Right wingers and liberal Democrats both love to say that I advocate for some kind of nebulous utopian dream.

 from The Progressive Dilemma in the Diary What to do now? by tahoebasha3

The terms Utopia and utopian are often used as terms of disparagement, and not without reason. Massive social experiments based excessively on theory or reason have wreaked social havoc from The Terror during the French Revolution to the Maoist Great Leap Forward in the 1960s and 1970s. Yet one of the most dramatic Utopian experiments was never so labeled. The fact is that both Classical Economics and Neo-Classical Economics were/are utopian systems. In this sense Adam Smith predates Classical Economics. He was more practical and descriptive. Benthan, James Mill and Ricardo were prescriptive and axiomatic. And the economic system they created was, in fact, utopian, but of the dystopian flavor for all but the very wealthy. The 20th Century extension of Classical Economics — Neo-Classical Economics — retains all of the original utopian features despite the problems it has been shown to exhibit. Between them, Classical and Neo-Classical Economics as applied in the UK and the USA constitute the longest running Utopian experiment of which I know. We need to understand this history, which has been actively shunned, in order to understand where we are and where we are headed, unless we can change direction.  

The Challenge Elizabeth Faces  Fourteenth banker

Dodd-Frank establishes that the purpose of the Bureau is to implement and enforce Federal consumer financial law to ensure that markets for consumer financial products are fair, transparent, and competitive. Which raises the question, if all it is to do is enforce existing law, what has been going on all this time? Dilorenzo addresses that in great depth. A lot of the problem is that the enforcement of the existing law was not a priority of the various regulators that are currently extant. Consumer protections were always secondary. In many cases, consumer protection was viewed as being in conflict with the primary legislative purposes. Two of those legislative purposes have been to keep financial institutions safe and sound and to make home ownership cheap and easy. To accomplish these purposes, a regulator may have determined that banks should have nice fat profits and that credit should be liberal and easily obtained. Well, for a long time the regulators accomplished both of those purposes. However, it was at great expense. Dilorenzo identifies in his paper what some of that expense was. It can be summed up as lasting harm to vulnerable populations who have had their wealth and credit ravaged, predatory profits by many unscrupulous lenders, and of course the damage to financial institution safety and soundness that required the bailout of the entire system, at great taxpayer expense. Then you can add to those the large numbers of unemployed and the damage to general business conditions and the security of all citizens.

So that should be easy to fix, no?

Chris Dodd Asks Department Of Justice To Probe Lehman’s Repo 105 And Other Firms’ Shady Accounting Practices   Zero Hedge

March 19, 2010

The Honorable Eric H. Holder, Jr.

Attorney General of the United States

United States Department of Justice

950 Pennsylvania Avenue, NW

Washington, D.C.  20530

Dear Attorney General Holder:

I am deeply concerned about the facts that have come to light regarding the demise of Lehman Brothers and the accounting manipulation that contributed to it. I respectfully ask you to commission a task force to investigate the Lehman situation as well as other companies that may have engaged in similar accounting manipulation with a view to prosecution of employees or agents who contributed to any violations of the law.    

According to the Report of the U.S. Trustee-appointed Examiner Anton R. Valukas, Lehman presented a misleading picture of its financial condition to the public by using extensive repurchase agreements known as Repo 105 transactions. The Examiner found that “Lehman did not disclose its use — or the significant magnitude of its use — of Repo 105 to the Government, to the rating agencies, to its investors, or to its own Board of Directors.” The result was to conceal its holdings of bad assets and to temporarily remove approximately $50 billion of assets from its balance sheet at the end of the first and second quarters of 2008. The Examiner found that Lehman used Repo 105 transactions for no other articulated purpose than to shrink its balance sheet at the quarter-end, in a manner that deceived investors and creditors about its true financial state and misleading others.    

We must work tirelessly to reduce the incidence of financial fraud in order to restore trust and confidence in the financial markets. A task force investigation and taking appropriate Federal actions in these matters will contribute to these goals.

Sincerely Christopher J. Dodd Chairman

Timmy-Gate: Did Geithner Help Hide Lehman’s Fraud?   By L. Randall Wray

Timmy-Gate Takes a Turn For The Worse: Did Geithner Help Lehman Hide Accounting Tricks?

Just when you thought that nothing could stink more than Timothy Geithner’s handling of the AIG bailout, a new report details how Geithner’s New York Fed allowed Lehman Brothers to use an accounting gimmick to hide debt. The report, which runs to 2200 pages, was released by Anton Valukas, the court-appointed examiner. It actually makes the AIG bailout look tame by comparison. It is now crystal clear why Geithner’s Treasury as well as Bernanke’s Fed refuse to allow any light to shine on the massive cover-up underway.

