The financial industry brought the economy to its knees, but how did they get away with it?

19 thoughts on “The financial industry brought the economy to its knees, but how did they get away with it?”

1. I just had to share this with your readers, because I think the current crisis is more than just money crisis but a much deeper issue, more like a fundamental issue. We need to start the change within ourselves otherwise the failed system will always remain the same.

   http://www.ft.com/cms/s/0/5d5aa24e-23a4-11de-996a-00144feabdc0.html?nclick_check=1

   Ten principles for a Black Swan-proof world

   By Nassim Nicholas Taleb

   Published: April 7 2009 20:02 | Last updated: April 7 2009 20:02

   1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

   2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

   3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

   4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

   5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

   6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

   7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

   8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

   9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

   10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

   Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

   In other words, a place more resistant to black swans.

   The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable

2. Prof Black is illuminating a classic version of the foxes watching the chicken house. Builders profiting from inflated housing prices. Mortgage originators profiting from inflated prices, risky mortgages, fraudulent applications and then selling the mortgage. Once sold, they have no risk of loss if payments are not made. Mortgage packagers profiting from reselling mortgages. Investment bankers profiting from converting the mortgage packages into bond like products. AIG profiting from selling credit default swaps (insurance) without having to set aside sufficient capital to cover risk. Then selling multiple layers of the same insurance on the same mortgages to multiple buyers. Since none of the above have a requirement to underwrite the risk, the monies went to profits and bonuses. Merge smaller investment banks into fewer, larger ones means less competition and bigger profits. Appraisers and bond assessors colluding with all the above to inflate values and hide risk. Politicians receiving money from all the above to be elected, mostly reelected. Some even making political hay out making housing more "affordable" albeit at inflated prices. Political appointees to "regulator" positions coming out of companies that were making money through all the above and contributing to politicians. A house of cards built on lies. The bigger the lies, the bigger the profits.

   And we wonder why there's fraud?

3. Excellent comments and I agree with David Petersen. Deliberate, knowing fraud took place and that needs to be addressed. Release all the harmless junkies - sick people in jail - that are clogging the penal sysstem and put these dangerous criminals behind bars. Well, one problem at a time.

   On a deeper level, we have been betrayed by an elite - the upper echelons of Wall Street and Washington. We will always have elites but it's important to change them periodically. The root cause of the sub-prime crisis and the subsequent fallout, is a far-too-close relationship between Wall Street investment bankers and Washington. The players - top civil servants in the financial field and top investment bankers - are interchangeable. Until that whole interplay is broken up, I doubt that the current situation can be fixed. This unhealthy relationship can be seen throughout history.

   There's an article in the current Atlantic magazine written by the former chief economist at the IMF - sorry I forget his name for the moment and a tag to the site... just google Atlantic - that addresses this point. Basically, when third world countries came to the IMF for help and advice, it was always the same: step one is to break up the hand-in-glove oligarchy that is wrecking the economy. This is exactly what the US should be doing and it is exactly what they are NOT doing with the appointment of a tax cheat as the main man. Mr G is not a saviour, he is the very nexus of the problem. My view.

   I would feel much safer if Prof Black was Treasury Secretary.

4. The "little person" always has a frustration at being ignored and when it is time to vent the hatches then the little person becomes angry and veangeful. This has gone on for 40 years except for the anarchist and drug-fueled street riots in the 60s and early 70s by people who were experiencing severe socially and also drug-induced traumas.

   Then we get to the point of appointing a poor FOMC chief in 1969 and the Nixon frauds - which include the deliberate refusal to fund a leasehold at Cam Ranh Bay for an airfield with which to enforce the Treaty of Paris. Kissinger sold this already-agreed-to proposition to the Chinese Communists for a gratuity of 2.5 million rupees (as some of our writers advocate that the valuation of the dollar should be). We find the anti-war Democrats in the House of representatives conjoining with their republican colleagues in the Senate to refuse funding for that enforcement mechanism. Then we arrive at the Ford frauds, and Carter. Then we arrive at the appointment of a poor FOMC chief by Carter, the beginning of the Tehran hostage crisis, and the actions by a Republican President and Republican Congresses, which do not ignore the contributions by the Democrats. The FOMC chief was right there egging everything along.

