Revisiting the Squid

Back when we wrote a brief critique of Matt Taibbi's latest populist jeremiad against 'God's workers', a.k.a. Goldman Sachs, we were of course aware that the topic would be controversial. Quite a few people seem to have misread that piece as an apologia for Goldman Sachs (judging from some comments on the Seeking Alpha reproduction of the post and e-mails we received), so perhaps we didn't express our point clearly enough. Yesterday, another writer dared to speak up in Goldman's defense, specifically with regards to the questions surrounding its trades and Taibbi's allegation that GS executives are guilty of perjury. Just as we suspected, the case is not as clear-cut as Taibbi makes it out to be – not by a long shot.

 

We are thus taking the opportunity to briefly revisit the topic today. Our problem with Taibbi's approach is that for one thing he throws out grave allegations that are far from proved as though they should be accepted at face value on his mere say-so. He is of course banking (pardon the pun) on the righteous anger of his readers in the face of economic crisis and the envy the highly-paid 'masters of the universe' inevitably arouse. For another thing, he focuses exclusively on one private sector firm and its trading activities. He is thereby attacking precisely the one activity of GS that strikes us as perfectly legitimate – its trading in the markets. His assertion that 'from tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they're about to do it again' is plainly ridiculous. It suggests implicitly that every movement in the markets that people don't like (no-one was enamored by the collapse of stock prices after 1929 or after the tech stock bubble, just as no consumer is happy when gas prices rise) is somehow illegitimate, while ascribing almost god-like powers to what is in the end just one market participant who has as little control over the markets as anyone else. In Taibbi's portrayal, these investment bankers are described as omnipotent – they're not merely 'doing God's work', they are God, or rather his polar opposite, the devil. He doesn't waste a single sentence on the fact that without a fractionally reserved fiat money system it would be impossible to create any of these damaging bubbles. Goldman Sachs is not the 'bubble machine' – it is merely a cog in the bubble machine.

Taibbi neglects to look too closely on the interaction between financial firms and the State, this amalgamation of interests that is at the core of not only the crisis but also the inexorable slide from what was once free market capitalism toward a collectivist state-capitalistic system.

We certainly don't think Goldman or other members of the banking cartel are not deserving of critique. Alas, to us what is mainly worth criticizing is the fact that Wall Street and the government have melded together into a state-capitalistic combine, whose main raison d'etre is the maintenance of privileges for the banking class and the maintenance of the statist fiat-money based welfare/warfare system for the political class. Not coincidentally, one of the nicknames Goldman was stuck with over time is 'Government Sachs', in reference to the fact that an unusually large number of its executives tends to end up in high government posts, where they are then in a position of enacting policies that are favorable to the firm and its activities. Former treasury secretary Hank Paulson is a case in point. He at one point allegedly even threatened the imposition of martial law if Congress and the Senate were to fail to go along with the bailout of the big banks.

 


 

Vampiroteuthis infernalis

(Photo by R. Flood)

 


 

Meet the man from Government Sachs, Hank Paulson.  If we had not showered the worst stewards of capital with oodles of free money, the world would surely have stopped turning.

(Photo via shortsalemagicorder.com)

 


 

Regulations Favor The Banking Cartel

In this connection it is worth mentioning the 'Frank-Dodd' regulatory monstrosity again. Many people erroneously believe that the banks will somehow be 'punished' for their transgressions during the bubble and 'put on a tight leash' by this telephone-book sized law. In other words, one would suppose that the big bankers really hate it. We tend to think that it is more likely that they actually wrote it. All the 'too big to fail' banking institutions are today even bigger than they were before the crisis. The impenetrable thicket of regulations meanwhile ensures that they have even less to worry about the competition from upstarts than before. Not surprisingly, the smaller banks are the only ones that are vehemently protesting that the new regulations are making life impossible for them. You'll never hear Citigroup or Bank of America seriously complaining about the new laws. They know that in the end, these regulations have only created an even more powerful cartel of big banks. Consumers will over time end up paying through the nose for all of this, as whatever additional administrative costs the new regulations are creating will be passed on to bank customers. One must also keep in mind here that the more highly concentrated a banking system becomes, the less constraints there are on the concerted expansion of circulation credit and fiduciary media. In short, it makes inflation of the money supply that much easier. As it were, the privilege of creating new money from thin air is functionally not different from legally sanctioning the counterfeit money printing press in Tony Soprano's cellar. Obviously, this privilege has remained untouched.

