The Hazardous Morals of Bankers

Warning: You must forgive the writer for the exceptional length of this piece as a combination of rust that accumulated over months away from writing, a little too much time on his hands and what is feared to be the initial stages of ambiguphobia all contributed to the problem. 
- ed.

US federal debt will be more than $16 trillion by the time you read this. Student loan debt in the land of the free surpassed both credit card debt and the $trillion mark earlier this year. Greece teeters on the brink of bankruptcy while the other PIIGS wait their turn in the slaughterhouse. Three cities in California declared bankruptcy within a month this summer while nations have given up their sovereignty in order to avoid the same fate. Tens of millions have been thrown out of their homes in the past four years while even the Catholic Church battles to remain solvent. All of this was kicked off with the collapse of Lehmann Brothers four years ago triggering a crisis which forced governments and central banks around the world to pour trillions of dollars of bailouts into the financial system in order to stave off financial collapse and the threatened panic, chaos and disaster sure to follow. So, why are we here four years later staring over the US fiscal cliff, waiting for the eurozone to collapse and watching local sheriffs play the muscle for the mafioso banks repossessing all our neighbours possessions? The same reason the crisis seems perpetual. Debt and it's collector, moral hazard.

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”
 - George Bernard Shaw

Like all good yarns, that of debt goes way back in time, before money, before barter, beginning with the Sumerians in Mesopotamia over 5000 years ago in fact, but we don't need to go back that far. No, forty-one years is enough for our purposes, when Richard Nixon ended the post war Bretton Woods International Monetary system by suspending the convertibility of the dollar into gold (then $35 to the ounce, today around $1600) on August 15th, 1971, effectively creating the current floating currency regimes: fiat money. No longer would the US dollar be convertible to gold; no longer would money creation and thus finance be constrained. Not only was the US fighting a war in Vietnam that had to be paid for but they were battling "international money speculators" as Tricky Dick dubbed them. Heck watch for yourself:



So it was that the casino known as the financialization of capital was built, in order to protect the average worker "because they [financial speculators] thrive on crisis, they help to create them". By no means was this the first time the world had used virtual money with nothing guaranteeing its value but our faith. According to David Graeber, there have been two such previous periods in the history of money and debt: The Age of the First Agrarian Empires (3500–800 BCE) and The Middle Ages (600 CE — 1500 CE). The key difference with today was that both those eras saw strong institutions and traditions which placed controls on the potentially catastrophic social consequences of debt from Mosaic jubilees (debt forgiveness every 50 years) to Christian and Muslim prohibitions on usury. Fast forward in time to go backward as the current era has seen protection turned on its head creating the first effective planetary debt enforcement system, operating through the IMF, World Bank, governments, corporations and other financial institutions. In the past we protected debtors; today we protect the interest(s) of creditors. Spot the doublethink involved here as the danger posed by financial speculators led to a policy which in turn empowered the threat leading to it's perpetuation becoming a necessity to maintain the status quo. The battle against the money speculators has been fought just like the war on terror.

Nixon's move had predictable results, a series of crises as wave after wave of speculation, manipulation and deregulation smashed against the economy. Predictably, with no physical limit to fiscal and monetary expansion, government debts ballooned leading to inflation which needed 22% interest rates to tame causing economic malaise that necessitated tax cuts (mostly for corporations and the rich) and deregulation to get the economy going again. The balance of power between rentiers and workers was shifted by slashing capital gains and opening investment loopholes so that in less than a generation the very group we had been warned about had been handed the keys to the Porsche and proceeded to drive us all over the edge. The process seemed almost planned, conspiratorial, but it was our own hubris that allowed it.

"There are compelling reasons for paying attention to this potential for catastrophe as, every debt crisis in history since Solon of Athens has ended in inflation, bankruptcy or war, and there is no cause to believe we’ve solved this one, even if it has been postponed." - Susan George; Fate Worse Than Debt, p. 196

The Cliff's Notes to the crisis reads like a tragedy. Steady erosion of the competitive advantage enjoyed by the US after WWII and the west as a whole to the east leads to policies which ensured wage stagnation for those working in industries losing employment and skyrocketing renumeration for the CEO's outsourcing those jobs and the financial industry which facilitates it. This creates a feedback loop in which those at the top enjoy more influence on legislation thanks to their enhanced financial position. Those at the bottom, seeing themselves falling further behind turn to debt in order to maintain the illusion of keeping up with the Joneses. Check out this interactive chart to see the machine in action. Meanwhile, the flood of money to the top leads to fewer and fewer available investment alternatives necessitating looser regulation on credit to lend to less and less credit worthy clients through the creation of creative, near magical, financial instruments. All the while, the growing inequality brought about by transferring wealth to the top slowly strangles the consumer driven economy (about 70%) as those who would spend have less while those who invest, at home or abroad, have more. A little more doublethink courtesy of trickle-down economics.

