Friday, April 30, 2010
The Lunatics Who Made a Religion Out of Greed and Wrecked the Economy
by Matt Taibbi article link
04.28.10 Rolling Stone
The SEC's lawsuit against Goldman Sachs is a chance to prevent greed without limits.
So Goldman Sachs, the world's greatest and smuggest investment bank, has been sued for fraud by the American Securities and Exchange Commission. Legally, the case hangs on a technicality.
Morally, however, the Goldman Sachs case may turn into a final referendum on the greed-is-good ethos that conquered America sometime in the 80s – and in the years since has aped other horrifying American trends such as boybands and reality shows in spreading across the western world like a venereal disease.
When Britain and other countries were engulfed in the flood of defaults and derivative losses that emerged from the collapse of the American housing bubble two years ago, few people understood that the crash had its roots in the lunatic greed-centered objectivist religion, fostered back in the 50s and 60s by ponderous emigre novelist Ayn Rand.
While, outside of America, Russian-born Rand is probably best known for being the unfunniest person western civilisation has seen since maybe Goebbels or Jack the Ripper (63 out of 100 colobus monkeys recently forced to read Atlas Shrugged in a laboratory setting died of boredom-induced aneurysms), in America Rand is upheld as an intellectual giant of limitless wisdom. Here in the States, her ideas are roundly worshipped even by people who've never read her books or even heard of her. The rightwing "Tea Party" movement is just one example of an entire demographic that has been inspired to mass protest by Rand without even knowing it.
Last summer I wrote a brutally negative article about Goldman Sachs for Rolling Stone magazine (I called the bank a "great vampire squid wrapped around the face of humanity") that unexpectedly sparked a heated national debate. On one side of the debate were people like me, who believed that Goldman is little better than a criminal enterprise that earns its billions by bilking the market, the government, and even its own clients in a bewildering variety of complex financial scams.
On the other side of the debate were the people who argued Goldman wasn't guilty of anything except being "too smart" and really, really good at making money. This side of the argument was based almost entirely on the Randian belief system, under which the leaders of Goldman Sachs appear not as the cheap swindlers they look like to me, but idealized heroes, the saviors of society.
In the Randian ethos, called objectivism, the only real morality is self-interest, and society is divided into groups who are efficiently self-interested (ie, the rich) and the "parasites" and "moochers" who wish to take their earnings through taxes, which are an unjust use of force in Randian politics. Rand believed government had virtually no natural role in society. She conceded that police were necessary, but was such a fervent believer in laissez-faire capitalism she refused to accept any need for economic regulation – which is a fancy way of saying we only need law enforcement for unsophisticated criminals.
Rand's fingerprints are all over the recent Goldman story. The case in question involves a hedge fund financier, John Paulson, who went to Goldman with the idea of a synthetic derivative package pegged to risky American mortgages, for use in betting against the mortgage market. Paulson would short the package, called Abacus, and Goldman would then sell the deal to suckers who would be told it was a good bet for a long investment. The SEC's contention is that Goldman committed a crime – a "failure to disclose" – when they failed to tell the suckers about the role played by the vulture betting against them on the other side of the deal.
Now, the instruments in question in this deal – collateralized debt obligations and credit default swaps – fall into the category of derivatives, which are virtually unregulated in the US thanks in large part to the effort of gremlinish former Federal Reserve chairman Alan Greenspan, who as a young man was close to Rand and remained a staunch Randian his whole life. In the late 90s, Greenspan lobbied hard for the passage of a law that came to be called the Commodity Futures Modernisation Act of 2000, a monster of a bill that among other things deregulated the sort of interest-rate swaps Goldman used in its now-infamous dealings with Greece.
Both the Paulson deal and the Greece deal were examples of Goldman making millions by bending over their own business partners. In the Paulson deal the suckers were European banks such as ABN-Amro and IKB, which were never told that the stuff Goldman was cheerfully selling to them was, in effect, designed to implode; in the Greece deal, Goldman hilariously used exotic swaps to help the country mask its financial problems, then turned right around and bet against the country by shorting Greece's debt.
Now here's the really weird thing. Confronted with the evidence of public outrage over these deals, the leaders of Goldman will often appear to be genuinely confused, scratching their heads and staring quizzically into the camera like they don't know what you're upset about. It's not an act. There have been a lot of greedy financiers and banks in history, but what makes Goldman stand out is its truly bizarre cultist/religious belief in the rightness of what it does.
The point was driven home in England last year, when Goldman's international adviser, sounding exactly like a character in Atlas Shrugged, told an audience at St Paul's Cathedral that "The injunction of Jesus to love others as ourselves is an endorsement of self-interest". A few weeks later, Goldman CEO Lloyd Blankfein told the Times that he was doing "God's work".
Even if he stands to make a buck at it, even your average used-car salesman won't sell some working father a car with wobbly brakes, then buy life insurance policies on that customer and his kids. But this is done almost as a matter of routine in the financial services industry, where the attitude after the inevitable pileup would be that that family was dumb for getting into the car in the first place. Caveat emptor, dude!
People have to understand this Randian mindset is now ingrained in the American character. You have to live here to see it. There's a hatred toward "moochers" and "parasites" – the Tea Party movement, which is mainly a bunch of pissed off suburban white people whining about minorities consuming social services, describes the battle as being between "water-carriers" and "water-drinkers". And regulation of any kind is deeply resisted, even after a disaster as sweeping as the 2008 crash.
This debate is going to be crystallised in the Goldman case. Much of America is going to reflexively insist that Goldman's only crime was being smarter and better at making money than IKB and ABN-Amro, and that the intrusive, meddling government (in the American narrative, always the bad guy!) should get off Goldman's Armani-clad back. Another side is going to argue that Goldman winning this case would be a rebuke to the whole idea of civilisation – which, after all, is really just a collective decision by all of us not to screw each other over even when we can. It's an important moment in the history of modern global capitalism: whether or not to move forward into a world of greed without limits.
Matt Taibbi is a writer for Rolling Stone.
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Fix the Economy, Not Wall Street
Why regulate a broken system when we can build a better one? Welcome to New Economy 101.
by David Korten article link
Apr 28, 2010
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FRAUDONOMICS: 10 FUN FRAUD FACTS
By Mark Ames article link
CORRUPTION PORN / APRIL 28, 2010
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Thousands Rally in New York for Showdown with Wall St.
Over 10,000 protesters gathered in New York's financial district to demand financial reform.
By Alexander Zaitchik article link
April 30, 2010 AlterNet
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Posted by mammonmessiah at 1:44 PM
Thursday, April 29, 2010
Megabanks: The Banking Oligarchy That Controls Assets Equivalent to 60% of America’s GNP
Published on 04-28-2010 Commentary-Analysis
Today financial power is being concentrated in the hands of fewer and fewer individuals. In fact, the six biggest banks in the United States now possess assets equivalent to 60 percent of America's gross national product. Back in the 1990s that figure was less than 20 percent. These six banks - Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo - literally dictate what goes on in the U.S. banking industry. These entities are the poster children for "too big to fail", and they donate massive amounts of cash to the campaigns of both Republicans and Democrats to ensure that they will continue to receive favorable treatment. The vast majority of Americans have had a banking account, a credit card and/or a mortgage with one of these institutions at some point. If they acted in concert, these six banks could literally bring down the U.S. economy overnight if they wanted to. Together with the Federal Reserve, these six banks represent the real financial power in America. They are the 800 pound gorilla in the room that influences nearly every major financial deal that gets done and virtually every major political decision that gets made. As the last couple of years have demonstrated, top politicians from both parties (John McCain and Barack Obama for example) will instantly jump into action and start advocating that the U.S. government spend billions upon billions of dollars when the interests of these behemoths are threatened. The frightening thing is that the power of these megabanks is growing at a frightening pace. As dozens upon dozens of smaller U.S. banks are "allowed to fail", they either go out of existence or the Feds actually encourage these smaller banks to sell themselves to one of the big sharks. In either event, the banking power in the United States becomes further consolidated in the hands of the megabanks.
Bill Moyers recently interviewed Simon Johnson and James Kwak, the authors of a new book entitled 13 Bankers: The Wall St. Takeover and the Next Financial Meltdown. During that interview Kwak described to Moyers just how explosive the growth of the power of these megabanks has been....
Bill Moyers: And you write that they control 60 percent of our gross national product?
James Kwak: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.
Does it alarm you that the banking elite have accumulated such a large amount of financial power?
It should. These institutions have the power to wreck entire economies. Just consider what happened in Greece lately. Now, it is being alleged that the megabanks are ripping off American cities with the same kinds of predatory deals that brought down the financial system in Greece.
And that is what these megabanks are.
They are predators.
In fact, a very revealing article in Rolling Stone (Inside The Great American Bubble Machine) described Goldman Sachs this way....
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Unfortunately, they may have actually been understating things a bit.
These megabanks have rigged the game so that the wealth of the nation is slowly transferred from us to themselves and to the international financial interests that control them.
They can make money if the markets are going up, and they can make money if the markets are going down.
For example, in a newly released email from the height of the housing crash, the CEO of Goldman Sachs bragged that his firm "made more than we lost" by betting against the housing market.
Thankfully the SEC is starting to look into the fraud that Goldman Sachs committed during this time period, but the truth is that Goldman is not likely to receive any more than a slap on the wrist for what it has done.
They are way too big, way too powerful and have too many friends in high places for them to get into any real trouble.
For example, it has come out that Barack Obama does not intend to return any of the campaign contributions that he received from Goldman Sachs. And surely they will be glad to continue to pour big money into his political coffers.
So where does that leave the rest of us?
Well, the rest of us can expect higher taxes and a lower standard of living according to the IMF. The IMF (which has deep connections to these megabanks) says that the party is "over" for nations that have been enjoying the good life. In a recent article, The Washington Post summarized the message that the IMF is trying to communicate through their recent policy papers....
To keep the global economy on track, people in the United States and the rest of the developed world need to work longer before retiring, pay higher taxes and expect less from government. And the cheap imports lining the shelves of mega-chains such as Wal-Mart and Target? They need to be more expensive.
So are you ready to work longer, pay higher taxes, expect less from government and have a lower standard of living?
That is what the IMF says we are all going to be facing in the years ahead.
We are all going to financially suffer as the megabanks continue to thrive and consolidate power.
Isn't that wonderful?
You say you don't like that so much?
Well, good luck taking on the 800 pound gorilla.
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Lawmakers to Holder: Goldman, other firms aren't 'too big for jail'
By Greg Gordon article link
Posted on Wednesday, April 28, 2010 | McClatchy Newspapers
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Revolving Door From Capitol Hill to Big Banks
By Paul Blumenthal article link
04/28/10 Sunlight Foundation Blog
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Teapot Tempest Over Goldman Sachs
The Prospects for Real Financial Reform Remain Remote
By ANDREW COCKBURN article link
April 29, 2010
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Banks Bailed Out By American Taxpayers Are Paying Us Back By Shorting Our States and Cities
by Washington's Blog article link
TUESDAY, APRIL 27, 2010
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Worse Than the Robber Barons: Wall Street Amorality Takes on a False Calvinist Hue
By Peter Laarman article link
April 28, 2010
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It Takes Power to Control Power
By Joe Conason article link
Posted on Apr 28, 2010 truthdig reports
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"This Sucker Could Go Down"
by James Howard Kunstler article link
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Posted by mammonmessiah at 1:05 PM
Wednesday, April 28, 2010
The Big Six Banks are Shorting the American Dream
By Jerry Mazza article link
April 28, 2010
The Big Six investment banks, Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Bank of America and Wells Fargo, are “shorting the American Dream,” according to economist Simon Johnson and entrepreneur James Kwak in an interview on April 16, “Financial Regulation and Regulatory Capture” on Bill Moyers Journal. Here’s a summary of the big and important ideas and issues on the table.
First, Simon Johnson is a former chief economist at the International Monetary Fund, now teaching at MIT’s Sloan School of Management. James Kwak is a former management consultant at McKinsley & company, co-founder of the successful software company, Guidewire, and presently studying law at Yale Law School. Together Johnson and Kwak run the economic website BaselineScenario.com. To boot, they have written a new best seller, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.