We have yet to hear Taibbi mention this particular aspect of the system, although we must admit he did a fairly good job of getting closer to the central issue when he wrote a critique of the Fed's 'emergency' measures during the crisis ('The real house wives of Wall Street'). This article is valuable because it hits on the above mentioned amalgamation of private and State interests and shines a light on the big fat spider in the center of the web – the Federal Reserve. Alas, even this otherwise worthy piece is deficient. Taibbi mentions that all these bailout deals that evidently favored mainly well-connected insiders were done on the 'tax payer's dime'. Partly this is correct, but he  fails to note where the 'Fed dollars' as he calls the flood of money showered on the clearly undeserving really came from – namely, thin air.

As such it is not only detrimental to tax payers, but to every participant in the economy who is a 'late receiver' of the newly created money. Those who got first dibs on the funds (like apparently the wily wives of Wall Street executives who had the presence of mind to quickly set up 'TARP' related companies on the Cayman Islands before the money began to rain down) certainly profited from the inflation of the money supply. Every other holder of dollars drew the short stick in this exercise.

Yesterday an article in the NYT caught our eye that nicely exemplifies the incestuous relations between government and the big banks. One of the authors of the new banking regulations, the self-anointed 'top cop' of Wall Street, Barney Frank, has just held a fundraiser – on Wall Street!

You would think that the banks must hate the man's guts. In his public utterances he frequently demonizes them. He is selling himself as a 'man of the people', supposedly representing the interests of the common man against the greedy inhabitants of the money temple. It would seem logical if the bankers were financing whoever tries to unseat him in elections. Alas, this is evidently not the case. On the contrary, they shower Frank with significant amounts of money. As the NYT reports:

 

Representative Barney Frank proved Tuesday night that it never hurts to ask, even when you are asking longtime foes to fork over cash.

The Massachusetts Democrat held a Wall Street fund-raiser on Tuesday, less than a year after authoring the Dodd-Frank Act, a sweeping crackdown on the financial industry.

While some bankers saw the event as a striking display of chutzpah, even by Wall Street standards, other industry players were not about to miss the chance to hobnob with one of the nation’s top financial cops. JPMorgan Chase, Goldman Sachs and Morgan Stanley all dispatched officials to the event, hosted by the Securities Industry and Financial Markets Association, one of Wall Street’s most vocal advocates on the Dodd-Frank financial regulatory law. The attendees were a who’s who of Wall Street’s legal and lobbying community.

 

(our emphasis)

Apparently the NYT really thinks that Frank and the big banks are 'foes' and that the Dodd-Frank Act is a 'sweeping crackdown' on the financial industry. Both assumptions are erroneous. Their public enmity is nothing but political theater for the rubes, while the regulatory monstrosity further cements the domination of the big banks.

 

“But even Mr. Frank, known for his hard-edged political style and sarcastic wit, has shown a penchant for compromise. He has supported efforts to delay new restrictions on debit card fees, the scorn of bankers big and small. And that was not lost on his audience of donors, some of whom praised Mr. Frank’s recent efforts before entering the fund-raiser.

Still, banks complain that the Dodd-Frank law threatens to cost the industry several billion dollars.

And after the fund-raiser on Tuesday, Wall Street’s pockets were sure to be even lighter. “Frank for Congress” was charging $5,000 for a “host,” $2,500 for a “supporter” and $1,000 just to be a “guest.”

The event was hardly the pugnacious lawmaker’s first attempt to draw from the Wall Street well. In his most recent campaign, which raised roughly $4 million, Mr. Frank received $356,316 from the securities and investment industry, according to the Center for Responsive Politics.

He is a natural target for donations from bankers and the like. During the crisis, Mr. Frank was chairman of the influential House Financial Services Committee. Now that Congress is in the hands of the Republicans, Mr. Frank is the ranking Democrat on the panel and still wields significant power.”