On the government side, though Reagan talked a fiscally conservative game, he walked a public spending splurge as debt tripled under his watch. Bush the elder didn't do much better and though Clinton managed to run a couple of surpluses late in his second term, Dubya and Congress managed to pass two successive $trillion plus tax cuts while fighting two separate $trillion plus wars along with passing a $trillion plus prescription drug plan. The Anglo-Saxon affinity saw the UK walking in near lockstep; just replace Reagan with Thatcher and Clinton with Blair at the head of the parade through the Corporation of the City of London instead of Wall Street. The financial sectors share of domestic US profits skyrocketed from below 16% to 41% making bankers more important than ever. The partial repeal of Glass Steagall, allowing banks to gamble grandma's pension with the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act) and the Commodity Futures Modernization Act which ensured that the credit default swaps and collateralised debt obligations at the heart of the 2007/8 crisis wouldn't be regulated were the finishing touches as the banksters had merged with government and rigged the economy for explosion.

The story that unfolded in continental Europe was somewhat different but had the same result. Overnight, countries such as Ireland, Greece, Spain, Portugal and Italy were expected to transform into Germany. Shockingly, it didn't happen and without their own currencies to debase in order to regain competitiveness, the peripheral, low-capital investment economies were crippled while German producers were given a boost. Not only did prices go up - in Spain a loaf of bread doubled in four years - but salaries stayed about the same, rising 14% in the ten years from the introduction of the euro January 1st, 2002 to the end of 2011. Throw in the additional enticement of suddenly being deemed nearly as credit worthy as their northern partners and you've got yourself the perfect debt bomb recipe. The explosion of Benzes, Beemers and Audis on the streets of Madrid and Dublin created a surplus that found its way back to German banks who had to lend this money to someone and were happy to find eurozone approved customers from Porto to Thessaloniki to buy more German cars or real estate developers to build beach resorts to take vacations in. Each country took their own path to purgatory, in Spain and Ireland it was more private bank debt while in Greece and Portugal it was more public (and Italy, well, they've always had too much debt).

As we know, our story doesn't end well, in fact, there doesn't seem to be an end as it's starting to feel like the neverending story. The total cost is incalculable  in dollars, euros or pounds, but it's the human cost that should remind us that economies are meant to serve people and not the other way around. When the crisis hit, we were told we had to bailout the banks or the world would end, so we did. Ever since it became clear that Greece wasn't going to be able to maintain its debt, the troika always manages to get the money to Athens on time. When the Irish banks couldn't keep afloat, their government threw them a lifeline and guaranteed their debt. Spanish banks were going under so once again the troika (IMF/ECB/European Commission) saved the day. Trillions of paper dollars, pounds and euros all to ensure the debt obligations continue to be paid, trillions the people will have to pay back. For what? The sums will never be paid off, everything has been done to keep interest payments flowing to the banks and to give them enough time to get their capital out. The price of paying off failed bankster bets is not only the sweat of our brows but becomes ever more demanding, framed in the Orwellian language of fiscal austerity/consolidation, structural adjustment/reform, labour flexibility, competitiveness, and growth.

In the 70's and 80's the IMF/World Bank became despised figures in the developing world. As global capital sought higher returns than could be found in the developed west, their sites settled on the poorer resource-rich nations of the south and east where they found dictators, anti-commie generals and corrupt legislators willing to sign over their people's futures in exchange for ready cash to build vanity projects, fund coups, suppress insurrections or simply pad their Swiss bank accounts. When the people of their nations found they couldn't pay, the men in black would arrive, preaching the 'free market' mantra of globalization, structural adjustment programs, which always had the effect of worsening life for the people while benefiting the foreign corporations. Eventually, the anti-globalization movement and debt cancellation voices became loud enough and democracy returned to many places and debt was in some cases even forgiven. The first part of the story is now playing itself out in the 'developed' world except this time the countries aren't even getting a hydroelectric dam, bombs or a statue in return. Debt is granted only to maintain existing debt in exchange for lowering spending on those things that help the people, shredding the social safety net, firing workers, lowering tariffs and taxes and eliminating workers rights in a duplicitous attempt to make the economy more competitive in order to grow and pay off the increased debt load. Unfortunately it has never worked, isn't working and never will. The only winner, for awhile at least, are the banks to whom the interest keeps flowing.

Ironically, many accept this punishment as atonement, self-flagellation to purify the soul. Debts are contracts that must be paid off, more than an obligation, as the threat of moral hazard would not only destroy our financial system but lead to anarchy (gasp!). Yet bank bailouts are a perfect example of moral hazard as the banksters have now learned that they will not pay the costs of their losses; their gains remain privatized while their losses are socialized. Morality should be the last thing they want to talk about as their lascivious behaviour has been highlighted this summer with a series of scandals that illustrate they have no intention of ever doing the right thing whenever there's a whiff of profit to be had. If they don't get caught, great, if they do, well, there will be newspaper headlines, an investigation and finally, at worst, a fine to pay, usually a fraction of what the illegal behaviour gained. Somehow, even though both Mitt Romney and the US Supreme Court have defined corporations as people, not only are the big banks Too Big To Fail, they've become Too Big To Jail (TBTF/J).

"Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it." Adam Smith; The Wealth of Nations, Book V, Chapter I, Part III, p.820

This summer has put the lie to Adam's words once and for all. Most recently it was Britain's Standard Chartered, who NY state regulators accused of hiding $250 billion of transactions with Iran despite sanctions. A person would be charged with terrorism and sent to Guantanamo, a bank simply pays a $340 million fine; it's up to the families of those killed in terrorist attacks facilitated by StanChar to sue the bank. The reaction of the British government was particularly instructive; when a British bank is threatened with the loss of its New York banking license, officials, from the mayor of London to the Bank of England governor to the Chancellor of the Exchequer rush to its defense. This, from the same country that would and has done everything in its power to get Julian Assange extradited to the US for torture and possible execution and done nothing to prevent its own citizen, Gary MacKinnon, who suffers from Asperger's syndrome, from being extradited to the US for exposing weaknesses in the defense department's computer security systems.

