Thursday, October 28, 2010


"A holding company is a thing
where you hand an accomplice the
goods while the policeman searches you."

- Will Rogers

If it's true that a holding company is a place to stash the goods after you've ripped off the joint - and few can doubt Rogers' logic in this market environment - then what are we to make of the actual theft that occurs through proprietary trading?

In this article by Michael Lewis, author of exceptionally clever and Will Rogers-like Liar's Poker, we learn how Wall Street's biggest banks are renaming their proprietary trading groups. They're doing this because they want to avoid government scrutiny coming down the pike because of recent legislation designed to protect investor accounts.

As a reminder, and in oversimplified terms, proprietary trading occurs when big Wall Street firms gamble invest in stocks and bonds they're also selling to clients.

So, for example, if I have one client that wants to sell 10,000 shares of IBM at $100,000 I have two options. In Option 1, I can try to sell the shares immediately. With Option 2, I can hold or buy them for the firm because I know that another firm client wants to buy IBM stock. If I'm smart, and want to make money for the firm, my real goal is to buy or hold the shares until I can get the other client to agree to pay, say, $140,000 for the shares.

Guess which option Wall Street's biggest firms have been picking over the past few years?

But the real trick lies in how firms allow brokers/traders to use their client's capital - and not bank funds - to make purchases. The best way to conceptualize how this works is to imagine outlaws and highway robbers using the money they get from their heists to gamble in town, and then returning the money only if they win big. Only, in this case, Wall Street's highway robbers don't get prosecuted after robbing the stage coach. They get bonuses.

As you can imagine, proprietary trading is a phenomenal windfall - and source of income - for Wall Street firms that know how to play the game right. You see, Wall Street - like the house in Las Vegas - already bank on steady commissions, specific rules, and simple client carelessness and stupidity to make money. In Vegas this is called the House Advantage.

But, unlike Las Vegas, Wall Street's biggest players got tired of making chump change on the House Advantage. Simply servicing customers wasn't profitable enough. So, confident in the knowledge that they knew what their clients wanted to buy and sell, they decided to get in the game themselves, with their clients capital no less. Michael Lewis explains when this began to happen, and what followed:

Beginning in the mid- 1980s, the Wall Street investment bank, seeing less and less profit in the mere servicing of customers, ceased to organize itself around its customers’ needs, and began to build itself around its own big and often abstruse gambles ... the signature traits of modern Wall Street [now] follows from the willingness of the big firms to allow small groups of traders to make giant bets with shareholders’ capital, which the shareholders themselves don’t and can’t understand.

Over time, Wall Street figured out more complex and opaque ways to extract their client's wealth (they're not creating it), which led them to create ponzi-like schemes (CDS/CDO squared) that regulations and government regulators could neither catch up with or understand.

As we have learned, in the lead up to the 2008 market collapse, many of these the investment products were created (or purchased) with the idea of dumping them on unwitting and gullible clients. If government regulators didn't understand the products, and if gullible or clueless clients trusted your name - and you could say "it was legal" or that failed investments were tied to "unforeseen market forces" - why not take advantage of the situation, and create and sell as much as you can?

In a few words, Wall Street lured people out, took their money, and left them and the American taxpayer holding the bag. Kind of like door-bell ditch, for America's biggest financial institutions. As you can imagine, trading fees and bonuses exploded - whether their clients made money or not.

Today Wall Street wants to avoid government scrutiny. They know that the biggest banks, which now include Merrill Lynch and Goldman Sachs, among others (thank you favorable legislation made possible by the 2008 bailout environment), made lots of money selling toxic investment products (that they knew were toxic) to trusting or clueless clients, and don't want the game exposed.

Because the practice was so blatant, the Federal Reserve now wants banks to buy back some of the toxic deals they sold, while Goldman Sachs and Bank of America have had to pay almost $600 million between them for dumping toxic crap on investors. And these are just deals that were so blatant that regulators couldn't ignore them. Not that any of this matters.

After being made whole, with 100 cents on the dollar bailouts for their toxic deals, Wall Street has skimmed billions in make believe profits and real bonuses, and can afford to pay what amounts to nuisance fines for them.

At the end of the day, because Wall Street continues to profit from doing exactly what they did before the market collapse you can bet your last dollar (or let Wall Street do it for you) that they will fight government scrutiny and oversight any way they can. If that means hiding or calling their proprietary trading divisions another name, so be it.

Proprietary trading, as Will Rogers might say, is really the art of using other people's money to rob Peter to pay Paul. As you can imagine, Paul is laughing all the way to the bank.

- Mark

Tuesday, October 26, 2010


It seems only appropriate to follow up my post on The Looting Decade with this piece on our nation's 9.5% unemployment rate from 60 Minutes.

While the 60 minutes piece points to unemployment rate of 9.5%, and suggests a true jobless rate that may be 17.5%, if you count the temps and those who are no longer counted (because they've given up) unemployment in America could actually be closer to 22%.

- Mark

THE LOOTING DECADE: S&Ls, Big Banks, and Other Triumphs of Capitalism

In class this week we're going to discuss the Savings & Loan debacle as a prelude to our discussion on our current market mess. For those of you who don't have the patience, or money, to go through and read William K. Black's The Best Way to Rob a Bank is to Own One (which discusses the S&L debacle, and Black's role as a regulator) take a look at this piece from The Nation, which can also be accessed here at Micha L. Sifry's site under The Looting Decade: S&Ls, Big Banks, and Other Triumphs of Capitalism.

It's 50 pages long (32 pages in the magazine), but it will help you understand why we got screwed back in the 1980s and 1990s, why we're getting screwed now, and why, in spite of what conservatives like to claim, there is no such a thing as a free market.

- Mark


Via Huffington Post we get this from David Cay Johnston:

Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold.

In graph form the data kind of looks like this ...

The primary culprit according to Johston are favorable tax policies for corporate America, which are designed to secure campaign contributions, rather than focus on good public policy.

