Thursday, April 5, 2012

The Rule of Law

In his post, Too Big to Jail,  Simon Johnson writes: Among the fundamental principles of any functioning justice system is the following: Don’t lie to a judge or falsify documents submitted to a court, or you will go to jail. Breaking an oath to tell the truth is perjury, and lying in official documents is both perjury and fraud.

My parents and I arrived in the US in 1949, from a German DP camp (displaced person camp). We entered the land of freedom via Ellis Island. I was almost 3 years old. We'd come from a country where secret police knock on your door in the middle of the night and take you to jail.  As students in Ukraine, both of my parents were political activists fighting to free Ukraine from Polish and then Soviet domination. My father spent 4 years in Polish prison and my mother was sentenced to death by a Soviet kangaroo court. She documented her experiences in Scratches on a Prison Wall published in 2009.

I grew up with an immigrant's belief in the goodness and justice of America. Over the years, that belief (ideology) has been eroding. The final nail in my ideological coffin has been America's response to it's own financial crisis of 2008.

In previous financial scandals there were prosecutions and convictions:
*In the savings & loan crisis of the late 1980's Charles Keating, among many others, spent time in jail.
*The Enron scandal of mid-2000 saw prosecutions & convictions
*Tyco CEO, Dennis Kozlowski, was convicted in 2005 and went to jail.

Yet today, after a crisis which nearly brought down the US and the rest of the global economy, there has been no real investigation of the crimes committed -- although it is obvious to any informed observer that there was perjury and fraud. The Rule of Law applies to "regular people" who make up our ever growing prison population, but obviously, not to those in power. Three plus years after the crisis, there have been no real investigations. The people who created the crisis are still at their jobs and are working hard to undercut the flimsy regulations Congress barely managed to pass.

The Banks which were Too Big to Fail and were bailed out with trillions of taxpayer funds have become even bigger. The CEO's and upper management continue to collect their bonuses funded by taxpayers. And, as Simon Johnson writes they are also now Too Big To Jail.

Saturday, March 31, 2012

Shooting in White Plains, New York

A bit off topic, but still relevant to morphing capital --

The media is consumed 24/7 with the Trayvon Martin killing both on the left and the right. Appropriately so. There have been other killings like this, but unlike those, Trayvon's killing has penetrated and captured the public consciousness. The audio of the killing with a voice calling desperately for help has gone viral. People can relate. The victim was a 17 yr old boy and the shooter was an adult male. The boy was black and the shooter was a white man -- George Zimmerman. When the police arrived on the scene, Mr. Zimmerman, who carried a concealed weapon, admitted to shooting Trayvon. This happened on February 26, 2012. Trayvon Martin is dead. Zimmerman has not been arrested or charged as of today.

On November 19, 2011, there was a killing in White Plains, New York which did not capture the media's attention. The headlines in the local press read:  Officer Fatally Shoots Hatchet Wielding Man; Police Shoot Disturbed Man Carrying Knife. (was this reporting based on information provided by the police?) Those press reports are now invalidated by police video documentation and medical alert company audio, obtained by the victim's son.

The man the police shot was 68 year old Kenneth Chamberlain. He was sleeping in his apartment in White Plains when his medical alert pendant was triggered. He wore it for a heart condition. The Alert Service did not get an immediate response when they tried to contact him, via their speaker/recorder installed in his home. Their protocol is to call the police to investigate the medical emergency. This they did. Shortly thereafter, Mr. Chamberlain awoke and told the medical alert company that he was alright. They canceled the police alert. Despite this the police proceeded to his apartment. They demanded entrance even though he told them he was OK and was afraid of letting them in. (per the audio) The police ignored his pleas and broke down the door, took it off its hinges. They went in, tasered him, then shot him dead in his home. The police video shows a man, standing naked except for a pair of boxer shorts, with his empty hands at his side. A poignant irony of Kenneth's shooting, among many others, is that he was buried with full military honors. He was a Unites States Marine who served his country in Viet Nam.

Amy Goodman of Democracy Now covers Mr Chamberlain's shooting in detail and interviews his son. Like Trayvon, Kenneth Chamberlain was black.