The big ideas that emerge from the title of their interview are that financial regulators are not enough to deal with the Big Six banks, whose employees are very smart people, very hungry for financial opportunity, legit or not legit. Thus, very often regulators are sucked into large investment banks or affiliated financial institutions like the distinguished Michael Oxley, co-author of the Sarbanes Oxley Act. Oxley has joined the financial industry, along with some 124 former other members of Congress and their aides.
To Oxley’s undying credit, the Sarbanes-Oxley Act grew out of the debacle of Enron and made it a law that CEOs and other top managers were and are responsible for the policies and actions of their companies on their watch and can’t just shrug their shoulders, saying they didn’t know what was happening. What Johnson and Kwak are really calling for are more laws on the books that can safeguard against financial abuse.
Unfortunately, we have, as they point out, former Clinton Treasury Chief Robert Rubin now getting $100 million a year to consult for Citibank and he can’t explain how the company came so incredibly close to financial collapse. Yet, when Newsweek wanted someone of note to explain all this, the job was given to, guess who, Robert Rubin. Suddenly, he found religion?
Charles Prince, another former Citi CEO said: “Let me start by saying I’m sorry. I’m sorry that our management team, starting with me, like so many others, could not see the unprecedented market collapse that lay before me.” He must have seen it for years before that if he wasn’t blind or deaf, because it was reported on Internet news services at the very least, particularly Citi’s huge derivatives debt.
Both Rubin and Prince were accused by Democratic Chairman of the Bipartisan Financial Enquiry Committee Phil Angelides, “of either pulling the levers or being asleep at the switch.” This writer’s money is on pulling the levers.
Also, there is Washington Mutual’s CEO Dave Beck appearing before Senator Carl Levin, investigating how so many bad loans were made at WaMu. After all, this was the biggest “meltdown belly-up of a major investment bank in US history.” Yet a blasé Beck said when asked what happened, “It’s a very real possibility that the loans that went out were better quality than Mr. Shaw laid out.” Levin rebutted, “And there’s a very real good possibility that they were exactly the quality that he laid out, right? Is that right?” Beck wavered, “That’s right.” A frustrated Levin answered, “Okay. And you don’t know and apparently you don’t care. And the trouble is you should have cared.” So it goes.
In keeping with Beck’s feigned ignorance, it’s interesting that the Johnson-Kwak interview aired the day before the NY Times broke the story U.S. Accuses Goldman Sachs of Fraud. The short version of the article is that Goldman profited from the sale of collateralized debt obligations (CDOs) that were packaged with garbage loans and peddled to hedge funds and investors. This plan was the brainchild of Fabrice Tourre, a vice president at Goldman in London. The plan, cited in the SEC case as Abacus 2007-ACi, proved successful in having Wall Street hedge fund investors make a mountain of money on negative bets or “shorting,” betting on the bad loans to fail, which they did, thereby adding more disaster to the subprime lending market and helping to “short the American Dream,” that is, the market is not a level playing field for investors.
The follow-up Times article, Top Goldman Leaders Said to Have Overseen Mortgage Unit, indicates that “Mr. Tourre was the only person named in the SEC. suit. But according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. These people spoke on the condition that they not be named so as not to jeopardize business relationships or to anger executives at Goldman, viewed as the most powerful bank on Wall Street.
“According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation’s economy. It was Goldman’s top leadership, these people say, that finally ended the dispute on the mortgage desk by siding with those who, like Mr. Tourre and Mr. Egol, believed home prices would decline . . .”
The reason for extending the chain of responsibility up to the top is precisely to invoke a law like the Sarbanes Oxley Act, so that Abacus is not seen as the random action of a greedy profiteer, which also occurs, according to Johnson and Kwak. Now, it is verified that Abacus was a corporate plan that had the blessings of the CEO and top management. Let’s see what shakes out of this or what dodges are made.
Another major problem that Johnson and Kwak see is that the six megabanks have become a financial oligarchy. In fact, their aggregate assets equal some 63 percent of GDP. Back in the 1990s, adjusted for inflation, their assets equated to less than 20 percent of GDP. This rise in financial power gives them the notion that they can go out and take more and more risks. After all, the taxpayer and Uncle Sam will be willing to bail them out if they fail. The Fed lending window is wide open to them. It encourages them to “distort the system . . . change the rules of the game to favor themselves. To that end, they spend a million dollars a day lobbying against reforms to fix the financial system.”
As asset power increases, the oligarchy’s power to twist arms in Congress increases. In fact, Johnson claims “the big banks got stronger as a result of the bailout . . . They’re turning that increased economic clout into more political power. And they’re using the political power to go out and take the same sort of risks that got us into disaster in September 2008,” when Lehman Brothers was allowed to fail and shook the international banking system.
The truth is Citibank alone, according to Johnson and Kwak, controls some $12.5 trillion in assets, so it can’t be allowed to fail without causing another catastrophe à la Lehman Brothers. Johnson and Kwak’s idea is to have the banks break themselves down to into entities with no more than a $100 billion cap each. That makes them and the other mega-banks small enough to fail. This is really a key point. And one wonders why the Glass-Steagall Act hasn’t been reinstituted as promised to help facilitate this division for break-down purposes.
Included in the “too big to fail” discussion were the quasi-government/Wall Street Fannie Mae and Freddie Mac mortgage lenders, which literally “captured Congress” with their financial lobbying in the 1990s, arguing for rights to take on improper risk. And it was the Republicans who “called them on that.” Unfortunately, Treasury Secretary Henry Paulson in 2008, confronted with the multiple “too big to fail” banks, as Johnson points out, “was right. If you let JPMorgan Chase or Goldman Sachs fail, the consequences would have been devastating, because they are so big. It’s a Fannie May and Freddy Mac structure come to Wall Street, come to the top guys on Wall Street. And our Republican colleagues and friends should recognize this, they should acknowledge it. And then we can all fix it together.”
On the other hand, Johnson and Kwak’s whole point is also that we can’t allow these bailouts to continue. We have to fix the system with a series of laws that prevent the next bubble, the mindless creation of toxic lending, and the imminent failure of banks that have wrongly become “too big to fail.” We can’t institutionalize the corruption that leads to financial failure. We have to legislate against it. Or the economy will collapse.
To that point, Johnson and Kwak single out Magnetar, “a hedge fund named after a neutron star that spews deadly radiation cross the galaxies,” if you can believe that weirdness. “Magnetar worked with American banks to create toxic CDOs, securities backed by subprime mortgages that managers knew were bad. Magnetar took information and bet against the same investments which they recommended to buyers. Selling short and making a fortune.” This process is as deadly as radiation and a repetitive event in contemporary finance. It’s got to go.
Another scam pointed out by Johnson and Kwak is Goldman bailing out Greece with an initial amount of money and then stashing that debt paper in a secret Cayman account. Then it sold a second round of debt to investors, not divulging the first debt, and how deep the total truly was. Then it bet against Greece paying it off and once again made a fortune off of investor ignorance and Greece’s bad luck. These are not accidents. These are planned strategies to defraud, to look for the loopholes to cheat, to short the American Dream.
Also, a not so accidental complexity in procedures, management, sheer numbers of employees and divisions in huge financial companies makes for rogue traders who seek loopholes to create questionable if not illegal offerings, even at their company’s expense. The moral barometer here is at its nadir.
Moyers pointed out “that even when JPMorgan Chase lost $880 million [in] one of these whacky obscure deals . . . the executives still paid themselves millions of dollars in up-front fees. It exploded and personally they still made money.” This is a classic case of top executives cheating their own company, as Enron’s cheating their own employees out of retirement funds, walking away with hundreds of millions, and later with jail sentences. There is a fundamental cynicism in the financial community that their ilk is above the law, that they are smartest guys in the room, and not subject to the suckers’ rules.
This kind of brashness is reminiscent of CEO Jamie Dimon who said of his company JPMorgan Chase in 2009 that “they had the best year in their history.” That’s because his company was “big and beautiful” and sucked up enough of the bailout dollars to land in the black. This is a guy who dines with President Obama, does lunch, and god knows what else, namely playing financial oligarch. Obama called him “a savvy businessman,” but in this writer’s opinion, he’s a high level sleaze.
Yet it comes down to the lobbying dollars that help keeps this deadbeat oligarchy afloat and the lack sufficient of legislation like the Glass-Steagall Act from resurfacing to separate commercial banks from investment banks. Or to have a toothier Commodities Futures Modernization Act, which former Commodities Futures Trading Commission Chair Brooksley Born wanted to protect against derivatives.
The act was gutted by Senator Phil Gramm with Clinton’s blessings in 1999. The link above is to an article I wrote about Born’s travails, the intimidations by Greenspan, Rubin, and particularly Larry Summers, who called her, saying he had 13 bankers in the room who all said that if she proceeded with her CFMA, the financial system would totally collapse. She subsequently resigned, having done all she could to protect her fellow citizens from these financial predators.
Johnson and Kwak remind us to remember that fighting this fight is a long-term job and not a quick fix. As Johnson points out, Teddy Roosevelt faced the bankers for a decade and brought Morgan in tow as FDR did his corps of bankers. Early on Andrew Jackson faced down the national bank. It will take a president with backbone and conviction to tell these guys what to do, rather than seeking “consensus” in lieu of courage. I also believe there are intelligent Republicans out there who see and know what’s going on and need to act in unison with their Democratic counterparts.
Like the Marines, we need a few good men, maybe more than a few, to stand up and fight the Blankfeins, the Rubins, the Princes, etc. Kwak suggested that some people should go to jail for fraud. I’m for that, the more the merrier to make an example and save the financial system. Both Johnson and Kwak are practicing financial professionals who believe in the system, which can’t be run with a totally unregulated free-market hand, but with laws that keep the playing field level.
As a closer, Moyers pointed to the Republican leader in Congress, Senator Mitch McConnell from Kentucky who was being taken to task by reporters recently for “attending a fundraiser with hedge funds and other Wall Street poobahs.”
This came, as Johnson shredded a recent statement by McConnell: “He [McConnell] says let the biggest banks fail, go bankrupt, don’t do anything, leave the situation as it is now and when they get in trouble, let them fail. If you do that, you’ll have catastrophe. The bankruptcy system clearly and manifestly cannot deal with the failure of a complex, global, financial institution. And we have the evidence before us in what happened after Lehman Brothers failed. That was bankruptcy. It caused chaos around the world, Bill. That’s what the Republicans are advocating. If we just leave things as they are and next time we’ll take that chaos and we’ll get a second Great Depression. We’re arguing for reform. We’re arguing for change. We’re arguing for ways to make those biggest banks smaller and safer. If they were small enough to fail, that’s a very different story. And that’s a much safer place to be.
When Moyers asked, “What do these big six banks think about what Senator McConnell is saying?” Kwak nailed it: “Well, the big six banks don’t want any reform at all, essentially. So, I think . . . there’s some evidence that Senator McConnell has been talking to the big banks and to other people on Wall Street.” So let’s leave it at another regulatory capture.
Hopefully, you’ve gotten an idea of what a brilliant and important interview this was. See or read it for yourself, before your American Dream gets shorted again in a new financial collapse.
Jerry Mazza is a freelance writer and life-long resident of New York City. Reach him at firstname.lastname@example.org. His new book, “State Of Shock: Poems from 9/11 on” is available at www.jerrymazza.com.
Frauds And Scandals Follow The Collapse Of The Financial System
April 28, 2010 "International Forecaster"
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How the SEC and Congress Can Bring Down Goldman Sachs and Expose the Financial Coup
By David DeGraw article link
April 28th, 2010 AmpedStatus Report
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Protesters Launch Showdown With Monster Banks, Demand Wells Fargo End Predatory Lending
By Daniela Perdomo article link
April 27, 2010 AlterNet
Bank Local: Indie Businesses Embrace Move Your Money
By Stacy Mitchell article link
April 28, 2010 AlterNet
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What Really Triggered the Financial Crisis?
The Shadow Banking System Blew Up
By MIKE WHITNEY article link
April 27, 2010
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by Paul Buchheit article link
April 27, 2010 CommonDreams.org
Plunder or Enterprise: The World's Choice
by Thomas E. Woods, Jr. article link
April 28, 2010
Financial Reform: The Final Con Game
by Joan Veon article link
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Moyers/Kwak/Johnson: Is the U.S. at the Mercy of an Unstoppable Oligarchy?