We have created a tax system that changes continually as politicians manipulate it to extract campaign donations. We have enabled ''free trade'' that is nothing of the sort, but rather tax-subsidized mechanisms that encourage American manufacturers to close their domestic factories, fire workers, and then use cheap labor in China for products they send right back to the United States. This has created enormous downward pressure on wages, and not just for factory workers.

Combined with government policies that have reduced the share of private-sector workers in unions by more than two-thirds -- while our competitors in Canada, Europe, and Japan continue to have highly unionized workforces -- the net effect has been disastrous for the vast majority of American workers. And of course, less money earned from labor translates into less money to finance the United States of America.

This policy focus helps to explain why income inequality in America has crawled to a point that it is now worse than before the market collapse of 1929 ...

... while total debt has also risen to all-time highs.

As you can see, none of this started under President Obama but, rather than work together to solve these issues, the Republicans are going to make sure that he gets blamed for it. For a peak at what the Huffington Post sees as the "10 Scariest Charts of the Recession" check out this list.

- Mark

Friday, October 22, 2010


I don't claim to be a constitutional scholar, but senate candidate, Christine O'Donnell - who claims constitutional expertise - is simply pathetic.

This  clip from Anderson Cooper provides what might be considered generous analysis.

- Mark


Dan Froomkin has a detailed nine point list of stories that the press is ignoring, courtesey of Super Regulator and author of The Best Way to Rob a Bank is to Own One, William K. Black.

The list is a nice synopsis of what has gone wrong with markets in America, and makes it clear - as Black argues - that bad ethics have not only become "a competitive advantage" in America but that it has driven "good ethics out of the marketplace."

While you should read the piece (and buy Black's book), here's an abbreviated list of the ignored stories.

* How our bubble economy was hyperinflated by mortgage fraud.

* The increasing use of accounting tricks in the business world, which helped to make mortgage fraud, and the big bonuses that followed, possible.

* The "partnership" between the FBI and the Mortgage Bankers Association, which (implicitly) defined mortgage fraud "out of existence" and made mortgage bankers out to be the victims.

* How subsequent "echo" epidemics of fraud, by loan brokers and appraisers, was set off by CEOs who consciously used their firm as a weapon to loot creditors and shareholders (called “control fraud").

* How the massive foreclosure fraud we are seeing now is another "echo" fraud from the orginal mortgage fraud.

* The massive cover-up of fraud. This is done with the creative use of accounting lies, taxpayer money/guarantees, rule changes (like suspending mark-to-market accounting methods), and the medias acceptance (ignorance of) inflated asset values.

* The continued absence of effective regulation.

* The financial crises confronting state and local governments. They have neither the resources nor means to confront fraud, but are being targeted for cuts by Congress from stimulus sharing programs.

* The insanity of accepting mass, long-term unemployment rather than having the government provide productive jobs for everyone willing to work (as the employer of last resort).

The details and links from Black's list are informative and spot on. They also help us understand why were still in trouble.

- Mark

Thursday, October 21, 2010


Last week in my class, The Myth of the Free Market, we made the turn toward the modern era. We had already discussed the historical role of the modern state in protecting rights and creating opportunities, especially in early America for settlers, people of color, and women, among others.

The goal in the first few weeks of class was to demonstrate how the state creates the conditions under which wealth is created. On a general level the state has to protect freedom and guard individual rights. More specifically, the state has had to work consistently to remove or soften the impact of market enemies like market conspiracies (monopoly, oligopolies, etc.), societal prejudices (racism, sexism, etc.), government-corporate collusion or capture (favorable legislation, slavery, bailouts, regulatory capture, etc.), hereditary privileges (inheritances, wealth transfers, etc.), and outright corruption and theft.

Slavery and the Black Codes did much to undermine Black America's ability to accumulate wealth.

Left untouched these enemies of the market undermine both talent and initiative, and work to destroy the moral justification of capitalism. This, as I described in class (and in my book), undermines the laws of justice and the integrity of the market.

But going after market deadening activities like market conspiracies, corruption, and collusion still doesn't allow us to create a level playing field. Especially when we consider how modern market players pursue the state in an effort to enhance their bottom line.  

To make my point I discussed several government sponsored (and taxpayer funded) market supports that make it clear how the state helps create the conditions under which wealth is created.

More importantly, these market supports also make it clear that if private market players don't operate in a marketplace free from government intervention it's because of the private sectors penchant for asking the government to give them a hand, and not simply because of regulatory excess.
Get Government Off My Back? Hardly ...
Among the many complaints that we hear from modern market players is that the state acts as a hindrance to their efforts. If only the state would leave them alone, all would be good, so the argument goes. Nothing could be further from the truth.