Some very brief thoughts on societal factors contributing to these shootings:
* The militarization of the police since 9/11
* The growing insecurity in a society, where personal responsibility is emphasized to the society at large, while income is redistributed upward to the 1%.  This trend, starting in the 1970's, increased exponentially since the 2008 crisis. Additionally, the push for privatization while cutting the government safety net, has ratcheted up our economic insecurity. All of society is feeling the anxiety created by this insecurity, including the police.
* The fear promoted and fed by some politicians and media
*  The growing conservative/religious movement fostering fear of "The Other" evidenced by stricter immigration laws, increased government surveillance, legislative attacks on women's rights, increased covert racism (eg. many states limiting voting rights, which disproportionally affects the poor and minorities)
* The success of the NRA in promoting the weaponization of our society in which the individual is urged to purchase guns to defend against all threats.
* The US is the arms dealer here and to the world (people the world over, may not be able to feed their children, but they have guns. security world expoWeapons Trade Shows 
* Despite or maybe because of the crash of 2008, which gave us the "Great Recession", security firms and defense contractors are thriving and have done well in the Stock Market.

These two killings did not happen in a vacuum. The societal context for incidents like this is expanding as evidenced by the above list. I believe the only way to reverse these trends is to develop an alternative vision for society backed by a strong popular movement. And this will take decades and will probably include violent action. Power is not surrendered easily. 
 “We live in interesting times.” (a chinese saying)

Friday, March 23, 2012

Needed: A Vision

Recently, Jerry Epstein, an economist with The Center for Popular Economics
was interviewed by Truthout. Below are two excerpts from that interview, with my comments:

Epstein ... the growth paradigm is no longer viable in industrialized economies because of environmental constraints and because it no longer produces jobs. 

I assume he's referring to the current neoclassical economic growth paradigm, overlaid with neoliberalism. This approach to economics was popularized by Milton Friedman and The Chicago School. It was first applied in Chile under the autocratic regime of Pinochet, with questionable success. Here in the US it gained prominence in the 1980s with Reaganomics, and has been making advances ever since. Neoliberalism advocates economic liberalization, privatization, open markets and free trade. It's objective is to transfer the control of the economy to the private sector and eliminate the public sector except for Defense. The financial crisis of 2008 gave neoliberalism the opportunity to advance on steroids. It's been adopted globally, including the Eurozone, which is now in crisis.  It has been successful (until the crisis of 2008) in growing the GDP which is identified as economic progress. Epstein labels this growth paradigm no longer valid for two reasons -- good ones, but there are many others, among them:
      1. Surplus and the falling rate of profit   Neoclassical economics (Capitalism) is incredibly efficient in producing goods and extracting rents. The surplus created by this growth is greater than current global demand can absorb. Or stated another way, we have an over-supply of goods given our national and global income distribution. When the rate of profit started falling in the industialized economy other sources of profit had to be found. This led to the primacy of Finance Capital -- the financialization of our economy (money making money and a paper debt economy). Think of General Motors' finance unit generating higher profits than its manufacturing division. In 1973-85 the financial sector's share of corporate profits was 16%, while this decade it reached 41%. Finance Capital's sole focus is on profits to the exclusion of any other consideration. (i.e. societal or environmental impacts)  With falling profit rates, industry fled to cheaper labor markets to maintain high profit margins. They were aided by Trade Agreements written for politicians by industry lobbyists. The result has been job losses in the industrialized world and labor exploitation in the emerging world. And thus, we end up with high unemployment and low wages for the jobs that can't be exported.
2. The Private Market as the best allocator of resources. A precept of neoliberalism is the Efficient Market Theory - privatize everything (except Defense) and starve the Beast (the government). This approach has been hugely successful if the objective was to grow the GDP and concentrate wealth in as few hands as possible. But, if the objective is to allocate resources for the benefit of society as a whole, then it has been an abject failure. Profits are privatized while costs are socialized. (bank bailouts with tax dollars vs millions of people loosing their homes to foreclosure; environmental costs shifted to taxpayers, etc.) This trajectory is unsustainable as evidenced by -- financial crises (of increasing frequency & intensity), global social unrest, and severe environmental impacts such as Fukushima, BP oil spill, Bhopal, global warming and so on.  

Epstein   What's the economy for, anyway? We need to rethink: what are our needs and how do we meet those needs?