Just a few week before that came the revelations of the LIBOR rigging scandal. A story that is 'too complicated' to understand by the public was therefore ignored by the media. Besides, there was that whole Batman shooting and then the Olympics to worry about. Denver theater body counts and jingoistic medal counts are far more interesting than a bunch of bankers sending each other emails, right? Well, no, not really when mass shootings seem to have become monthly occurrences in the US (surprise! another one today), the Olympic medal count can be predicted based on population, per capita GDP, past performance, and host status while the bankster collusion earned them hundreds of billions (trillions?) in profits while costing the public an impossible to figure, er, figure. Wait, sounds a bit like the Olympics. Anyway, as usual it's not all that complicated.

LIBOR stands for the London Inter Bank Offered Rates and it's used in the setting of most other kinds of interest in the world, from credit cards, student loans and mortgages to the cost of government bonds. Seeing as we live in a 'free market', up until the scandal we all assumed this rate was set by the 'laws' of supply and demand but, as usual, our naivety cost us and profited them. Instead, the most important rate in the world is determined every morning by representatives of the 18 largest western banks who report on what they expect to pay to borrow funds from each other (Inter Bank) in the future. Under LIBOR rules, the four highest and four lowest estimates are eliminated, and the average of the rest becomes the official rate. Well, shockingly, banksters used this opportunity to artificially set rates everyday a bit higher or lower in order to profit from the positions they held in their portfolios. Barclays had their boss Bob Diamond resign and was fined ￡290 million by British authorities, who were involved in the racket, while seven banks including Barclays have been subpoenaed in the States. A few Italian families get together and we call them the mafia and charge them with racketeering but when banks do it we call it cooperation. It will take years of litigation to sort it all out but you can be assured, a few banks will have to pay a fraction of the profits earned in the scam.

Speaking of the mafia, seeing as interest rates aren't spicy enough to make headlines, the other summer scandal involved just that, Mexican drug lords who line headless bodies on highways. Once again the contrast between the justice meted out to the flesh and blood people and the corporate people is illuminating. A real person gets caught selling dime bags on the street corner trying to raise money to go to college, we go to jail for life; they get caught laundering the money from the profits earned on those bags, they say they're sorry and get a slap on the wrist. Europe's largest bank, HSBC, not only transported billions of dollars of cash in armoured vehicles, cleared suspicious travellers' cheques worth billions, and allowed Mexican drug lords to buy planes with money laundered through Cayman Islands accounts, they also moved money from Iran, Syria and other countries on US sanctions lists, helped a Saudi bank linked to al-Qaida shift money to the US and even cleared $290 million in "obviously suspicious travelers cheques" that benefitted Russians "who claimed to be in the used car business." Lucky we only have to worry about Iranian-American used car salesmen hiring Mexican drug lords to assassinate the Saudi ambassador or this might sound like a conspiracy theory. Yep, all this was part of a report by a US senate committee which revealed HSBC failed to monitor $60 trillion in wire transfer and account activity, had a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity, and failed to conduct anti-money laundering due diligence before opening accounts for HSBC affiliates.

Each time new revelations come to light, bank executives line up to testify in front of an important sounding committee and explain how they are "horrified" by what has happened, that they couldn't have foreseen events, that measures have been put in place, that it was bad luck or a black swan or a rogue trader. Then it happens again. Just this spring, the last remaining 'good banker', Jamie Dimon had his bank JP Morgan victimized by one of those rogues as "the London whale" lost a bet on a position that could cost his bank $9 billion. Just the kind of gamble we were promised these banks would no longer make in exchange for bailing them out just four years ago. Just the kind that lost UBS $2 billion last September, Societe Generale $6 billion in January 2008, or Barings Bank $1.3 billion in 1995. Our always vigilant press is always sure to name them rogues, despite being the norm, performing unauthorized trades and justice is swiftly served on these lone scoundrels while pensioners and savers pay the price and the banks continue to promote the culture of short term profits in which psychopaths thrive, to inflate their quarterly earnings. Had enough yet? There's always the fattening of the PIIGS, the Magnetar trade, the Sentinel fraud, any of these, or ...

If these were people, as corporations such as banks have supposedly become, we'd execute, jail or banish them from our communities so how do you explain the social pressure to repay criminal enterprises that are slowly sucking the life from our economic system? In order to succeed in society, few would disagree that a university or college education is a prerequisite. Such a degree costs tens of thousands of dollars or pounds obliging many to take out student loans which become payable upon completion of their studies. In America, if you decide to head to Vegas and max out your credit card on hookers, blow and roulette only to find yourself unable to pay, one option is to declare bankruptcy, ruining your chances to obtain credit but clearing the debt off the books just as the hangover clears after a good, greasy breakfast. If you find yourself without a job (or only part-time or unpaid internship) once you finish school and unable to pay back a student loan, you don't have the bankruptcy option, it can't be cleared and will be with you until death or its paid. Heaven forbid if you're among the 25% of Americans without health coverage and you or a family member fall ill, the cost of which forces many into a debt spiral. This is nothing if not slavery. Even if you're a good client and you pay your debts, or the debts of your nation through your taxes, you are forced to work in order to earn the income. What else is forced labour but slavery?