 

As noted above, the only banks that really 'complain' about the cost of the law are the small banks for whom the law makes competing in the market place against the big guys all the more onerous. And surely no-one can be as naïve as to think that the bankers are bankrolling Mr. Frank because they are happy that there is a 'tough regulator' who really steps on their toes. Will they really get nothing in return for their generosity? Frank himself does indeed possess a good portion of 'chutzpa', as he is making just this assertion:

 

Mr. Frank says campaign contributions do not influence his policy decisions. The congressman’s spokesman told Marketplace on Tuesday: “If Wall Street is trying to buy influence with him, it has been a dramatic failure.”

 

And we have a bridge in Brooklyn for sale.



 

Barney Frank, the 'Wall Street Top Cop' – surely no-one thinks that the bankers get anything in return for showering him with money?

(Photo via mediabistro.com)

 


 
 

 
 

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6 Responses to “State-Capitalism And The Banking Cartel”

  • contulmmiv:

    Hello – and congratulations on your blog. What a tremendous relief it is to find such places on the web (and the people behind them…)…

    In order to sweep away any misunderstandings, I will start by saying that I find myself in complete agreement with your critique of Taibbi and your diagnosis of the collusion between governments and banks.

    There is, however, an important consequence of this relationship which not only that you fail to notice, but you write in contradiction to it.

    Banks are market _participants_ but they are not market _entities_. Any market entity is bound by two factors: the risk factor, and the supply of capital. These factors inherently limit the range of activities of any market participant; they tend to keep market participants rather small, and the market environment highly competitive.

    Banks, as a direct consequence of the quid pro quo with governments, are not bound by these limitations: the “too big too fail” propaganda, and its implementation in the practice of bailouts, eliminate the risk factor; while the direct access of the major banks to near zero interest rate money, in practically limitless quantities, from the central banks, eliminate the limitations on the supply of capital (to complete the picture, and to give substance to the notion of quid pro quo, in exchange, the banks stockpile junk sovereign bonds, this keeping interest rates on increasingly valueless sovereign debt ridiculously low).

    The direct consequence of the violation of these factors is that banks’ participation in the markets profoundly distorts the rationality and the ethics of the markets (their valuation function foremost, which is to say, the price discovery mechanism). This necessarily impacts on all aspects related to trading, (after all, the chart patterns are only expressions of the price discovery mechanism underlying market action, as it is rooted in fundamental parameters of human psychology).

    In contradiction with this consequence, which follows directly from your correct diagnosis of the governments-banks collusion, you write: “[Taibbi] is thereby attacking precisely the one activity of GS that strikes us as perfectly legitimate – its trading in the markets.”

    I believed I recognize here (and this gave the motive of my intervention) the tone of an exquisitely scrupulous market participant, intensely concerned about not being unjust towards “bigness”, only because he is a small actor: and he is doing it to the point of sustaining positions at odds with his reasoned analysis.

    While the said reasoned analysis should have led to the straightforward notion that the participation of banks in trading activities is simply illegitimate under the conditions of a mature fiat system. _Banks are simply destroying whatever has been left of the rationality of the marketplace_. (A perfect case in point for this destruction of rationality is the recent story of Bill Gross: his decisions were splendidly correct from the point of view of _economic_ rationality; but he failed to take into account that the rationality of the bond market is no longer economic, but _political_, in precisely the sense discussed here…).

    On the other hand,by their participation in the markets, banks occasion endless fodder for politicians, scholars and academics eager to bring down the last trace of free enterprise left in the world. Instead of researching and discovering what is precisely that which causes the failure of the rational functions of the market, they are rushing to cheer the death of capitalism (the academic attack on the foundations of free market is probably the most dangerous aspect of the evolutions we are witnessing since the crisis began in 2008 and rests precisely on the denial of market rationality).

    I hope you will find my intervention appropriate and will be able to profit from with.

    Friendly, M.

    • Thank you for the interesting comment. I agree, the activities of privileged actors at the very core of the market system, i.e. the realm of money, represents a market distorting influence. There is no true competition between these actors, which is why I always refer to the banks as a cartel. I’ll have to think about your objection regarding the trading activities of such market participants, but my hunch is that it is valid.
      I completely agree that the academic attack on the market – and the ridiculous blaming of a failure produced by an interventionist and cartelized apparatus on the non-existent ‘free market’ – is a very deplorable and dangerous development. The same happened incidentally during the Great Drepression.

