. He goes after both the left and the right for their criticisms of President Obama (though, it would seem, the right is the only group who don't like being criticized). Check out Sullivan's defense of Obama with Chris Matthews.

Visit msnbc.com for breaking news, world news, and news about the economy

- Mark

BEYOND MLK ... ANOTHER MT. RUSHMORE?

2012-01-16T14:34:00.000-08:00

With all that's going on today - and with last year's dedication of the Martin Luther King, Jr. Memorial - it might be time to start thinking beyond MLK and Black History month. How about another Mount Rushmore?

- Mark

FOX NEWS A JOKE ... STILL

2012-01-14T14:22:00.000-08:00

Fox News is at it again (actually, they don't ever stop). They're busy trying to give the economy that President Bush left to President Obama a makeover. Put another way, they're lying. Media Matters has the story, and links, here. I especially like this reference to unemployment rates under Bush (which I blogged about here and here):

In addition to blurring the timeline, media conservatives inflated Bush's economic performance. In August, Limbaugh claimed that Obama inherited "an unemployment rate of 5.7 percent." A few days later, Hannity claimed Obama inherited an unemployment rate of 5.6 percent. Fox's Brian Kilmeade hearkened back to a time when things were "a lot better" under Bush, when unemployment was 5 percent. All of these figures are "flat out lies." Obama inherited an unemployment rate of 7.8 percent.

Long story short? Fox News lies, but their viewers don't seem to give a damn. Sigh ...

FINANCING FAILURE ... A STORY HALF TOLD

2012-01-14T11:03:00.000-08:00

One of the joys I get from writing about the relationship between markets and politics is reviewing books that set out to deliberately elevate the virtures of the market while demonizing the state. Financing Failure: A Century of Bailouts is one of those books.

On the surface, one might be inclined to follow the argument made by the author, Vern McKinley. It's pretty simple, and it makes sense. In a few words he argues that government intervention creates a crutch, which doesn't allow poorly run institutions to fail. End of story. This would be a strong narrative - especially since it's true - were it not for one thing. It's only half of the story.

What McKinley ignores is how financial institutions and other market players have consistently overplayed their hands and then go running to Washington for cover when things blow up (he also ignores how it's the role of the state to protect everyone's interests, and not to simply allow market players to run wild, which even Adam Smith understood ... but this is another story for another day). Things really took off after the Great Depression, when FDR figured out that wild economic swings and periodic market collapse were no way to run a nation. Dangerous ideas, and even more dangerous movements often followed.

In part because of the growth of our regulatory infrastructure after the Great Depression, industry lobbyists have been yapping in Washington's ear ever since.

Year after year, decade after decade, their goal is the same. To find someone to grant a waiver or to write favorable legislation that will either protect them (or their industry), subsidize them, or bail them out. It's even better when they can get market sycophants appointed to head government agencies, where they will dutifully ignore or reinterpret mandates. McKinley either downplays or ignores these dynamics because, in his eyes, market players are virtuous and rational while state sponsored agencies are irrational. For McKinley, government agencies are created - and exist - for no other reason than to antagonize rational market players who do the right thing and rarely over reach.

Is this an exaggeration on my part? Perhaps (it is my blog after all). But the message that McKinley sends follows this logic.

To be sure, I want to make it clear that McKinley is spot on when he argues that the federal government (especially congress) often manages things by the seat of their pants during crisis. It's not a fun thing to watch. The most recent market collapse in 2008 is evidence of this. But McKinley ignores how virtually everything that was done to save the system after 2008 was done at the request of the nation's biggest financial institutions and other market players who had a financial stake in the system. But this is where McKinley's argument falls flat (and lies at the core of what McKinley downplays or ignores).

The 2008-09 bailout was made necessary only after the financial sectors biggest players over borrowed, and then over bet (even surpassing 30-1 ratios). What makes McKinley's "the-state-is-the-problem" argument even less convincing is that the financial sector over borrowed only after the industry pushed for, and secured, favorable rulings in Washington that would allow them to over borrow (like the SEC's 2004 net capital rule change).

Then we want to keep in mind that nobody forced anyone in the industry to go out and gamble on the toxic securities that Wall Street was able to create only after they lobbied congress to deregulate their business practices. This is what allowed Wall Street to create the toxic securities (CDOs, ABSs, etc.) that - as George W. Bush put it - Wall Street got drunk on before 2008.

It has often been said that the definition of chutzpah is a child asking the judge for leniency after he kills his parents because he's an orphan. Wall Street's chutzpah is conceptually similar to this. McKinley ignores how this logic applies to Wall Street. And it shows.

Too bad. McKinley's primary argument - government interventions creates a crutch - is a good one. It's just incomplete.

- Mark

WALL STREET'S DOING IT AGAIN (PART I)

2012-01-12T09:13:00.000-08:00

Once upon a time there was a big problem on Wall Street. But it wasn't 1929. It was 1968. And the problem would persist until 1970. More than 40 years ago broker-dealers who over saw individual investment portfolios decided that it would be a good idea to use the assets in client accounts as collateral for their personal business deals. So, for example, if you had $500,000 invested with a Wall Street firm they would use your assets (mostly securities) as collateral for their own investment purposes.

The idea was that they would put up your assets as collateral, take out a loan, invest that money, make a quick killing, and then return the asset before anyone knew what happened. Shear brilliance, wouldn't you say?

Anyways, in part because of the increased number of trades being made at the time major market players - but especially the broker-dealers - found it difficult to keep track of all the transactions (it was before computers and automation dominated the day). No one really knew who had what. This was OK by many broker-dealers because they really didn't really want their clients (or the Feds) to know what they were up to (proprietary information, you know).

Because market players weren't offering up their own assets as collateral they made big bets. Needles to say, they were also reckless. As the brilliant schemes of broker-dealers began to collapse, a large number of their client's assets (i.e. securities) were seized and sold. After the dust settled, it was discovered that big chunks of customer accounts - may of whose assets were stuffed with fully paid securities - had disappeared.

Wow. As Yogi Berra might have said, it could be déjà vu all over again.

Banks who had granted loans to broker-dealers had cashed in the collateral. Clients lost millions. Many Wall Street firms who had either participated or winked and nodded at the activities crashed too.

In fact, more than a dozen New York Stock Exchange firms failed (many because their "back offices" couldn't keep up). Losses exceeded $100 million. To stop the bleeding of public confidence swift action was taken to prop up the securities industry. Funds were pooled from industry survivors to help compensate clients who had been cheated. But this was just the beginning.

To protect the public Congress enacted the Securities Investment Protection Act (SIPA) in 1970 which, generally speaking, is the cornerstone of Rule 15c3-3 for the Securities Exchange Commission (SEC).

Among the changes that Rule 15c3-3 did was:

* Segregate Accounts: SIPA mandated that fully paid off securities in a customer's account be kept separate from client assets that have been used as collateral, or that have not been fully paid off (i.e. purchased on margin).
* Reserve Requirement / Net Capital Rule: SIPA mandated that accounts have enough liquid assets on hand. This meant implementing a requirement that broker-dealers had to tabulate how much a client's portfolio was worth in the market, and then limited how much could be borrowed against those assets (about 8-15 times the total value; this is the "net capital" rule).
* Securities Investor Protection Corporation (SIPC): SIPC is a federally mandated, member-funded, corporation that protects securities investors if their broker-dealer cheats them or goes under. In many ways, SIPC is an insurance program for holders of securities.

Well, guess what? Because of deregulation (especially with reference to reserve requirements in 2004), much of what SIPA was supposed to do is now being undermined. To be sure, SIPA is still there. But the spirit of the law is being turned into a cruel joke.

It's somewhat complex, which is why I won't continue the discussion here in this post. But there should be no doubt that what's happening helps explain why we're in for another 2008-style market collapse. I hope to have this post up by the middle of next week, if not sooner.

Stay tuned.

- Mark

HUNTSMAN: BIG BANKS ARE THE PROBLEM

2012-01-10T15:40:00.000-08:00

This one slipped in under my radar screen. I found it in the Fox News.com opinion section, so can you blame me? But then again, even a blind squirrel finds a nut now and then ...

Anyways, this column from GOP presidential candidate John Huntsman is a good read. He makes the point that Wall Street's biggest banks are the real threat to our economy. It's generally well written, and demonstrates why he won't be the Republican candidate in 2012 ... he's simply too practical. He also wants to break up the big banks.

Oh well, at least we know that there's hope for the party in the future.

- Mark

OBAMA SET TO CONFRONT GOP STONEWALLING IN 2012?

2012-01-05T11:55:00.000-08:00

So Republicans are up in arms over the recess appointment of former Ohio Attorney General, Richard Cordray, to be our nation's top consumer protection agent. In the FYI category, the Constitution authorizes presidential recess appointees to serve until the end of the year, and don't require Senate confirmation. Cordray will head the Consumer Financial Protection Bureau (CFPB).

The GOP is also upset that President Obama made recess appointments at the National Labor Relations Board. I say, So what ... Who cares? Apart from the fact that the GOP has been deliberately stonewalling President Obama's agenda, President Obama is no where near making the number of recess appointments per year that his predecessors have.

President Obama's hand was forced because Republicans made it clear that unless the CFPB were gutted, and turned into a paper tiger, they would never support anyone who was nominated to head the CFPB, regardless of party.

Simply put, the GOP doesn't like the idea of the CFPB — or anyone else — protecting the interests of ordinary taxpaying consumers. To be sure, they have no problem with Republicans in Congress protecting and subsidizing the interests of Wall Street and the big banks.

They just don't want anyone sticking up for the American taxpayers who underwrite the trillions in corporate bailouts. Go figure.

Anyways, the real problem Republicans have with Mr. Cordray - as the Raw Story's Linette Lopez points out - is that Cordray doesn’t just go after Wall Street Institutions. He goes after individual executives as well. Here are a couple of examples:

* In 2009, representing several state public pension funds, he reached a settlement with Hank Greenberg and other AIG execs that blew the SECs settlement out of the water. Cordray got $115 million, the SEC got a mere $15 million.

* The following year he settled another suit against AIG itself (also for Ohio) for $750 million. Some reports said the insurance company would actually be paying out $1 billion.

* And then there was the Bank of America Merrill Lynch merger. Cordray sued on behalf of Ohio pensions on the grounds that BofA concealed billions of dollars of Merrill Lynch losses from their clients before the merger. The case settled for $475 million.

Long story short? Cordray seems to understand the many and different ways Wall Street has screwed (or tried to screw) the American taxpayer. And he wants to hold them accountable.

Imagine that ...

- Mark

PAT ROBERTSON: THIS WEEK'S VILLAGE IDIOT

2012-01-03T15:56:00.000-08:00

Making a repeat visit to my "This Week's Village Idiot" category, via the Huffington Post, we learn that God shared with Pat Robertson who the next President of the United States will be. Here's Robertson, in his own words: "I think He showed me about the next President, but I'm not supposed to talk about that ..."

Also, according to Robertson, God told him that President Obama has "radical" views. Well, at least he's not making any more asteroid predictions for 2011.

What an idiot.

- Mark

HAPPY NEW YEAR! (and work smart this year)

2011-12-31T12:37:00.000-08:00

This coming year remind yourself that, more than working hard, you should always work smart. Otherwise you might find yourself swimming in ...

- Mark

WEALTH EXTRACTION 101

2011-12-29T07:40:00.000-08:00

Remember this? (full view here; thanks Seven)

This chart explains who owns the title to one home in America. It was put together by a securities analyst who wanted to know who held the title to his home. It took him one year to figure this out. Here's the incredible part. It's the day job of this analyst to figure this stuff out on a daily basis.

Yeah, I know. Property rights in America shouldn't be this difficult. What a mess.

Anyways, I wrote about this and the legal maze that makes our financial and real estate markets such a mess earlier (here and here). Specifically I wrote that the very notion of property rights in America may be in trouble because of how Wall Street wanted access to income streams (to create securities), but didn't want to actually produce anything for the money. So they found a way to dump the actual title (plus the administrative and legal responsibility) of a home on to an obscure mega corporate entity called Mortgage Electronic Registration Systems (MERs). Then - in a demonstration of wealth extraction at its finest - they siphoned off the house payments into another legal maze (of securities) that benefited a few Wall Street market players.

And just like that, a small group of market players were able to make claims on millions of mortgage payments (through various "security" instruments) without having any responsibility for filing, registering, and tracking who owned the note on the house. (If you're looking for a metaphor it's kind of like handing the car keys, your wallet, and a keg of beer to your unemployed cousin and telling him to have fun.)

This is where it gets real good.

Rather than deal with homeowners after the mortgage bubble collapsed - and after their mortgage payment-security scheme went bust - Wall Street and other big market players said: "We can't negotiate with homeowners because we don't have the title to the home (MERs does). And besides, the loans have already been sold several times over ... oops."

Then, while threatening that system collapse was imminent if they didn't get bailed out, Wall Street and America's biggest financial players got the federal government to provide them with trillions in taxpayer backed guarantees. Why should big banks and Wall Street have to negotiate with homeowners (and learn from market justice) when Uncle Sam can foot the bill for their greed and arrogance?

Trillions of dollars in bailout money are now being used to purify and prop up an entire industry, while filling financial holes created when the income stream (i.e. mortgage payments) behind Wall Street's (pyramid) security schemes dried up.

Again, wealth extraction at its finest (if you're wondering why Wall Street isn't in jail, me too).

Anyways, I'm writing about all of this (again) because of how this Harper's Magazine article on MERs (hat tip to Barry Ritholtz) explains how Wall Street can make claims on money without actually producing anything of value. It also helps us all understand how our nation's biggest market players have undermined our nation's market integrity, while making a mockery of property rights in America.

If you care about the Constitution (hello, Tea Party) and the future of our nation this is one of the areas where you should be directing your attention.

- Mark

MERRY CHRISTMAS REAL AMERICA

2011-12-23T10:34:00.000-08:00

As Real Americans continue to work and prepare for family and friends during this Holiday Season, we shouldn't forget about the people who've made record profits and secured ginormous bonuses from their taxpayer backed loans and bailouts.

So I want to invite everyone to recall how Wall Street and America's biggest financial institutions secured trillions in bailout/borrowed funds and then dumped their toxic crap on us with this classic, but humorous, Christmas reminder of what happens when we let irresponsible "family" take advantage of our good nature. Enjoy.