Funny that we (or at least the Sumerians) had this all figured out 5000 years ago. Even then they recognized the need to protect those forced into debt from unforeseeable circumstances or the avaricious. Interest rates also seem to have first appeared in Sumer where most transactions were conducted on credit. Years with bad harvests resulted in peasants hopelessly indebted to the rich, forced to surrender their farms and, ultimately, family members, in debt bondage. Inevitably this would lead to a social crisis in which the masses were enslaved to the few. It soon became traditional for each new ruler to wipe the slate clean, cancel all debts, and declare a general amnesty or 'freedom', so that all bonded labourers could return to their families. Significantly, the first word for 'freedom' known in any human language, the Sumerian amarga, literally means 'return to mother' while in Sanskrit, Hebrew and Aramaic, debt, guilt, and sin are actually the same word. Julius Caesar became the hero of the Plebs, and was ultimately killed by the nobles, for introducing debt forgiveness schemes after he took power from the corrupt patrician oligarchy. Solon laid the foundation for Athenian democracy by "shaking off the burdens" of enslaving debt. Biblical prophets instituted a similar custom, the Jubilee, whereby after seven years all debts were similarly cancelled, the direct ancestor of the New Testament notion of ‘redemption’. Through some historical error, we inherited the institutions of lending at interest without the original checks and balances.

Instead, we live in a world where banks are bailed out while people are sold out. In which lenders making up details on credit applications became such a common practice it became known as liar loans but debtors get sent to jail for 30 years for lying on the same forms. It was after all many of those liar loans that were slapped together, sliced, diced and bundled into the CDO's that helped cause the crisis, but no one needs to be jailed for that. It's only those uncivilized countries that obviously need a good bombing where bankers are actually punished for fraud. Tax evasion is only for the rich and corporation kind of people not the 99%. It's jail for you or me if you screw the IRS but if you're HSBC or Credit Suisse, you just cut a deal in which you hand over email and telephone records of your staff to the US Department of Justice. Stealing from your clients is frowned upon unless your MF Global, an investment company run by the former governor of New Jersey Jon Corzine, then of course it's okay. It's usually fraud if I sell you something that I know is going to blow up, but if you're Goldman Sachs, where your clients are referred to as muppets, well, it's fine to sell your clients investment products that your bank is offloading as fast as possible on the open market because you know they're about to explode, even when there's emails to prove it.

It doesn't seem like banks have morals and they definitely don't learn their lesson from the punishments they receive. Bank of America’s securities unit has agreed four times since 2005 not to violate a major antifraud statute, and another four times not to violate a separate law. Merrill Lynch, which Bank of America acquired in 2008, has separately agreed not to violate the same two statutes seven times since 1999. They're just doing cost-benefit analysis, where their benefits are our costs as when Morgan Stanley entered into a complex swap agreement with the New York electricity provider KeySpan in 2006 that gave it a stake in the profits of a competitor enabling the two companies to push up the price of electricity. Price fixing is illegal, so Morgan Stanley had to pay a fine of $4.8 million for enabling it, but they got to keep the $21.6 million they made for handling the swap and didn't have to admit any wrongdoing. The cost to New Yorkers in higher utility bills? $300 million. Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase came out smelling like roses converting human shit into billions of dollars in profits by financing a new sewer treatment plant for the people of Jefferson County. The people didn't come out smelling so pretty though as the financing cost forced them into the biggest municipality bankruptcy in US history. The same thinking probably went into Wells Fargo's alleged decision to fire an employee three days before his daughter was scheduled for surgery in order to avoid paying the bill. No cash, no cure for cancer as the hospital cancelled the surgery and the child was left to die.

What of finances role of market maker and facilitating transactions for investors and consumers, surely we owe them something for that? Well, thanks to the deregulation of the agricultural commodity market in 2000 Goldman Sachs earned £600m from food speculation in 2009 alone. While the bank's profits were boosted, the numbers dependent on food banks and aid were exacerbated thanks in part to the banksters. No one disagrees that their gambling pushes up prices, the only question is how much relative to other factors such as biofuels, changing consumption patterns and drought. The poor are disproportionately affected by a rise in food prices as they spend a higher percentage of their income for the basics, just as they do for debt. If you use anything made of plastic, drive a car or heat your home, you should know oil speculation adds $23.39 to the price of a barrel (around a quarter) which translates to about an 83-cent-per-gallon of gas premium and costing an average American family $82/month. And people we're angry when Bank of America introduced a $5/month debit card fee!?! Seems these financial behemoths need the cash though as they need to keep up with their competitors in the new world of flash trading. By spending billions on faster cables they can shave microseconds off the latency, or trading execution time, thus allowing themselves to peek at the orders of other traders before they're made. Not only does this destroy the idea of investing, especially by us flesh and blooders, but it opens up the markets to one of the newest perils, the flash crash. Hooray, more risk!