      • contulmmiv:

        Hello PT – and thank you for taking the time to reply, which I did not quite expect considering how busy you must be with writing the blog. Which, by the way, has become the most pleasant and one of the most useful of my daily reads. I like everything about it, including your alias (my personal favorite which I do not get to use much is ‘pelerinx’ ; )) It’s like a friendly encounter in a world for which the world of Walter M. Miller is the future…

        The free market is a selection environment: and one of the things it selects _for_ is rationality and the cerebral virtues. And it is precisely that which makes a world free and civilized. We no longer live in a civilized world, but in a world of unleashed, Bacchanalian political hubris, and the Golems we now call “banks” are essential pillars of it. For the unfree market is also a selection environment, but what it selects for is, as Hayek had it, the worse in man.

        Speaking of trading, when one trades, say, EURUSD or European sovereign bonds (on the short side, of course :)), one trades with the FED->ECB via a murky chain of zombie banks feeding on free money, and the Chinese Communist Party! Now, what kind of trade is that? The same has always been the case for oil since the 1970s or so and, since 2009, pretty much everything else, including lumber and cocoa beans (see the proliferation of commodities ETFs which, if GLD is any indication, are put out also by the banks)!

        The fact is that markets are disconnected from the economy and the real life – and that is why trading can no longer capture economic rationality. Instead of being the lubricant of the economy, the vehicle of voluntary exchanges between free individuals, money (which you rightfully emphasize) has become the instrument of fraudulent wealth transfers and of the mad rush to pile on whatever real resources one can lay his/her hands on (see news about Chinese peasants scavenging for copper…).

        I believe that the only reasonable (which is to say, most rewarding but also wrought with great perils) way of trading today is by trying to capture the logic of this sick hallucination with which the unleashed political hubris has covered the world – and to trade _against_ it. This requires cognitive acumen, and a continuous assessment of the conditions of its failure: which is precisely what I believe your blog does in an exceptionally accurate and exhaustive manner. For fail it must, if people like you and your readers are still to walk this earth.

        Friendly, M.

  • Jay:

    Pater, thanks for this fine piece. I tried reading Taibbi’s Rolling Stone “Bubble Machine” article, and while Taibbi is an entertaining writer, I couldn’t finish it because he was just throwing too much stuff out there with little backup. He argues a point while missing the point: dishonest money is the root cause of the bubbles (and many other evils as well).

    Keep up the good work. I love the pictures too.

  • What a stage show. The entire efforts of the Federal Reserve have been to shift income to the big banks at the expense of the rest of America. The outfits should have gone broke and been resolved in bankruptcy.

    The sad tale is they call this the free market when anyone who studies it over time realizes it is nothing more than a group endowed with an unconstitutional title of nobility that returns back scratchings with the politicals.

    One of the biggest misunderstandings in the general population is that regulation is anti-big business. It is the bigs that can afford to comply, while any competition is buried by the cost of compliance. Of course the big oligarchs write the laws through their massive lobbying and their big money treats to politicians that don’t want to go along.

    Then we have the money cartel itself. When the Fed was established, it relieved all the banks of having their credit dishonored in public. Prior, currency out of a weak bank was increasingly hard to pass. Knowing this, they got the government to set up an outfit that allowed for the over inflation of credit. When that failed, they came up with a system of insurance that made the depositors liable, as the money supply is what is owed by the banks and the money supply can only be guaranteed and paid out of the money supply. I know for some people this is deep and maybe off base, but where else can the FDIC collect what they have to front? The money is all there is to pay the bonds and backing already existing deposits at best places more debt into the system. Thus we have 2 tricks that have allowed bankers to pass off bad paper instituted over the first half of the 20th century.

    There is no bigger scheme than the pretense that those that can’t pay can pay. The 2 games in the prior paragraph have run their course, so now they merely mark their books to fantasy and uncle Ben puts in money so they can keep writing hot checks. There is going to be hell to pay when one bounces.

    • Very well put. Indeed, big business is never really against regulations, for the very reasons you cite. And as you say ‘there is no bigger scheme than the pretense that those that can’t pay can pay’ – indeed, it is on this absurd conceit that the entire Western, or better global, monetary system and web of debt is built upon.

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