Six Banks Control 60% of Gross National Product
By Bill Moyers blog link MMr
April 23, 2010 "Bill Moyers Journal"
Posted by mammonmessiah at 4:33 PM
Tuesday, April 27, 2010
The Death of Self-Interest Fundamentalism
Tuesday 27 April 2010 Cognitive Policy Works
Self-interest fundamentalism was the economic religion of the 20th Century. We are now in the midst of an economic reformation on par with the Enlightenment as we enter the new millennium.
Have you noticed that a lot of people seem to think that appeals to self-interest lead to a moral and just society?
No, I’m not merely talking about economists. Self-interest evangelicals have been spreading the good news for decades in public policy programs, political science departments, and financial institutions too. Converts can be found in environmental organizations that tell us we’ll save on our energy bills if only we change those light bulbs. And blind zealots run polling companies that deploy the doctrine of self-oriented rationalism when they tell us that the preferences of individuals exist in a meaningful way to be measured – with nary an inkling that the way polls are conducted might influence how people respond.
Is self-interest fundamentalism dying? Cracks are certainly spreading through its foundations, as I’ll discuss in a moment. The more important questions we need to grapple with are whether it should die away and, if so, with what should we replace it? Consider your answers to these questions. I’ll share some of mine below.
Yes, rationalist fundamentalism still has a stranglehold on society. It’s meteoric rise to dominance goes all the way back to the nuclear arms race that poured truckloads of cash from public coffers into defense contractor piggy banks through the “game” of mutually assured destruction during the Cold War. We saw it clearly during the Vietnam War when “body counts’ laid the foundation for an entire generation of video game players to score points by killing more enemies – never mind that we were slaughtering innumerable civilians.
And, of course, it was only a matter of time before schools fell under the knife of test-based bookkeeping to “hold students accountable” to rationalist ideals of performance measurement – at the expense of actual learning. A web of trans-national organizations have come into existence – the World Trade Organization, International Monetary Fund, and World Bank being the best known – that push the ideology of self-interest into the center stage of world affairs.
Theory of Self-Interest: A Creation Story
How could an impoverished model of human-as-self-focused-calculating-machine have ever come into being? A common myth is that self-interest theories rose out of behavioral studies conducted by psychologists. A nice bedtime story perhaps, but it isn’t true. Would you believe me if I told you the behavioral model underlying the global economy came, not from the human sciences, but from mathematics?
Back in the 1940’s and 50’s, a research center was created to explore fundamental issues of concern to the Air Force. This Research ANd Development institute was aptly named the RAND Corporation. Within the high security walls of this military think tank, mathematicians developed abstract principles for nuclear strategy during the Cold War. In the midst of this particular, historically contingent environment – and motivated by concerns of defense contractors in the air combat arena – the notion of self-interested rational action was born. Proof positive that the most bizarre stories are found in the non-fiction section of your local library.
(If you’d like to read the full story, check out S.M. Amadae’s Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism.)
So the birth place of modern market fundamentalism, in the guise of “rational choice theory”, was the military think tank that gave us the disastrous arms race. Untested and theoretical, it quickly spread throughout the highest levels of government during the tenure of Robert McNamara at the Department of Defense, then whipped through the economics departments of many prominent universities, spurred the creation of public policy analysis as a “scientific” field, and undergirded today’s global institutions of economic governance.
But things are starting to change.
Looking Forward: 21st Century Institutions
The first experimental studies of rational choice theory by behavioral scientists, principally Daniel Kahneman and Amos Tversky, showed that a foundational premise of the theory was wrong. (As a technical side point, they showed that preferences can be reversed by merely framing a question differently.) The “prospect theory” that arose through these experiments became the bedrock of a new field – behavioral economics – that has grown in prominence since its birth in the 1970’s.
Throughout the subsequent decades, researchers found more damning evidence against self-interest. Paul Slovic and his collaborators at Decision Research have systematically explored how risk perception influences our decisions in many ways that fly in the face of rational choice theory. Human beings depend on emotional cues to make decisions. And many of these cues are associative rather than based on inferences – thus they do not fit the paradigm of rationality presumed by rational choice theory. In fact, human beings cannot manage risk – especially in the highly complex social situations we often find ourselves in – when regions of our brains that process emotional information are damaged. Antonio Damasio sealed this argument in his 1994 book, Descartes’ Error: Emotion, Reason and the Human Brain.
A new view of human reason is on the rise in academia. Unlike its predecessor, the new paradigm is profoundly based in the workings of our bodies. This “embodiment” view incorporates insights from computer science, linguistics, neuroscience, philosophy, psychology, and robotics. Its adherents include people like Gilles Fauconnier, Raymond Gibbs, Mark Johnson, George Lakoff, Eleanor Rosch, Mark Turner, and Drew Westen.
Arising with this new view is a profound shift in how we understand human thought and behavior. Just as the institutions of yesteryear grew out of the old paradigm, research in the cognitive sciences beckons us to think differently about the institutions of tomorrow.
This is where I do my work.
I’ve seen how methods like cost-benefit analysis fail utterly when applied to environmental challenges. Future costs are weighed against current gains in a false choice between short-term profit seeking and long-term sustainability. I’ve also watched as public policies built on outdated performance measures undermine that which they are meant to improve. A key example is the educational paradigm that gave us No Child Left Behind – high-stakes testing – which flies in the face of what our teachers know about real learning. Any effort to treat moral pursuits – like making the world safe for future generations or educating a child – will demand broader measures of success than numbers alone can describe.
In a previous article, I described some things we’ll need our institutions to do in the 21st Century:
In a world based on this new perspective, things work very differently:
* Citizens recognize fear-inducing news reports intended to inflate manufactured risks and hide awareness of genuine threats, thereby reducing the effectiveness of these manipulative tactics.
* Journalists understand the consequences of how facts are presented and beliefs are promoted in the structure of news reporting, resulting in coverage that enhances—rather than erodes—the democratic process.
* Policy-makers abandon contrived and faulty presumptions about “economic rational actors” and instead craft solutions to societal challenges that improve the lives of real people through deeper insights into the human condition, culminating in robust policies that stand the test of time.
* Advocates articulate clear and compelling calls to action that resonate deeply with the values of the citizenry, thereby promoting greater civic engagement and community empowerment.
What’s more, we’ll need to build a new foundation for our economic institutions. A recent example shows that the old approach is inadequate. Amartya Sen and Joseph Stiglitz, two Nobel prize winning economists, led a commission to improve upon the Gross Domestic Product (GDP) when measuring economic well-being. They spent most of the 79 pages of their personal reflections (pdf) describing a long history of criticisms that show GDP to be grossly inadequate. Yet, very little of substance was offered to take its place.
What does it mean that a group of leading economists don’t know how to measure economic progress? In the words of Sen, when talking about the limits of rational choice theory:
It seems easy to accept that rationality involves many features that cannot be summarized in terms of some straightforward formula, such as binary consistency. But this recognition does not immediately lead to alternative characterizations that might be regarded as satisfactory, even though the inadequacies of the traditional assumptions of rational behavior standardly used in economic theory have become hard to deny.
This tells us that many economists recognize the limitations of rational choice, but they don’t have ready-made alternatives. Yet the old tools are well-known and ready for use so they pick them up again and again. They are looking for something better, but haven’t found it yet.
I’d like to offer that the alternatives are starting to emerge in the unexpected corner of academia where researchers study the human mind. New tools cannot be found so long as the old paradigm of human nature remains. My colleagues and I are in the process of developing these new tools. What does our paradigm look like? Here are the key features:
* Human beings are profoundly social. We are wired for empathy and we learn how to act in the world through interactions with other human beings and the natural world;
* Human reason is embodied. We think and act through the interplay of brain, body, and environment. Emotions are vital to effective decision-making. And our understandings are shaped by the contexts we operate in;
* Human thought is evaluative. We interpret the world through core values, our sense of identity, and conceptual models for how we believe the world works. There’s no such thing as “an objective world” when dealing with social and political issues because we are co-creators of the realities we experience.
Each of these features tells us something about how a human-based economy should work. It should recognize the value of community in our dealings with one another. It should be designed around our biological needs for survival in a world where things like potable water and fossil fuels are becoming limited and the planetary climate system has been disrupted in a manner that threatens us all. And it should acknowledge that interpretations of human well-being are perpetually contested by competing perspectives.
Yes, it is time to let self-interest fundamentalism go the way of monarchy and feudalism. It may not go silently into the night, but the end is nigh. Pretty soon we will have laid the foundation for a sustainable future – both ecologically and financially. In order to do so, we’ll have to acknowledge how human beings actually are instead of how theorists engaged in military strategy presumed us to be 60 years ago.
This is a huge undertaking. It won’t be completed overnight. Nor will it be the sole effort of a few visionary thinkers. But it must start somewhere. My suggestion is that you’ll see it starting to take shape at the boundary between cognitive science and the world of expert practitioners at all levels of governance.
Look there and you’ll probably find me too.
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Posted by mammonmessiah at 11:47 AM
Socialism vs Corporatism
by Ron Paul article link
April 27, 2010 LewRockwell
Lately many have characterized this administration as socialist, or having strong socialist leanings. I differ with this characterization. This is not to say Mr. Obama believes in free-markets by any means. On the contrary, he has done and said much that demonstrates his fundamental misunderstanding and hostility towards the truly free market. But a closer, honest examination of his policies and actions in office reveals that, much like the previous administration, he is very much a corporatist. This in many ways can be more insidious and worse than being an outright socialist.
Socialism is a system where the government directly owns and manages businesses. Corporatism is a system where businesses are nominally in private hands, but are in fact controlled by the government. In a corporatist state, government officials often act in collusion with their favored business interests to design polices that give those interests a monopoly position, to the detriment of both competitors and consumers.
A careful examination of the policies pursued by the Obama administration and his allies in Congress shows that their agenda is corporatist. For example, the health care bill that recently passed does not establish a Canadian-style government-run single-payer health care system. Instead, it relies on mandates forcing every American to purchase private health insurance or pay a fine. It also includes subsidies for low-income Americans and government-run health care “exchanges.” Contrary to the claims of the proponents of the health care bill, large insurance and pharmaceutical companies were enthusiastic supporters of many provisions of this legislation because they knew in the end their bottom lines would be enriched by Obamacare.
Similarly, Obama's “cap-and-trade” legislation provides subsidies and specials privileges to large businesses that engage in “carbon trading.” This is why large corporations, such as General Electric support cap-and-trade.
To call the President a corporatist is not to soft-pedal criticism of his administration. It is merely a more accurate description of the President’s agenda.
When he is a called a socialist, the President and his defenders can easily deflect that charge by pointing out that the historical meaning of socialism is government ownership of industry; under the President’s policies, industry remains in nominally private hands. Using the more accurate term – corporatism – forces the President to defend his policies that increase government control of private industries and expand de facto subsidies to big businesses. This also promotes the understanding that though the current system may not be pure socialism, neither is it free-market since government controls the private sector through taxes, regulations, and subsidies, and has done so for decades.
Using precise terms can prevent future statists from successfully blaming the inevitable failure of their programs on the remnants of the free market that are still allowed to exist. We must not allow the disastrous results of corporatism to be ascribed incorrectly to free market capitalism or used as a justification for more government expansion. Most importantly, we must learn what freedom really is and educate others on how infringements on our economic liberties caused our economic woes in the first place. Government is the problem; it cannot be the solution.
Dr. Ron Paul is a Republican member of Congress from Texas.
LewRockwell The Ron Paul File
Posted by mammonmessiah at 11:44 AM
The New Secessionists
Published on Monday, April 26, 2010 by TruthDig.com
Acts of rebellion which promote moral and political change must be nonviolent. And one of the most potent nonviolent alternatives in the country, which defies the corporate state and calls for an end to imperial wars, is the secessionist movement bubbling up in some two dozen states including Vermont, Texas, Alaska and Hawaii. These movements do not always embrace liberal values. Most of the groups in the South champion a “neo-Confederacy” and are often exclusively male and white. Secessionists, who call for statewide referendums to secede, do not advocate the use of force. It is unclear, however, if some will turn to force if the federal structure ever denies them independence.
These groups at least grasp that the old divisions between liberals and conservatives are obsolete and meaningless. They understand that corporations have carried out a coup d’état. They recognize that our permanent war economy and costly and futile imperial wars are unsustainable and they demand that we take popular action to prevent citizens from being further impoverished and robbed by Wall Street speculators and corporations.