Perusing the comments under any number of stories of payday loan companies charging four to 5000% interest, distraught families being tossed on the street or students in the streets protesting their debt enslavement, one can always be sure to find defenders of the faith of finance. These moralizers are quick to point out that no one forces people to sign on the dotted line but never take into account the asymmetry of information and power between the parties or the corrupting influence of living in a society built on sating our short term desires no matter the cost. The tired refrain of taxation and representation is trotted out to rationalize paying the debts of our governments but loses all meaning when put in the context of the options faced by voters today: Bad or Worse, Red or Blue, vote wrong and it's a redo, either/or results in another IOU as the need for money to get elected forces politicians to prostate themselves before the FIRE (finance, insurance and real estate, one for all and all for one thanks to deregulation). Insisting people today make rational economic decisions seems ludicrous while our educational system is being sold off to the lowest bidder and converted into a propaganda factory where standardized test scores are more important than critical thinking. Arguing we have a choice when the information we receive is nothing but a toxic mix of cognition clogging updates in our Twitooglebook universe alongside stories from a media controlled by six corporations (down from 50 in 1983) offering 2,000 channels with the same message while selling an illusion of choice barraging us with a constant stream of crisis reports, crisis summits and near-crisis averted but never connecting the dots.

"When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretend payment." - Adam Smith; The Wealth of Nations, Book V, Chapter III, Part V, p. 481

To review. Forty years ago we entered a new era of fiat currency which untethered money and thus debt from any constraints in order to protect ourselves from "money speculators". The US in particular experienced a long economic boom for the wealthy with stagnation and even decline for the rest as taxes for the rich and corporations were cut, unions were gutted and jobs were outsourced. In the past 30 years, 96% of the growth of average incomes have gone to the richest 10% and in the past 10 years, the incomes of the other 90% have declined. In Europe, a new currency was introduced with supposed magical powers to turn the likes of Greece into Germany but only had the effect of causing them to diverge. On both sides of the Atlantic, the shortfall of the poor, the middle class and their governments was made up by increased borrowing. The "money speculators", whose ingenuity was unleashed by the deregulation that regulatory capture bought them, were more than happy to find more and more creative ways to eliminate risk and earn huge rewards. When the ponzi scheme faltered, we were told there was no alternative to saving the banks, transferring trillions from public hands to private with no consequences and next to no oversight. With nothing fixed and no lesson having been learned, the banks emerged bigger and more powerful than ever with the knowledge they can act with impunity while the public from Madrid to Manchester to Miami are forced to accept ever more stringent austerity measures in exchange for ever larger bailouts which continue right under our noses.

Oh, it continues. TARP was just the beginning of bank bailouts as the program has continued in stealth and shows no sign of being abandoned therefore changing the game is the new moral imperative and sustaining it a sin. Language is their most effective ruse, twisting meanings and changing expressions. Quantitative easing in the US and UK is nothing more than printing money electronically and using it to overpay banks for their financial assets or by lending to them on the cheap, minimizing their borrowing costs and lowering their reserve requirements in the hopes they will lend that money on to the real economy. Of course they don't, they just buy more bonds (gilts in the UK) to earn a risk free return (as long as the merry-go-round continues) and wait for the next round of easing (QE3 is rumored for a fall sailing). All this goes to pad the bottom line which they need to perpetually improve to keep increasing CEO salaries, keep the stock market happy and of course, give idiots like this something to babble about incoherently.



European sensibilities were a bit too sensitive for such blatant Zimbabwe/Weimar Republic-like behavior (at least until recently when they just up and gave Spanish banks €100 billion that the people will have to pay back), so the ECB basically did the same thing but called it LTRO, Long Term Refinancing Operation. Prohibited from giving money directly to countries, the ECB printing press is used to give money to banks ostensibly to buy bonds from countries having problems selling them (ie. Greece et al). More free money for the banks if the game continues as they can either put the cash into the riskier bonds at higher rates or play it safe and deposit it back at the ECB. Other Newspeak candidates include 'Growth friendly' policies, those which hand more power to foreign corporation and banks to continue their plunder while David Cameron's 'expansionary austerity' is more Orwellian than his Big Society and has driven the UK into a 'surprise' double-dip recession. Confused? Yep, you're meant to be, otherwise you'd wonder why they don't just give the money directly to the people instead of banks while artificially maintaining low interest rates in order to force the elderly to eat cat food or starve.

"And Jesus went into the temple of God, and cast out all them that sold and bought in the temple, and overthrew the tables of the moneychangers, and the seats of them that sold doves" - Matthew 21:12

Just this past week US VP Joe Biden got in a little hot water for telling a half-truth:

People (well, right-wingnuts) went, well, nuts, as they tried to turn his words into an insensitive race play. The mistake he made though is that we're already in chains, slaves to greedy, immoral (amoral?), psychopathic bankers. It wouldn't be so bad if we at least we're being driven for a monumental purpose, I dunno, like building pyramids, the US capitol or White House instead of facilitating the worship of the Golden Calf. Up til now we've been complicit in their shakedown where debt is a sacred obligation only if it is owed by the poor and vulnerable to the rich and powerful who have used their gains to purchase political power or hidden them away in the Caymans. Yet debt is always negotiable or can even be written off when it's the other way around ensuring the wealth keeps flowing upwards. The growth in inequality seen before the crisis has been put on steroids since the bailout with more than 90% of the gains going exclusively to the richest 1% causing the middle class to slowly disappear and poverty to explode while Paul Ryan argues to cut their support. Regardless, much of the rabble will rally to the Romney/Ryan call to extend the Bush tax cuts and further cut taxes on the rich while making the rest pay for it. We used to ask "What's the Matter With Kansas?" but we need to ask "what's the matter with us?" today for doing nothing as the air raid sirens are sounding the next attack.