For the record, our free loading financial institutions on Wall Street are represented by Randy Quaid.

Happy Holidays.

- Mark

TRAILER PARK ECONOMICS

2011-12-22T10:18:00.000-08:00

So, I'm thinking, How do I make this somewhat complicated post easier to understand? In the post I explained how Wall Street and the nation's biggest banks profited after making stupid business decisions. Specifically, I wrote how Wall Street was able to get the ~~federal government~~ American taxpayer to underwrite their stupidity with ~~government~~ taxpayer backed loans after they lost a bundle gambling on reckless derivative investments, and then wrecked the economy. Here's a short - and a bit more humorous - take on the events surrounding our market collapse and bailout.

* * * * * * * * * * * * * * * * * * * *

Imagine that you owned a trailer park development project and went to Las Vegas. You borrowed against your assets and then gambled away all your money. You now have to file for bankruptcy. This is how market justice is supposed to work.

Then, out of the blue, your bank covers your losses in Las Vegas. Then they open the loan spigot for you. The bank also tells you that you can continue doing what you were doing before you lost everything (in this case gambling). Seeing all this the Vegas casinos jump in and say, "Come to our gambling dens (again) ... we're even going to comp your suites."

The best part (for you) is that the banks are going to charge you virtually zero percent on the money they're lending you. All you have to do is give the bank title to your "trailers with a view" development project as collateral.

But wait. It gets even better. The banks are going to loan you money based on the value of your trailer park development BEFORE the market crashed. It doesn't matter that you over inflated the value of your $100,000 project by $1 million. You still get your million dollar loan because neat accounting tricks make the value of your crappy assets look good. You can walk away with the borrowed money any time too.

At the end of the day, you know you're going to walk away because the ~~American taxpayer~~ banks are going to be left with your trailer park assets. Sweet (for you).

Incredibly, things get even better for you because, with new money to backstop your stupidity, you can now start kicking out renters that you never liked. With your trailer park investment project effectively paid off, you can become arrogant and vindictive. And you're bringing a new landlord.

Can you imagine this happening? Of course not. This level of reckless support only happens if you're one of the big financial players making stupid bets in America.

While I've oversimplified all of this, conceptually the logic applies. Our financial mandarins, who like to think they're rugged individualsts, are really wards of the state. And you and I get to pay for it all.

- Mark

INTEGRITY OF THE MARKET IN TROUBLE

2011-12-20T13:31:00.000-08:00

Those of you who have read my book, or who read this blog regularly, will understand the following two pieces instantly ...

In my book I discuss the difference between wealth creation and wealth extraction. This article from NY Times' columnist Paul Krugman (hat tip to Brian) helps explain the mechanics behind wealth extraction ...

This SF Chronicle article from Robert Reich - which discusses Wall Street's dependence on bailouts, and their subsequent government escorted record profits - helps explain why Wall Street is its own worst enemy.

Both pieces help us understand why the moral justification of capitalism is in trouble. In a few words, Wall Street is destroying what most of us understand to be the integrity of the market.

- Mark

ECON 101 ACCORDING TO LINCOLN

2011-12-15T07:56:00.000-08:00

- Mark

BORROWING $1 TRILLION IN ONE DAY ... WHY IT MATTERS (and where the hell is the Tea Party on this?)

2011-12-13T16:49:00.000-08:00

Exactly three years ago today, at the height of the market crash, I pointed out on my blog (and my radio program) that the biggest banks in America were granted well over $1 trillion in ultra-low interest rate loans by the Federal Reserve. These loans were granted so the biggest banks would have money to stuff the financial holes that their trillion dollar (derivative) bets had created. They also helped purify toxic crap and kept the banks out of court.

Best of all, the loans were backed by the ~~government~~ American taxpayer.

Thinking how bad things were - and so people could see for themselves - I explained (very slowly) how to find the more than $1 trillion in loans in the Federal Reserve's December 11, 2008 "Flow of Funds Accounts" release.

Things were so bad at the end of 2008 that the banks borrowed $1.2 trillion on December 5, 2008. Let's repeat that ... the banks had to borrow $1.2 trillion on one day.

Worse, much of the collateral the banks put up to secure the loans was either inflated, or simply toxic crap. These toxic instruments are the stuff you and I will get stuck paying for over the next few decades.

Putting it All in Perspective
To put $1.2 trillion in perspective, think about this little nugget: $1.2. trillion is much more than what President Bush spent on the TARP bailout ($750 billion), and far more than what President Obama asked for in the Stimulus Program ($825 billion, of which $275 billion were tax cuts). And it's also far more than the $907 billion we owed as a nation in 1980.

As you can imagine, the Federal Reserve and the big banks fought to keep $1.2 trillion in bailout loans a secret. To do otherwise would have alerted America to how much trouble the banks were really in back in 2008 (they're still in trouble). It was the largest loan-bailout in U.S. history, after all.

Fortunately for America's biggest financial institutions most Americans didn't catch on to what was happening. This includes the vast majority of our incredibly hypocritical "We Just Found Financial Jesus" Tea Party movement. Most them still don't have a clue. Nor do they seem to understand how the banks used more than $1 trillion in low interest loans to profit off of the U.S. taxpayer.

How the Banks Profited ...
Thanks to Bloomberg News we can see exactly who profited from the barely above zero interest loans made to Wall Street's biggest banks. One thing's for sure. It wasn't the American taxpayer. Here's the details.

Simply put, the banks made about $13 billion in taxpayer funded profits (play with the interactive here). How did they do it, you ask? Simple. They borrowed the money at rock bottom interest rates from the Federal Reserve, then "walked down the street" (as it were) to purchase Treasury Bonds from the federal government that paid almost 3% interest. A classic case of robbing Peter (the American taxpayer) to pay Paul (themselves).

But wait, it gets better (or is that 'worser'?).

Flush with cheap taxpayer-backed loans America's bankers began lobbying Washington to stop the movement for more regulations. Their argument? Since they were so healthy - and weren't bankrupt - they didn't need pesky regulations. Regulations and oversight distracted them from making money.

That's right. While America's biggest bankers were on government life support - and had one hand in the taxpayer's pockets - they were also pretending they had done nothing wrong. Ergo, they didn't need to be regulated.

While TARP and taxpayer backed loans enabled banks and Wall Street to dodge bankruptcy, America's biggest banks began turning away and punishing customers who lost their jobs and homes as a result of the 2008 market collapse. Bankrupt citizens facing tough times as a result of the market collapse had to be punished.

Long story short? In spite of collapsing the economy, and asking the American taxpayer to underwrite their market stupidity, the banks demanded market-like discipline be imposed on the American public. It didn't matter that the American taxpayer had helped turn their toxic investments and stupid bets into market gold.

Aren't double standards beautiful?

The Chutzpah Behind the "Self-Esteem" Loans ...
Let's make this real simple. If the banks had not received government loans, or had been forced into bankruptcy or receivership, the lobbying efforts of the banks would have been comical (they still are in my book, but that's another story).

But stuffed with TARP bailout money, and with emergency loans from the Federal Reserve (who created brand new loan "facilities" for troubled banks), America's biggest failed banks were able to escape market justice and pretend things were just fine. Congress played along ... as they continue to do today. But here's the kicker.

In a classic WTF moment, the banks argued that they were simply borrowing from the Fed (again, at least $1.2 trillion in one day) so other banks wouldn't feel "stigmatized" by having to take loans from the Federal Reserve. Huh? Are you kidding me? How clueless are these people? They didn't want other banks to feel shame for making stupid decisions, so banks had to borrow money from the Federal Reserve? Unbelievable.

At the end of the day, the thinking behind our banker bailout programs is akin to the logic behind toddler leagues. You know, the leagues where parents don't keep score so they don't hurt little "Johnny's" feelings. Incredible. Apparently bankers and Wall Street need self-esteem programs too.

Keep this in mind the next time your friend wants to discuss corporations and rugged individualism in America.

The End ...
This, my friends, is just one reason why it's difficult to take the status quo "happy talk" about profits, falling unemployment, and Wall Street success stories seriously. It's all backstopped with trillion dollar federal loans and taxpayer furnished bailout money.

The happy talk about Wall Street means little for jobless and foreclosed upon Main Street. Monopoly Man's successes mean nothing to Joe Six-Pack. This is especially the case since it's all backstopped with taxpayer money, still overly complex loan structures, lax regulatory oversight, and record debt loads.

So - again - my question is Where's the Tea Party outrage on all of this?

- Mark

CORPORATE PERSONHOOD ... A FLAWED IDEA

2011-12-11T11:38:00.000-08:00

My article on corporate personhood - the idea that corporations are people too, and deserve the same rights and protections as U.S. citizens - came out in the Bakersfield Californian today. You can read it here.

Long story short, the idea that corporations are people too needs to be rejected.

- Mark

Addendum: I'm attaching the article below.

***********************

Corporate personhood: A flawed construct that undermines democracy

“If you can’t vote, you can’t contribute.”

This was part of a conversation I had about political campaigns a while back. And it stopped me in my tracks. With this simple comment Larry Moxley summarized how to deal with the influence money has on our political system. And I agreed.

So you know - and I want to be clear on this - Larry Moxley and I are on opposite sides of the political spectrum. There’s very little we agree on. We’ve had strong debates that literally have turned heads in restaurants over the years. But we’re friends who can agree on the things that undermine our national priorities.

When it comes to the influence of money in our political system Mr. Moxley and I agree on this: It’s undermining our political system.

Most of us understand the influence money has on our politics. Simply put, to become legitimate candidates, office seekers spend so much time chasing large donations and corporate money that they lose sight of what‘s good for our communities and our nation.

This shouldn’t be a surprise. When asked why he robbed banks famed bank robber Willie Sutton replied, “That’s where the money is.” Candidates go where the money is too. This means going to large corporations and groups with deep pockets. More on this below. But first, some background.

Candidates for office are forced to pursue money in part because of two legal developments. The most recent allows corporations to give almost unlimited amounts to political campaigns. The earlier, and most important, development granted corporations personhood status.

GOP presidential candidate Mitt Romney acknowledged this when he shot back at a heckler: "Corporations are people, my friend …”

What Romney didn’t discuss was how corporations became people. If he had he would’ve had to explain how corporate personhood came about.

The key here is a Supreme Court (SC) case decision on taxes (Santa Clara County v. Southern Pacific Railroad Company, 1886). While the SC ruled in the railroad's favor - arguing corporations are entitled to 14th Amendment protections - it said nothing about corporate "personhood." A court reporter did.

Specifically, a court reporter - not a SC Justice - wrote the Santa Clara case summary in the head notes, stating corporations enjoy the same rights as a U.S. citizen (yes, I've deliberately oversimplified the primary issues here). Corporate America has been running with this ruling ever since. And just like that - and with no birth certificate - corporations now have the same rights and protections as any U.S. citizen.

Later, in Buckley v. Valeo (1976) the SC ruled that spending money to influence elections is a form of constitutionally protected free speech. This was followed up in a 5-4 decision in Citizens United v. Federal Elections Commission (2010), which effectively allows corporations to spend what they want on political campaigns.

The result? Because of the functional equivalent of a typo (1886), corporations are considered people who can speak (1976) as loudly and brashly as they want (2010). Conversely, citizens in the streets of America are given strict limits (time, place, voice) as to how they can exercise their constitutional rights. And it’s distorting our political picture.

If you don’t see it, here’s what’s wrong:

* Corporations are a legal abstracts, created by the state. Per the Enlightenment, constitutional protections were designed for citizens whose rights were historically abused by large corporate entities and the state.

* Corporate "personhood" status was a legal accident. No claim to citizen rights should rest on the functional equivalent of a typo.

* If we can't yell fire in a crowded theater, corporations shouldn’t be able to set fire to political campaigns. Citizens United went too far.

* Unlike most citizens, corporations can directly lobby and get favorable legislation, regular bailouts, subsidies, generous tax write-offs, legal exemptions, limited liability, and can live on indefinitely.

* Foreign subsidiaries can access Madison Avenue, which can distort and elevate their foreign "voice" above most U.S. citizens.

* Corporations find legal cover under proprietary rights (trade secrets) and legal settlements (or fines). This allows corporations to distort and hide their voice.

Our constitution was created to protect citizens from corporate and state abuses. One way to address the trend of corporate money swamping broader national priorities is to consider what Mr. Moxley has suggested for some time now: “If you can’t vote, you can’t contribute.”

It won’t solve all our problems, but it’s a start.

MARK A. MARTINEZ Ph.D., author of The Myth of the Free Market, is professor of political science at Cal State Bakersfield.

THE EURO MESS ... MARCHING US TOWARDS THE PAST?

2011-12-09T14:48:00.000-08:00

This commentary on the European Summit-Debacle - from Tyler Durden at Zero Hedge - is both succinct and spot on. This one pretty much sums it up:

"... it means that the Greek scheme of playing chicken with the Euro zone, has now been adopted by everyone else in the core."

Our (America's) political and economic challenges won't make things any better for the global economy.

Not only is history whispering in our ear, but the coming calamity doesn't appear to be on anyones radar screen. I don't know whether it's a product of people not knowing their history, or because people are still caught up in a failed free market ideology that blinds them to reality. Simply believing in free market myths does nothing for people who are desperate and out of work. Desperate people do desperate things.

Indeed, desperate people will also follow stupid people who say and do stupid things. It may take a while, but a collapsing global economy is a bigger threat than al Qaeda. Big time.

Stay tuned. Sigh ...

- Mark

SO, WHERE'S THE TEA PARTY ON THIS ONE?

2011-12-08T12:13:00.000-08:00

Via Think Progress we learn that thirty big corporations in America actually spent more money lobbying Congress between 2008 and 2010 than they paid in taxes (hat tip to Tom for the link).

What has all that lobbying gotten corporate America over the long-term? In a few words corporate profits have soared (money once set aside for taxes suddenly becomes "revenue"). Just as importantly, corporations now pay a smaller share of taxes into our economy (as a percentage of GDP) than they did in the past. Check it out ...

All of this helps explain why middle America's income tax (what you earn) and payroll tax (social security, medicare, etc.) payments have remained relatively stable or grown (payroll). Middle America is told that they need to keep paying their share of the bills, while America's richest Americans have convinced most Americans that their tax load has to go down ... for the good of the nation. Trickle down, you know.