   Then we arrive at Mr. Blackwell's criteria. Yes, the young NYC bankers need to be imprisoned. And we need ongoing and thorough auditing everywhere which has the force of law and penalties which apply to the elite. When I see Goldman senior staff walking in Baghdad to do business and effective audits in-place which have law enforcement, then I will thin k that we mean business. Until that time, it is a part of the Kondrieft cycle analysis published by TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES about 2 years ago - prior to the start of the recession - that Mr. Obama will be a one-term president.

5. I am no relation to Dr. William Black, but he has at least a name that I support. Although my comment is rather lengthy and somewhat unusual, I hope it will be of some interest and spur debate. Professor Black's analysis is true, and so are a lot of the above comments. The point I see in all of this is the unregulated wholesale greed of the thieves who call themselves bankers, but should be called "Usury Agents". Their tactics make any loan shark say that he wishes he had thought of that. The question is how do these middle men still have the legal right to borrow from the FED at .25% and then lend it out via credit cards at legal rates of up to 30% or more??? and for the FED to print money to the point of making it as worthless as toilet paper. If this is not consumer fraud, and a national or international terroism, please tell me what is??

   Accordingsly, I believe that the entire banking system as we know it, from the Federal Reserve, on down to the local bank, needs to be scrapped. There is no reason that these "Usury Agents" who are nothing but middle men, should collect a penny from the use of the product they provide. In fact, this is not a product they make, but one they simply control. Why not build a banking system like the postal system? You have employees who collect a reasonable salary, charge a fee for their service and provide the product directly to the end user. Therefore, the consumer, and businessman who actually makes use of the money should be the one to borrow at .25%. This privilege is now only enjoyed by the "Usury Agents". The "Usury Agent" providing this product which is created out of thin air and is called money, would receive a living wage and no billion or million dollar bonus for their evaluation services. Just like FEDEX and UPS, competing but regulated systems could be provided apart from the "Postal Style" system, but the base would be this simple product to end user system at the lowest possible cost.

   The postal system idea means that the "Usury Agents" would still look at a loan application, and approve it, but they would not be ever longing to get the big bonus by flagging through loans with no merit at all, because no bonus would be avialable.

   Under this system, loans or even grants could be given directly to entrepreneurs at the rate currently enjoyed only by the "Usury Agents" eliminating the middle man mark up on the product known as money. Anyone who presents a business plan that is feasible would obtain his loan or business grant at no or extremely low interest. The taxpayers or investors who are funding the grant would get a stake in the business. As this new business employs people, the taxes that are collected, wages paid, and goods bought and sold by the business would more than benefit the amount invested. Payback of the grant would be upon sale or liquidation or upon a flexible payment schedule as profit allowed. Currently the same idea is done in a much less beneficial fashion via programs like government construction projects. These funds are given out on bid basis, for projects that often have as little merit as a "bridge to nowhere" and for some projects that actually are useful. As far as I have heard, not one penny is every repaid, nor are the projects tested to be economically useful, but instead just politically helpful to the politician in office and to the short term job supply.

   So, why have banks at all?? Beats me, but the biggest reason I see is the make "Usury Agents" rich at the expense of the entrepreneur, worker, inventor, employer, businessperson, and of course if they screw up, the taxpayer like you and me. The Creature from Jeckell Island, and its Masters of Business Arrogance have no real value. Most would not know how to run a real business that makes actual goods and services, but they are masters at manipulation of numbers and public relations.