Market players actively seek out government favors. In class I'll be taking a look at some of the following market supports in greater detail over the next few weeks.
* Write-Offs and Write-Downs: Great for facilitating exchange and reducing tax burdens.
* Market Subsidies: Whether it's farm subsidies, oil subsidies, or grazing rights (among many others), it's clear market players are addicted to them.
* Market Protections: Ever wonder why you pay double and triple the price for medicines, or why you pay $1.69 each for an avocado, when our neighbors to the north and south pay much less? Want to understand why Americans pay almost double the rate for sugar that other markets around the world do? Think market protections.
* Market Interventions: Do we really let the magic of the market work? Or does trading on the NYSE shut down when the Dow drops by 10%, 20%, or 30%?  What about initiatives like the government-sponsored Public-Private Investment Programwhich helped kick start "private" investments after 2008?
* Regulatory Favors: How does did the financial sector benefit from "net capital rule" changes, and other decisions that allowed market players to suspend market prices for their toxic assets? (Hint: Their loans don't get called so they borrowed and bet more)
* Favorable Legislation: While there are too many to cover here, think how off-shore tax havens and the out-sourcing of jobs have been made even more profitable because of legislation developed in Washington at the request of industry lobbyists.  
* Government Sponsored Legal Cover: Let's just say that when the government forces firms to give up their day in court and then accepts multi-million dollar payouts (instead of going to court) has saved America's private sector from having to acknowledge or accept responsibility for many activities that we have found reprehensible.  
* Ex Post Facto Re-Classifications: Don't like the rules you had to play by? You'll especially like the regulatory decision that allowed investment firms to officially become banks after the 2008 market collapse (this allowed institutions like Goldman Sachs to become eligible for FDIC funds, and get access to government loans).
* Government Spending: If we had a spending problem before 1980, Ronald Reagan got us addicted. Think about it. Ronald Reagan almost tripled our national debt in 8 years. He did it with tax cuts and tax hikes that were focused on the wrong groups. Both acted as a conveyor belt for transfer payments. Think of the Reagan years as one massive public works program for the financial sector, which set the tone for years to come. 
* Monetary Policy: Alan Greenspan's loose money policies did much to inflate our economy, and create the illusion that prosperity could be had by all. There were no invisible hands here (as Jon Stewart got Greenspan to admit).
* Government Take-Over: No, I'm not talking about the bank nationalizations that should have occurred after the 2008 market collapse. Nor am I talking about the automobile deals in 2009 (which proved to be a huge success). I'm talking about the American taxpayer federal government assuming, or taking over, the private obligations that the private sector either screwed up or neglected. On this, think Maiden Lane(s) and private pensions.
* Government Bailouts: Don't get me started. But it's important to know they really got going in the 1980s (yeah, that was under Reagan too).
There's more. Much more (think of the role infrastructure projects, government sponsored R&D, public universities, the military, etc. play in propping up our market environment). But you get the picture. While our free marketeers want the government off their back, they definitely want the U.S. government - and the American taxpayer - to support their private efforts.
This brings me to my next point.
The State Creates the Conditions ...
The rugged sense of individualism that market players want Americans to buy into, and the idea that we operate in a free market environment, is supported by neither history or the facts. More realistically, as I and many others have demonstrated: The state creates the conditions under which great wealth has been created in America.

This is why it should be difficult for any American to buy into the idea that the private sector wants government out of their business. The record is clear. While market players may work hard, America's capitalists have consistently depended on the state to make their efforts in the marketplace even more profitable.
Problems, however, arise when market players overplay their hand.
We Regulate People, Not Markets
At the end of the day, we need to understand that while market players may have a bucolic view of how markets work - if the government would simply leave them  alone - the reality of modern markets is quite different. Market players will do what they need to do to get an edge and to increase profits, which includes seeking favorable legislation.
This is not evil (though some market players may engage in evil acts). It's simply market players acting rationally, and doing what they can to increase their bottom line. This is why we created laws and regulatory bodies. We need rules to insure that market players don't get out of hand in their pursuit of wealth. James Madison told us over 225 years ago (as I discuss in my book) that government intervention is necessary because market players have often overplayed their hand, to the detriment of society. This is why we have Art. I, Sec. 8 (and 9) in the Constitution.

In this way, we need to understand one simple truth: We don't regulate markets, we regulate people. Our Constitution is testament to this basic principle.
On Rationality and Reason
We regulate people for a reason. Apart from the fact that - as the Framers also pointed out in the Federalist Papers - men are not angels. The Framers understood this, and even discussed our penchant for not always acting rationally in a market setting.
To be sure, we may possess the capacity to reason and act rationally (a "truism" that the field of economics hangs it's hat on). But the reality is just because we possess the capacity to reason doesn't mean we will act reasonably - especially when a pile of money is staring us in the face and we can say (later, of course) that "it was legal."  
Because the state has determined that market players don't always do the right thing in a market setting, and understands that people must be regulated, it should come as no surprise that market players get upset with the government when it decides that it needs to regulate and create laws that don't allow them to do what they want, when they want. The state, in their view, gets in the way of their profit making ideas. It's one of the reasons market players argue that the state causes inefficiencies in the marketplace.
Is the Government Inefficient?
Is the government inefficient? My response to this question is, Compared to what?
Suggesting that the government is inefficient because it doesn't allow individuals to do what they want, when they want, isn't inefficiency. The state has different and longer term obligations than markets. States have to respond to societal needs which require that it focuses on infrastructures, the environment, public safety, the law, and other public needs that market players don't have to concern themselves with (markets and market players, on the other hand, must respond to fleeting tastes and consumer demands).
Here we have to remember that the idea behind modern government is to expand opportunities and guarantee individual freedoms. On this score, in spite of market responses that have often undermined individual freedoms (think slavery, child labor, and family wage laws, among others), the state has been very effective.
At the end of the day, comparing what markets do and what states do is like comparing an NFL team to the Russian ballet ... they're two different beasts.

I'll be commenting on the things market players ask for and demand from government in greater detail over the next few weeks.
- Mark

Wednesday, October 20, 2010


Why Latinos vote for or support the Republican Party is a mystery to me.

Republicans did little to condemn Pete Wilson's efforts to criminalize Latinos with Proposition 187 (I know from experience that Latinos - and not just "illegals" - became targets). Since then the Republican Party has done even less to disassociate itself from the race-baiting efforts led by nativist groups like FAIR, CIS, and NumbersUSA. More recently, the Republican Party effectively stood by and did nothing when Arizona passed legislation that effectively encourages racial profiling of Latinos by law enforcement officers (let's face it, mostly Latinos will be targeted for ID checks).

Now, the Republican Party of Nevada has come out with this neat tactic: They're telling Latinos not to vote in Nevada.

Watch the ad in English here:

Watch the ad in Spanish here:

While the focus is on Democrats, left unsaid in the ad is how the Republicans would have blocked any attempt at immigration reform (where were their proposals during the Bush years?). Also left unsaid is how Republicans have consistently used Latinos as convenient political scapegoats over the years. An ad detailing this history would be far more informative, and accurate.