Long story short? Our debt problem is largely A REVENUE PROBLEM. And it's caused by a group of people who think shifting the responsibility of maintaining our great nation on to others (the middle class) is a good idea (and it is, for them).

Think about it. As I explained (or tried to explain) to Republican Mark Abernathy during one of our KGET 17 sparring matches, spending as a percentage of GDP has remained relatively stable over the years, and only started to surge under President Reagan's trickle down policies.

At the end of the day, by reducing their tax burden, while maintaining (or raising) the tax load on ordinary Americans, what we're seeing is one of the greatest wealth transfers in human history. Seriously.

Not only do the top 1% and those at the top of corporate America's food chain get to keep more, but someone's going to have to pay for the $14 trillion that's been added to our national debt since 1980 (when it was only $907 Billion). And you can bet your life that the top 1% don't think it should be them.

So, my question is, where's the Tea Party on this one?

- Mark

WALL STREET'S GET OUT OF JAIL FREE CARD ... "INTENT"

2011-12-05T17:19:00.000-08:00

If you ever wanted to know why no one from the financial sector and Wall Street is behind bars look no further than this 60 Minutes piece on mortgage fraud and Countrywide. Simply put, committing fraud isn't enough to get you prosecuted. You have to show that fraud was also intended (can you imagine a criminal defendant saying, "I didn't mean to kill him, he just happened to be in the way of my bullets"?).

Also, in the FYI category, none of this was confined simply to Countrywide either. It was prevalent and encouraged throughout the industry (and by Wall Street), and is indicative of corporate entitlements and protections that you and I don't get.

I've said it before, and I'll say it again, we can fix a lot of this if we understood Bill Black's "control fraud" better, and used RICO statutes to go after our financial institutions as criminal enterprises ...

- Mark

QUANTITATIVE EASING III (a.k.a. "Corporate Welfare") HAS BEGUN (again)

2011-12-01T11:51:00.000-08:00

My God, this is getting way too easy. I said it would happen back in 2010. This past summer I said it would happen, again. So, what happened? Simply put, the Federal Reserve is dumping more cheap money into the markets. This time it's down a European rat hole.

Here's the problem. The Fed's action won't accelerate recovery. It also won't fix Europe's debt woes. And it certainly doesn't make market players any smarter. But it keeps many market players solvent (and arrogant) because it's a bailout that maintains market confidence.

While the Federal Reserve doesn't want to anyone to think it amounts to another market bailout (it is), the sudden availability of cheap cash in Europe allows European banks and market players around the world to continue pretending that our market environment is sound (it isn't). Here's how the bailout plan works.

HOW IT WORKS
In real simple terms America's central bank, the Federal Reserve, is lending dollars to European central banks. European banks need dollars because European banks lend significant amount of dollars (about $3 trillion) to investors and other market players. Dollars are getting harder to find in Europe (which drives up the price). In exchange European central banks send us other currencies (as "collateral"), which include Euros (these are called Fed Swap Lines).

The idea is to put enough cheap dollars into European central banks so that they will lend to domestic banks throughout Europe. What's the goal? To prevent U.S. markets from tanking. How would this happen, you ask? Glad you asked.

If European banks, who need dollars, can't borrow dollars they will begin dumping (selling) U.S.-denominated assets, like U.S. stocks, mortgages, and corporate loans (among others). They do this because they need dollars to cover their losses elsewhere. If the European banks can borrow dollars cheaply, the thinking goes, they don't have to sell U.S. assets. Ergo, if the Fed makes more dollars available to Europe, we don't get a sudden market dump of stocks and bonds out of Europe, which might lead to a wholesale fire sale, and the sudden collapse of the U.S. stock market (again).

Seriously, lending money to Europe on the cheap is our way of keeping Wall Street and our financial markets afloat. But opening the money gates for European banks is really corporate welfare. By not having European banks dump U.S. assets into the market (in order to generate dollars in Europe) the Federal Reserves money dump helps maintain, or artificially inflates, the value of U.S. assets around the world. Portfolio managers win. Wealth managers win. Wall Street wins, again.

You and I, however, foot the bill if (when) it all blows up. We're also told to be quiet when market players cash out their bonus-laden contracts, which have been made whole by these money dumps. No Fed-Funded bailout tax. No "QE Tax." No taxes on taxpayer backed money dumps, period. Nada. Zilch.

Finally, because it sounds better than corporate welfare the Federal Reserve likes to call making cheap money available quantitative easing. Quantitative easing has been done twice since the market began it's crash in 2007. But they're not calling it quantitative easing (QE) this time because, according to the Fed, it isn't. Huh? [head scratch]

BUT "QUANTITATIVE EASING III" IT ISN'T ... HUH?
The Federal Reserve - and everyone who benefits financially from the money dump - don't like to see what's happening (the money dump) as the opening of QE, Round III. They don't like to call it QE III because they know it's corporate welfare, and it kind of hurts market confidence (and their feelings).

As such, global money managers are making a point of letting everyone know that (1) this is for Europe only (it's actually to prop up U.S. assets), (2) the cost of money's not getting cheaper in the U.S. (it's also not available unless you give up your first born), and (3) they haven't restarted 2007-08 crisis programs, like the Term Auction Facility (which would signal a real mess).

Great. In plain speak, this is like saying your recovering alcoholic in-laws are doing fine because you're only giving them beer instead of the hard stuff. Oh, and you're limiting them to drinking until midnight. You get the point.

QE III has begun. But don't call it QE III because it's really corporate welfare, which hurts market player feelings. Shhhh ...

- Mark

ADDENDUM: Almost forgot, here's a humorous but surprisingly well-informed look at quantitative easing and the Fed. Enjoy ...

DEUSTCHE BANK ... THE TRUE FACE OF BIG BANKS IN AMERICA?

2011-11-30T12:31:00.000-08:00

Most of you have heard of Deustche Bank. Some of you might even bank with them. A regional Deustche branch in Atlanta requested the eviction of Vita Lee, a 103-year-old Atlanta woman, and her 83-year-old daughter. They have lived in the home for 53 years. The good news is that when the movers and county sheriff arrived they took one look at the bed ridden 103-year-old and had a change of heart.

No doubt - in spite of the movers and sheriff being the good guys here - Deustche Bank will try to spin the event so that they look like they're merciful bankers. Then they'll probably try the eviction again, when no one's looking. But, in reality, whatever reprieve is granted to Vita Lee, the merciful banking face we're looking at resembles the one in this scene ...

For those of you who aren't familiar with Deutsche Bank know this: Deutsche Bank was a big ~~trader~~ bettor in the toxic market instruments that Wall Street gambled on during the U.S. mortgage bubble.

Indeed, a Senate report about Wall Street and the financial crisis found that Deutsche Bank even continued to churn out toxic crap even as the market was collapsing, with one top trader betting that home mortgages (which were inside the larger toxic instruments, or CDOs) would fail. Put more simply, Deutsche Bank set themselves up to make money when they foreclosed on certain mortgages. This helps explain why selling faulty mortgages and then kicking a 103-year-old out of her house makes good business sense for Deutsche Bank. They make money off the process.

And, yes, apart from lying to customers in the U.S. and Germany about the investments, Deustche Bank received over $12 billion in bailout funds, and was poised to take a hit of hundreds of billions if the U.S. government didn't bailout A.I.G. (kind of like the House in Vegas covering your losses into the hundreds of thousands, but allowing you to keep your winning bets).

Oh, and for good measure, the former chief economist at the International Monetary Fund called the CEO of Deustche Banks, Josef Ackermann, “one of the most dangerous bankers in the world” because of his reckless business practices.

- Mark

FOX NEWS (misinformation)

2011-11-27T06:26:00.000-08:00

Apparently you're better off watching nothing than watching Fox News ... Check this out.

- Mark

LAW & ORDER IN AMERICA

2011-11-26T11:50:00.000-08:00

Stuff that's really not important, but kind of fun reading on a lazy Saturday afternoon. Two not so great headlines from Seattle ...

"Joshua Lambert, Whidbey's Other Accused Murderer, Defending Self, Claims Insanity"

Then we have ...

"George Hinnenkamp, Elderly Oregon Man, Has Car Stolen and Crashed--Is Now Being Sued by Folks Who Crashed In It."

- Mark

THE "BIG LIE" CONTINUES

2011-11-21T16:29:00.000-08:00

Early last week I posted on the GOP presidential field and their penchant for blaming the housing mess - and subsequent 2008 market collapse - on government policies. Long story short? Calling on my inner Paul O'Neil, I commented that the candidates in the GOP field are acting like blind men in a room full of deaf people. I posted links to earlier posts and op-eds I've written on the topic to provide substance and background.

Today I ran into this Washington Post discussion on the market collapse by Barry Ritholtz. It's titled "What caused the financial crisis? The Big Lie goes viral."

In a few words, Ritholtz makes the same points that I do, and argues persuasively that - rather than admit error - there is an emerging industry out there bent on creating a new narrative. Not only is this new narrative full of lies but, unfortunately, it's also winning the day.

Challenged on his op-ed points, Ritholtz responded with this piece in the Washington Post. It's excellent. I encourage you to read both his Nov. 5 and Nov. 19th columns. Both have inspired a great deal of ill-informed push back.

According to Ritholtz, the "push back continues from the usual sources." He lumps the Know Nothing sources into "3 distinct categories" that tell us much about a larger "disturbing trend" in America:

1) The Cognitive Dissidents (my term for a those politically dissenting from reality); their brains simply will not allow them to see what disagrees with their ideology. This is a very real and unfortunate part of human nature;

2) The Political Manipulators, who cynically know what they peddle is nonsense, but nonetheless push the stuff because it is effective. These folks are more committed to their ideology than the good of the nation, and as such earn my disdain.

3) The Innumerates, the people who truly disrespect a legitimate process of looking at the data and making intelligent assessments. These innumerates — mathematical illiterates — seem to revel in their own ignorance; it is embarrassing.

Ritholtz adds, "denying of reality has been an issue, from Galileo to Columbus to modern times. Reality always triumphs eventually, but there are very real costs to it occurring later versus sooner . . ."

I couldn't agree more.

- Mark

GERMANY'S THE KEY

2011-11-19T11:03:00.000-08:00

With a Hat Tip to Barry Ritholtz, here's some really good interactive graphics that provide additional information on Europe's (and our global) debt mess. Enjoy (or get worried).

And keep in mind - as I discussed here - there's a difference between systemic risk (the political stupidity in the U.S.) and financial risk (Greece). How people talk about Europe's debt is important. At the end of the day, Germany's the key ... and pray to God (or whoever you pray to) they're either poitically ambitious or still looking for redemption.

- Mark

WHY CAIN'S LIBYA MOMENT MATTERS ...

2011-11-16T09:26:00.000-08:00

For those of you who are wondering why Herman Cain's Libya Moment is so important, we can start by acknowledging that national security is something that we shouldn't play games with. We shouldn't leave our national security thoughts and judgments to personal biases and moments of the mob. I think we can all agree to that, right?

That said, in my International Relations class I often start the quarter by showing this Monty Python clip, which illustrates what happens when you embrace biases and mob moments.

This is why Herman Cain's Libya Moment is so important. You can see him searching for President Obama's policy, and then circling the drain so that he can oppose it. It's that simple. Check it out here:

Several points here. First, Cain doesn't understand what President Obama's policy is in the region. Second, this also showed that Cain doesn't understand that President Obama has a larger foreign-global policy approach that he outlined at Oslo (which former Speaker Gingrich said bordered on the "historic"). Finally, it also showed that when it comes to national security and foreign policy Herman Cain is always ready to play politics, and run with the mob, instead of looking at how real problems are solved. This is not a good thing.

I'll leave it at that for the moment.

- Mark

THE GOP FIELD ... LIKE BLIND MEN IN A ROOM FULL OF DEAF PEOPLE

2011-11-15T11:13:00.000-08:00

Republican presidential candidates are ignoring reality, again.

Ten months ago I wrote that the GOP would - against all the evidence - begin blaming the government for a housing mess that was largely caused by the private sector and Alan Greenspan's policies. I wrote about it again in June. So, what happened last week? GOP presidential hopefuls blamed the real estate mess on "the government."

Like Paul O'Neill's blind man in a room full of deaf people, the GOP field ignored the role "Wall Street," "deregulation," and our "shadow banking" system played in creating the conditions for our housing market to bubble and burst. Nice.

But none of this should come as a surprise. GOP operatives began laying the groundwork for this narrative ... last December. Like last year's GOP operatives, todays Republican presidential hopefuls ignored the following:

* Freddie Mac and Fannie Mae were privately managed (and even became one with Wall Street) during the worst period of the housing bubble and bust.

* The real estate bubble and crash was global. Freddie, Fannie and the Community Reinvestment Act aren't global.

* Our commercial real estate market bubbled and crashed, too. Housing policies concerning Fannie, Freddie and the CRA had nothing to do here.

* Federal Reserve data reported that more than 84 percent of subprime mortgages in 2006 (right before the crash began) were issued by private (shadow) lending institutions. Yeah, that's 84 percent.

* Of these, only one of the top 25 subprime lenders in 2006 was directly subject to the housing laws like the CRA.

For added measure, here's what Federal Reserve Chair Ben Bernanke had to say about the real estate bubble and crash:

"(M)ore than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties."

And the GOP's vaunted free market claim? Their record's not good here either. Back in 2003 Republicans began praising subprime lending as the type of innovative lending that comes from deregulated or unfettered markets. Again, they praised subprime lending that led to low quality mortgages.

But this isn't the worst of it.

The real story here is how Republican members of Congress actually used Wall Street talking points to criticize Freddie and Fannie in the lead up to collapse. They did this because it helped AIG, Goldman Sachs, Lehman, Merrill Lynch, etc., muscle in on Freddie and Fannies market share (between 2004 and 2006 Fannie and Freddie went from holding a high of 48 percent of the subprime loans to about 24 percent).

After dumping many of these products on unsuspecting clients, Wall Streets economic mandarins are now dumping many of these toxic ("legacy") assets on the American taxpayer, in exchange for cash payouts.

You won't hear any of this from the GOP list of presidential candidates. Ever.

- Mark

ITALY: A NEW LEASE ON LIFE?