Alone, none of us can destroy the false idol of greed, there's no Moses amongst us, the only way is if enough people act together. Think and buy locally, plant a garden, ride your bike, vote for alternative parties and take your money out of the TBTF/J  banks (US, UK, Facebook) and put it in a credit union that puts profits back into communities are all simple ways to start. The more ambitious can talk to and teach others, join a protest, or even try to get out of the fiat economy altogether by investing in physical gold, silver or other metals. Of course if you're worried about all that extra weight in your pockets try using the alternative, electronic, secure Bitcoin currency. Finally, we have to shed the holier-than-thou shackles placed on us by those that would call people who walk away from underwater homes deadbeats, graduates unable to make their student loan payments slackers and governments tricked into a debt trap unable to meet their debt obligations lazy while bailed out banks behave beligerently, 'good' governments gut the promised social welfare state and corporations renege on obligations and commitments made to provide health care, pensions and other benefits to workers. The parasites may seem to have the power, they may have won the previous battles, but we, as flesh and blood people, have the real power, it's time to Strike Debt, stop paying what is no longer morally owed, a debt strike to stop the bankster shock doctrine takeover.

Who's Afraid of the Big Bad Wolf?

Is it all Walt Disney's fault? Maybe if we had all learned the original story of the Three Little Pigs instead of growing up with the Disney version we would know to be afraid of the big bad wolf. You see, in the original story the two lazy pigs who built their houses of straw and sticks were both eaten, whereas in the Disney version they run to their hardworking brother's house of bricks for protection. With all the talk of PIGS and Greece in the financial world today, it seems only natural to see the situation as an allegory with people, companies and nations representing the little pigs and debt as the big bad wolf.

If you haven't heard of the PIGS yet, it's an acronym for what are also known as the Club Med nations in the eurozone, Portugal, Italy (or Ireland if you listen to the Italians), Greece and Spain. All have been thrust into the international spotlight recently as their soaring debt, deficit and a slight credibility gap have been undermining confidence in the euro pushing it down from over $1.50 to around $1.35. The focus started out on Greece, but has now widened its spotlight onto Spain and Portugal bringing with it the huffing and puffing about default and the implications for the euro, a German/French bailout and good old moral hazard or an IMF rescue package and their wicked witch guidance.

Of course there's a variety of reasons for problems in the eurozone: loss of competitiveness due to eastward EU expansion, a sharp drop in tax revenue brought about by the financial crisis, lack of monetary policy options as they now don't have the option to devalue national currency - but the main problem is debt, too much of it. Yet, it's not like any of this happened at once, all three countries, plus most of the western world, have been running astronomical deficits for as long as I can remember. The IMF says that the G7 nations owed a combined $30 trillion US. So, what happened to make this a crisis? Fairy tales, like debt, have predictable story lines, so just follow the money to the beginning as we already know they end the same, night after night, empire after empire.

It's not surprising therefore that the Greek story seems a little repetitive as it parallels the events that led up to crisis 1.0 in 2008. Step one, create the illusion of stability. While the banknotes weren't issued until 2002, the euro came into being January 1st, 1999 when 11 countries took part in conversion day as rates between the euro and national currencies were irrevocably fixed. Greece wasn't one of the 11 as they failed to satisfy all the stipulations of the Maastricht Treaty. Then, as if magically, I love fairy tales, they did; becoming the 12th June 19, 2000. It's since been shown that the EU bought a pig in the poke as we learned in 2004 that total debt was over 100% and worse yet, deficits have been running well above 3% of GDP since the 90's every year except 2006. How'd they get away with it? Of course it was the big bad wolf, Goldman Sachs, and the magic of cross currency swaps.

Remember the wolf in last night's story where he created the illusion of security by bundling mortgages and other debts together, magically obtaining triple AAA ratings in order to buy cheap insurance from the AIG's of the world? Surprise! He also helped Greece to do the same thing. Much as Goldman knew they could rely on the US government to bailout corporate counter-parties due to their TBTF (too big to fail) status, sliding Greece into the eurozone ensured that the ECB (really Germany or France as direct European central bank intervention isn't allowed) would now be standing behind Greek liabilities. These days it seems the wolf also sells the building material to build our financial houses out of straw and twigs.

Cross-currency transactions are part of normal government refinancing as nations issue debt in dollars or yen, swap it for euro debt for a certain period and then exchange it back into the original currency at a later date. However, in Greece "around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future." Bankers devised a special kind of swap with fictional exchange rates which enabled Greece to receive a far higher sum than the actual euro market value of 10 billion in dollars and yen. Basically, Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks disguised as a swap which didn't show up in their debt statistics allowing the books show in 2002 that the Greek deficit amounted to only 1.2% of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7%. According to today's 2002 records, it stands at 5.2% (nothing compared to the 12.7% it had planned for this year). With bond maturities at between 10 and 15 years, it'll get even worse when Greece has to pay up for its swap transactions, while of course Goldman Sachs charged a hefty commission of $300 million for the deal and later sold the swaps on to a Greek bank in 2005.