“The defining characteristic of the Second Vermont Republic is that there are two enemies, the United States government and corporate America,” Thomas Naylor, who founded Vermont’s secessionist movement, told me when I reached him by phone at his home 10 miles south of Burlington. “One owns the other one. We are not like the tea party. The underlying premise of the tea party movement is that the system is fixable.”
Naylor rattles off the stark indicators of the nation’s decline, noting that the United States stands near the bottom among industrialized countries in voter turnout, last in health care, last in education and highest in homicide rates, mortality, STDs among juveniles, youth pregnancy, abortion and divorce. The nation, he notes grimly, has trillions in deficits it can never repay, is beset by staggering income disparities, has destroyed its manufacturing base and is the planet’s most egregious polluter and greediest consumer of fossil fuels. With some 40 million Americans living in poverty, tens of millions more in a category called “near poverty” and a permanent underclass trapped by a real unemployment rate of 17 percent , there is ample tinder for internal combustion. If we do not undertake a dramatic reversal soon, he asserts, the country and the global environment will implode with catastrophic consequences.
The secessionist movement is gaining ground in several states, especially Texas, where elected officials increasingly have to contend with secessionist sentiments.
“Our membership has grown tremendously since the bailouts, since the tail end of the Bush administration,” said Daniel Miller, the leader of the Texas Nationalist Movement , when I spoke with him by telephone from his home in the small town of Nederland, Texas. “There is a feeling in Texas that we are being spent into oblivion. We are operating as the cash cow for the states that cannot manage their budgets. With this Congress, Texas has been squarely in their cross hairs, from cap and trade to the alien transfer and exit program. So many legislative pieces coming down the pike are offensive to people here in Texas. The sentiment for independence here is very high. The sentiment inside the Legislature and state capital is one of guarded optimism. There are scores of folks within state government who are supportive of what we are doing, although there is a need to see the public support in a more tangible way. This is why we launched our Let Texas Decide petition drive. We intend to deliver over a million signatures on the opening day of the [state legislative] session on Jan. 11, 2011.”
Miller, like Naylor, expects many in the tea party to migrate to secessionist movements once they realize that they cannot alter the structure or power of the corporate state through electoral politics. Polls in Texas show the secessionists have support from about 35 percent of the state’s population, and Vermont is not far behind.
Naylor, who taught economics at Duke University for 30 years, is, along with Kirkpatrick Sale and Donald Livingston, one of the intellectual godfathers of the secessionist movement. His writing can be found on The Second Vermont Republic website, on the website Secession News and in postings on the Middlebury Institute website. Naylor first proposed secession in his 1997 book “Downsizing the USA.” He comes out of the “small is beautiful” movement, as does Sale. Naylor lives with his wife in the Vermont village of Charlotte.
The Second Vermont Republic arose from the statewide anti-war protests in 2003. It embraces a left-wing populism that makes it unique among the national movements, which usually veer more toward Ron Paul libertarianism. The Vermont movement, like the Texas and Alaska movements, is well organized. It has a bimonthly newspaper called The Vermont Commons, which champions sustainable agriculture and energy supplies based on wind and water, and calls for locally owned banks which will open lines of credit to their communities. Dennis Steele, who is campaigning for governor as a secessionist, runs Radio Free Vermont, which gives a venue to Vermont musicians and groups as well as being a voice of the movement. Vermont, like Texas, was an independent republic, but on March 4, 1791, voted to enter the union. Supporters of the Second Vermont Republic commemorate the anniversary by holding a mock funeral procession through the state capital, Montpelier, with a casket marked “Vermont.” Secessionist candidates in Vermont are currently running for governor, lieutenant governor, eight Senate seats and two House seats.
“The movement, at its core, is anti-authoritarian,” said Sale, who works closely with Naylor and spoke with me from his home in Charleston, S.C. “It includes those who are libertarians and those who are on the anarchic community side. In traditional terms these people are left and right, but they have come very close together in their anti-authoritarianism. Left and right no longer have meaning.”
The movement correctly views the corporate state as a force that has so corrupted the economy, as well as the electoral and judicial process, that it cannot be defeated through traditional routes. It also knows that the corporate state, which looks at the natural world and human beings as commodities to be exploited until exhaustion or collapse occurs, is rapidly cannibalizing the nation and pushing the planet toward irrevocable crisis. And it argues that the corporate state can be dismantled only through radical forms of nonviolent revolt and the dissolution of the United States. As an act of revolt it has many attributes.
“The only way we will ever stop these wars is when we stop paying for them,” Naylor told me. “Vermont contributes about $1.5 billion to the Pentagon’s budget. Do we want to keep supporting these wars? If not, let’s pull out. We have two objectives. The first is returning Vermont to its status as an independent republic. The second is the peaceful dissolution of the empire. I see these as being mutually complementary.”
“The U.S. government has lost its moral authority,” he went on. “It is corrupt to the core. It is owned, operated and controlled by Wall Street and corporate America. Its foreign policy is controlled by the Israeli lobby. It is unsustainable economically, socially, morally, militarily and environmentally. It is ungovernable and therefore unfixable. The question is, do you go down with the Titanic or do you seek other options?”
The leaders of the movement concede that sentiment still outstrips organization. There has not been a large proliferation of new groups, and a few old groups have folded because of a lack of leadership and support. But they insist that an increasing number of Americans are receptive to their ideas.
“The number of groups has not grown as I hoped it would when I started having congresses,” said Sale, who addresses groups around the country. “But the number of people, of individuals, of websites and the number of libertarians who have come around has grown leaps and bounds. Many of those who were disappointed by the treatment of Ron Paul have come to the conclusion that they cannot have a Libertarian Party or a libertarian Republican. They are beginning to talk about secession.”
“Secessionists have to be very careful not to be militaristic,” Sale warned. “This cannot be won by the gun. You can be emphatic in your secessionism, but it won’t happen by carrying guns. I don’t know what the tea party people think they are going to accomplish with guns. I guess it is a statement against the federal government and the fear that Obama is about to have gun control. It appears to be an assertion of individual rights. But the tea party people have not yet understood how they are going to get their view across. They still believe they can elect people, either Republicans or declared conservatives, to office in Washington and have an effect, as if you can escape the culture of Washington and the characteristics of government that has only gotten bigger and will only continue to get bigger. Electing people to the House and Senate is not going to change the characteristics of the system.”
The most pressing problem is that the movement harbors within its ranks Southern secessionists who wrap themselves in the Confederate flag, begin their meetings singing Dixie and celebrate the slave culture of the antebellum South. Secessionist groups such as the Southern National Congress and the more radical League of the South, which the Southern Poverty Law Center has labeled a “racist hate group,” openly embrace a return to uncontested white, male power. And this aspect of the movement deeply disturbs leaders such as Naylor, Sale and Miller.
What all these movements grasp, however, is that the American empire is over. It cannot be sustained. They understand that we must disengage peacefully, learn to speak with a new humility and live with a new simplicity, or see an economic collapse that could trigger a perverted Christian fascism, a ruthless police state and internecine violence.
“There are three or four possible scenarios that will bring down the empire,” Naylor said. “One possibility is a war with Iran. Another will see the Chinese pull the plug on Treasury bills. Even if these do not happen, the infrastructure of the country is decaying. This is a slower process. And they do not have the economy fixed. It is smoke and mirrors. This is why the price of gold is so high. The economy and the inability to stop the wars will alone be enough to bring us down. There is no escape now from our imperial overstretch.”
Copyright © 2010 Truthdig, L.L.C.
Chris Hedges writes a regular column for Truthdig.com . Hedges graduated from Harvard Divinity School and was for nearly two decades a foreign correspondent for The New York Times. He is the author of many books, including: War Is A Force That Gives Us Meaning , What Every Person Should Know About War , and American Fascists: The Christian Right and the War on America. His most recent book is Empire of Illusion: The End of Literacy and the Triumph of Spectacle .
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Hell Yes, Secesh!
Don’t Let The Door Hit You On The Way Out
By David Michael Green article link
April 26, 2010 "Information Clearing House"
Renouncing American Citizenship
by Llewellyn H. Rockwell, Jr. article link
April 27, 2010
Posted by mammonmessiah at 11:33 AM
Sunday, April 25, 2010
Showdown on Wall Street and K Street
by Peter Dreier article link
Sunday, April 25, 2010 CommonDreams
The shake-out of the American economy has left a handful of large banks at the pinnacle of the American corporate power structure. Next week, a coalition of major community organizations, unions, and religious groups will launch a campaign to challenge the economic and political influence of these mega-banks, beginning with a series of protests in San Francisco, Kansas City, Charlotte, Chicago, New York, and Washington, D.C.
As a growing number of banks have collapsed and been gobbled up by larger institutions, the four biggest commercial banks - the Bank of America, Wells Fargo, JP Morgan Chase, and Citigroup - now control about 40% of the nation's $8 trillion in bank deposits. The two largest investment banks - Goldman Sachs and Morgan Stanley - hold one-third of the securities industry's $4.4 trillion in assets.
"We want to use this moment and the rage that the American people have at banks as a way to get into the bigger issues of how Wall Street banks and corporate power have sabotaged the economy and enriched themselves," explained Stephen Lerner, a veteran organizer with the Service Employees International Union (SEIU), who heads the union's campaign on financial reform.
The organizing campaign is spearheaded three community organizing networks - PICO, National People's Action (NPA), and the southeast region of the Industrial Areas Foundation (IAF) - along with SEIU and the AFL-CIO. Organizers believe that the recent victory on health care reform will help propel a similar movement to take on banking giants.
"There's only one group of people in this country who are more hated than insurance companies," Lerner said. "That's the banks and Wall Street. This is not complicated. A bunch of rich, greedy oligarchs crashed the economy and got bailed out by tax payers."
A new public opinion poll sponsored by the nonpartisan Pew Economic Policy Group confirms Lerner's observation. A national survey conducted in March found that 68% of the public have an unfavorable opinion of big banks. Two-thirds of the public blame either the big banks or Congress' failure to regulate banks for the current financial crisis. Seventy-nine percent think it is important for Congress to take action quickly to reform Wall Street's abuses.
To help channel public outrage, the coalition's short-term goal is to push Congress to enact strong consumer protection regulations on the financial industry. Their intermediate goal is to pressure banks to stop the epidemic of foreclosures and renegotiate mortgages so owners can keep their homes. Their long-term goal is to limit the banking industry's political clout and its economic influence. They believe banking should be reorganized so it invests in good jobs, affordable housing, and environmentally-friendly businesses.
"The big banks shattered our economy and left workers and our communities to clean up the pieces. We've lost 8 million jobs, 1 out of every 8 mortgages is in default or foreclosure, and our cities, counties and states teeter on the edge of bankruptcy," said Heather Booth, executive director of Americans for Financial Reform, a coalition of unions, consumer, and community organizations. "Now the same banks that we bailed out with billions of tax dollars are pouring $1.4 million per day into the Senate to stop real Wall Street reform."
"This is a fight about which side are you on -- Main Street or Wall Street? Main Street is organizing, forcing the politicians to decide whether they follow the money or support the American people," Booth noted.
Just as activists hope that voters will reward Congressmembers in November who supported health care reform, they want voters to re-elect politicians who support bank reform and punish politicians who are in the pockets of the bank lobby.
The protests will take place just as the Senate will be debating and voting on bank reform legislation. Progressive Democrats want the bill to include strong consumer protections, requirements that banks renegotiate mortgages for families facing foreclosure, limits on the size of banks, and new regulations against Wall Street gambling with default swaps and derivatives.
The banking industry and its business allies are pushing hard to weaken the proposed regulations. In the past few months, the major banks, along with the U.S. Chamber of Commerce, have dramatically increased their lobbying activities and campaign donations to thwart reform. Senator Mitch McConnell of Kentucky, the Republican leader, has become the banking industry's top ally, but every other Republican and some Democrats also oppose any reform that bank lobbyists don't like.
To rally public opinion, President Barack Obama gave a speech Thursday at Cooper Union in New York, close to Wall Street, and insisted that Congress needed to rein in the risky practices that led to the financial crisis and the recession. He criticized the "battalions of financial industry lobbyists descending on Capitol Hill, as firms spend millions to influence the outcome of this debate."