2011-11-14T08:34:00.000-08:00

So Italy has a new premier, Mario Monti. If his past is any indication of what he brings to the table, Italy has a fighting chance. I wrote about Mario Monti at the beginning of Chapter 8 in my book, The Myth of the Free Market. Here's what I wrote about Monti in my book, and what we might be looking at in the immediate future ...

**********************
Months before the start of the Second Gulf War in 2003, Secretary of Defense Donald Rumsfeld chided Germany and France for not following the U.S. lead on Iraq – derogatorily referring to their leaders as holdovers from “old Europe.” The claim was both misinformed and full of hubris. Since 1945 Europe had embraced democratic and free market principles, was a solid ally during the Cold War, and pursued economic integration as a way to foment cooperation and allay past tensions in the region.

Rumsfeld’s comments demonstrated a willful ignorance of how “new Europe” fulfilled, if not exceeded, the aspirations of America’s post-war architects. Old Europe – if we are to get our history right – would not have waited for the U.S. to sweep into the Middle East. In the end, Rumsfeld would have done well to have spoken with General Electric’s former Chief Executive Officer, Jack Welch. He understands “new Europe.”

During his tenure as CEO Welch merged more than 900 firms with GE. When Honeywell became available in October 2000 Welch went into action. While Honeywell produced many of the same products as GE – plastics, chemicals, electrical machinery, and aircraft engines –Welch was not concerned about anti-trust legislation because he believed Honeywell’s products were “complimentary” rather than competitive. And, besides, why should he worry? He was Jack Welch.

After getting the green light from the U.S. Justice Department Welch met with Eurocrat, Mario Monti, the European Union’s Director-General for Competition (its “antitrust” division). In Brussels Welch would find “new Europe.” In The United States of Europe T.R. Reid described the introduction: “Welch flashed his friendly, casual smile, stuck out a hand, and said, ‘Mario – call me Jack’ … ‘Mr. Welch,’ [Monti] replied in his accented but precise English, ‘we have a regulatory proceeding under way. I feel the proper approach would be to keep things on a more formal basis. You can call me Sgr. Monti.’”

Monti’s team had done their homework. They secured information from both GE’s industry competitors and United Technologies (the firm GE outbid for Honeywell). At one point, when asked about aircraft electronic parts manufactured by Honeywell, GE’s team offered only blank stares. And on it went.

When Monti finally called Welch to tell him the “deal is over” he would end the conversation by saying, “Now I can say to you, ‘Good-bye, Jack.’” Fifty-five years after the end of WWII Mr. Welch learned the hard way that the system U.S. post-war architects wanted to build for the world had found a home in Europe. Welch learned something else: By creating the conditions for a prosperous and independent Europe to emerge America’s grand liberal strategy had – and apparently without Donald Rumsfeld’s knowledge – erased “old Europe.”

**********************

If Monti does his homework and can stick to his guns like he did with Welch, things could work out. I'm not hopeful (Greece and the larger debt situation are a mess), but Monti could give Italy and Europe a new lease on life.

- Mark

IT'S DEJA VU ALL OVER AGAIN

2011-11-09T22:49:00.000-08:00

It's déjà vu all over again ... yet, all the U.S. media want to talk about are Herman Cain's girlfriends, while ignoring the GOPs "Just Say No" obstructionism in Congress. Today, with the debt crisis in Europe flaring up again (this time with Italy), we're reminded that there's another world out there that warrants some serious discussion. Yet, America's political burlesque show is mesmerized (again) by sex scandals, and appears more than content pondering why Mitt Romney hasn't caught fire with the GOP (like that's some kind of mystery). Sigh ...

All of this kind of reminds me of all the Gary Condit sightings, and the shark fear mongering off the Florida coast right before 9/11. Seriously, what's happening with Europe's debt-to-default dance is pretty big stuff, and deserves more attention than Herman Cain's predations. Consider the following ...

Here's a statistical table with more countries that could be affected once the financial dominoes begin to collapse in Europe ...

I know, I know. Simply putting figures like these up without context is unfair.

So consider this. When Germany finally defaulted on it's World War I debt obligations after 1929 it had a debt-to-GDP ratio that stood at around 90 percent (they owed about $33 billion, or about $402 billion today, which was a reduction from the original $63 billion, or about $768 billion today). Today Greece's debt-to-GDP ratio stands at 157.7 percent, while Italy is around 120 percent. Is history whispering in our ear, again? I think so.

Relatedly, when Germany finally defaulted the French Chasseurs Alins (elite mountain infantry) had already occupied Germany's Buer (in North Rhine-Westphalia) region in 1923.

Today, instead of sending in the troops to deal with troubled debtors the world's economic mandarins are banking on central bank (or IMF sanctioned) cash. Specifically, they're banking on the Federal Reserve shoving half a trillion dollars or more on to Europe's books (and hoping no one notices). When all is said they're doing little more than pushing the economic debt can down the road.

This is especially not good when you consider that MF Global's recent Chapter 11 bankruptcy was not supposed to happen. Think about it. In our post 2008 market collapse environment, a firm like MF Global wasn't supposed to be able to borrow so heavily (or use investor funds) to make multi-billion bets on European debt. How much did MF Global borrow? It appears that MS Global may have had a 40:1 debt to equity ratio. What does this mean? It means that if you made $40,000 per year at your job, the bank would give you a $1.6 million loan ... three years after doing the same thing and watching previous clients piss it away gambling.

Yet MF Global's private industry regulator raised no red flags about MF Global debt to equity ratios, nor said anything about it dipping into $600 million of investor money to make their bets.

Yeah, it's déjà vu all over again, on so many levels.

- Mark

IT'S HAPPENING IN ISRAEL TOO

2011-11-09T09:31:00.000-08:00

For those of you who think America's embrace of neoliberal, market-players-do-the-right-thing, policies is unique to the United States think again. Check out this overview of what's happening (and one persons take on voting) in Israel.

The piece raises the same issues that many in the U.S. (and Europe, I'm sure) are grappling with today. Long story short? We're all in the same political boat, and it appears to be sinking.

- Mark

WHY IS THIS STILL NEWS?

2011-11-07T11:33:00.000-08:00

- Mark

YET ANOTHER (yes, "another") EPIC FAIL WEEK FOR THE GOP

2011-11-04T10:08:00.000-07:00

Recall when the GOP arrived on the scene after winning the House in 2010? They immediately went to work ... pursuing reckless and largely symbolic policies.

It was so pathetic (and transparent) that I wrote about their epic failures during their first few weeks in power here and here. Reading the Constitution on the House floor. Redefining rape. Passing symbolic bills with no chance of being signed by the president.

And let's not forget the crying. All that manly-man, "I'm so proud of myself" crying.

Anyways, the goal for the GOP then wasn't to govern. And it still isn't today. This helps explain why, in spite of an on-going recession that still threatens to slide into an all out depression, our GOP led House has done a fraction of the work that they could have.

At the end of the day, the goal of our House led GOP is to gum up the works so much that President Obama can't govern either. Check out this week's "Just Say No" nonsense:

* This past week our GOP led Congress decided to follow an idolatrous path and loudly reaffirm our nation's commitment to God ... like God really cares if we kiss His ass on the House floor. Like that's so much better than finding ways to create jobs for the unemployed, or working to fix our housing and mortgage mess.

* God, I'm sure, must be happy with the super committee's stalled talks over the GOP's decision to keep the richest Americans from seeing their taxes increased to help pay down our nation's debt (which forces us to borrow from China).

* Related, not only did our Congress fail to deal with unemployment (or increasing revenue), but the Senate voted to block President Obama's $60-billion jobs plan this past Thursday (Nov. 3). This was a follow up to last month's "let's do nothing" filibuster of President Obama's larger $447-billion jobs plan, and their subsequent "let's continue doing nothing" rejection of Obama's $35-billion proposal to save the jobs of teachers and firefighters. Nice.

* Incredibly, though, our GOP led House found the time to pass H.R. 2527, which allows for the creation of a baseball Hall of Fame commemorative coin.

So, there you have it. Nothing on jobs. Nothing on infrastructure. Nothing for teachers and firefighters. Nothing on revenue from those most able to pay. Not even a murmur about the Greek situation.

And, no, the GOP job proposal legislation that's "sitting in Congress" doesn't count. They're really deregulation-tax favor poison pills, which are industry favors and only serve to set us up for a replay of the Bush Titanic.

Still, we need to understand how politically useful all of this obstinacy and obstructionism is for the GOP. Simply put, it allows Republicans to point to President Obama as a president who "can't get it done." Never mind that no president has ever had to work with a Senate that requires a filibuster proof 60 votes to pass a bill. Never mind that just saying "no" is no way to govern. Never mind that 30 years of a failed ideology should be proof that we can't do it all over again. And never mind that all of this is destructive to our nation's democracy and our economic health.

As long as the GOP gets more Americans to believe that President Obama is not fit to govern, all is good in their world. Which explains why this past week was yet another epic fail week for the GOP.

- Mark

IN CASE YOU'VE MISSED THE GOP PRESIDENTIAL DEBATES ...

2011-11-03T19:21:00.000-07:00

If you've missed any (or all) of the Republican presidential debates, you're in luck. This piece pretty much synopsizes the talking points for the GOP lineup on the economy ...

Relatedly, this piece tells us how myopic and intellectually bankrupt the GOP's position on President Obama's economic proposals really are ...

And let's not forget the GOP's position on science and the Enlightenment ...

It doesn't change much from this. Seriously. And, no, Newt Gingrich becoming their flavor of the month won't change anything either. It will still be the same.

Consider yourself free to do something useful the next time the GOP presidential debates come around.

- Mark

PRISON INC. USA

2011-11-02T08:10:00.000-07:00

The United States has less than 5% of the world's population. Yet, we have 25% of the world's total prison population. OK, let's hear it, "We're #1, we're #1 ..."

How much does our punitive and wasteful prison culture cost America? Think about this: If California emptied its prisons today and sent every inmate to college in California we would save almost $7 billion per year. Check it out ...

Created by: Public Administration

Here are a few more numbers ...

Now, I'm not saying that we should empty our prisons, but we definitely need to have a discussion about our priorities. And, yes, the Tea Party should be all over this issue too.

- Mark

THIS IS WHAT'S HAPPENED TO THE GOP

2011-11-01T07:55:00.000-07:00

- Mark

ADDENDUM: This one from Goldwater is pretty good too ...

I'm frankly sick and tired of the political preachers across this country telling me as a citizen that if I want to be a moral person, I must believe in "A," "B," "C" and "D." Just who do they think they are? And from where do they presume to claim the right to dictate their moral beliefs to me?

REAGAN WOULD SUPPORT DEMOCRATS TODAY

2011-10-28T16:45:00.000-07:00

President Reagan called for closing "crazy" loopholes that let millionaires pay less taxes as a percentage of their income than bus drivers. Kind of sounds like Warren Buffet saying he shouldn't be paying less in taxes as a percentage of income than his secretary, doesn't it?

Let's make this real simple. President Reagan's policies wouldn't fit in with the right wing today if you judge him by today's right wing standards. In fact, by acknowleding that the rich should pay more in taxes than a bus driver Reagan was acknowledging both Adam Smith, and reality:

1. Adam Smith: The intellectual godfather of capitalism, believed that higher tolls on luxury carriages should be charged because the "indolence and vanity of the rich" should be made to pay for the public good.

2. Reality: Even if we taxed and confiscated everything the poorest 50% of Americans earn or own today (about 2.5% of our nation's wealth = $1.4 trillion), it still wouldn't pay for the first installment of the Wall Street bailout (above $4 trillion, to date), let alone for the amount that we've been told has been encumbered (between $9-14 trillion).

Long story short. President Reagan - like Warren Buffet - would support the Democratic Party position on closing loopholes on the top 1% today.

- Mark

BUNKER MENTALITY

2011-10-27T15:22:00.000-07:00

Leaders and politicians who understand they can't hold their own in the civilian population often find themselves looking for shelter and comfort. Whether it's at the end of their days in power, or because they need a place to hole up and nurture their crazy ideas, the outcome is the same. They develop a paranoid bunker mentality. With that, here are a couple of famous bunkers that helped protect those whose ideas ultimately couldn't survive the light of day ...

Hitler's bunker ...

Saddam Hussein's Spider Hole ...

Moammar Gaddafi's drainage pipe ...

The high tech bunker of many modern day conservatives ...

Just saying.

- Mark

WHERE'S THE TEA PARTY?

2011-10-25T11:01:00.000-07:00

Why isn't the Tea Party all over this?

Via former regulator, Bill Black, we get this story of Bank of America directing one arm of it's company - Merrill Lynch - to transfer some it's most toxic crap (derivatives) to Bank of America. Why in the world would Bank of America want one of its subsidiaries to shift their toxic assets on to its books you ask? It's actually very simple.

The account where Merrill Lynch held its toxic assets wasn't ~~federally~~ taxpayer insured. The Bank of America account they shifted their toxic crap to happens to be insured by the ~~Federal Deposit Insurance Corporation (FDIC)~~ United States taxpayer. So if the toxic crap flounders and eventually tanks the U.S. taxpayer is on the hook, again.

Got that? The American taxpayer is getting set up to pay for Bank of America's stink, again. But wait. It gets better.

Bank of America actually started doing stuff like this when they began dumping their delinquent ("Noncurrent") debt contracts onto the ~~federal government~~ American taxpayer ("GovGuar") back in 2009. In fact, they went from having a little over 2 1/2 percent ("Perc") of their delinquent debts covered by government guarantees to over 20 percent covered by the government in less than 3 months. Check this out ...

For the record - and for those of you who don't remember - Bank of America received a $45 billion bailout during the financial crisis. But they also just posted a $6.2 billion quarterly profit, just 22 months after crowing about paying back their bailout money.

My question is this: If Bank of America is so healthy why does the American taxpayer have to backstop their toxic crap? I mean, part of the reason for "paying back" their bailout loan was because they were healthy, right? (actually they paid back the loans early so they could pay out bonuses, meaning it was all smoke & mirrors, rather than financial health driving the pay back; but that's another story) Instead, they're acting like Zombie Banks, surviving off the flesh of the American taxpayer.

There's much more to this story, but I think you get the point. The bailout of Wall Street and the biggest banks continues. And the "concerned about our tax dollars" Tea Party has little to nothing to say about any of this. Seriously, where's the Tea Party rage over Wall Street and the big banks dumping their crap on the American taxpayer?