In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways through a legal entity called Aeolos (god of the winds, they should of gone with Demeter to keep the pig theme) in 2001 which helped Greece reduce the debt on its balance sheet that year. In much the same way the wolf picks up the scent of a strapped homeowners forced to take out a second mortgage to pay off credit card debts, the Goldman pack has been stalking Greece to feed it's fairy tale debt habit. As late as November a team from Goldman Sachs led by president Gary D. Cohn arrived in Athens with a deal to create a financing instrument that would push Greek health care debt far into the future.

A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those 'mythical' transactions as sales, not loans, despite doubts by many critics. The tide of fear caused by this uncertainty is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow. For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin (sorry, I know mixing in biblical stuff now): countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments chose to artificially reduce their deficits by resorting to derivatives sold by and benefiting only the big bad wolf.

But are firms like Goldman really the big bad wolf? After all, they've done nothing illegal (so far, we think) and they're simply providing a service, supplying for a demand. They weren't doing anything wrong when they bundled junk debt into pretty packages, secured AAA ratings then bought insurance on default for low prices from companies like AIG. Neither was it illegal when they started selling those same securities short, causing their prices to fall and triggering massive contractual payouts from AIG when the value of the bonds fell below certain levels. They were simply playing by the rules of the game when they benefited from their timely trades and ensuing government bailouts. When will we sit up and take notice that the wolf is now as influential on the fairy tale genre as the Brothers Grimm? The same little piggy has roast beef whether the market goes up or down and the rest of us have none.

Much of that nasty debt that Wall Street bundled into pretty packages came courtesy of Main Street. Living within one's means sounds so simple; don't spend more than you can afford. Yet today's reality isn't that easy. Temptation is all around and folks need their flat screen TV's, new cars and homes to put all their stuff in. Governments play a roll here too; whether it's encouraging behemoths like Fannie May and Freddie Mac to give mortgages to people who can't afford them or offering tax incentives for people and corporations to take on debt; tax shields make corporate debt as much as 42% cheaper than equity. Individuals are able to write off all their mortgage interest, up to a million dollars, and companies can write off all the interest on their debt, but not things like dividend payments. Yet these incentives are clearly unnecessary; people will always need mortgages to buy homes, the deductions do nothing to increase home ownership while businesses already like debt as it offers leverage. The business-interest deduction, meanwhile, may lower an individual company’s taxes, but it also means that the overall corporate tax rate is higher, so its real impact is to give companies with lots of debt an unjustified advantage. So the system skews decision making in favor of debt and housing away from equity and other investment choices which magnifies risk making the economy more fragile and volatile.


Three Little Pigs from Guy Galer on Vimeo

The big bad wolf can even be re-branded; the leveraged buy-out firms of the 80's became the private equity firms of the 90's. Like the wolf in sheep's clothing though, the name change hasn't affected their modus operandi, company-flipping through debt which has squeezed the life out of any number of venerable companies and engorged many a Gordon Gecko. Sometimes they even set their sites on sports franchises. The Glazer family's purchase of Manchester United, the world's most valuable sports team, will provide a case study for future generations on how financiers enriched themselves while destroying our cultural icons. Thus far success on the field has managed to paper over the financial cracks but the creaking from the mountain of debt recently forced them to float a £500 million bond. While the demand for the bond issue was strong, it's only a matter of time until the interest payments (£325 million since the Glazier acquisition in May 2005) and the 'fees and loans' being issued to family interests sink the club. After all, you can't sell Cristiano Ronaldo to service your debt every year.

The wolf in Disney's Three Little Pigs was said to be an allegory for the Depression at the time of it's Silly Symphony 1933 release. Sadly, today's PIGS have been forced into responding to their financial woes by reducing many programs begun during that era; squeezing their people in order to keep the wolf from the door. Cutting social programs always come before financial reform or reducing spending on things like defense. Which of course brings us to the US, the Federal Reserve and it's magical printing press. Just as you fatten a hog before the feast, the US has been gorging on debt. With their 14 figure debt and $3.7 trillion deficit (yes just one year), optimistically it'll only take until 2020 for debt to reach 100% of GDP when yearly debt maintenance payments of 20% of GDP should be reached, a figure considered unsustainable.

Like a child believing this time the fairy tale will end differently, America and the neoliberal economic model are following the path of all empires. First, the ideology becomes corrupted and the believers lead us down an economically unsustainable model which inevitably forces the currency down until finally, military power loses its supremacy. Spending half of the world's total on defense every year won't help avoid the fate of the Habsburg's in Spain, pre-revolutionary France, the Ottoman and British Empires, or even the Soviets. Just google "Roman Empire economic collapse" to see how many results come up with the end of the American empire to see how most people think this story ends.

No government can ever balance their budget when the poor live hand to mouth, the working class and the middle class are mired in debt, and corporations and the wealthy can buy tax breaks and/or hide their money from the tax man in off-shore accounts. Yes, we need debt, without it we wouldn't have money apparently. Just as s a growing youth is said to have a wolf in its belly, it can quickly expand out of control; Einstein may or may not have said "compounding interest is the most powerful force in the universe". Conservatives rail against it while needing it to supply their pet projects and war machines, liberals feign concern while writing huge checks that necessitate it and all the while the balance of power in the world shifts inexorably east.