The Party of No has always been the Party of Division and Fear. Now, with far right members of the Republican Party on the move (masquerading as Tea Party wannabes), a growing number of Republicans feel free to show their real colors.

Telling people not to vote is both unpatriotic, and has nothing to do with what the real Tea Party revolutionaries were about.

- Mark

Tuesday, October 19, 2010


When the Titanic sank on April 14, 1912 one of the grimmer discoveries were reports that the lifeboats carrying survivors were only a little over half full. There were many stories as to why this happened, but several reports focused on the ghoulish fear of lifeboat occupants who didn't want to be swamped and even capsized by hundreds of floating survivors who were still in the water.

Whatever the rationale, one thing is clear: Even if all of the lifeboats had been filled to capacity (almost 1,200 seats), there was still only enough seats to accommodate about 35% of the Titanic's maximum passenger and crew load of 3,511. There was no way to prevent a high death count when the Titanic sank.

Why is this important? Because it tells us that not only can the experts become myopic in their thinking before a disaster, but that fear, selfishness and outright stupidity can lead people to do the wrong thing. Worse, the Titanic experience helps us see how fearful and selfish people can turn their back on others in need after they've narrowly escaped disaster.

I bring the Titanic up because it helps us understand how President Obama's economic stimulus package is in the process of becoming Titanic-like, in that the survivors who got into the life rafts have been turning their backs on the rest of us still in the water.

Specifically, as our economic disaster continues, the bailout-stimulus package has been exposed (1) for allowing Wall Street's biggest market players to act like the survivors who made it on to the Titanic's lifeboats, and for (2) not being big enough and sufficiently developed to deal with other non-bank market players who need help.

Put another way, we need to force the banks to make some loans with their bailout money and/or provide more lifeboats in the form of another economic stimulus package.

I know, I know ... Fox News and the Party of NO likes to report that the stimulus package has done nothing. Let's check out the facts.

If we look at recent reports coming out of the Congressional Budget Office (CBO), we find that - in spite of Wall Street's best efforts - a good deal of Main Streeters actually made it on to the economic lifeboats made available by the economic stimulus. The CBO's August report makes it clear that President Obama's stimulus package not only added between 1.4 and 4.1 points to economic growth (which prevented the GDP from going negative) but that the stimulus package also produced (or saved) between 1.3 to 3.3 million jobs in 2010.

In addition to adding economic growth (GDP) and jobs, the stimulus package also provided more than $200 billion in tax cuts for you and me, and went directly to help develop numerous critical programs.

Put another way, rather than complaining about the half-filled economic lifeboats that made it back safely we should be thinking about building more lifeboats for the rest of Main Street. This means another economic stimulus package.

To be sure, Wall Street's lifeboat survivors, who are now on shore living the high life, seem more than prepared to throw the rest of us an anchor. And why not? Now that they've gotten their bailout and other government guarantees, they're sitting on trillions and don't want to build any more lifeboats. As our nation's biggest Wall Street banks read the news, every thing's just fine ...

Regardless of what Wall Street thinks, and in spite of the gains that have been made (mostly keeping the nation from going into negative growth rates), things are far from good. Like the survivors of the Titanic who were cruelly turned away by others who made it on to the available lifeboats, there are many survivors still floating in our turbulent economic seas.

Like the banks, they need a lifeline.

- Mark

Saturday, October 16, 2010


President Obama did not sign legislation that the Senate passed with a voice vote last week. The bill would have allowed banks to speed up home foreclosures by diluting and removing notary due diligence requirements that are supposed to be carried out during the mortgage and foreclosure process.

While the banks and mortgage industry claim the primary goal of the proposed legislation was to facilitate "interstate commerce" the reality was quite different. Simply put, the bill would have enabled the nation's largest banks to push people out of their homes quicker by allowing banks to cover up deceit and fraud during the loan origination and foreclosure process.

While it is good news (for now) that President Obama did not sign the bill into law, this piece from MSNBC's Dylan Ratigan explains why our mortgage and real estate industries are now facing a legal mess. In a few words, those involved in financing and servicing mortgages are trying to hide the fact that they didn't care about qualifications, and did a piss poor job of documenting loans that they subsequently dumped on the American taxpayer federal government after 2008.

Worse, as Ratigan points out, there are a lot of people trying to cover up "systematic criminal and civil fraud at the highest levels of America's banks and in its political corridors."

Put another way, thanks to Wall Street and Washington the American taxpayer is getting the shaft, yet again.

- Mark

Friday, October 15, 2010


Here's how you know you're dealing with a survey company that's dealing from the bottom of the deck ...

Check out this question, and see if you can spot the section where they're doing a little "push-polling" (planting an idea in your head before they ask the question they really want you to answer).

2.* Some say that Wall Street investors and mortgage companies are to blame for the problems with subprime mortgages and foreclosures. Others say that individuals who borrowed more than they could afford are to blame. Who do you believe is primarily to blame?

Can't find it? OK, let's try again. This time I'll pull out the phrase that makes the query a "leading" question. Using the same language I'll ask the question the way it should be asked, if the pollsters were being intellectually honest.

2.* Some say that Wall Street investors and mortgage companies are to blame for the problems with subprime mortgages and foreclosures. Others say that individuals are to blame. Who do you believe is primarily to blame?

Got that? The polling company inserted "who borrowed more than they could afford" in an attempt to plant the idea that borrowers were reckless and irresponsible when they took out loans.

If I were going to reverse the goal - and try to make an equally culpable Wall Street and their mortgage industry buddies out to be the bad guys - I would ask the question like this ...

2.* Some say that Wall Street investors and mortgage companies who recklessly securitized loans and took out insurance that could not be paid if the market collapsed are to blame for the problems with subprime mortgages and foreclosures. Others say that individual homeowners are to blame. Who do you believe is primarily to blame?

See how that works? The question takes on an entirely different connotation when you suggest that Wall Street's recklessness is also to blame for the mess.