This is why the Tea Party is really a right wing joke. It has always been a front for deepening the GOP's tax cut-deregulation talking points. And the Occupy Wall Street movement is (or should be) helping to make sure more Americans understand this point.

- Mark

UPDATE: It turns out that the total amount of derivatives in the FDIC-insured portion of B of A as of mid-year was $53.7 trillion, up 10 percent from $48.9 trillion the prior year. This is up nearly 35 percent from its pre-fall crisis level of $40 trillion (the Merrill Lynch securities division holds $22 trillion in addition.)

I'LL TAKE SOCIAL SECURITY ANY DAY ...

2011-10-24T08:16:00.000-07:00

From Senior Annuity Alert. Underline and italics are mine. This is classic ...

__________________________________________

The purpose of an annuity
... The purpose of an annuity is always income, whether you need money now or, in the future ... The added security is that it gives you a way to get the income you need knowing it will never run out ...

__________________________________________

So far so good, right? OK, now for the fine print at the bottom ...

___________________________________________

NOT FDIC INSURED. NOT BANK GUARANTEE. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.

_____________________________________

Take away all the bailouts, Fed money dumps, and other favorable legislation that subsidize our markets and, really, what do you have left? I'll take all comers that want to compare annuities to Social Security.

- Mark

THERE'S HONOR IN THIS ...

2011-10-22T12:21:00.000-07:00

United States Marine Corps. Sgt. Shamar Thomas confronts the New York Police Department because of their actions during the Occupy Wall Street movement ... Check out the video here.

- Mark

DO YOU MISS BUSH?

2011-10-21T10:04:00.000-07:00

From my friend Seven ...

- Mark

OBAMA DOCTRINE VINDICATED (again) IN LIBYA

2011-10-20T20:29:00.000-07:00

On the surface this is what most Americans see ...

After massive demonstrations, Tunisia's Zine al-Abidine Ben Ali was forced to flee his country as protesters forced him into exhile ... Facing similar conditions, Eypt's corrupt Hosni Mubarrak was forced to resign in February of 2011 ... Libya's leader Muammar Gaddafi is hunted down and killed by Libyans, after 41 years of ruling his nation through fear and intimidation.

But there is much more to the overthrow of three corrupt and kleptocratic regimes in Tunisia, Libya, and Egypt. In fact, in many ways, it all started with a vegetable seller in Tunisia.

After Tunisian police confiscated Mohamed Bouazizi's only means of earning a living in December of 2010 he set fire to himself. He was fed up with a corrupt regime that would take his only means of earning a living. Street protests were initiated. They became uprisings. Subsequent events in Tunisia, and then throughout the Arab world, are now known as the Arab Spring.

The Arab Spring, in turn, has both drawn from and given life to the Obama Doctrine (which he first articulated in Oslo in 2009). In simple terms the Obama Doctrine is about Peace through cooperation, Order through strength.

In the real world it means, when possible, encouraging our allies to go through international institutions, like the United Nations and NATO, to assist repressed people looking to overthrow corrupt regimes. But the Obama Doctrine also means relentlessly pursuing those who threaten America's security.

Killing Osama bin Laden in a stunning raid led by U.S. Special Forces in May proved this. This, in turn, was followed up by another spectacular military operation in September that killed the most potent post-Bin Laden al Qaeda threat to the United States, Anwar al-Awlaki.

It would be easy for me to say that cooperation and successful military raids are sufficient to understand the Obama Doctrine. But, as President Obama's comments on Israel demonstrate, this doesn't do justice to the complex thinking that the Obama Doctrine involves.

It is the difference between a checkers player and a chess player. Consider how it worked in Libya.

About a month after the protests in Libya started President Obama imposed powerful sanctions, froze Colonel Qaddafi’s assets, secured a UN Security Council resolution, organized an international coalition, executed another stunning military campaign through NATO, pushed Gaddafi’s forces back with air strikes, which effectively neutered Gaddafi's military and left them (and Gaddafi) to flee towards safe havens.

Allies. International institutions. Strategic restraint.

And the best part? It was all done without having to put American troops on the ground. This meant no American military casualties and only a handful of Libyan civilian casualties. All of this allowed the British and French to lead the United Nations and NATO - at the request of the Arab League - to continue pursuing a crippled regime on behalf of a beleaguered civilian population.

Ultimately the Obama Doctrine doesn't provide the media with the "shock and awe" fireworks of a U.S. military invasion, or the pomp and pageantry of a Mission Accomplished photo op. But it's working.

While all of this may all be too much for those who want to turn every conflict country into parking lot, today's developments - understood in the proper context - help us see the Obama Doctrine for what it really is. An approach to global politics that's starting to win the United States new fans. That it's happening in an historically antagonistic region bodes well for America, on many levels.

- Mark

Addendum: This is probably the best interactive on the Arab Spring I've seen. Check it out.

THIS IS WHY MORE AMERICANS SHOULD BE IN THE STREETS

2011-10-18T13:46:00.000-07:00

Yesterday we had an interesting conversation in class about the global economy and America's debt load. Students wanted to know why we're accumulating so much debt. I explained, apart from reckless policy decisions made under President Bush, that we're lending or committing massive amounts of money - backed by the American taxpayer, mind you - with little or no understanding of where it ends up.

One egregious example was when half a trillion dollars was transferred to Europe's central banks. Federal Reserve Chair Alan Greenspan couldn't track or explain it's final whereabouts. Seriously, even after trying to check his notes, Federal Reserve Chair Alan Greenspan had no clue about the final destination of half a trillion dollars. That's $500,000,000,000. Check it out here.

Look, accounting for a half a trillion dollars shouldn't be that difficult. Back in 2009 half a trillion dollars amounted to approximately one-half of what all of America produced and sold (GDP) in one month ...

Not being able to account for the monetary equivalent of one-half of America's total economic output for a month is akin to you and me not knowing where half our paycheck goes every month. Most people can explain where one-half of their paycheck goes every month.

I know I can. And I can do it without notes too.

But wait. It gets better (or is that worse?). Half a trillion dollars is small potatoes when we consider the trillion dollar transactions that the Federal Reserve couldn't account for back in May of 2009. Actually, it was about $9.7 trillion. But who's counting, right?

Fortunately, for us, there were several independent bean counters who figured out where the money was going. And they have nice interactive graphs that explain where the money went. Here's The Atlantic Monthly with a nice interactive of "The Fed's Cash Machine" ... in May of 2009.

If Bernanke was too busy saving the world during May of 2009 to read the The Atlantic Monthly he could have checked out Bloombergs interactive of the $9.7 trillion that we've encumbered ... back in February of 2009!

So, how many of you have heard Washington's courageous politicians talk about the trillions in future obligations that we've been put on the hook for to save Wall Street? But I'm sure you've heard plenty about taxing the bottom 50% of Americans who pay no income tax, right?

But consider this. The bottom 50% earn or own the equivalent of $1.5 trillion, total. This means we could confiscate everything the bottom 50% earn or own this year - and then turn them into industrial slaves - and we still wouldn't come close to paying what we've paid as a down payment on the 2008 market collapse.

At the end of the day, as I explained in class, we're looking at several problems here.

First, all of the money we've made available to Wall Street and the biggest banks is being used to clean up toxic assets and the failed market bets that created our bubble economy. The result is that many market players now look solvent and successful when, in fact, many should be under indictment.

Also, I have a problem with Federal Reserve officials who often don't know - or claim not to know - who ultimately gets the money we lend or make available. Playing stupid with our money is not a quality we should encourage.

Look, as early as December 2008 I found a trillion dollar hole in the Federal Reserves balance sheets. It didn't take as long as you might think. If I can find a trillion dollar obligation made with taxpayer backed dollars don't you think Federal Reserve officials should be able to explain where it went? Me too.

Next - getting back to Bernanke and that mysterious half a trillion dollars we discussed above - we need to keep in mind that the European Union could collapse under a series of national defaults (hello Greece). This is a problem because we lent the money to the EU, not to individual European nations. If the European Union collapses the EU may never pay back the hundreds of billions they've borrowed. This is a distinct possibility since Europe is essentially using debt to pay off debt, and because the language in the Fed's loan contracts to Europe effectively allows roll overs in perpetuity.

This means that what we've lent to Europe would stay on our books as debt. Nice.

Long story short? We've accumulated trillions in debt obligations that Congress neither signed off on, nor seem overly concerned about. And it's all been done in the name of saving Wall Street and the biggest banks.

Even if most ordinary Americans don't understand the specifics, they intuitively understand the larger implications. This is why they are pissed off at Wall Street. It's really that simple.

- Mark

MONDAY FUNNIES (kind of) ...

2011-10-17T09:23:00.000-07:00

Speaking of village idiots, here's the headline ... "Brothers charged with stealing western Pa. bridge, selling 15.5 tons of scrap metal for $5,179."

From this story, it appears that this is the bridge ...

- Mark

BILL O'REILLY: THIS WEEKS VILLAGE IDIOT

2011-10-13T20:27:00.000-07:00

While defending Wall Street and the big banks, Fox's Bill O'Reilly asked why there haven't been any investigations into Wall Street criminality if what they did was so bad. In an exchange with Cornell West and Tavis Smiley, O'Reilly argued that there is "no evidence" of wrongdoing because "they didn't violate any laws!"

What an idiot.

We haven't had big investigations - let alone convictions - after the 2008 market collapse because we dumped trillions in taxpayer funded bailouts and other guarantees into the financial sector. In the process we effectively removed the threat of receivership, bankruptcy, disgrace, or the full force of our legal system from Wall Street's horizon. This is the way our legal and political system works for white collar executives with money.

So, it's not that there wasn't illegality and theft in the lead up to 2008. It's just that the rules of the game prevents our financial mandarins from having to account for their actions. And, yes, this undermines the integrity of our market system.

Specifically, O'Reilly needs to take a look at:

Purified Toxic Crap ...
Bailouts essentially turned straw into gold by using taxpayer funded cash, to purchase toxic "legacy assets" for example. To date, well over $5 trillion in watered stock, bad assets, and toxic securities have been pretty much cleaned up (forcibly) by the U.S. ~~government~~ taxpayer. If the worst is cleaned up, what do you go after?

Information Blackouts ...
One of the cornerstones of any market economy - and any democracy - is transparency. Without it you can't get good information. Guess what? Bailout payout information was deliberately withheld from the public on orders from current Secretary of Treasury Tim Geithner. With an information blackout the most toxic and ethically challenged market instruments have been able to fly under the radar (and then get cleaned up).

Out of Court Legal Settlements ...
Instead of entering into court battles - which are critical for building precedent and case law - financial firms like Goldman Sachs routinely pay fines into the hundreds of millions of dollars. This is chump change when you look at the trillions the financial industry has hauled in (and the trillions more we're on the hook for). It's hard to get convictions when you can pay a taxpayer subsidized fine and walk away.

Right to Sue is Waived ...
At the center of all the toxic payouts in 2008 was A.I.G. In exchange for getting bailout cash, A.I.G. was forced to give up it's right to sue Wall Street firms in court. In a few words, A.I.G. was given an offer they couldn't refuse: Take the money and shut up, or you don't get any help at all (and you might even get caught up in a legal dragnet too). But it gets better (or is that worse?). At one point during the height of the market crisis in 2008 the Federal Reserve demanded unusual national security procedures before it would share or supply critical A.I.G. bailout related documents.

For whatever reason, none of this adds up for Bill O'Reilly.

So, to simplify, you can't be sued or convicted if the problem is purified with a pile of taxpayer backed cash ... information is deliberately withheld or distorted ... you pay record fines to avoid court trials ... and if the initial keystone bailout institution is told they can't sue as a condition for receiving taxpayer money.

Let me repeat the point. You can't get investigations - let alone sued - if the state intervenes to help you bury the financial bodies. It's that simple.

If you understand this you know why Bill O'Reilly is this weeks Village Idiot.

- Mark

Addendum: As you can imagine, things haven't gotten any better over the years. Corporate America is busy playing Blame Games, and are suing one another for selling toxic crap to one another. Similarly, we're learning about the usual political stonewalling and massive lobbying of state attorney generals, which prevents or undermines larger investigations. All of this is critical for understanding why there haven't been any investigations because of how the FBI acknowledged that "mortgage fraud was substantial" as early as January 2008.

UPDATE: Here's Robert Reich with more examples of Wall Street seeking and getting legislative and legal cover from Washington.

THIS IS OCCUPY WALL STREET

2011-10-12T15:38:00.000-07:00

Former reppresentative Alan Grayson explains Occupy Wall Street in less than a minute ...

Former representative Grayson also makes P.J. O'Rourke look puny and insignificant, as this longer clip from The Raw Story illustrates.

- Mark

OUR MODERN ECONOMY

2011-10-11T11:03:00.000-07:00

This is why we're in trouble. Our modern economy, via Calvin and Hobbes ...

- Mark

OCCUPY WALL STREET & FOX NEWS

2011-10-11T04:45:00.000-07:00

Check out this interview story, which Fox News decided not to air after the interviewee was told that he had an open mic to “put any message you want out there,” without manipulation ...

The story went viral after The New York Observer (not Fox News) gave the interview some media legs.

So after a news editor admitted "infiltrating" D.C. protests in order to undermine it, and GOP congressman Peter King (a Fox News darling) stated we can't allow more coverage of Occupy Wall Street, a narrative seems to be emerging. Unless it's a Tea Party protest - which defends tax cuts and reckless deregulation (i.e. more of the same) - the Right, and Fox News, want nothing to do with demonstrations on the street that question financial subsidies for corporate America and Wall Street's taxpayer subsidized gains.

One would presume that this is the rationale for the crowd chanting "Fox News Lies!" and forcing Geraldo Rivera to flee an Occupy Wall Street event.

- Mark

SECONDARY MARKETS AND VULTURE CAPITALISM

2011-10-10T16:59:00.000-07:00

When I discuss the issue of development and underdevelopment, among the topics I cover are debt and the rise of secondary markets. What are secondary markets, you ask? I'm over simplifying but, in a few words, they're like financial flea markets where market players buy and sell debt and other market instruments that may have been "marked down" or discounted.