   Their control of money has an impact on the economy that is similar to giving a group control of the air you breathe. Everyone must have air, and the economy must have money to lubricate the exchange of goods and serivces. Why give this control to middle men who want nothing more than to take away from the actual people their hard earned profit. Give "Usury Agents" a working wage, and make them all into a system to give out money to the general public with no charge for the middle man except for a reasonable evaluation fee that would give him or her a living wage. The only charge is the hourly time they spend on evaluation and processing the item, namely money. No more 30% interest rates, or loans above the .25% that now is available to these theives, but not to the people who actually put the money to work.

   The flaw in this thought... of course, the crooks, I mean "Usury Agents", couldn't run their elaborate Ponzi schemes to make themselves rich and they might actually need to do something useful besides stealing from the rest of us. No, this could never happen. Why? Because....repeat the above.....

6. With the attitude that we are so helpless that the banks and gov"t forced us to buy real estate, stocks, derivatives,etc. They were satifying the excitement of the public. If you keep up the blame game you will encourage the whiners and losers to disrupt the attempts to soften the economic disaster that cycles hatch and that we are now suffering.

7. Who is going to jail? If I held up a bank and got caught; you do the crime you do the time. Martha Stewart was made an example because she lied about insider trading; what she did has no comparison to the fraud and decit of the American tax payer. Most of us are honest hard working Americans that pay our taxes, mortgages, support our families and try to make an extra buck to plan for retirement or other needs and the Govenment spends (devaluates) what we make faster than we can save it. The UBS scandal as discussed by Professor Black is just another example of abuse of the American Tax Payer. Why don't we hear more about this in the news; I suspect that the 52,000 off shore accounts have a few senators and congressmen on the list. A first step would be to confiscate the money due to income tax evasion and use it to help pay down the debt. Did't Al Capone go to jail for income tax evasion? Oohh Timmy Tax! He did't pay until nominated.
   May be someone out there can draft a letter that we can Email-jain to WHOEVER to get the FRAUDS and the incompetant CEO's, thrown out of office and into jail?

   1. David,

      I agree.

      Thanks for your comment and feedback.

      Adam

8. I agree with Mr Black on many of his suggested causes for this current crisis...however, he has missed a few key components.....the problems originated with the Sub Prime loans, then moved to Alt-A, and now into Prime...but they started with Sub Prime....now ask this question; -what is Sub Prime and why did banks do this type of loan? Well, starting with Pres Carter, then getting full support under Clinton the CRA (Community Reinvestment Act) was a GOVERNMENT program to create "homes for all" and although the cause was noble (as most socialist type programs are) the results were terrific...banks had to comply, not opt-out so to speak...meaning, in order to get through Gov audits, ect they had to loan a certain percentage of loans to folks who really should not be buying them....but the banks were forced into doing this...in fact, during the Pres Bush term (2nd Bush, not the 1st) some went to Barny Frank and Dodd at the Banking committee to try and "tame" these types of loans but it was too late...Fannnie Mae and Freddie Mac (2 quasi gov agencies at the time or gov. sponsered enterprises as they were called) were asked to buy up (or strongly encouraged) these loans and get them off the banks balance sheets...well, once the Investment Banks got involved then they began to repackage them, sell them and so the story is now picked up by Mr Black....but Mr Black missed this key point....any time the Gov tries to put its hand into the pie, unintended results always apply.....I can tell you now as a fact, I am trying to buy toxic assets from Banks but they don't want to sell them...the reason why is that they would have to mark down the assets in the sale and take another big balance sheet hit....even though you "think" they have marked them down enough...they haven't....it will get worse......

   1. Preston,

      Great post and you are spot on.

      Thanks
      Adam

9. Hi Adam,
   First I want to thank you for the great services that your company provides to your subscribers.

   Now here is something I don't understand, Mr Black managed to crack this nut very elegantly and he provided us, the viewer, the proof of the fraudulent state of the financial industry as whole,

   So now where is the Dept of Justice and FBI when we need them?
   I want to see my tax money at work, this is just beyond outrage.