An excellent question. Unfortunately, I believe that neoliberalism with its Free Market ideology, has achieved the status oa religion. This belief, despite all the current crises, seems unshakable. It has given us the greatest income disparity in the US since the 1920s. And not only in the US, but globally, we have an international super super rich elite to whom country allegiance is secondary to profits. (Halliburton doing business in Iran despite US sanctions) On the other hand, companies readily call on the US and its military when their foreign profits are threatened. 

Do the financial elite really want to live in a world where 99% of it's people live with financial, food, health, and shelter insecurity? Thus far the answer seems to be yes, as long as their profits are not threatened. Occupy, despite being peaceful for the most part, was understood as a threat, which explains the ferocity of the response. (thousands arrested and encampments destroyed) 

How about the rest of us, the 99%. Will we continue to accept a life of increasing poverty and insecurity? The free market ideology and the cult of individual responsibility is so inculcated in the US that most people do not perceive it as an ideological choice, and seem incapable of contemplating alternatives. Recently I spoke to a man losing his house to foreclosure. I explained how the game was rigged, fraudulent mortgages, robosigning, securitization etc. He listened and finally said "I should never have bought this house." He is a private contractor and prior to the crash had an income that qualified him for the purchase of that house. Yet, he left filled with regrets and a belief that his family's downfall was his fault.

The crisis of 2008 spawned Occupy, but it also gave Finance Capital the opportunity to consolidate its power. Instead of being prosecuted and jailed the Big Banks are bigger, the bonuses are larger and the CEO's are presidential advisers. As Congresswoman Marcy Kaptur says in Capitalism a Love Story, "there has been a financial coup d'etat and Wall Street - rather than Congress - is in charge."

An ideology this embedded and pervasive will be extremely difficult to alter.
Power this concentrated and tentacled is unimaginably impossible to dislodge.

Occupy has been a start. But there is a very long road ahead. As I see it the following questions have to be asked and answered:

1.   Epstein's question: What's the economy for, anyway? What is needed is an alternative vision of how society can be organized for the benefit of all people and for the preservation of our planet's ability to sustain all life. This vision has to be succinct and easy to grasp. It has to have the power to capture peoples' imagination, so that it can displace the current ideology. The ideology of today is an illusion, but it has captured the population, even to the extent that people vote against their economic interest.  The right, starting with Goldwaters' defeat, has been developing and supporting think tanks which have promoted it's agenda very successfully. This is what we have to counter. It is not an easy task, it will take time, maybe decades.

2.  How is this alternative economic systen and the corresponding vision to be developed? Occupy, think tanks, blogs, universities. Occupy action was very effective this fall. It raised many peoples awareness of important issues. We are the 99% was a stroke of genius. Continued targeted action (against foreclosures, banks, SEC etc) is useful, but without a clear focus and a vision there's a danger Occupy's energy will dissipate or it may lose its commitment to non-violence.  I believe there is a need for groups of thinkers and intellectuals to focus on the development of alternative economic systems and formulate a path forward. To be effective, they cannot work in ivory tower isolation but must interact with others, both nationally and internationally. And, they must not exclude input from "the man in the street", who can be very effective in providing a bout of reality. 

3. "Know thy Enemy". The ideology of Neoliberalism and Finance Capital are embedded globally and institutionally from a congressman's aide to an administrator at the WTO, to your neighbor. Before change can happen one must fully understand the workings of our current global reality.

Friday, January 6, 2012

Collapse of 2008

The recent Fannie & Freddie discusion which tries to apportion blame for the mortgage meltdown lays the blame on the government and F & F itself. Yes, they both deserve part of the blame -- the government for it's lax regulation and hands off policy (see Greenspan's statements on self regulation), and F & F for trying to compete by lowering it's standards. What I find missing from today's discussion is the role of Wall Street money (the elephant in the room) in fueling the housing bubble. This made me search out my notes from 2008. Here's what I wrote at that time. (Please note it's not sourced as I was writing for myself, in my own shorthand, pre blog. BF emphasis was done today)

<<<<  In 2001 economy was already in recession after the collapse of the dot com boom. After 9/11/01 Greenspan feared collapse and started lowering interest rates. Mortgage rates declined, housing boom started.