This impacts development because when financial players (or banks) find, or think, they won't get paid for the loans and debt that they underwrite they will sell it to other market players at a discount. It's like the 99 cents store buying books in bulk when they don't sell. But unlike the 99 cent store, the market players who purchase discounted debt don't settle for 99 cents. They pursue avenues for negotiating settlements, or getting countries to pay as much of their debt as possible.

As you can imagine, this means pursuing high cost legal and political efforts. It also means using the levers of the state (i.e. government officials, state courts, and international institutions) to get debtor nations to pay out. Threats and legal pressures are applied. In fact, without the levers of the state, there would be few to no payouts at all.

And the payoffs are big, as you will learn from this article on vulture capitalists.

- Mark

KRUGMAN: "PANIC OF THE PUTOCRATS"

2011-10-10T09:18:00.000-07:00

___________________________________________

In addition to creating the link, I'm going to post half of Paul Krugman's NY Times' op-ed, "Panic of the Plutocrats." Follow the links to read the entire article. It's excellent.
___________________________________________

Op-Ed Columnist
Panic of the Plutocrats
By PAUL KRUGMAN
Published: October 9, 2011

It remains to be seen whether the Occupy Wall Street protests will change America’s direction. Yet the protests have already elicited a remarkably hysterical reaction from Wall Street, the super-rich in general, and politicians and pundits who reliably serve the interests of the wealthiest hundredth of a percent.

And this reaction tells you something important — namely, that the extremists threatening American values are what F.D.R. called “economic royalists,” not the people camping in Zuccotti Park.

Consider first how Republican politicians have portrayed the modest-sized if growing demonstrations, which have involved some confrontations with the police — confrontations that seem to have involved a lot of police overreaction — but nothing one could call a riot. And there has in fact been nothing so far to match the behavior of Tea Party crowds in the summer of 2009.

Nonetheless, Eric Cantor, the House majority leader, has denounced “mobs” and “the pitting of Americans against Americans.” The G.O.P. presidential candidates have weighed in, with Mitt Romney accusing the protesters of waging “class warfare,” while Herman Cain calls them “anti-American.” My favorite, however, is Senator Rand Paul, who for some reason worries that the protesters will start seizing iPads, because they believe rich people don’t deserve to have them.

Michael Bloomberg, New York’s mayor and a financial-industry titan in his own right, was a bit more moderate, but still accused the protesters of trying to “take the jobs away from people working in this city,” a statement that bears no resemblance to the movement’s actual goals.

And if you were listening to talking heads on CNBC, you learned that the protesters “let their freak flags fly,” and are “aligned with Lenin.”

The way to understand all of this is to realize that it’s part of a broader syndrome, in which wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is.

Last year, you may recall, a number of financial-industry barons went wild over very mild criticism from President Obama. They denounced Mr. Obama as being almost a socialist for endorsing the so-called Volcker rule, which would simply prohibit banks backed by federal guarantees from engaging in risky speculation. And as for their reaction to proposals to close a loophole that lets some of them pay remarkably low taxes — well, Stephen Schwarzman, chairman of the Blackstone Group, compared it to Hitler’s invasion of Poland ....

Read the rest here.
___________________________________________

- Mark

AL DAVIS, 1929-2011

2011-10-08T13:20:00.000-07:00

Click here for photos and here for Raider.com video of Davis.

- Mark

WHAT A BUNCH OF PR**KS

2011-10-07T13:47:00.000-07:00

From TheConsumerist.com ...

In an effort to tweak the noses of protesters involved in the "Occupy Chicago" movement signs were placed in the windows of the Chicago Board of Trade that say, "We are the 1%."

So you know, the Chicago Board of Trade is the nation's oldest mercantile exchange. People make lots of money there. It's where the top 1% of our nation's wage earners work.

The interesting thing is that the signs are on the 8th floor. This tells me that the people who posted them are gutless wonders. Security keeps them shielded from repercussions. Cowardice shields them from reality.

At the end of the day, while market traders may talk about "survival of the fittest," and being rugged individualists, they don't even have the cajones to walk into the street and tell protesters what they really think. Taunting from behind a wall isn't bravery.

And we wonder why the top 1% need bailouts when they screw up the market. It's obvious they can't face the person on the street, let alone professional failure. Can someone explain that rugged individualist, accountability thing, again ... please.

What a bunch of pricks.

- Mark

WE'VE CREATED A FINANCIAL MONSTER

2011-10-06T09:57:00.000-07:00

After years of reckless deregulation, the Financial Services Modernization Act (1999), the 2008 market collapse, and our screwed up bailout in perpetuity programs, we've created a banking and financial monster ...

More specifically, just as Frankenstein was built from the parts of the dead, our increasingly Frankenstein-like banking and financial system has been pieced together from dead and rotting institutions (click chart to enlarge) ...

Why is this important, you ask? Consider this.

A year ago (2010) the total assets controlled by Bank of America, Citibank, JP Morgan, and Wells Fargo ($7.7 trillion) were almost double the combined assets of the next 46 biggest banks. This represented at least 64 percent of total commercial assets of all the banks in the United States.

This is a real concern because the four biggest banks banks in the nation now control more assets today than they did in December 2007 - when they held just $4.95 trillion in assets, and were considered Too Big to Fail.

But wait. It gets even better. We haven't even begun to delve into our "shadow banking" system, which manages and controls even more assets than the big four do today.

- Mark

Addendum: Kudos to John (and others) for posting the chart above on FB. Also, here's a list of the biggest commercial banks, with assets, from SNL ...

STEVE JOBS, 1955-2011

2011-10-06T08:03:00.000-07:00

* * * * * * * * * * * * * * *

- Mark

If you want to read additional commentary on Steve Jobs check out this list of articles compiled by Barry Ritholtz ...

• Steven Paul Jobs, 1955-2011 (WSJ)
• Steve Jobs, Apple’s Visionary, Dies at 56 (NYT)
• Apple Fans From Cupertino to Singapore Mourn Passing of Jobs (Bloomberg)
• Steve Jobs’ 2005 Stanford Commencement Address (Video)
• Steve Jobs’s Best Quotes (Digits)
• His Life, His Companies, His Products (NYT interactive)
• boingboing goes old school Mac Classic (bb)
• Mossberg: The Steve Jobs I Knew (WSJ)
• Tech honchos remember Steve Jobs (Digits)
• A Look Back at Steve Jobs of Apple (Dealbook)
• Jobs’s Death Draws Outpouring of Grief and Tributes (NYT)

THE WHINE INDUSTRY ...

2011-10-04T16:38:00.000-07:00

Kudos to Tom for finding this. The Whine Industry ...

- Mark

A MONKEY WITH DARTS, AND OUR ON-GOING MARKET "CRASHES"

2011-10-04T12:18:00.000-07:00

So the market's tanking. Again. Yawn ...

Every time this happens I have fun watching the market analysts. Many like to pretend they know what they're doing when, in fact, they're little more than market cheerleaders, who live in a bubble that they help inflate.

What they ignore is that for the better part of 30 years what's been supercharging the markets - and subsidizing their profits - has been a combination of emergency bailouts, easy money policies (the Greenspan Put), plus favorable legislation and reckless deregulation (which has pretty much made gambling legal on Wall Street).

Then we have the backdoor bailouts, regulatory market props, and other government supported market schemes that pretty much insure that a monkey throwing darts could have made money in the market over the past 30 years. Seriously.

Don't believe me? Check out this story.

A Monkey Throwing Darts

In 1988 the Wall Street Journal began a contest inspired by Princeton Professor Burton Malkiel’s book A Random Walk Down Wall Street. In the book Malkiel suggested that "a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts."

While the WSJ didn't ultimately use real monkeys (liability issues) they did use staff members to throw darts. The contest became such a popular feature in the WSJ that journalists and academics alike wrote about the implications (which you can find here). While rules were established and changed over time the basic guidelines included asking four professional market players to make market picks each month. They would then select one stock that would be followed over the next six months.

The "pro" stock picks competed against four stocks chosen by the Journal's "monkey" staffers, who tossed darts at financial pages pasted on a board. On October 7, 1998 the Journal presented the results of the 100th dartboard contest, with the pros winning 61 of the 100 contests.

There's no doubt that winning 61 out of 100 times is impressive. It would get you into the playoffs in most professional sports. But the fact that throwing darts randomly at financial pages could produce better results than the pros 39 percent of the time says much about market players. Think about it. A team of monkeys wouldn't beat a professional sports team 39 percent of the time, even if they were WSJ monkey staffers.

But wait, it gets better.

The performance of the market pros "sure winner" stocks was compared against simply leaving portfolios alone to ride out the fluctuations of the Dow Jones Industrial Average. It was even less impressive. The pros beat the DJIA only 51 out of 100 contests (though pro returns were slightly better). Put another way, if you simply invested and left your money alone in a portfolio (i.e. passive investing) you - the real investor - would've beaten the pros almost half of the time.

In 2002, the WSJ stopped the contest, but wouldn't say who won. Still, a point was made.

This isn't good, especially when you consider management fees, transaction costs, or taxes assessed on taxable investors. And all for what? So you can be told the market equivalent of "don't put all your eggs in one basket"? (though, to be fair, there are smart market players who will tell do-it-yourselfers what to look for, or who will admit that they really can't beat the market over an extended period of time).

If you're still not thinking about dumping your market expert for monkey staffers with darts that's fine. I wouldn't either. Playing the percentages wins games in baseball too.

Still, confirming the fact that market analysts and market pros aren't always the best sources for understanding what's happening in the market is the following ...

Going Ape in 2008
We always want to keep in mind that a great deal of the market enthusiasm before the 2008 market crash came from market experts who were supposed to be objective analysts. None of them ever took a step back to explain that the market surge since the 1980s was a direct result of government bailouts, Fed money dumps, and reckless deregulation - or that it couldn't last.

In fact, none of the market experts who were cheer leading everything from deregulation-tinged CDOs and CDSs - or those who were coddling the financial titans that peddled financial crap - were made to pay for their boot licking incompetence after 2008.

Look at all the talking heads on the cable networks today. Who left? Who was forced to resign in disgrace from the networks?

Then we have all those bonuses that were paid out to Wall Street for doing such a bang up job before 2008 ... What made the "recovery" and record payouts possible? Taxpayer backed guarantees, or market acumen?

Which brings us back to what's happening in markets today. Let me make this real simple, again. The outlandish market successes we've been enjoying over the past 30 years have been the product of primarily three interrelated market subsidizing developments:

1. Bailout Nation

2. Easy Money (the Greenspan Put + debt)

3. Favorable Legislation / Reckless Deregulation

At the end of the day, our market system is living on borrowed time, and borrowed money. And it's all government sponsored. When these three "magic of the free market" gifts end, or stop working - for whatever reason - the geniuses who have been managing your money, or talking up the markets, will no longer be geniuses.

And I should know. I'm been a market guru for some time now ;-)

- Mark

WALL STREET OPERATING AS A CRIMINAL ENTERPRISE?

2011-10-03T09:18:00.000-07:00

If you want to know what's helping to drive the protests on Wall Street check this out ...

I've been saying that we should use mob-driven RICO statutes to go after the banksters for some time now. The key is prosecuting our biggest banks as criminal enterprises. So, have our nation's biggest banks become criminal enterprises? This July article from Money Morning's Shah Gilani - "The Bank of America Settlement: The Latest Travesty in the U.S. Banking System" - says the answer is "yes."

Those of you who follow this blog know why I agree. So, I'll leave it at that for now.

On another note, this article on pensions explains why we need to keep public sector defined benefits programs with the public sector, instead of shifting public sector retirement monies to Wall Street/private sector managers.

In a few words, the private sectors fee and bonus stuffed overhead costs are prohibitive, with guaranteed percentages regardless of performance. In many ways, it's the essence of wealth extraction over wealth creation.

Neither article is long or overly complex, so I'm pretty sure you'll enjoy both.

- Mark

FACEBOOK REALITY

2011-09-28T14:00:00.000-07:00

Kudos to my friend Leonel for posting this ...

- Mark

GOP DOESN'T HAVE A CLUE ABOUT THE HUMAN SPIRIT

2011-09-27T12:23:00.000-07:00

We here it all the time. Let's cut taxes and deregulate so that entrepreneurs can work their magic. Only then can we spur entrepreneurialism and rejuvenate America's markets, the argument goes.

Well, guess what? Creativity and prosperous markets were with us long before Ronald Reagan and the current wave of deregulation, tax breaks for the rich, and other legislative gifts to America's financial mandarins. In fact, I'm pretty sure that Bill Gates and Steven Jobs weren't sitting around their garages waiting for tax cuts and deregulation to come up with their Microsoft and Apple ideas (go ahead, ask them).

Inventions and creativity have been happening since the dawn of time. History tells us this. Initiative and innovation are human constants, and depend on many factors that go beyond tax cuts and deregulation.

Benjamin Franklin's lightening rod, penicillin, and Jonas Salk's polio vaccine are examples of this. The influenza outbreak during WWI stirred curiosity and spurred some of the greatest publicly funded medical research that the world has ever seen. History is full of many other examples where phenomenal breakthroughs were made for reasons beside monetary gain.

The thing we want to keep in mind is that people invent and do things for reasons that go beyond the profit motive or tax cuts. Think about the things that were invented in the 1940s and 1950s when the tax rate on America's wealthiest wage earners was 90 percent.

Whether it's pride, personal goals, accident, art, nationalism, or simple curiosity, the human experience shows us that tax breaks aren't the only instigator behind human creativity.

Below is a very partial list of creativity and products that were built without the promise of tax breaks, the profit motive, or deregulation.

_______________________________________

THE NASA INVENTIONS ...

Do you like ear thermometers, memory foam, scratch resistant lenses, invisible braces, shoe insoles, satellites and long distance communication, ionized adjustable smoke detectors, road safety grooving (which cuts hydroplaning), cordless tools (for Apollo missions), and water filters (ionized charcoal), kidney dialysis, cat scans, cancer fighting drugs and shiny hair, and deformable mirrors (which provide 100 times the imaging), among others? Thank NASA for directly building or having a drawers hand in these and more than 6,300 other patented inventions.

But, contrary to common folk wisdom, TANG was not one of NASA's inventions. That's a myth.

THE MILITARY DISCOVERIES ...

The military connection ... Anesthesia (Civil War), nuclear energy, the computer (from code breaking), the Internet (cold war invention for use during nuclear war), satellite communications, synthetic rubber, penicillin, jet engines (thank you German military scientists), submarine technology (American Revolution, 1775), and Pepto Bismol.