   On other more important notes, here is something very important that I thought your audience should also watch
   "Gov. Perry Backs Resolution Affirming Texas Sovereignty Under 10th Amendment"
   http://www.youtube.com/watch?v=0LHrIxc-QyE

   Dr. Ron Paul has been right all along, the future of the union is now in jeopardy and we all know about the entity behind it all, the Federal Reserve.

   Thanks for the opportunity!

10. One can say what one will about Mr. Moyers, but I think that misses the important points raised by the Professor. I had already been circulating the transcript of this interview with family and friends and am glad to see you sharing it here, Adam.

    Professor Black is telling it like it is. The White House has, unfortunately, chosen to hire the crooks who started this mess in the first place. Rather than address the root causes of the problem they are rewarding fraud and failure.

    I would prefer that my tax monies go towards ethical businesses with sound business practices, not the cover up of criminal activity. I would like to see a rejuvenation of FBI forces and delivery of justice on behalf of the U.S. taxpayers. If that includes rounding up members of Congress, so be it.

    For those who care about the future of this country, I would also recommend reviewing the historical stands of Brooksley Born against "Pro-Fraud" crooks like Greenspan, Robert Rubin and Phil Gramm. There are lessons from our recent history that need to be taken to heart if we are ever to get out of this mess. The President seems only to be giving these things lip-service right now, as his appointed hit-man, Tim Geithner, works overtime to resuscitate the Grand Ponzi Scheme.

    http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html

    Also here's another article, by Professor Black:

    http://online.barrons.com/article/SB123940701204709985.html

    Thanks again.

11. This is one of the most important revelations that will govern my investment strategy in the future that I have ever seen.

    It seems that investment strategy now boils down to second guessing what the administration wants the public to believe. There is no point in any sort of rational analysis of the anticipated future prospects of any equity or commodity and past performance or relationships are of little value in anticipating future prices.

    I am tempted to conclude that this house-of-cards will eventually tumble and shorting anything and everything on the US markets is a reasonable reponse.

    First thot in response is to short DX and go long gold with an inverse market etf in place. Eventually we will see the SHTF.

12. Black does a fine job but I think he's overlooked a few of the players.
    Reagan appointed Greenspan. Mr. G seemed to enjoy his position and seemed to do what was required to keep his Pres. happy. Economic indicator formulaes were revised, always favorable to the sitting administration, rates lowered to encourage borrowing and the expansion of credit. And weren't some members of congress instrumental in encouraging home ownership for all? This crisis was not suddenly dropped by the stork. An interesting book on the subject, published in Feb. 2004, is Conquer The Crash by Bob Prector of ElliottWave. Zweig and a few others also said the same. Now we have an extended depression in our future. Jobs are the issue and until the dollar is recognized as another cheap currency by other nations, buy at Walmart.

    1. John,

       Thanks for your insightful feedback.

       Adam

13. Moyers has whitewhased people like Jeremiah Wright at the behest of his political masters. A rhetorical switch-hitter, Moyers has also slimed people when called upon to do so, always hiding behind a pious mask.

    Moyers has an agenda - advancing his career - but no credibility. He's a fraud, and cannot be taken seriously at any level.

    That said, I'm all for learning more about the origins of our current fiscal mess. You simply picked the wrong messenger.

    1. Mister Snitch,

       Thanks for the feedback. What did you think of Mr. Black?

       Adam

14. Adam,
    Thank you for sharing this information. It is imperitive that Americans truly understand the depth and severity of what is happening RIGHT NOW in our country. This type of financial terrorism cannot be undone, and we will be stuck paying the price for these thefts for generations to come. We need more people like William K Black, less Paulsons and Geithners, and NO Federal Reserve.

    1. Curtiss,

       Thanks for your feedback. I agree we need more William Blacks in this world and less government involvement.

       Listening to Mr Black and others you have to look at the corruption we are seeing in both government and corporations. What ever happened to ethics and doing what is right for the country. We seem to have gotten it all backwards in the last 25 years.

       As the pendulum swings we will see a swing back to a more ethical standard that we can all be proud of.

       Adam

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