The poll, which was reported in Rasmussen Reports, was conducted by Rasmussen, a conservative-leaning polling organization. They finished off their 5 question push-poll with this innocuous sounding question ...

5.* Would you favor or oppose a plan forcing banks to stop all mortgage foreclosures for the next six months?

As you can imagine, the wording of Question #2 allowed them to come up with this "made for TV" headline.

"Americans Are Now Less
Supportive of a Foreclosure Moratorium"

Nice. I'm sure Wall Street and the mortgage industry was happy with this one (though I'm not sure who paid for the poll).

At the end of the day, as I always tell my students, you can't simply depend on what the polls say. You need to know who's asking the questions, and how they put the poll together.

- Mark

Thursday, October 14, 2010


After the Citizens United decision - which I wrote about here, here and here - it was quite clear that the door was open for corporate America and others to start dumping lots of money into our political system. What I didn't expect was that it would get so bad so fast.

First, Fox News started showing it's colors by donating $1 million to the GOP. We're now learning that apart from U.S. foreign-based affiliates making contributions, more than 80 foreign companies have donated at least $885,000 to the U.S. Chamber Commerces' 501(c)(6) entity, the same account that finances the Chamber's $75 million dollar partisan attack ad campaign.

If a major media firm like Fox News Corporation (which is owned by a foreigner) and wealthy foreigners can directly contribute to U.S. groups in an effort to influence elections, we need to ask ourselves whether America is now legally up for sale.

Seriously. Where's the Country First crowd on this one?

- Mark

Wednesday, October 13, 2010


Wow. No wonder the banks don't want to have Congress regulating the amount of money they can charge merchants and consumers for using debit cards. Last year, consumers shelled out more than $1.2 trillion to purchase goods and services with their debit cards. These transactions generated $19.7 billion in fees, most of which went to the banks that issue debit cards.

Because of the amount of money to be made in fees, a Minnesota-based bank is suing the Federal Reserve over recent fee limits, claiming that regulations that limit the fees a bank can charge retailers for debit card transactions are unconstitutional.

Constitution, Article I, Section 8, Clause 3, “ [The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes ..."

The Necessary and Proper clause makes it clear that Congress has certain "enumerated powers." Specifically, Congress has the power "To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof."

There's more, but you get the point.

Our clueless bankers, who helped run our economy into the ground, don't seem to understand that Congress has the power to both regulate interstate commerce (see also Art. 1, Sec. 9) and vest "all other Powers" (including the Federal Reserve) with the authority to regulate commercial activities as well. 

Pretty simple if you ask me.

- Mark

Tuesday, October 12, 2010

OUR NEW, AND RIDICULOUS, FORECLOSURE STANDARD(S) has the new numbers. We're now in the 18th straight month with 300,000 or more foreclosures. Why is this happening?

According to Barry Ritholtz, author of Bailout Nation, the problems aren't simply a matter of paperwork glitches. Apart from legitimate issues of people not paying their mortgages, what we're seeing is rampant fraud on the part of the banks.

What's worse, in my view, is how rampant fraud and cloudy ownership claims now constitute a genuine threat to property rights, which is the linchpin behind modern capitalism in America. Indeed, things are so bad that title insurance companies are now reluctant to guarantee properties that banks are foreclosing on because of improper foreclosure proceedings. Fraud and ownership claims are made even more murky by securitization claims and homes that have been improperly foreclosed on, even when they've been paid in full. is reporting on the story of a Florida woman who bought a foreclosure home, only to be told later that the property's foreclosure might not be valid. Cases like this, coupled with banks improperly changing locks on homes that aren't in foreclosure or foreclosing on homes that don't even have mortgages -- constitute a crisis of historic proportions, Ritholtz said.

Diana Olick, who was reporting on this story for MSNBC's Larry Kudlow, responded by saying "You're always going to see those stories," and that even though they shouldn't happen she dismissed the story by asserting, "The cops often knock on the wrong door in other cases as well."

You know, this is akin to saying "It doesn't matter if you get accused of assault or rape. If you haven't done anything, you have nothing to worry about."

Rampant fraud ... Property rights under assault ... S**t happens, live with it ... This is how low our standards have dropped in our mortgage and housing market.

- Mark

Monday, October 11, 2010


In class last week we discussed the transformation of America, from agrarian to industrial society. Key to this transformation is recognizing the demographic shift that occurred in just one generation, and how the state helped turn this period into an era of extraordinary opportunity for American industrialists.

Developments occurred so quickly that somebody born in 1845 was introduced to a country where roughly 90% of Americans lived in rural areas. If that person lived to the age of 80 they would have seen their grandchildren living in an industrial America with over half of it's population residing in the cities.

This had a significant impact on American politics in 1925, as cities had to deal with crowding, health, and infrastructure issues. Specifically, America had to become more diligent in the areas of public planning, public health, and public order.

As you can imagine, when the stock market crash hit in 1929 a majority of Americans could no longer feast off of nature's bounty, like early pioneers, because they lived in the cities. Capturing and feeding off of rats and other street vermin is not the same as hunting down and feasting on the deer and fish caught in the countryside.

This new reality posed serious problems during the Great Depression. Astute politicians and policy makers understood quickly that economic depression created entirely new problems when people live on top one another in urban settings. But I'm getting ahead of myself.

The real story is what made industrial America tick.

What Made the Great Transformation Possible
During the Great Transformation of America individual achievements and spectacular events were made possible and driven by the liberties granted by the Constitution, the gift of natural resources, protective tariffs (the highest in the industrializing world), and a very aggressive foreign policy, which we called Manifest Destiny.

While we like to believe that Americans achieved greatness because of hard work and the spirit of entrepreneurialism alone, the reality is the very visible hand of the state and nature's bounty were critical for setting the table for Americans to work hard and get ahead. The moral justification of capitalism draws it's lifeblood from this dynamic mix.

Along the way, there were many problems and issues that had to be dealt with which, as we shall see, required much more than a mythical "invisible hand" to solve.