Perhaps the best example of a military-related invention is the story of the most popular gun in the world, the AK-47. Mikhail Kalashnikov, a Russian tank driver came up with the idea for the AK-47 while recovering in a military hospital during World War II. Around the world between 75-100 million AK-47s are in use today, which makes it the most popular gun in the world.

And if we want to stretch it, even the Rosetta Stone was discovered as a result of a military campaign (Napoleon's romp through Egypt). Anthropology and study of languages haven't been the same since.

ACCIDENTS & SERENDIPITY ...

Do you like the microwave, Viagra, artificial sweeteners, Popsicles, brandy, Teflon, and penicillin? They were accidents of curiosity. So were Velcro, X-rays, the pacemaker, super glue, and play-doh.

Then we want to keep in mind that while Thomas Edison wanted to make money, reproducing music wasn’t what he had in mind when he invented the phonograph. And the list goes on ...

_______________________________________

As you can imagine, there's many more discoveries and inventions that have made the United States and our world a more comfortable, interesting, and dynamic place. And these discoveries weren't tied to tax breaks or deregulation. Curiosity, environment, and simple need matter. Whether it's national security (nuclear weapons), concern over health (medicines), the thirst for knowledge, personal pride, the arts, or simple accidental discoveries it's clear that tax breaks and deregulation are weak excuses for hijacking both the economy and the legislative process in America.

What Wall Street and our nation's bankers want today are specific guarantees on return to go along with their bailouts. This is especially the case when we consider that 30 years of tax cuts and deregulation have produced little beyond $14 trillion in debt, a collapsed economy in 2008, and wealth gaps that rival the Gilded Age. Indeed, after 30 year years of the GOP's tax cut jihad America ...

... has reduced it's revenue source to such a degree that we now owe $14 trillion, instead of the $979 billion when Ronald Reagan entered office.

... has refocused the economy so that extractive financial instruments, which rest upon up-front fees and larger than life bonuses, dominate the mind-set of America's shadow banking system and Wall Street.

... has made America lose sight of the fact that innovation, curiosity, and inventions aren't entirely dependent on tax cuts for the rich. They never have been, and we shouldn't believe that they are today.

I'll go one step further. Tax breaks and deregulation are now political poison pills that have recklessly reoriented America's economy and burdened its financial future.

Think about it. Our 30 year tax cut race to the bottom has become the GOP's way of using the levers of the state to push an innovative and inventive spirit that has always been with us. But instead of spurring wealth creating innovations Wall Street and America's shadow banking system have focused their energies on creating wealth draining financial instruments that have done little but create a largely "symbolic" economy dependent on taxpayer bailouts.

Today, only a handful of individuals on Wall Street have benefited from 30 years of tax cuts and favorable legislation. Yet, the GOP is calling for more of the same. Worse, the collateral damage has been so great that many believe human curiosity and innovation in America today are dependent on the very same state sanctioned tax breaks and legislative gifts that brought us the financial blow back we saw in 2008.

Somehow using the state to create an economy that benefits a few at the expense of the rest doesn't strike me as the best way for getting the government out of the marketplace. In fact, in many ways, it makes today's financial titans almost entirely dependent on the state for their financial fortunes. Let's call it their Orthodox Paradox.

Look, after 30 years of tax breaks for the rich and deregulation America should be swimming in jobs and be pretty much debt free (as Reagan promised tax cuts would do, but Clinton's tax hikes were scheduled to produce). Instead we're trillions in debt and have an economy swamped by growing wealth gaps and unemployment, both of which are a product of tax cuts and favorable legislation for Wall Street's financial mandarins.

At the end of the day, people demonstrate initiative and inventiveness for many reasons that go beyond tax brackets and legislative fits. Telling Wall Street and our bailed out bankers that they can hide behind the economic uncertainties caused by their policies - which collapsed the economy and primarily benefited them - is the height of insanity.

But we have learned one thing from the GOP's 30 year race to the bottom. They really don't have a clue about American history, or what motivates the human spirit.

- Mark

THIS SHOULDN'T BE A SURPRISE TO ANYONE (but I'm sure it is)

2011-09-26T11:53:00.000-07:00

Bank of America is being accused of cooking the books to hide potential losses of at least $10 billion. Yawn ...

If you've followed this blog, and read about Bank of America's faux paybacks ... or the wonderful world of book cooking Structured Investment Vehicles here and here ... or corporate America's evolving legal blame game ... Bank of America hiding $10 billion in losses shouldn't be a surprise to anyone. But I'm sure it is.

The only question now is how they explain and then bury the problem with some more creative book keeping.

And you wonder why market-to-market is so important for the banks ...

- Mark

GAMBLERS IMITATING WALL STREET ...

2011-09-24T09:42:00.000-07:00

Life imitates art. This the phrase we use when events in the real world mirror or seem to be inspired by creative work. Now we have this example of gamblers imitating Wall Street ...

The Justice Department is filing charges against online's Full Tilt Poker, claiming that it's really a Ponzi scheme that's cheated its players out of hundreds of millions of dollars. The Justice Department claims that over the course of four years Full Tilt Poker's executives used $444 million of player gambling deposits - which were supposed to be protected separate accounts - to pay themselves millions. Specifically, federal prosecutors claim top executives Raymond Bitar paid himself $41 million and Howard Lederer received $42 million.

Gamblers imitating Wall Street ... this is the essence of what Bill Black meant when he wrote about "control fraud" in The Best Way to Rob a Bank is to Own One.

- Mark

P.S. Here's a thought. To be fair, Wall Street did imitate Vegas when it created and then collapsed our Casino Economy in 2008. Kind of begs the chicken/egg question, doesn't it? Twilight Zone here we come ...

SOCIAL CONTRACT EXPLAINED BY ELIZABETH WARREN

2011-09-22T23:19:00.000-07:00

Elizabeth Warren, as I've noted here many times, knows what she's doing. This is what the social contract and the laws of justice are all about (mutual consent and political balance). Kudos to my friend Seven for finding this ...

“You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.

“Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”

Warren is running for U.S. Senate in Massachusetts against Scott Brown. You can bet that Wall Street will throw a ton of money at Brown. Warren is the real deal. I hope she wins.

- Mark

WHY THE MARKET CRASHED IN 2008 (in 10 easy to understand steps)

2011-09-22T01:14:00.000-07:00

Arrgh ... If I hear one more GOP presidential hopeful blame our current market mess on President Obama again I think I'm going to have a brain aneurysm. To be sure, I understand the political part of what the candidates are doing. What gets me is how so many Americans buy into the ignorance and stupidity, and it's starting to burn through the electorate like wildfire ...

I bring this up because people speak as if President Obama could have somehow waved a magic wand and fixed the economy in just three years. Apart from having to deal with a "just say no" GOP, what they forget is that it took the better part of 6 years for the Bush administration and a GOP-led Congress to blow through budget surpluses and set the stage for burning down our economic house.

Destroying the peace and prosperity that was left to President Bush took some real effort and incompetence, and can't easily be undone.

So, in an effort to dispel any notion that President Obama is to blame for our current mess (though, I agree, he screwed up on bailing out the banks), I'm going to present what I hope is an easy ten point overview of why the market collapsed in 2008. What you'll see is that our current economic mess didn't happen over night, and won't be turned back over night either. I'm drawing the information straight out of my book. So if you want more information go out and buy my book (I know, shameless plug).

As you'll see, there's enough bi-partisan stupidity to go around, though one party definitely deserves more blame than the other for our current mess. You can quibble with the 10 points (I might even emphasize one point over another in the future), but the general outline of our market collapse, and what ails our markets today, are here.

Anyways, here goes. Our market collapse, in ten easy steps ...

______________________________________

THE BEGINNING

1. A Naive Belief in "Free Market" Ideology (blinds policymakers)
... Ronald Reagan enters the White House after Maggie Thatcher becomes Britain's Prime Minister. Trickle Down economics is born. Deregulation, tax cuts for the rich, and globalization are embraced.
... After dumping trillions in borrowed money into the economy Reagan almost triples the national debt, raises taxes on the middle class (FICA), and lifts the debt-limit ceiling 17 times. Yet he's hailed as a fiscal conservative.
... In an effort to concentrate on "free markets" in the 1980s, U.S. leaders effectively ignore economic costs associated with (1) paying for the defense of the west, (2) America's rude introduction to unbridled globalization (caused, in part, by the success of Bretton Woods), (3) the structural changes in the economy caused by the rise of financial services sector (i.e. the "symbolic" economy), (4) Nixon's price controls, and (4) OPEC's inflation inducing price hikes.
... Instead of dealing with costs of U.S. militarism, competition from abroad, the financialization of the economy, Nixon's price controls and OPEC price hikes, America's leadership blames sluggish U.S. economy on "the state" (regulations, domestic programs, and taxes), while calling for "a good 'ol shot of capitalism" in 1980.

BUILD UP: 1970s-1980s

2. Deregulation / Financialization of Economy (regulator vacation)
... 1971 the dollar is de-linked from gold and becomes a commodity. Futures markets develop for money, interest rates, and other novel investment tools of the trade.
... OPEC price hikes wreak havoc on markets and prices. Pundits and foreign policy experts alike (see especially Henry Kissinger) are caught flat footed.
... new policies and deregulation pushed by financial services sector make the Savings & Loan debacle possible (1970s/1980s), and help to set the stage for the deregulation stupidity that eventually leads to the dismantling of the Glass-Steagall Act and the passage of the Financial Services Modernization Act (1999)
... financial services sectors consolidates as symbolic economy grows in importance. SEC begins its disappearing act.

3. Interest Rate Manipulation (what free market?)
... Interest rates are used first to stabilize markets, and then as a tool to stimulate them. Bailouts and money dumps begin in earnest under Alan Greenspan's leadership at the Federal Reserve. The Greenspan Put (dumping cheap money into the system when Wall Street gets in trouble) begins in 1987.
... Federal Reserve becomes Wall Street's support system, and then it's puppet.
... Market recklessness surges as financial services (and gambling) grows.

4. Yield Hunts / Secondary Markets (casino economy begins)
... Inflation + low interest rates in 1980s lead bond traders to start looking for higher yield investments.
... Non-traditional investment products become more attractive, but market players are (initially)reluctant because of low bond ratings.
... Globalization (largely unregulated) allows financial firms to seek higher investments abroad through loans, secondary markets, arbitrage, etc.

5. Bailout City (what, accountability?)
... Beginning with Mexico in 1982 (actually it begins earlier, but this is where I'm starting), Wall Street's stupidity is bailed out time and time again. The Greenspan Put begins in earnest in 1987 with LTCM.
... Accountability and free market ideology are undermined with bailouts, but no one cares. Wall Street/investment bankers continue to believe in the wonders of the market.

MANIA: 1990s / Aughts ...

6. Securitization / Derivative Markets Explode (hello Rumpelstiltskin)
... Market players become Rumpelstiltskin, and turn crap into gold. CDOs, SIVs, CDSs, and other novel investment products become popular, especially after ratings agencies get into bed with Wall Street's biggest investment banks. Interconnected market players game the system.
... Wealth extraction becomes more important than wealth creation. What would have been criminal or fraudulent before becomes modus operandi with favorable legislation.
... Security markets begin demanding more products (i.e. debt) to securitize, as rating companies begin to hand out AAA ratings on virtually anything that can be chopped up and modeled.
... Symbolic economy grows 30-40 times the real economy.

7. Toxic Market "Innovations" Applauded (herd mentality for rugged individualists)
... Wall Street (Goldman Sachs then-CEO, Hank Paulson) goes to SEC for permission in 2004 to carry 40:1 debt to equity ratios (Imagine going to a bank and asking to borrow $2 million on a $50,000 a year income). It's granted.
... With demand for securities growing, hedge funds, shadow banks, and Wall Street press Washington regulators to allow "non-conventional" lender packages into the housing market.
... Non-bank, or shadow banks, become critical cogs in financial machine. Subprime mortgage underwriters ignore all lending standards.
... With brokers dumping newly created loans 30-60 days after they're written, NINJA loans, No Doc loans, Liar loans, and other type of teaser programs become the norm.
... Caution thrown to the wind as competent regulators like Brooksley Born are buried politically (after she called attention to disastrous derivative markets), and Sarbanes-Oxley legislation allows Washington/Wall Street to say "See, we fixed it" after Enron. Free market praised as fraud & lack of oversight become the norm.
... Consumers borrow and use homes as ATMs, which give the illusion of prosperity.
... Personal debt climbs; Bush doubles the national debt. Bubbles and record profits grow.

8. The Federal Reserve / Congress Become Cheerleaders (casino economy goes Vegas)
... Cheerleaders (who should be regulators) applaud innovative instruments and massive (unregulated) lending as evidence of the power of unrestrained markets.
... Home equity loans explode, consumption increases. Debt is the name of the game as it provides source for new securities and credit default swaps (insurance).
... Alan Greenspan cheers "new paradigm of active credit management" as interconnected institutions and the shadow banking system sign off on new securities, mortgage back contracts, and other debt instruments/loans.
... Wall Street and financial services sector pay and bonuses shoot through the roof.
... Notional value of contracts surge past $285 trillion (when annual GDP is only $14 trillion).

PAYING THE PIPER: The Mother of All Bailouts

9. Boom / Bust / Credit Freeze (back to reality)
... What do you know? Strawberry pickers making minimum wage really can't afford $700,000 home loans.

10. Blame Game Begins (continues today)
... Government Secured Enterprises (Fannie Mae), FHA loans, and Community Reinvestment Act (the poor) originally blamed for market collapse. Former Treasury Secretary Hank Paulson joins the game.
... George W. Bush (wrongly) claims he inherited a recession, and left with a recession. Nothing to see here. What a loser.
... Much anticipated bi-partisan FCIC report is blind-sided by GOP primer that deliberately excludes any mention of Wall Street, the shadow banks, interconnected cronyism, and deregulation (all the stuff I highlighted in red above).

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The incredible thing is that we have now come full circle. Today, Republican presidential candidates are full fledged free market ideologues, pushing for more of the same policies that got us into our current mess. Don't believe me? Start at #1 above. Begin reading, again.