"It is essential that we learn from the lessons of this crisis, so we don't doom ourselves to repeat it," Obama said. "And make no mistake: That is exactly what will happen if we allow this moment to pass. And that's an outcome that is unacceptable to me, and it's unacceptable to you, the American people."
"Unless your business model depends on bilking people, there's little to fear from these new rules," Obama said to an audience of 700 people that included Goldman Sachs CEO Lloyd Blankfein and executives from JP Morgan Chase, Morgan Stanley, Bank of America, and other financial powerhouses.
"I want to urge you to join us, instead of fighting us in this effort,I'm here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector."
For the activists, the battle to overhaul federal banking regulations is one part of a broader strategy. "We have one eye on winning significant financial reform now and one eye on building a movement for corporate accountability," explained George Goehl, executive director of NPA, which has 25 community organizing affiliates in 14 states.
On Tuesday, April 27, organizers expect more than a thousand consumers, union members, and clergy to march through downtown San Francisco to Wells Fargo's annual shareholder meeting at the Merchants Exchange Building. Some of the protesters who have purchased Wells Fargo stock will confront the board of directors with a list of demands. On that day in Kansas City, family farmers, retirees, veterans and union members from Missouri, Kansas, and Iowa will march through that city's financial district to the Bank of America, an action that organizers are calling "showdown in the heartland."
The following day in Charlotte, N.C., veterans, clergy, and working families hurt by foreclosures and lay-offs will rally at the First United Presbyterian Church and then, proxies in hand, march to Bank of America's annual shareholder meeting at Belk Theater, while in Chicago, unions, community groups, and faith-based activists will march to the corporate offices of Goldman Sachs, whose outrageous executive bonuses, illegal practices, and political influence-peddling have made it the poster child for public anger against big banks. (Last week the Securities and Exchange Commission accused Goldman Sachs of defrauding investors). NPA started the ball rolling last month by announcing and organizing the April 29th march on Wall Street. Organizers now predict over 5,000 protesters, joined by AFL-CIO President Rich Trumka, will march on Thursday.
The protest actions will culminate in three-day "Showdown on K Street" in Washington, D.C. from May 15 to 17. The DC mobilization will focus attention on the connections between the banking industry's political clout through its huge campaign contributions and lobbying warchest. It will include a series of protests at the offices of corporate lobby groups and members of Congress - Democrats and Republicans -- with close ties to the banking establishment.
The protestors have a list of demands for each bank. In San Francisco, for example, they'll insist that Wells Fargo CEO John Stumpf resign from the board of the Financial Services Roundtable, the powerful lobby group that represents the nation's largest banks and which is using its muscle to thwart the proposed federal Consumer Financial Protection Agency, one of the top priorities of the Obama administration and Congressional Democrats.
The grassroots delegation will also ask Wells Fargo to stop rampant foreclosures and evictions of homeowners and tenants.
"Everyday Americans from all walks of life are going to be challenging banks like Wells Fargo to keep families in their homes, to stop predatory and payday lending, and to start investing to create jobs and rebuild our communities" explained Adam Kruggel, director of CCISCO, a PICO affiliate in northern California. "Wells Fargo was one of the biggest subprime lenders in the United States and it has modified less than 8% of the troubled mortgages eligible under the president's Making Home Affordable program. That is unacceptable. It has an awful track record of predatory lending, including offering payday loans to its own customers at annual interest rates of 240%."
The bank reform coalition hopes to popularize a "move the money" campaign to help channel public anger with the banking establishment. Drawing on the boycott tactics of the civil rights and labor movements, and the divestment efforts that helped dismantle apartheid in South Africa, the campaign is based on the idea that Americans should move their money from mega-banks that destroy jobs and communities to financial institutions that act more responsibly.
"Can you imagine what would happen if we could get the major labor unions and religious denominations, and even some local governments, foundations, and universities, to take their pension funds, endowments, and deposits out of banks that engage in abusive practices and into banks that support our families and communities?" asked Gerald Taylor, the southeast director for IAF, a community organizing network with seven chapters in North Carolina, including one in Charlotte, where the Bank of America is headquartered.
In addition to mobilizing for federal reform legislation and pushing banks to address the foreclosure crisis, the coalition wants to draw attention to the banks' responsibility for state and municipal budget crises.
"Cities and states are cutting vital services, and laying off teachers and other employees, because the banks crashed the economy and starved local and state government of the revenues they need," explained Gordon Whitman, director of public policy for PICO, which has 1,200 religious congregations as members in over 150 cities.
"The compensation bonus pool for the big six banks - over $130 billion -- would solve the entire budget crisis for all the states," noted Lerner, the SEIU organizer.
Activists in different cities have been organizing people to push for municipal legislation to hold banks accountable for exacerbating local economic problems. In Oakland, for example, SEIU and several community groups have pressured the City Council to demand that banks renegotiate or cancel interest-rate swaps that cost the city $5.2 million in fees. In Los Angeles, SEIU, LA Voice (a PICO affiliate), and the Alliance of Californians for Community Empowerment (a new organization formed by former leaders and staff of ACORN) worked with City Council member Richard Alarcon on legislation to renegotiate swap deals on municipal bonds and would require the City to move its investments (including $25 billion in pension funds and almost $1 billion in deposits) from financial institutions that failed to cooperate with local, state and national foreclosure-prevention efforts.
At least five states have introduced legislation to explore how their deposits in banks can be used to guarantee reinvestment in their state and more responsible lending practices.
Grassroots organizing against the power of banks goes back to the agrarian Populist movement in the late 1800s. In the 1970s, community organizing against redlining - racial discrimination in mortgage lending and bank divestment from inner cities - led to passage of the Community Reinvestment Act (CRA) in 1977, led by NPA. Over the past decade, ACORN, along with the National Community Reinvestment Coalition, the Center for Responsible Lending, and NPA, led the fight against predatory lending and the foreclosure epidemic. NPA is now mobilizing people in cities around the country to hold banks and bank regulators accountable. Two years ago, for example, NPA brought over 500 people to a protest at Federal Reserve Chairman Ben Bernanke's house in Washington, D.C. Since then, NPA leaders have meet with Bernanke three times, pushing him and his staff to toughen regulations on rip-off "pay day" lenders and to update the CRA.
The battle for bank reform has triggered new alliances. This is the first time that PICO, NPA, and IAF have worked together on a common campaign. And the recent involvement of the labor movement in the battle against Wall Street and the big banks injects additional political clout into the activist coalition.
"We need stronger reform of Wall Street, but we also need a new business model for banking," said PICO's Whitman. "We need to get back to the day when people could trust their banks and banks made their money by lending to homeowners and small businesses, not speculating in the Wall Street casino. We want to squeeze speculation out of the banking system. This is about rebuilding our communities and our economy."
More information about the activities in each city and the coalition's broader agenda can be found at: http://showdowninamerica.org and http://www.ourmoneyourvalues.org.
Peter Dreier is E.P. Clapp Distinguished Professor of Politics, and director of the Urban & Environmental Policy program, at Occidental College. He is coauthor of Place Matters: Metropolitics for the 21st Century and The Next Los Angeles: The Struggle for a Livable City. He writes regularly for the Los Angeles Times, The Nation, and American Prospect.
Posted by mammonmessiah at 2:21 PM
Saturday, April 24, 2010
Moyers and economists James Kwak and Simon Johnson wonder whether the financial powers are more profitable, and more resistant to regulation than ever.
Six Banks Control 60% of Gross National Product
Is the U.S. at the Mercy of an Unstoppable Oligarchy?
By Bill Moyers article link
April 23, 2010 "Bill Moyers Journal"
So even if the Tea Party folks saw the light, what can ordinary Americans do?
That's the question I want to put to my guests, Simon Johnson and James Kwak. They have written this new book, 13 Bankers: The Wall St. Takeover and the Next Financial Meltdown. It's a must read - already a best seller -- and it couldn't have come at a better time. This book could change the debate over financial reform by tipping it in favor of the public.
Simon Johnson is a former chief economist at the International Monetary Fund. He now teaches at MIT's Sloan School of Management and is a Senior Fellow at the Peterson Institute for International Economics.
James Kwak is studying law at Yale Law School - a career he decided to pursue after working as a management consultant at McKinsey & Company and co-founding the successful software company, Guidewire. Together James Kwak and Simon Johnson run the indispensable economic website BaselineScenario.com
Welcome to you both.
Let me get to the blunt conclusion you reach in your book. You say that two years after the devastating financial crisis of '08 our country is still at the mercy of an oligarchy that is bigger, more profitable, and more resistant to regulation than ever. Correct?
Simon Johnson: Absolutely correct, Bill. The big banks became stronger as a result of the bailout. That may seem extraordinary, but it's really true. They're turning that increased economic clout into more political power. And they're using that political power to go out and take the same sort of risks that got us into disaster in September 2008.
Bill Moyers: And your definition of oligarchy is?
Simon Johnson: Oligarchy is just- it's a very simple, straightforward idea from Aristotle. It's political power based on economic power. And it's the rise of the banks in economic terms, which we document at length, that it'd turn into political power. And they then feed that back into more deregulation, more opportunities to go out and take reckless risks and-- and capture huge amounts of money.
Bill Moyers: And you say that these this oligarchy consists of six megabanks. What are the six banks?
James Kwak: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.
Bill Moyers: And you write that they control 60 percent of our gross national product?
James Kwak: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.
Bill Moyers: And what's the threat from an oligarchy of this size and scale?
Simon Johnson: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.
Bill Moyers: So, you're not kidding when you say it's an oligarchy?
James Kwak: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.
Simon Johnson: I know people react a little negatively when you use this term for the United States. But it means political power derived from economic power. That's what we're looking at here. It's disproportionate, it's unfair, it is very unproductive, by the way. Undermines business in this society. And it's an oligarchy like we see in other countries.
Bill Moyers: And you say they continue to hold the global economy hostage?
James Kwak: Exactly. Because what's happened- what we learned in 2008 were certain institutions are so big and so interconnected that if they were to fail, they would cause systemic shocks throughout the economy. That's essentially what happened in September 2008 when Lehman Brothers collapsed. And what's remarkable, and I think what essentially proves the point of our book is that almost two years later, nothing has changed.
Or the only thing that has changed is that these banks have gotten larger, more powerful, both economically and politically. And they've been flexing their muscles in Washington for the last year and a half. So Neal Wolin, the Deputy Treasury Secretary gave a blistering speech to the U.S. Chamber of Commerce in which he said, look, the financial sector has been spending more than one million dollars per day lobbying against the reforms we need to fix the financial system. Now, Simon and I think those reforms that the Administration has proposed do not go far enough. But we think they're certainly better than nothing. What Wall Street wants is they want nothing. They want to stop this in its tracks and go back to where we were five years ago.
Simon Johnson: It's amazing, Bill. But this is this is politics and this is money. And you know, there's a ground game, which is campaign contributions, which are surging in. I'm sure on both sides of the aisle. And there's also the ideological space. It's amazing. The Chamber of Commerce that claims to represent the broad cross section of American business is siding with six big banks, who favor policies that are directly contrary to the interests of most of the membership of the Chamber of Commerce. And that's just not just me saying that. That's Neal Wolin. That's Treasury. That's the White House saying that now. Calling fortunately, they've come to the point where they're willing to call the Chamber of Commerce on that. But I don't know if that message is getting through to people.
James Kwak: You see what the bankers have done is they have taken a basic principle which is more or less true. Which is that free financial markets do enable money to go to the places where people need it. But on top of that, they've erected a system that is indescribably complex. And gives many opportunities to make money at the expense of their customers, at the expense of their counterparties. Even at the expense of their own employers. So, one of the things that has happened has been that Wall Street finance has become so complex and the internal systems of Wall Street banks has become so complex that if you are a smart banker, who is out to maximize your own income, you can find the loopholes in the system and you can exploit them, even if it means taking money from your own-- from your own company
Bill Moyers: You've been writing this week on your website-- about this hedge fund in Chicago that's made a lot of money. In effect, betting against the American Dream. What was that?