As the demographic shift in America was occurring, old customs and habits were slowly swept away. A culture that valued familiarity and a handshake was gradually giving way to a world of increasingly distant and impersonal relations. The allure of the West - made possible by an aggressive foreign policy - and a string of economic booms and busts, pushed people across the continent in droves.

In the process, loyalties dissolved, while old forms of control, like familiarity, family bonds, and a sense of community were turned upside down. Practically, this meant that the familiarities of custom and tradition had to be replaced by state mandates and law enforcement as forms of social control.

In this way - and in spite of what contemporary politicians might argue - while we like to say that we want the state off our back, we definitely wanted them on our neighbors back. This was all part of the magic that was America.

Because people on the move were no longer held in check by local customs, traditions, or old family histories, self-starters understood that they could get a fresh start if they were willing to leave their comfort zones. Going to a new town, where no one knew your story, was a blessing for many. Perhaps more importantly, for those that had failed before, it gave life to the notion of redemption that was captured in the Constitution (see especially debtors and bankruptcy).

In the process many Americans took advantage of the opportunities available to make money and get fabulously rich.

From Sam Colt to Andrew Carnegie and John D. Rockefeller, people with great ideas and an organized mind found the right environment to create business empires that became the envy of the world. Along the way, the state made things easier for great wealth accumulation with a living Constitution that breathed life into vibrant public policies that favored industry and wealth creation.

Whether it was clearing Indians off the land, granting homesteaders property rights, building infrastructures, creating public education, subsidizing the railroads, embracing land grant colleges, and providing the legal infrastructures for businesses to become corporate behemoths (the Santa Clara decision in 1886 was particularly important), public policy promoted industrialization. There were no invisible hands here.

But there was a flip - and even dark - side to these developments.

How the Other Half Lived
As many began to point out in the late 1800s, Americans were leaving rural communities in droves. This forced them into cities and crowded conditions that were entirely unfamiliar. Customs and folk wisdom that came from the slower pace of the countryside were quickly lost. Neighbors didn't necessarily look after one another in an urban setting as easily as they did in the countryside.

Worse, as personal bonds disappeared, or never developed, in the cities an impersonal gap emerged between those who worked in America's emerging industrial palaces and those who owned them. Workers were often viewed as cogs in a machine, whose only utility lied in keeping the wheels of commerce going strong. The losers in our rapidly industrializing society were considered more as throwaways than they were viewed as wasted opportunities, a sentiment which photo-journalist Jacob Riis captured in the late 19th century

Driven by a ruthless laissez-faire, government-out-of-the-market, approach to production industrialists believed that the best worker was one who did what they were told, and was left alone to do their job. It didn't matter what they did, or how they lived once they left the job. What mattered was that they showed up and worked.

Those that didn't like their job - the argument went - could always leave. America was a free country after all. America's "survival of the fittest" mantra mandated that you suck it up, or fail trying.

For many at the top of America's economic food chain, if you couldn't hack it you were a loser, plain and simple. Society had no responsibility for your station in life, especially since your station in life was determined by talent, hard work, and individual initiative alone. 

Or was it?

What people often ignore or downplay is that at the time it didn't matter that social mores cast women in a light that gave them one role in society, which robbed them of any real opportunity to compete or live on their own, without being socially stigmatized ...

It didn't matter that children weren't real free agents, and weren't competent to negotiate salaries and fend for themselves in the mines or on the shop floors of America ...

Finally, it also didn't matter that Jim Crow and outright racism robbed an entire segment of American society of their opportunity to compete on a level playing field ...

According to the economic winners of the day, the losers of life deserved their station in life because they were either genetically or racially inferior. And they knew this because, as we shall see, science proved it.

The Junk Scholars of the 19th Century
Among the many intellectuals who helped breathe life into the notion that your position in life was determined by hard work and initiative alone were popular academics, like William Graham Sumner and Herbert Spencer. In fact, while many believe that Charles Darwin coined the term "survival of the fittest" it was actually Herbert Spencer who gave life to the phrase.

It would help him win praise and monetary support from America's wealthiest tycoons.

For his part, William Graham Sumner helped convince America's richest that they not only deserved their place in society because of the hard work that they did, but that "a drunkard in the gutter is just where he ought to be, according to the fitness and tendency of things ..."

These observations were tied to laws of nature, according to Spencer and Sumner, and should not be tampered with. For them, the natural order of "divine right and privilege" we saw during the Feudal Order had been replaced by the natural order of "success or failure" in the America's new liberal republic. Drunks in the gutter, like social misfits, deserved all the scorn and ridicule they had heaped upon them because they were nature's losers.

But the benevolent spirit, and chivalry, were not entirely dead. Because women had a natural place in the society, the state didn't have to concern itself trying to educate their delicate minds. For William Graham Sumner, the state had only one objective when it came to women, protecting their honor.

Herbert Spencer was so adamant about maintaining the proper place of women that he believed society's softer gender should not be allowed to be educated because:

... such brain forcing could lead to nervousness, anaemia, hysteria, stunted growth and excessive thinness.
But this wasn't the worst of it.

The Junk Science of the 19th Century
Franz Joseph Gall (1758-1828) made a name for himself building phrenology, a controversial field of study in 19th century.

The experts in the field argued, to an increasingly wide audience, that you could determine the emotional and personal characteristics of an individual by looking at their skull.

According to Gall the mind is composed of multiple and distinct faculties. Each one determines traits and characteristics from individual benevolence to violence. As a result, the size of each "faculty" in the brain is important because each faculty pushes and shapes the skull in such a way that by measuring skull patterns a good phrenologist could determine whether someone was predisposed towards charity, spirituality, kindness and aggression.

More simply, with the proper training and tools, the surface of the skull was viewed as a good index for reading individual aptitude and personal tendencies.