Only this time the banks and Wall Street are the only ones who have access to, and are profiting from, unlimited cheap money and our propped up casino economy. Think about it. Today the house of cards (yes, it's still a house of cards) is propped up by cheap money for Wall Street, deregulation for Wall Street, favorable legislation for Wall Street, and adherence to a failed ideology in Washington that keeps the trillion dollar bailout and QE money flowing, for Wall Street.

At the end of the day it took almost a full generation to reach our current level of market stupidity. It's not going to end under President Obama in one term. Especially with the GOP acting like a political boat anchor.

- Mark

YEAH, IT'S CLASS WARFARE

2011-09-20T10:19:00.000-07:00

Here's how you tell that it's class warfare ...

Why is it good policy when Republicans Jeb Hensarling (R-TX) and Paul Ryan (R-WI) say it's OK to raise taxes on Joe Six Pack - those hardest hit after 2008 - by letting their payroll tax cuts / deductions expire?

But when President Obama says we can raise taxes on people making over $1 million a year - those who benefited most from post 2008 bailouts and the Bush tax cuts - it's suddenly class warfare?

And keep in mind that these are the same "job creators" who created 2.4 million manufacturing jobs abroad, while eliminating more than 2.9 million jobs here.

- Mark

EXPLAINING THE TEA PARTY (and Rick Perry) ...

2011-09-17T11:45:00.000-07:00

Have you ever wondered how something as serious as this ...

... could be hijacked and morphed into the functional equivalent of this?

Well, wonder no more. First, you start with the Bush Titanic ...

Then you sprinkle in some major blame shifting ...

... with true believer footsoldiers who look like this.

Then sprinkle in some major disinformation about taxes (and unemployment) when, as former Reagan adviser Bruce Bartlett made clear, the reality is quite different ...

Then you add in the continuous rants of media clowns like Rush Limbaugh, while stirring in Sarah Palin knockoffs like Michelle "Submissive" Bachmann and Christine "I'm not a witch" O'Donnell.

In the past we might have gotten something like this ...

Instead, because there is no longer a moderating force in the GOP, frontrunning Republican presidential candidates look like "Most-Likely-to-Secede" Rick Perry ...

So, to synopsize ...

Any questions?

- Mark

FROM EPIC TO MASTERPIECE

2011-09-16T21:01:00.000-07:00

I liked this song before, but it's been turned into a real masterpiece. This is absolutely the best rendition of Unchained Melody I've ever heard:

This reminds us that it doesn't have to be original to be great ...

- Mark

GOOD NEWS, BAD NEWS ON THE U.S. ECONOMY

2011-09-16T07:52:00.000-07:00

This is big picture, long term stuff. OK, first the Good News ...

Good News ...
Because of advances in technology, innovation, and significant improvements in U.S. productivity, America's share of total world output has remained remarkably constant at a little more than 25%, despite the significant increases in output around the world, especially in Asia.

Bad News ...

With the rise of other national economies, our bloated national debt, and the slow collapse of the dollar, the world has slowly dropped it's use of the dollar for trade and as a store of value ...

So, are we on the right track given the rise of the rest of the world (since we're holding steady), or is something amiss?

We'll be discussing this in class on Monday.

- Mark

TRICKLE DOWN ECONOMICS, SOVIET STYLE ... STALIN'S AMERICA

2011-09-15T10:24:00.000-07:00

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In spite of recent bailouts, favorable legislation, and regular money dumps from the Federal Reserve, we don't have socialism in America. Not even close. This is the case even if you count government safety nets, which don't cost anywhere near what we've committed or disbursed to Wall Street since 2008 (at least $13 trillion). But if you're going to make the "socialism in America" argument this is how you might want to start ....
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In an effort to explain the logic behind market economics, in my book I tell the story of Russia's peasant economies after the October Revolution of 1917. One of the biggest problems Russia ran into was getting peasant farmers to produce. Things took a turn for the worse during Russia's Civil War (c. 1918-1922), when the nation was faced with frustrated revolutionaries and mass starvation. This was a critical moment since Russian revolutionaries wanted to sell surplus agricultural production to facilitate industrialization. But there were no surpluses.

While agriculture production increased with the introduction of the New Economic Policy in 1921, the program was abandoned by Josef Stalin and replaced with forced collectivization. Not surprisingly, agriculture production slipped, again.

To better understand why revolutionary peasants weren't producing surpluses - which were necessary to help fund industrialization - teams of anthropologists were sent to study peasants societies throughout Russia. This was a tremendous undertaking as it meant spending months, and even years, at a time in distant rural communities. But the findings were extraordinary.

PEASANT STUDIES & "UNCLE JOE"
Headed by researchers like Aleksander Chayanov, various institutes studied and learned about peasant societies throughout Russia. One key finding was that peasants would work until they had enough to feed their families, and not much beyond this point. As I point out in my book, they learned that subsistence peasant households didn't particularly care about wage or price incentives. Instead, for a variety of reasons (discussed in class), they focused primarily on the “use-value” of a good in the immediate term rather than its “exchange-value” in a market. Producing more than what they needed was viewed as “drudgery.”

Though the findings of Chayanov and others were instructive because they helped explain what was wrong with collectivization in the Russian countryside, they didn’t sit well with Stalin. He wanted to know how he could get peasants to produce. As a result, because of his own paranoia's and twisted world views, he saw the reports emerging from the countryside as an unwarranted defense of rich kulaks (productive peasant farmers). All he knew was that the revolutionary state demanded surpluses, and the peasants weren't producing.

Stalin saw traitors in his midst.

After Stalin took control of Russian agriculture the studies done by Chayanov and others were virtually ignored by the Soviet state, and many of the institutes were closed. But this was just the beginning. Repression and purges in the early 1930s were followed with large-scale disappearances of "non-revolutionaries."

Chayanov was among those branded a non-revolutionary. He was arrested, tried, and then shot on the same day in 1937 [photo below is not Chayanov].

In Stalin's world, the Russian revolution and the worker's paradise would be a success, even if he had to use the levers of the state to spin lies, send misfits to labor camps, or kill his political enemies (both real and imagined). This is where it gets interesting.

TRICKLE DOWN THEORY, SOVIET STYLE ...
While Chayanov's story is instructive for what it tells us about peasant economies (and capitalism; a topic for another day), it's also significant because of what it tells us about Russian revolutionaries and die-hard Bolsheviks like Stalin. They were so committed to their theories of socialism that they would use the state - which was supposed to wither away according to Karl Marx, mind you - to make sure that agriculture surpluses were created and transferred to the more productive industrial sector.

It was deemed unimportant that the state would became increasingly repressive as it forced collectivization on peasants, suppressed living standards in the countryside, and then transferred resources from Russia's agriculture sector to industry and the city. The needs of backward peasants could be put off.

Part of the rationale for this line of thinking was that Stalin believed peasants would soon benefit from the availability of manufactured goods, agriculture equipment, and other products that would eventually reach the countryside. As Cambridge economist Ha-Joon Chang points out, this was trickle down theory, Soviet style.

I tell this story because, as Ha-Joon Chang suggests in 23 Things They Don't Tell You About Capitalism, policymakers today who claim to be die-hard capitalists and free marketeers are actively using the state - which is supposed to stay out of the marketplace, mind you - to bailout Wall Street, facilitate money dumps when markets fail, and to rewrite the rules to suit the needs of a specific class.

At the same time, by using the state to pursue union-busting trade agreements (while doing little for labor), winking at weak immigration laws (which helps suppress prices and wages), and then ignoring collapsing wage and living standards for America's middle class, America's policy makers are acting very much like Stalin's Politburo.

They're even promising that by transferring wealth to a designated productive class that the benefits will eventually reach those at the bottom. And they've been doing this for the better part of 30 years, in spite of a history of spectacular failures and budget deficits.

Like Stalin's planning authorities, today's proponents and willing recipients of bailouts, money dumps, and favorable legislation understand the importance of using the state to create and transfer wealth from one sector of the economy to another. With more than $4 trillion disbursed, and a total of 13 trillion in tax payer backed dollars committed to Wall Street's collapse, you can be sure of this.

But this is precisely the problem.

As I point out in my book (Ch. 11), by using the state to transfer wealth to achieve market results (profitability), America’s bailed out and subsidized market players are on no firmer intellectual ground than the Soviet Union's Vladimir Lenin and Joseph Stalin. Pushing for and accepting government favors, while speaking admiringly of the wonders of the market, imposes an Alice in Wonderland character on modern markets in America.

Seriously, at what point do we stop using the resources and authority of the state to prop up failed banks, wink at market busting Wall Street schemes, and continue to believe in the value of disastrous trickle down market ideology?

- Mark

SUPERCHARGING WALL STREET, AND AMERICA'S EVOLVING SYMBOLIC ECONOMY

2011-09-14T16:14:00.000-07:00

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In my International Political Economy course today we spent a good deal of time talking about the interplay between economics and politics, and how both impact modern markets. Since some of it was a bit detailed, below is a brief outline of some of the topics we discussed for my class. Those of you who are not in my class can read too ;-)
__________________________________________________________

In International Political Economy class this Monday we briefly discussed what happened when Congress created the 401k (tax deferred incentives to invest), and then encouraged, or allowed, other novel financial instruments to arrive on our economic stage. In the process Congress supercharged Wall Street's numbers, but what we really saw was the evolution and consolidation of what Peter Drucker called the "symbolic" economy, and what Kevin Phillips referred to as the beginning of the "financialization" of the American economy.

What did this mean for America? In a few words the American economy became increasingly dominated by trades in money, interest rates, futures contracts, and other "derivative" instruments. Trade in durable or manufactured goods has taken a back seat to these financial products. In fact, the American economy has been trading in these "symbolic" financial instruments to such a degree that they now represent at least 20 times (and perhaps 40 times) what we will produce and trade in the "real" economy this year (about $15 trillion).

In plain speak - and as economist Joseph Schumpeter might have put it - we are now living in a world where America's economic mandarins are playing monopoly rather than building them. This is the biggest difference between the Robber Barons of the past and our Robber Barons of today.

The Carnegies, Morgans and Rockefellers of the 19th century built steel mills, railroads, and other real industries which created real wealth. If they went bust at least they left railroads, steel mills, and other industries of substance. Not so with today's financial wizards. The Robber Barons of the 21st century are financial zombies bent on extracting rather than creating wealth. It's really that simple.

We can see the impact of America's economic transformation because of the emphasis on the financial sector, and how more and more Americans are seeing their wages squeezed (see graph below). Unfortunately, this has forced many Americans out of the middle class.

At the same time Americans are watching their incomes collapse Wall Street has been focused on safeguarding their empires of paper wealth, and finding new ways to pump up the market. This is one of the reasons we have seen a plethora of financial instruments created and traded. Not surprisingly, total volume traded on the NYSE has exploded since 1982 ...

As should be expected, with every fee-laden trade, and with every new expanded portfolio managed, Wall Street's financial mandarins have gotten increasingly wealthier. This explains, in part, the growing wealth gaps in America. But volume isn't everything. There's also this. Every time Wall Street's wizards created new ways to trade and then collapse the economy, Congress and the Federal Reserve have stepped in with an assortment of bailouts, money dumps, and favorable legislation to save their bacon.

WHAT WE'RE GOING TO DO THIS QUARTER (in part)
While many Americans don't understand the details of any of this, one thing is clear: Our economy is built around increasingly fuzzy financial instruments that take many shapes. This is part of what we'll be looking at this quarter. But we'll be doing this at a global level too.

As an example of how this works in the United States, when we look at home mortgage loans and other debt contracts (student loan, credit card debt, etc.), we find that they are no longer single documents holding all the information you need to know about a loan. Instead, debt contracts like home mortgages are sold, bundled, and resold (and resold again). Today most mortgage contracts that are bundled into securities and sold can only be understood if you can decipher this ...

While these mortgage backed collateralized debt obligations (CDOs) make money for market players, the thing to understand now is (1) how these CDOs created the environment for deregulation and shoddy lending standards, among others, and (2) how these CDOs pushed the financial industry, and our shadow banking system, to ask for more (shady) debt contracts.

These contracts lie at the heart of what brought the economy down in 2008.

The fact that we did little to fix the problems that caused the meltdown help us understand the nature of our new economy, and the broad outlines of our next market collapse. Also helping us understand our new economy is that, while all of this has been going on, the vast majority of Main Street has seen their wages decline precipitously since 1980 ...

Two key components of this new economy include the wonderful world of "derivative" markets and our extremely important "shadow banking" system (which GOP FCIC members pretended didn't exist in their 2010 report). If you can find the time, try and read the links.

These topics are among the many issues we're going to be looking at this fall. I'll have more to say about derivatives, our shadow banking system, and our symbolic economy as we move through the quarter.

- Mark

PARTY OF LIFE CROWD CHEERS, "LET 'EM DIE" ...

2011-09-13T14:54:00.000-07:00

During the Republican presidential primary debate the crowd cheered when Rep. Ron Paul (R-TX) suggested that it was OK to let someone die if they chose not to have health insurance, and were suddenly struck with a life threatening calamity. Check it out ...

You know, if a drunk walked out in the middle street and got hit by a car I'd like to think that I would still care as much as I would for the person who was hit accidentally. No matter who it is ...

You can't just leave them in the street, or pull them to the side of the road and call it a day. We don't live in the jungle. You would think the sanctity of life crowd would agree.

What the hell is wrong with these people?

- Mark

FIRST DAY OF CLASS ...

2011-09-12T09:23:00.000-07:00

It's the first day of class at California State University Bakersfield today. I always begin my Introduction to International Relations Theory with a long discussion of the scientific method (followed by theory) ...

* Click to enlarge.

In my introduction to International Commerce class we begin by discussing the challenges posed by what we want to believe about markets, and the reality that's out there ...

* Click to enlarge.

While class lecture is a bit more detailed, you get the general idea.

- Mark

HOUSING FOR THE NEXT RECESSION ... THE CUBE PROJECT

2011-09-09T13:53:00.000-07:00

While this appears to be an architectual masterpiece, if the price is right it may also catch on as an economic lifesaver during the next market collapse. In fact, don't be surprised if you start imagining yourself in one of these after you watch the animation and the walk through ...

It's built in the UK, and is part of the "Cube Project."

They're marketing the Cube based on it's energy efficiency and use of space. My question is whether a good 5th wheel would be a better option.

- Mark