James Kwak: Magnetar is a hedge fund which means that other people gave them money to invest. And their job is to make as much money as possible. And these were the smart guys in the room. They saw that the system was broken. And they found a specific way to exploit it. And they knew that they could go for example, they could go to Wall Street banks and the banks would collaborate in making these extremely toxic securities. Because they knew what the bankers incentives were. They knew that the banker's incentives were to do the deal, to do the transaction, to get the fees up front. And they knew that there was nobody watching out for the investors. There was nobody watching out to make sure that securities they manufactured were actually good securities. But essentially what they were doing is they wanted to short the housing market. And they shorted the market in such a way that they actually made the problem worse, because what they did is they encouraged they tried to create these very toxic securities explicitly so that they could then short those securities. And that's why in a sense, they were they were shorting the American Dream. But what the real story of Magnetar, I think, is that they were exploiting a system that was deeply broken.
So, we like to think that the financial system we have in Wall Street are set up so that as people try to make lots of money they are they are indirectly helping the economy by making sure their capital goes where it's needed most. What the Magnetar story shows us that this is a casino, where you can make money you can make money exploiting the weaknesses in the casino. And it has nothing to do with the American Dream. It has nothing to do with making sure that capital goes to the places where it's needed most. I have to say that we owe a great to debt to "ProPublica" and "Planet Money" and "This American Life" for uncovering this story
Bill Moyers: Public radio's excellent program, "This American Life", did a terrific broadcast on this subject, based upon the ProPublica investigation that you talked about. And there's a song in it that I have to play for the two of you and for my audience. Take a listen.
UNIDENTIFIED MAN: Step one. You write a check for 10 million dollars. Hand the check to a Wall Street bank, and ask them to make us a CDO. Step two: they create the CDO, using risky stuff, very risky stuff, extremely risky stuff. Step three: other investors commit hundreds of millions of dollars to the CDO. Step four: we bet against the CDO, using a credit default swap. Step five: the housing market crashes. The CDO's value goes to zero, our bet pays off and we make hundreds of millions of dollars and before you can say step six, we're rich! We're going to bet against the American Dream, we're going to be on the winning team, purchase risky debt on a massive scale. Then place a bet that the debt will fail. Hundreds of millions for Magnetar, the economy collapsing like a dying star. No one will know till it's on NPR, and who cares? It's time to hit the town, this sucker could go down. The housing market's losing steam. And all we got to do to make our dreams come true is bet against the American Dream!
Bill Moyers: You're smiling, James, but is it really that funny?
James Kwak: Well for decades, we've been told that Wall Street and financial innovation were promoting the American Dream. And what they've I think what the show and the song have really hit the hit the nail on is that in fact, you can make even more money betting against the American Dream. And that's the kind of system we have today.
Simon Johnson: My bumper sticker from this and I hope it does become a bumper sticker is, "Trust me, I'm a banker."
I mean, you need to break through there's a level of progress here, Bill. Which is when people can laugh about it. When people can break it down into pieces. When you've got the 60-second version. And you can hammer that. And people understand it. Then you're starting to fight back. This is about ideology. This is about belief. This is about these guys are smart. These guys are well paid. So they must know what they're doing. And that's wrong.
Bill Moyers: You wrote on your website this week about how JPMorgan Chase lost $880 million on one of these kind of whacky obscure deals? But the executives still paid themselves millions of dollars in up front fees. And you conclude that bankers placed a ticking bomb on their own bank balance sheet. It exploded and personally they still made money.
James Kwak: Exactly. Because this is an example so, this is from the "ProPublica" investigation of Magnetar. essentially the bankers at JPMorgan Chase involved in the transaction created a new CDO. A new collateralized debt obligation. Which was very, very toxic. And either they knew at the time that it was toxic, or they should have known, I have no way of knowing. JPMorgan decided to hold onto most of this toxic product they-- they had built. A billion dollars worth of toxic product. And then when the market collapsed, it turned out they lost $880 million on that position.
So, if we think about it, there are really two possibilities here. The bankers involved in the transaction either really thought that this was a good product and a good investment, in which case they're incompetent. Or they had- they may have doubts, they may have thought it was toxic, but they knew that the way the internal systems at JPMorgan Chase worked, they could get the fees front, they could get bonuses based on those fees, and leave the bomb for later.
Bill Moyers: Somebody wrote on your blog this week, "If I were to buy an old house. Make some cosmetic improvements that mask an underlying rot. Got my insurance company to write an exorbitant homeowners policy exceeding any leans against the property. Then burned it down, wouldn't that be fraud?" Did you answer this guy?
James Kwak: I haven't. That would
Bill Moyers: Would you?
James Kwak: That would be fraud.
Bill Moyers: That would be fraud. So, explain to me how you manage to lose $880 million on your own company's money to make a quick buck for yourself and you get away with it?
James Kwak: Well, I think that there are laws in this area. So, for any securities, there has to be-- for this type of security, there has to be a document which explains those securities. And that's a document that you give to the investors who might buy them. And there are laws governing those. And if you put in facts in there that that are materially false. That you know to be true, that is fraud. But I think the problem is that in many of these cases, I don't think that many of these people are criminals. I get a lot of criticism for saying that I don't think these people are criminals. But I think it's relatively easy to write these documents in such a way that you're not saying anything you know to be false. And so, they pass through, they pass through any kind of you avoid any possible criminal liabilities there. But yet, they can be misleading in a way that encourages people to buy them.
Simon Johnson: I think it's actually worse in some instance, Bill. Certainly for offshore activities. Goldman Sachs was involved in hiding a lot of Greek government debt. They then sold new Greek government obligations to people in the United States as far as far as we understand it. And didn't reveal that they'd hidden the levels of the true levels of government debt. Now, that is withholding material information. That's a violation of rule 10B-5. and where is the legal process, you should ask, that holds them accountable for that? I've talked to lots of very good lawyers about this. And there are many complicated stories about why Goldman Sachs won't face any civil action or criminal action. There are huge loopholes in our legal system with regard to financial services that need to be closed.
Bill Moyers: There were some interesting hearings, as I know you saw, before the Financial Crisis Inquiry Commission. And some of the first, some of the most interesting testimony came from the former honchos at Citigroup. Mr. Prince and Mr. Rubin. Take a look.
CHARLES PRINCE: Let me start by saying I'm sorry. I'm sorry that our management team, starting with me, like so many others, could not see the unprecedented market collapse that lay before us.
ROBERT RUBIN: My role at Citi, defined at the outset, was to engage with clients across the bank's businesses, here and abroad. Having spent my career in positions with significant operational responsibility at Treasury and, prior to that, at Goldman Sachs, I no longer wanted such a role at this stage of my life, and my agreement with Citi provided that I would have no management of personnel or operations.
ROBERT RUBIN: But almost all of us, including me, who were involved in the financial system, missed the powerful combination of factors that led to this crisis and the serious possibility of a massive crisis. We all bear responsibility for not recognizing this, and I deeply regret that.
PHIL ANGELIDES: The two of you, in charge of this organization did not seem to have a grip on what was happening. I don't know that you can have it two ways. You were either were pulling the levers or asleep at the switch.
Bill Moyers: How can it be that a Robert Rubin, former Secretary of the Treasury, pulls down $100 million as a senior advisor to Citigroup and claims he doesn't know the risk that was involved in what he was trying to sell to clients and foreign officials? How can that be?
James Kwak: I think there are two things. There's a narrow and a broad view of this. The narrow view is I think Rubin is actually not lying. I think it is true that Rubin did not know what the risks were. Although he certainly should have known what the risks were. And that's because he was fully subscribed to this ideology that free markets are good. That the market will take care of itself. That, he also suffered from a lot of the blindness that corporate officers and directors have. Corporate officers and directors manage these enormous organizations with tens of hundreds of thousands of people. They have very little idea what's going on. They're getting their information from subordinates, who are giving them a filtered view of the world. On the other hand, when he says, no one could have foreseen this. This is what I call an intellectual cover up. And I say that because it's very disingenuous. Over the past 20 years, these banks used their economic power and their political power to engineer an unregulated financial environment in which precisely this sort of thing could happen. And in that sense, I think that this was not an accident. It was not a natural disaster. It was not unforeseeable. It was the product of the efforts by the sector over the past 20 years to reshape Washington and to engineer an environment that would allow them to make as much money as possible. Simon talked earlier about money. And we know that the financial sector, especially Wall Street, has been, has made enormous contributions to both campaign contributions and lobbying expenses. But I think there were, there were two more potent weapons in their arsenal. One is the revolving door. So, we've seen an enormous number of people passing back and forth between Washington and Wall Street over the past 20 years. This is not a new phenomenon. It happens in every industry. But there are certain things that make it especially pernicious when it comes to finance. One is that, one is a question of incentives. So, compared to other industries, Wall Street can simply offer enormous amounts of money. I'm not saying that everyone did that. I'm not saying that even the majority of people did that. But that is, that is very clear.
Bill Moyers: The New York Times has a story this week saying that 125 former members of Congress and staffers are now working for the financial industry in Washington. One of them is Michael Oxley, whose name is on one of the most important pieces of business legislation in the last 20 years. The Sarbanes-Oxley bill, which was designed to impose some very strict accounting rules after Enron on all of this. And there he is now, he's a lobbyist for the securities industry.
Simon Johnson: But Bill, it goes even further and deeper than that. Robert Rubin was Secretary of the Treasury in the 1990s. He oversaw the deregulation. He fought hard against Brooksley Born, the only regulator in living memory who tried to prevent derivatives from getting out of control. He then went to Citigroup. He presided over this nonsense and this mess. He's now and he was he's clearly éminence grise of this administration. Mr. Geithner and Mr. Summers are his protégés. But that's, that's not all. Next week, the Hamilton Project, a project of the Brookings Institution founded by Mr. Rubin, will have a big public event. Probably Mr. Rubin's most prominent Washington appearance since the crisis broke. The headline act at this event will be Vice President Joe Biden. Now, maybe Mr. Biden will be taking on the view of finance that we all should fear greatly. But I'm not so optimistic.
Bill Moyers: You know, I don't get it. Recently when "Newsweek" wanted to give big space to somebody to explain how we get out of this, who wrote the piece? Robert Rubin. I mean, are they locked into this worldview so that they cannot see the consequences of their own actions?
James Kwak: Well, I think there are a couple things going on. One of the things we talk about in the book is how the Democratic Party became taken over by this Wall Street friendly view in the 1990s, which is, you know, extremely important, because in the 1980s, we had a deregulatory administration that was largely opposed by a Democratic Congress. And it became very convenient for Democrats, because if you believed in the ideology of finance, you could sincerely think, I am a Democrat, I am a servant of the poor and the working class. And yet, I can take campaign contributions from Wall Street, because I sincerely believe that Wall Street is doing what's best, what's in the interest of the country.
I think it's been exposed in the last year and a half that a lot of what Wall Street did was not in the best interest of the country, not in the interest of the people getting these subprime loans, not in the interest of the taxpayer who was paying for the immense fiscal costs of the financial crisis and the recession. But it's, there's a curious time lag going on in the, in the Wall Street, intellectual and political establishment, where they think they're still in 2005.
Simon Johnson: As I travel around the country, Bill, I'm really struck by the fact that while people in Washington talk about populist anger in the country, most of what I encounter is legitimate, sensible anger. People actually understand what happened. They understand what went wrong. And they want to stop it. And the banks don't get this. The belief system on Wall Street is the same. Jamie Dimon, head of JPMorgan Chase, one of the most powerful men in the country. If you don't know his name, you should look him up because this is a man to fear.
Bill Moyers: Very close to the President. Has dinner- lunch with the President.
Simon Johnson: The President called him a savvy businessman, recently. Jamie Dimon told his shareholders, we just had probably our best year ever. They didn't have their best year ever. They went through crisis. They were saved like the rest of the financial system by the government, by the taxpayers, but that's not how they see it. That's not what they believe. That's really important. That belief must be shaken if we're to make any progress at all.
Bill Moyers: But we can't compete with those lobbying dollars. We can't compete with this interlocking oligarchy that you say. That's a fact.
Simon Johnson: Bill, in 1902, when Theodore Roosevelt took on the industrial trusts, nobody knew what he was doing. Nobody thought he could win. The Senate was called the Millionaires Club for a reason. And it wasn't even any theory. The antitrust theory, everything we know and believe about monopoly, why monopoly is bad for society, didn't really exist, certainly not in the mainstream consensus, when Roosevelt decided to take on J.P. Morgan, okay?