Over the course of the 19th century phrenologists were able to determine - scientifically, of course - that certain ethnic groups were predisposed towards violence, while others were geared for success because of the shape of their heads. As you can imagine, Western European skulls emerged with the most aptitude and benevolence skull spots (bumps?), while slaves, Eastern/Southern Europeans, Asians, and other groups were deemed to have skull shapes that kept them out of the highest levels of civil society, and far away from success.  

This pseudo science was embraced by many who were looking for scientific justification for their capabilities and acumen in the business world. Similarly, phrenology was supported by those who wanted to justify slavery (it was part of their heritage), and those simply looking to reaffirm their life of leisure in the country club (it's their natural environment).

But the distorted teachings of these "junk scientists" didn't end with phrenology. There would be an even uglier spin-off, which helped justify emerging social hierarchies, and the status quo in America. This school of thought was eugenics.

The Eugenics Spin-Off
Louis Agassiz (1807-1873) was one of the first scholars to give scientific racism intellectual heft. Agassiz argued that each race on earth were separate creations, that were started in diverse geographic zones (called polygenism). These distinct beginnings, according to Agassiz, endowed each race with different and/or unequal attributes.

For this reason, Agassiz argued, each species can be tied or classified by specific climate zones, just like animals and plants. One of Agassiz's great "discoveries" came when he proved the superiority of European stock over all others. Agassiz's spectacular findings should not have come as a surprise to anyone. As a European, it was only natural that he (or someone like him) would make this discovery.

As you can imagine, Agassiz's life work was very popular in the America South, where slave owners were looking for ways to justify slavery and racism (from a Christian perspective, of course; Agassiz was a Christian).

But the eugenics legacy didn't end with simply establishing the superiority of one ethnic groups genetic make-up over another.

The real genius behind eugenics was when policymakers started to buy into the idea that certain genetic groups were predisposed to certain behaviors, and believed that they could purify society. To do this many states in America began to sterilize habitual criminals, lunatics, schizophrenics, and others who had been officially labeled as social misfits.

And, if you're wondering, yes, this is where the Nazis got many of their ideas.

The irony in all of this is that while many of these 19th century scientists drew from Charles Darwin (who was a real scientist) most, if not all, of their work would have been rejected by Darwin on scientific grounds.

Unfortunately, though, the damage had been done.

 Real World Effects ...
One of the most damaging effects that came from embracing the junk science that Spencer, Sumner, Gall, Agassiz, and their followers embraced is that it reinforced certain stereotypes, which perpetuated a biased and unequal system.

We have to keep in mind here that while the Robber Barons of the 19th century were undoubtedly hard workers, competitive, and possessed keen minds, they were successful in part because they didn't have to compete on a level playing field. One half of the population (women) were bottled up by an entrenched belief system that said a women's place was in the home, having babies. Moreover, blacks were systematically excluded, while other ethnic groups were removed from life's great entrepreneurial experiences by the prejudices and biases of the day.

With phrenology, eugenics, and the works pushed out by Sumner and Spencer (and their followers) dominating the day the promises of equal opportunity were distant dreams for many who lived in 19th and early 20th century America. Worse, women, the poor, certain ethnic groups, and people of color were viewed as nature’s misfits who deserved their misfortune.

This was, after all, the natural order of the day. And science was there to prove it. I'll pick up on this, and discuss the social and political reactions that challenged these developments in a post later this week.

- Mark

Friday, October 8, 2010



Eight months ago, in February, I penned an article on the Bakersfield Business Conference for Bakersfield Express, which I posted here. The Bakersfield Business Conference is scheduled for tomorrow. Below I'm reposting what I presented back in February in it's entirety. As for me, I'll be in the Bay Area tomorrow. Enjoy.


 In “The Republic,” Plato imagined a world filled with people living in a dark cave. Their eyes were capable of seeing only silhouettes and were permanently fixed to a cave wall. They could not see the events and objects that created the shadows. When one of the cave dwellers emerges to take a look at the real world, his senses are overwhelmed. For Plato, it was the duty of the elite, or enlightened leaders, to educate those bewildered by the shadows on the wall, and the events that created them.

Herein lies the problem that plagues our world. What happens when the leaders are as equally clueless about the shadows on the walls as Plato’s cave dwellers? It looks like we’re going to find out at this year’s Bakersfield Business Conference, to be held Oct. 9 on the campus of California State University, Bakersfield.

Traditionally, the BBC has been a conservative cheer leading-fest. This year’s BBC is no different. Rudy Giuliani, Michael Steele, Dick Cheney, Karl Rove, Sarah Palin, Mitt Romney, and more shadow talkers are scheduled to appear.

There are many shadows to talk about on our cave wall. There are the “dark paranoia” shadows. This explains Dick Cheney’s invitation. There are the “smoke and mirror” shadows. Welcome Karl Rove. And then there are the “ignorant and stupid” shadows that dance about on the walls more than the others. These, one would assume, will be covered by Sarah Palin.

What the Shadow Talkers are here to do is explain a world they don’t really understand because, quite frankly, it doesn’t really exist. Put another way, they’re here to explain market fairytopias and the demons that haunt their souls. Let’s take Dick Cheney.

He’s been getting virtually everything wrong about our enemies since the Cold War. For example, during the 1980s he was speaking about the durability and threat that an omnipotent Soviet Union posed to the United States – right up to the moment that its empire collapsed. Oops.

Then there were the many Russian and Eastern European threats that existed when the Bush administration arrived in Washington. The Bush administration wanted to dispense with treaties on weapons, and was on pace to reignite the Anti-Ballistic Missile defense program (aimed at Russia and China). This was to be the centerpiece of the Bush administration’s defense program. Then 9/11 happened. Oops, again.

Then Dick Cheney claimed that Saddam Hussein was the bad guy we needed to fear because he had weapons of mass destruction. We all know how that went.

Dick Cheney has a legacy of getting the world wrong, and the coordinators of the BBC think he actually has something meaningful to say to our nation’s myopic cave dwellers? (Cheney is also famous for claiming “deficits don’t matter.” But that’s another story.)