Recall that the New York Fed arranged for AIG to pay one hundred cents on the dollar on bad debts to its counterparties-benefiting Goldman Sachs and a handful of other favored Wall Street firms. (see here) The purported reason is that Geithner so feared any negative repercussions resulting from debt write-downs that he wanted Uncle Sam to make sure that Wall Street banks could not lose on bad bets. Now we find that Geithner’s NYFed supported Lehman’s efforts to conceal the extent of its problems. (see here) Not only did the NYFed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better. Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent.

Reading ECONned By Richard Smith. A Guest Post in Jesse’s Café Américain by the copy editor of blogger Yves Smith’s new book ECONned Yves explains how the spell we are still under was cast upon us.

The Financial Crisis of 2007-2009 (no-one’s settled on a name yet; we are still too close to the action, and that end date might still need some discreet pushes to the right) has naturally set off a book publishing frenzy. With the first wave of instant histories now spent (the startlingly fast-out-of-the-blocks chronicle “Bailout Nation”, the elephantine “Too Big To Fail” etc, etc), we are now getting a second wave of books, whose authors have had time to dig deeper and reflect more on how we got into this mess. Yves Smith’s offering is the first integrated account of the root causes of the financial crisis, and a compelling one.

For Smith, it turns out to be a matter of bad economic theory, self-serving ideology, and, under cover, plain old rapacity. The author gives us a brisk historical sweep through what sounds like deeply unpromising, but, as it turns out, surprisingly engaging terrain: post- war economic theory, the evolution of the financial services industry and its regulation since the 1970s, modern financial instruments, and the Crisis itself. It’s been a long time a-comin’, this Crisis. It all culminates in a whodunit account of the mechanisms that brought the crisis to its acute phase; an account that respects the complexities, yet grips like a vice. But first of all, it’s about the way a single phrase, “free markets”, was turned into a justification for profoundly destructive behaviour.

Yves Smith (got it yet?) points out that there was always more to Adam Smith’s account of the free market than its modern reduction allows:

Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.

Yves shows us that little has changed since Adam’s day (last chance!). Running through the book, we will find ever more glaring contrasts between the official slogans: “invisible hand”, “free market” and so on, and what is really going on: scams, rip-offs, increasingly brazen looting. This is sanctioned, in an unwelcome display of bipartisanship, by intellectually bankrupt and venal politicians of all hues.

The entire post is about eight screens of text, including the following:

Next we are into the meat of the economic theory (Chapters 2-4). Smith briskly takes a sledgehammer to any number of plaster saints cluttering up the edifice of modern economics:

“assumptions that are patently ridiculous: that individuals are rational and utility-maximizing (which has become such a slippery notion as to be meaningless), that buyers and sellers have perfect information, that there are no transaction costs, that capital flows freely”

And then…papers with cooked figures, economists oblivious to speculative factors driving oil prices, travesty versions of Keynes’s ideas that airbrush out its most characteristic features in the name of mathematical tractability.

And then…any number of grand-sounding theoretical constructs: the Arrow-Debreu theorem, the Dynamic Stochastic General Equilibrium model, the Black-Scholes option model, Value at Risk, CAPM, the Gaussian copula, that only work under blatantly unrealistic assumptions that go by high falutin’ names – equilibrium, ergodicity, and so on.

The outcome of this pseudo-scientific botching is an imposing corpus of pretentious quackery that somehow elevates unregulated “free markets” into the sole mechanism for distribution of the spoils of economic activity. We are supposed to believe that by some alchemical process, maximum indulgence of human greed results in maximum prosperity for all. That’s unfair to alchemy: compared with the threadbare scientific underpinnings of this economic dogma, alchemy is a model of rigor.

Too bad Yves came two centuries after her Adam! 🙂

Cornered: by Barry C. Lynn

From Thomas Frank’s review in the WSJ:

‘If monopoly persists, monopoly will always sit at the helm of the government,” Woodrow Wilson once wrote. “If there are men in this country big enough to own the government of the United States, they are going to own it.”

This was the great, consuming fear of the once-robust antitrust movement: that competition would be destroyed and government itself brought to heel by concentrated private power. That movement was a force to be reckoned with in the 19th and early 20th centuries, but after World War II the public’s dread of bigness seemed to fade away.