Ten years later, the mainstream consensus has shifted completely. People understood from the debate and from the struggle, from the fact- from the way the trusts fought back and the way they spent their money, they began to understand this was profoundly dangerous, politically and socially. 1912, everyone agreed that breaking up Standard Oil was a good idea. Had to be done. They broke into 35 companies, most of them did well. The shareholders actually made money. It's a very American resolution, Bill. And it's very clear that we've had this confrontation before in American history: Andrew Jackson against the Second Bank of the United States in the 1830s, Jackson won, barely; Theodore Roosevelt, the beginning of the 20th Century; FDR in the 1930s.
The American democracy was not given to us on a platter. It is not ours for all time, irrespective of our efforts. Either people organize and they find political leadership to take this on, or we are going to be in big trouble, okay? Now, I agree, we don't have Theodore Roosevelt. I agree. The only Senator who speaks complete truth and clarity on this issue is Ted Kaufman from Delaware, who's an appointed Senator, he got- he was appointed to Joe Biden's seat, and he's not running for reelection. He therefore doesn't care about the money. I take that point. But there are others. There must be others. We must find them and we must fund them, individually, sufficiently, to fight against this nonsense from the corporate sector.
I would like to emphasize, Bill, I'm a professional entrepreneurship, James is a successful entrepreneur. We're not anti-finance. We have many people endorsing the book, backing us, and you know, they, we put their blurbs in the book for a reason, who are from finance. Who really appreciate and understand this key point. Which is the complexity has gone too far. It's become dangerous. And we need to return our financial system to a simpler, more direct, easier to manage way.
Bill Moyers: You both paid attention last week, to the hearings in Washington, on the Financial Crisis Inquiry Commission. Was there a theme that you heard emerge there?
James Kwak: I think the biggest theme that I heard emerge was that this was an innocent mistake. So, what I mean by that is-
Bill Moyers: You mean the collapse of 2008? All of this? What- was-
James Kwak: Exactly.
Bill Moyers: An accident?
James Kwak: Yes, an accident in the sense that-
Bill Moyers: Natural disaster?
James Kwak: As we heard Chuck Prince say and Robert Rubin say, we couldn't see it coming. These were, there were risks that build up in the system, and our models didn't account for it. We're sorry that it happened. Not even, we're sorry that we did it. We're sorry that it happened.
And I think that this is, I mean, it's unfortunate if they really believe this. Because again, if we just take a very small example, one of the things that clearly went wrong is these banks were not able to manage their own risk. They did not know what positions they had. They did not know what market forces they were exposed to. You would think that should be the first job of a bank. And I don't think this was an innocent mistake. And I say that for this reason. It was in the bank's short term financial interest to underestimate their risk. Because if they had estimated their risk accurately, they should have had to set more capital aside, they would have been less profitable.
So, yes, it's possible that the CEOs of these banks honestly did not understand their risk positions. But that mistake-- there was an incentive behind that mistake. You know, banks never overestimate their risk. These mistakes always only go in one direction. Because that's the direction they have an incentive to make the mistake in.
Bill Moyers: What do you mean they have an incentive to make a mistake?
James Kwak: So, in the short term, a bank's profitability is going to depend on how much capital it has to set aside. So, in banking, if I have a certain position, I have to set aside a certain amount of capital to protect myself from that position going bad. If I think the position is less risky than it actually is, I'm going to set aside less capital to cover that position, and that's going to give me a higher profit margin.
If I'm the head of this bank, that means that in the short term, I'm going to have higher profits, higher stock price, more money for me, but I'm underestimating the risk of something blowing up several years down the line. But we know that the, essentially, the incentive systems within these banks favor short term profits over long term solvency.
Simon Johnson: The most profound thing, observation, on this structure, inadvertent, I would say, observation, was by Chuck Prince, the former head of Citigroup. In July 2007, right before the whole structure began to crumble. He said, "As long as the music is playing, you've got to get up and dance." And that's a statement about the incentive structure. Saying, well, everybody's doing it. That's how we all make money. We've got to do it, too. I'm just a bank doing what all the other banks are doing. That's absolutely the heart of the problem. I would also say and tell you, and emphasize, these people will not come out and debate with us. The heads of these companies or their representatives, they will not come out. They're afraid. They don't have the substance. They don't have the arguments. We have the evidence. They have the lobbyists. And that's all they have.
Bill Moyers: They've got the power, the muscle, the money.
Simon Johnson: They have money.
Bill Moyers: You just have the arguments. You just have the facts. On your side.
Simon Johnson: Absolutely. That's exactly what it comes down to.
Bill Moyers: Let me show you one of my favorite moments of the week. The commission on the crisis is looking into two former executives of the big mortgage giants, Fannie Mae and Freddie Mac. And the Fannie Mae guy tries to say, what happened was Congress made us do it.
BILL THOMAS: Was there an opportunity, perhaps, to reprioritize your charter and focus on those things that were most relevant in the marketplace that would have made the institution more sound?
ROBERT J. LEVIN: That wasn't done at my pay grade.
BILL THOMAS: My understanding is, between 2000 and 2008, you made $45 million. So only people above 45 thousand-- 45, excuse me, million dollars, between two and 2008, could answer that question?
ROBERT J. LEVIN: What I meant by the, what I was addressing was the question of, could we have affected the charter act--
BILL THOMAS: Right. And it was above--
ROBERT J. LEVIN: Of the company--
BILL THOMAS: Your pay grade.
ROBERT J. LEVIN: Yes. And my language was sloppy, and--
BILL THOMAS: No, it wasn't sloppy.
ROBERT J. LEVIN: And what I meant by that--
BILL THOMAS: It was flippant, if you want that as a choice.
ROBERT J. LEVIN: What I meant by that, sir, was that that was in the purview of the Congress, not the company.
Bill Moyers: You're laughing.
Simon Johnson: So, look, what I say to my, to all my Republican friends: on Fannie Mae and Freddie Mac, you were right. They became too big to fail. They captured Congress. They were known as some of the most formidable financial lobbyists in the 1990s. They argued for the rights to take on these kinds of risks, okay?
And the Republicans were right. The Republicans called them on this. But now it's the big private banks that have the same incentive structure. That have bulked themselves up so big that you can't let them fail. That's what we saw in September 2008. Hank Paulson looked at his options. And they are all pretty awful. And I'm not a big fan of Hank Paulson, but I think the moment where he looked at it, he was right. That if you let JPMorgan Chase or Goldman Sachs fail, the consequences would have been devastating, because they're so big. It's a Fannie May and Freddie Mac structure come to Wall Street, come to the top guys on Wall Street. And our Republican colleagues and friends should recognize this, they should acknowledge it. And then we can all fix this together.
Bill Moyers: Well then why is Mitch McConnell, the Senator from Kentucky, who is the Republican Leader in the Senate saying what he said this week? Let me show you from his statement.
SEN. MITCH MCCONNELL: If there's one thing Americans agree on when it comes to financial reform, it's that it's absolutely certain they agree on this: never again, never again should taxpayers be expected to bail out Wall Street from its own mistakes [...] This bill not only allows for taxpayer-funded bailouts of Wall Street banks, it institutionalizes them. The way to solve the problem is to let the people who made the mistakes pay for them. We won't solve this problem until the biggest banks are allowed to fail.
Bill Moyers: He seems to be saying what you say, right?
Simon Johnson: It's a clever piece of political manipulation. It's not at all what we say. What he says is dangerous and deliberately misleading.
Bill Moyers: How so?
Simon Johnson: He says let the biggest banks fail, go bankrupt, don't do anything, leave the situation as it is now and when they get in trouble, let them fail. If you do that, you'll have catastrophe. The bankruptcy system clearly and manifestly cannot deal with the failure of a complex, global, financial institution. And we have the evidence before us in what happened after Lehman Brothers failed. That was bankruptcy. It caused chaos around the world, Bill. That's what the Republicans are advocating. Is we just leave things as they are and next time we'll take that chaos and we'll get a second Great Depression. We're arguing for reform. We're arguing for change. We're arguing for ways to make those biggest banks smaller and safer. If they were small enough to fail, that's a very different story. And that's a much safer place to be.
Bill Moyers: What do these big six banks think about what Senator McConnell is saying?
James Kwak: Well, the big six banks don't want any reform at all, essentially. So, I think that they are, and there's some evidence that Senator McConnell has been talking to the big banks and to other people on Wall Street.
Bill Moyers: There have been published reports that he attended a fundraiser with hedge funds and other Wall Street poobahs just last week, before he made this statement. And the reporters, knowing that he had been at this big fundraiser for hedge fund and Wall Street tycoons a week before, begin to press him in an unusual, and actually promising way. Take a look at this.
REPORTER: How do you push back against this perception that you're doing the bidding of the large banks? You know, there was a report that you guys met with hedge fund managers in New York. A lot of people are viewing this particular line of argument, this bailout argument as spin--
SEN. MITCH MCCONNELL: You could talk to the community bankers in Kentucky.
REPORTER: I'm not asking you about the community bankers--
SEN. MITCH MCCONNELL: But, I'm telling you about the community bankers in Kentucky. This is not, everybody--
REPORTER: Have you talked with other people other than community bankers?
SEN. MITCH MCCONNELL: Well, sure. We talk to people all the time. I'm not denying that. What's wrong with that? That's how we learn how people feel about legislation. But the community bankers in Kentucky, the little guys, the main street guys, are overwhelmingly opposed to this bill.
REPORTER: Well what would you say to folks who say that this is just spin to deflect attention from the fact that you're representing the large banks?
Bill Moyers: So, he deflects their questions about being at this meeting with the large banks, the oligarchs, as you called them. And talks about community banks back in Kentucky. What do you make of that?
Simon Johnson: Well, two things, Bill. First of all, he's embarrassed, as he should be, and that's good. I don't think they used to be embarrassed. I think-- I hope Vice President Biden is somewhat embarrassed by the event he's going to attend next week with Robert Rubin, unless he criticizes Rubin and goes after Rubin's view of the world. In which case, I'm okay with that.
James Kwak: This other part of the problem which Simon and I talk about more in the book, and that we don't think is fully solved by the legislation in the Senate, is why do you have to have these too big to fail banks in the first place? So, we think that's the obvious and simplest and almost unarguable solution that you should simply not have banks that are too big and too interconnected to fail.
Simon Johnson: There are no benefits to society, Bill, from having banks that are larger than $100 billion in total assets. This is a well-established fact. The evidence does-
Bill Moyers: You make the case.
Simon Johnson: There's nearly 100 pages of footnotes for a reason.
Bill Moyers: But don't let the facts get in the way.
Simon Johnson: I understand. But there's no evidence, okay? We've let our banks get to $2 trillion-- Citigroup when it almost failed or did fail in fall 2008 was a $2.5 trillion bank. Jamie Dimon runs a $2 trillion bank at JPMorgan Chase and says, if we're big, it's 'cause we're beautiful and efficient. And we should be allowed to get bigger. It's not true. They're big because of the government subsidy, right? That's what gives them the profits at this level. If they get bigger, they'll become more dangerous. That's, those are the costs. On the benefit side, there's no economy of scale or scope or anything else to support the case that banks bigger than $100 billion. That's on a pure cost/benefit basis.
James Kwak: So, there's no way that Jamie Dimon, who according to many observers is perhaps the savviest bank CEO, the best one out there, there's no way that he can know what's going on within his organization. There's no way he can even have an information system that will let him know, efficiently, all the things that he needs to know. So, why is JPMorgan Chase so big? One reason is that it's in the interest of CEOs to have large banks. Because if you have, the larger your bank, the bigger your salary. But then at the same time, it creates this incentive among the traders, the people who really make the money or lose the money in these banks. It creates an incentive to the traders to essentially exploit the management failings of the company.
Bill Moyers: The toughest hearing in Washington this week was conducted by Senator Carl Levin in the Senate, looking into Washington Mutual. That's the largest bank ever to go under in our history, and there are some friends of mine in Washington say there's some possible criminal indictments going to be coming out of this. Let me show you Senator Levin laying out some of the evidence.
SEN. CARL LEVIN: To keep that conveyor belt running and feed the securitization machine on Wall Street, Washington Mutual engaged in lending practices that created a mortgage time bomb...WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage-backed securities. Because volume and speed were king, loan quality fell by the wayside and WaMu churned out more and more loans that were high risk and poor quality.