Then we have Sarah Palin. Or, as Cenk Ugyr from The Young Turks might put it, we have “the irrefutable stupidity of Sarah Palin.” (Don’t get ahead of me on this one; keep reading).

Now, we could discuss how Sarah Palin didn’t know that Africa is a continent, or that the players in the North American Free Trade Agreement are the U.S., Mexico and Canada. Then there’s that famous ABC Moment when she had no clue about the Bush Doctrine (it’s about preemption), or the bailout proposal. I could also discuss Sarah Palin and her position on Intelligent Design. I won’t say anything more than to remind everyone that the Flintstones isn’t a documentary.

But what’s really disturbing about inviting Sarah Palin to our regional cave convention is her complete and utter disregard for the historical record, and how her rhetoric is at odds with her reality. Let’s consider what she supported while she was in her Alaskan cave, and how her life is more socialistic and tied to the redistribution of wealth than anything President Obama has ever concocted.

Consider this little nugget. Alaska ranks number three nationally when it comes to what its citizens pay out in federal taxes, and what it receives from the federal government. For every dollar Alaskans pay into the system, they take $1.84 out. Put another way, Alaska’s hardened sense of “rugged individualism” is really built on a foundation of communal welfarism, direct from the American taxpayers in the lower 48.

This probably explains why Alaskans have come to see oil within their borders as a form of community property. Big oil in Alaska must send the state a check for every barrel they pull out of the ground. The state then turns around and redistributes the wealth. In 2008, for example, Sarah Palin and the federal government watched over a system that distributed $3,269 per Alaskan citizen ($1,200 of this came from a resource rebate program). This adds up to just under $20,000 for the Palin family. While each Alaskan is scheduled to receive only $1,305 for 2009 we shouldn't lose sight of the fact that this money falls into each Alaskan's lap for no other reason than the state embraces a wealth distribution policy that many rugged individualists claim to despise (wink, wink).

With that much money from the Feds and Big Oil you would think someone might inform Alaska’s cave dwellers about their socialist tendencies. Not Sarah Palin. Instead of calling it the “Redistributing the Wealth Because We’re Really Communists Fund” – as Sarah Palin might call it if President Obama suggested the same program nationally – the state of Alaska calls it the “Permanent Fund Dividend.” Just more shadows.

Does anyone think Palin’s going to explain her shadows at our regional cave convention? Imagine what would happen if she carried her redistributive message to oil-laden Kern County. But the chances of this happening are about as good as Dick “Chicken Little” Cheney explaining how his five deferments make him a true patriot.

We now live in a country where Christian Fundamentalists believe that abortion is bad, but war and the death penalty are to be exalted.

We now live in a country where people believe it was OK for Ronald Reagan to almost triple our national debt, and for George W. Bush to more than double it. But President Obama is a big spender because he inherited a $1.3 trillion deficit (that's ballooned to $1.6 trillion), a sinking economy, and two bungled wars.

We now live in a country where compassion has more to do with condemning the poor while we provide America’s wealthy with government escorted profits and bailout dollars that reach into the trillions of dollars.

These shadows need explaining.

Instead, Dick Cheney and Sarah Palin are going to explain the silhouettes they see on the wall, as they want to see them. Palin’s a rugged individualist. Cheney’s a warrior-nationalist. Forgive me for saying this, but I think we are better off in the dark.

- Mark

Thursday, October 7, 2010


My god, how many bailouts do these guys get? Seriously ...

A bill that passed through the Senate last week - the Interstate Recognition of Notarizations Act - would make it more difficult for homeowners to challenge bank foreclosures if President Obama signs it into law. Specifically, the bill says that the courts must accept digital notarization done by electronic means (in another state, no less).

This means that anyone with the right software could notarize a digital document, or image of a document, without watching or actually validating in person that specific procedures and due diligence were followed. As you can imagine, this could create an even bigger environment for fraud ... while putting a stamp of approval on the fraud that's already happened (in what's being called "Foreclosure Gate").

So this is what we're looking at. Once a notary signs and gives the banks legal cover for saying "everything's on the up and up" there's little recourse for a homeowner, other than spending more money to fight or challenge suspected fraud.

But even this option would become more difficult if you've already been foreclosed on and kicked out of your house, which this bill would facilitate. Kind of like calling the fire department after your house has burned down.

Ultimately, this bill would raise the bar for homeowners who want to challeng the legality of documents that the banks claim were prepared properly. That this is being shoved in front of President Obama when banks have already been caught forging documents and lying about what they've done with homeowner documents should raise all kinds of red flags.

At the end of the day, the right and authority to challenge foreclosures would be more difficult for homeowners - who are already under stress with job insecurity, mortgages that are underwater, and collapsing home prices - if the president signs the bill.

President Obama needs to veto this bill.

- Mark

Tuesday, October 5, 2010


Larry Summers, a senior economic advisor to President Obama and, previously, a senior economic advisor to President Clinton, is going to leave his White House position to return to academia before next fall. Larry Summers is famous for advising President Clinton to sign the disastrous Financial Services Modernization Act, which removed the last remaining FDR era regulations that kept banks, investment houses, and Wall Street brokers from making a wreck of things, like they did in 1929.

While others saw and predicted that President Clinton's signing of the Financial Services Modernization Act would lead to economic disaster, Larry Summers rejected their concerns without seriously addressing them at the time. In fact, when he was President of Harvard University Larry Summers responded rather petulantly to a fellow academic who was critical of Summers-inspired policies, and who saw the 2008 market collapse coming:

... When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a "full-blown financial crisis" and a "catastrophic meltdown."

When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)

If you want to see how Larry Summers reacted to earlier warnings on how his policy recommendations might adversely affect our economy, check out what he, Alan Greenspan, and Bob Rubin did with Brooksley Born, head of the Commodity Futures Trading Commission in the late 1990s here.

In my view, we can't get rid of Larry Summers and his laissez faire market approach fast enough.

- Mark