As housing prices increased, affordability decreased. “Creative financing” was needed. The “opportunity” came with accounting scandals in Fannie & Freddie.  F & F traditionally bought mortgages from mortgage originators (usually banks). They then packaged the mortgages & sold them as Mortgage Backed Securities - MBS, primarily to pension funds & institutions, who only bought investment grade securities (AAA to BBB). F & F were dominant in the market so they dictated terms and those terms were very strict. A documented mortgage could take up to 90 days. Wall Street had always salivated over this business and for years had been pressuring Congress to do away with F & F.

After the scandal, F & F lost market dominance, so mortgage originators needed another source of cash. That is what Wall Street was waiting for. In 2001 & 2002 Wall Street was awash with cash from petro dollars and emerging economies. It poured the money into mortgages. Unlike F & F it did not care about standards, as it immediately packaged them into Collateral Debt Obligations - CDOs, and sold them all over the world collecting huge fees. With home prices rising & affordability declining a solution was found via Orange County and creative financing – no doc loans. (Countywide)  Wall Street was able to do this with the collusion of credit rating agencies & the financial engineering of CDOs.

CDOs were engineered by several geeks at Bear Stearns. (Basically, another level of derivative of MBS)  MBS are sliced and repackaged into a new product – CDO, which holds slices of numerous MBS. (Greenspan admitted he’d read several prospectuses of CDOs and could not understand them). CDOs were created not only with mortgages but with corporate & municipal bonds. (Staples Center, Films, etc)  Anything that could show a future income stream could potentially be securitized, sold, and fees collected. Rating agencies (only 3) were paid by the banks that issued the securities. If a bank did not like the rating they could always go to another agency. So, the agencies were incentivized to provide the highest rating possible. Their formulas assumed house prices would rise 6% - 8% per year forever. After all, there had not been a single down year in house prices since the Great Depression. Additionally they designed mathematical models, which gave a AAA rating to CDOs that contained 80% AAA and 20% junk.

In 2004 Bush made his push for the ownership society and Greenspan responded – in a speech he encouraged the mortgage industry to devise “product alternatives” to increase home ownership. The result – negative amortization loans.

At this time F & F reentered the market and started doing sub-prime loans. Prior to 2004 loan volume had been running at 50 billion/year. After 2004 it was 300 billion per year. By 2005 sub-prime made up 20% of the mortgage market.

The SEC never even questioned the banks about these structured products. They believed the banks would regulate themselves. The mortgage origination business was totally unregulated and the finance companies got their AAA rating from the agencies and Wall Street sold the products all over the world.

By the first quarter of 2006 mortgage delinquencies started rising and Wall Street cut off credit to the mortgage originators.  With no new mortgages, and no new buyers, housing prices started declining. This killed the refi market and adjustable rate buyers could not refi when the teaser rate ended nor could they sell in a declining real estate market. Investors around the world realized AAA was junk and credit stopped.

This describes what came to be called the “shadow” banking system. At one time, traditional banks wrote mortgages and kept them on their books. This system was regulated. The shadow system is totally unregulated because banks don’t issue mortgages they only buy them, package them as CDOs and sell them. And CDOs and “originators” are unregulated.
And then there are SWAPs -  insurance on CDOs, another level of derivative. Again unregulated. The shadow banking system is huge and it is part of the traditional banks. There is no end in sight if they securitize every income stream they can identify.  >>>>

Finance Capital, rightly, is in search of the a return and will always flow towards the highest return. But, given todays wealth concentration and the structure of the markets, (exponentially increasing derivatives products) a limited number of individuals, commanding huge sums can sway markets. (hedge funds)  Thus we get bubbles and crashes, with greater and greater frequency. (emerging markets, dot com, oil spikes and then crashes - 1987, 1998, 2000, 2008) 

Neoclassical Free Market ideology set the table for the mortgage debacle -- repeal of Glass-Steagall, the constant drone of anti-regulation rhetoric, regulatory and government capture, and finally Chairman Greenspan declaring that the financial industry was capable of self-regulating. In 2001 Wall Street needed a new "investable" market for it's billions. It saw the opportunity and supplied mortgage originators with cash in return for mortgages. Financial engineering created products based on those mortgages to be sold and traded. Wall Street profited by collecting fees and by trading those products, at times even taking positions counter to the product they were pushing to their customers. The profits rolled in. It was so profitable that Wall Street firms (Bear Sterns, Morgan Stanley, Goldman Sacks and major banks)  kept pushing out the money and demanding more product for its  financial packaging industry.

And that is the way the game was played until the music stopped in 2008.