Destructive compensation schemes played a role in the problems just described. These incentives contributed to shoddy lending practices in which credit evaluations took a back seat to approving as many loans as possible.
Bill Moyers: He goes on, you know? There's evidence that WaMu knowingly sold fraudulent loans to investors in the form of securities. That loan offices were falsifying documentation in order to churn out as many lousy loans as they could. And that senior management was putting pressure on the loan officers to do just this. And he claims, what we were talking about, that destructive compensation schemes were part of the problem.
James Kwak: I think that some people may go to jail. I think that falsifying loan documents, I think there's a good chance people could go to jail for that. I think that if there are- you know, when you get the emails of people at midlevel managers at these banks saying, you know, falsify the loan documents. They might go to jail as well. I don't think anyone who's high up in these banks is going to go to jail for this reason.
I think that, for example, these loans were eventually sold on to investment banks which used them to manufacture new securities. Those investment banks were getting documents from Washington Mutual. These are like representations and warranties. So Washington Mutual is saying, you know, these loans meet these criteria. And the investment bank is going to say, I got this document from Washington Mutual. They told me the loans were good. You can't send me to jail.
And he's absolutely right. So, you've got investment bankers who must have known. Who should have known that a lot of these loans are bad. But they've got a piece of paper from the person selling them the loan saying they meet these criteria. He's pretty much Scott free when it comes to criminal liability. So--
Bill Moyers: Mistakes were made, but not by me, right?
James Kwak: Exactly.
Bill Moyers: I mean, that seems to be the mantra that came through all these hearings this week: mistakes were made but not by me.
Simon Johnson: Or, no, I think they also say, Bill, well, everyone made mistakes, Bill. You know, we're just human. This was beyond our control. And that's not true, these are systems they controlled, they designed. Mr. Rubin designed this, right? And I want to point out there's something very interesting in this WaMu conversation.
It's only when a firm collapses that you get full discovery. Now, Senator Levin is a great voice on this. And I think he's absolutely nailing this. But he only has the ability to get at this level of detail and documentation from a company that failed like WaMu. For the people who were able to keep going. The Goldman Sachses of this world, you'll never know what they were really up to.
These are incredibly smart people. They're very well paid. They have ever incentive. The regulators are totally outgunned. It's not an accident that this complexity allows them to get away with it. It's by design. That's the system. Not a conspiracy, Bill. Don't say that.
Bill Moyers: I wouldn't.
Simon Johnson: It's a system of--
Bill Moyers: A system.
Simon Johnson: It's a system of beliefs and incentives, much more profoundly dangerous than a conspiracy.
Bill Moyers: Why?
Simon Johnson: Conspiracies you can unroot. Conspiracies you can have, you know, a couple of hearings. People can understand it on TV. You get the sound bite. This is very complex. This is about what many, many PhDs and specialists in finance have cooked up over 20 years with the active participation of the people who were supposed to oversee that in Washington.
Bill Moyers: Is this what the blogger meant when he posted on "The Baseline Scenario" this week, "Unnecessary complexity just creates rich opportunities for systemic corruption"?
James Kwak: That is certainly one of the things he meant.
Bill Moyers: What should be the purpose of reform? Should it change the behavior of Wall Street, or should it change the regulation of Wall Street? And there is a difference, is there not?
Simon Johnson: Absolutely. Look, I don't know if this will work or not. I don't know if at the end of the day, we will end up supporting the bill. I hope we will, okay? But whatever happens, this is one legislative cycle. Theodore Roosevelt did not change the mainstream consensus in this country with regard to power and monopoly and the dangerous side effects of big business overnight.
He didn't do it in one year or two years. It was a ten year process. The consensus has to change, Bill. And regulation, the role of regulation or understanding of regulation with regard to finance has to change. The regulation is there to limit the downside to society and to make sure that all of these activities have as much as possible of the positive effect on the economy without generating these massive negative shocks. And we're a long way from that point.
James Kwak: I think the distinction you made is a very good one. Between changing the regulation of Wall Street and changing Wall Street itself. I think the bill does a lot of things that will improve the regulatory system.
I think it does not do a lot to change Wall Street. Certainly, better regulation will change Wall Street a little bit, but some of the basic fundamental issues, I think, for example, the fact that in many realms, Wall Street banks knowingly make money by finding, because they want to put on a trade, they find a sucker to take the other side of that trade.
They're making money directly off of their customers. You can't really have it any other way when you're engaged in proprietary trading. These, this is not going to change. The fact that we have these enormous banks that are too big to manage and that have a competitive advantage, because they're big. That's not going to change.
And that's one reason I think why it's not going to satisfy the many people in America right now who are upset and frustrated about what's happen. Because they're going to see that what we've done is we've made Washington a little bit better at regulating Wall Street. We haven't changed the fundamental causes.
Bill Moyers: Well, I've seen one regulatory agency after another taken over by the very industries they were supposed to regulate.
Simon Johnson: This is absolutely right, Bill. And, you know, the person who nailed this intellectually a long time ago was from the University of Chicago. George Stigler. Not a man of the left. He got a Nobel Prize for his observation. All regulated industries end up with the industry capturing the regulators.
And what's happened to us is a Stigler, exactly what Stigler warned against on a massive scale. And you have to think very hard about this. The Administration still argues that we should delegate responsibility, going forward, for lots of things around finance. Like how much capital you should have. Delegate that to the regulators.
Now, that's crazy. That's not acceptable. That is not what they should do. Particularly because, and any Democrat should say, well, wait a minute, next time a free market President who doesn't believe in regulation comes in will gut the system. And any person from the right who's read Stigler should say, Well, these regulators are just going to get captured. You've got to put it in legislation. You've got to design the legislation. You've got to go after the things that can be legislated. Congress must not abdicate this responsibility.
Bill Moyers: So, you would break up the banks. That's what you would do, right?
Simon Johnson: We would set a hard size cap on the banks. And the banks, in order to comply with that, would have to break themselves up. So, take a bank like Goldman Sachs, for example. It's about ten times bigger than what we would be comfortable with. And, you put that cap in-- they have to figure out how to do it. They have a fiduciary responsibility to their shareholders not to lose value as they comply with this law, not a regulation, law, right? Our book is called "13 Bankers" because it was 13 bankers who were pulled into the White House last March, and they were saved completely and unconditionally in the most amazing deal ever: their jobs, their pensions, their board of directors, their empires. But the title is also an echo of a remark made forcefully in 1998 by Larry Summers, who was then Deputy Treasury Secretary to Brooksley Born, who was trying to regulate over the counter derivatives.
And she was way ahead of her time, by the way. None of this nonsense existed. But she had- she saw this coming in a very profound sense. And she wanted to act in a preemptive and preventive way. Now, Larry Summers called her up. This is according to the public record and it's not been disputed by any of the protagonists here.
He called her up and he said, Brooksley, if you do what you want to do, which is regulate the derivatives. Over- regulate all this over the counter derivatives, you- I have 13 bankers in my office who say you will cause the greatest financial crisis since World War II., right? That was what he believed. That was the prevailing philosophy of the Rubin wing, the Wall Street wing of the Democratic Party.
That was Alan Greenspan's view. That is what brought us to this point. The idea that if you regulate, in any fashion, in any form, you will cause problems, you will prevent growth, you will cause crisis. That view is profoundly wrong. It has been manifestly and repeatedly demonstrated to be wrong. And the people who hold that view must change their minds or they should be voted out of office.
Bill Moyers: If Wall Street's behavior doesn't change, can we have another financial catastrophe like the one in 2008?
James Kwak: The definition of insanity is repeating the same thing over and over again and expecting a difficult result. And I think one of the core messages in our book is that the fundamental conditions of the financial system today are the same as the ones we had leading up to this crisis. And it would be folly to expect a different outcome.
Now, the legislation will help in certain ways. It will certainly, you know, it'll bolt the barn door after the horses have fled. The Consumer Financial Protection Agency will make it much harder to have a bubble built on subprime mortgages. But we'll have a bubble built on something else. And it may even be on a market or a product that doesn't even exist yet.
And that's why, again, legislation is helpful, but if you're going to have the same kind of incentive structures on Wall Street and the same degree of concentration, the same degree of political power, it's likely that we'll have another financial crisis.
The financial world has gotten much more dangerous in the last 30 years. We had this one. We had the stock market bubble of 2000. We had the long term capital management crisis. We had the S & L crisis. We had the Latin American debt crisis. And the question is, are these crises going to-- are we going to somehow figure out a way to have fewer of them, or a way to make them less damaging? And I'm not sure I've seen that.
Simon Johnson: The structure of the system is such that people will take these egregious risks. That's what they're paid to do. They will mismanage their companies. That is absolutely in their incentive. And they get the upside, remember? Goldman Sachs just helped Geely Automotive, a Chinese car company, buy Volvo from Ford.
Now, that's an interesting investment. It's a very risky investment. If that goes well, Goldman will get tremendous upside. If it goes badly or if Goldman's other investments go badly, who gets the downside? Well, Goldman Sachs is a bank holding company now. They were allowed to become that in September 2008 as a way to rescue them. They have access to the Federal Reserve discount window. Okay? If Goldman Sachs gets into trouble, that's the responsibility of the Federal Reserve and the downside is for society. That is an untenable, unacceptable position in America today.
Bill Moyers: We are moving now toward the decisive moment in this fight for reform, sometime in the next two or three weeks, we may well have a vote in the Senate. But what are you going to be looking for over the next two weeks that will convince you there is some possibility of true reform?
James Kwak: Well, it's going to be a little bit difficult, because right now a lot of the action is in the fine print. As often happens in the last phase of bills. But I think there's going to be an attempt to weaken the Consumer Financial Protection Agency. Even more than it's been weakened already.
And essentially, what will happen is opponents will try to make the C.F.P.A. subordinate to some other regulators, who can veto it. I think that on derivatives, there's going to be a lot of action, essentially on this issue of exemptions.
So, the derivative legislation looks quite good if you read the first page and look at the headlines. But then there are exemptions inside it. And the question is how big are the exemptions. The thing that we care about most is on the too big to fail issue. So, are we going to have real constraints on the size and scope of these banks? Things that the Obama Administration unveiled in principle to great fanfare in January.
They had a press conference with Paul Volcker and said we're going to have these Volcker rules. Those rules have been considerably watered down in the legislation. And I think that, you know, what we would most like to see are serious constraints on the scope and the size of these banks. Those are the main issues that I'll be looking at.
Simon Johnson: So, the second Volcker rule was proposed in January was to put a size cap on our largest banks at their current size. Now, that-
Bill Moyers: $2 trillion?
Simon Johnson: Yes.
Bill Moyers: 2 trillion- a
Simon Johnson: Now, a size cap is a good idea. Obviously, the current size makes no sense at all, because that's how we got into this mess. There will be amendments brought forward to the floor of the Senate, if this process has any integrity at all. For example, Senator Sherrod Brown has a very good draft amendment.
Bill Moyers: Ohio, right?
Simon Johnson: Absolutely. And he will, in that amendment, press for a hard cap on the size. And I think also restrictions on the scope. And they'll give a lot more restrictions in legislation, which regulators will have a hard time getting out to, in terms of what can be allowed in our biggest financial institutions.
For me, at least Bill, that is going to be the critical moment. How many people support that amendment or that kind of amendment. Does the Democratic leadership come out in favor of it? Where does the White House stand on this? If the White House steps back and the White House says well, it's all up to the Senate, we're staying out of this. I think you know what's going to happen. You're going to get mush, right? Nothing really meaningful will come of it.
If the President takes the lead, the President takes this one, if the President takes this to the country, takes on the Chamber of Commerce, goes directly to people. And explains why you need to make our biggest banks smaller. As one way, that's not a sufficient condition for financial stability, but it's necessary and it gets at the heart of their political power. Take on the big banks. Take them on directly. That's what Jackson did. That's what Theodore Roosevelt did. That's what Franklin Roosevelt did, too.
Bill Moyers: Simon Johnson, James Kwak, thank you for being with me. The book is 13 Bankers: The Wall St. Takeover and the Next Financial Meltdown. We will link this conversation with your website, BaselineScenario.com.
Bill Moyers is the host of Bill Moyers Journal on PBS.
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