Financial regulation is the brick house that can protect us from the wolves. Having seen how their game of financial Armageddon chicken worked out in 2008 when the rest of the world blinked and handed over mountains of cash, this time the wolf has decided to stick it's snout directly into the carcass of sovereign nations. It's only America that can save herself and the financial world but she better act soon. Goldman Sachs and the gang are hunting ever bigger prey, taking an ever larger portion of the pie, living high on the hog if you will, while the rest of us make do with less. Breaking up the TBTF or limiting their size through taxation using ideas such as the Tobin tax on financial transactions is a first step. More importantly we need to change the consumption culture in which we simply make pigs of ourselves; here once again government can play a role by shifting to more consumption based taxes. If there's a moral to learn from this story it's that the only way to catch the wolf in the pot is to stop consuming more than we produce.

Rent Seeking Parasites

Editor's note: There is no editor. Much like Qaddafi's translator at the UN, the editor went mad halfway through and began screaming "I can't take it anymore!". Therefore, venturing forward into this stream of consciousness is a decision not to be taken lightly, continue at your own peril.
If your still determined to continue, just click here, move the pop-up aside, and read.

Imagine walking into a casino where you're always a winner. Every game is rigged in your favour, every dealer is not only your friend, but accomplice, and the pit bosses are all in your pocket. At first, you can't imagine your luck, so you pump a few quarters into the slots. With each pull your stake grows. Over at the blackjack table you make a couple of small bets and your cards keep adding to 21. Emboldened by your early success you walk over to the craps tables where you start to push your luck as the dice are hot. A crowd grows, the collective excitement of the screams, shouts and cheers pushes you on as if in a dream. Other players are drawn in, with piles of chips going onto the 'pass' line and the 'no pass' bar on each roll as everyone is getting into the action, betting with and against you - how do they both keep paying off? You must have been born lucky as you've wandered into no ordinary casino. Somehow you've won the lottery and wound up a big banker in today's America, a world onto it's own where thanks to the system you can't lose. All well and good for those fortunate few, but really, can it go on forever?

We're a year removed from what was nearly the biggest global financial meltdown ever, yet looking around it's hard to see any tangible proof that we're in a better position than we were then; I'd argue that things have, in fact, gotten worse. The heart of the problem lies in the Panglossian vision of the financial world that still reigns supreme despite the abyss that we stared into not so long ago. Instead of viewing the markets as a casino with risks and pitfalls that need to be controlled, we live in the best of all possible worlds where the efficient market theory asserts that financial markets always get asset prices right given the available information. Therefore the best thing corporate chieftains can do, not just for themselves but for the sake of the economy, is to maximize their stock prices. Problem is, this efficient market is far too heavily influenced by a few rent seekers (some would call them parasites, sucking the blood out of the organism while giving nothing in return, others, simply banksters). A feedback loop wherein increased wealth leads to increased influence leading to increased wealth... Eventually those in power become completely beholden to these few. Together, they have managed to dupe the entire world into believing in the market's omniscience. Witness the knee jerk reaction by large swaths of the population, many of whom are dirt poor, without health insurance, to any suggestion of trying to improve the lot of millions, as it would involve obstructing the 'free' market. In other words, finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a “casino”. What keeps the rest of us content is the illusion that we, too, will eventually be able to game the system, so long as the government doesn't interfere.

Yet interfering is exactly what the government has done over the past year, with little or no questioning of why we're supporting a broken system. To seriously question a system that promotes short term profits and corruption remains blasphemous. Fact is, the capitalism we have is evil and it's threatening to devour itself along with the world. When a financial crisis hits most nations, investors run for the exits, the IMF swoops in, sweeps away the old banking regime and imposes usurious trading rules and financial regulation on the country. We've now seen what happens when a similar crisis hits the USA. A couple of scapegoats are allowed to fail (Lehman Brothers, Bear Stearns, Merrill Lynch...) while the friends of the ruling elite are saved by pumping tax payer money into them; trillions of dollars of wealth transferred from tax payers to wealthy bankers. Of course it was these bankers who made the ridiculous gambles seeking short term profits which allowed them to pay themselves huge salaries and bonuses. When the giant Ponzi scheme collapsed, no one was found responsible, worse yet, to question and regulate is seen as somehow "communist", and those guilty parties are allowed to continue on their merry way.

So, how did we get here? Historically, banking has been a risky industry having seen its share of spectacular crashes. Until the Great Depression, major crises struck about every 15 to 20 years – in 1792, 1797, 1819, 1837, 1857, 1873, 1893, 1907 and 1929-33. Then the crises stopped. The last two led directly to the creation of the Federal Reserve and the New Deal. A magical machine to manufacture money out of thin air along with financial regulation such as federal deposit insurance, the passage of the Glass-Steagall Act and the separation of commercial and investment banking created a stable environment without hindering growth which was also broad based as we saw either stable or falling income inequality. Unfortunately, the seeds of moral hazard were also planted. As depositors and investors no longer had to worry about the soundness of the banks, they would be attracted to riskier institutions and higher rates of return without the fear of downside risk, causing money to flow to weak banks rather than strong. Said one opponent in 1933, “A reputation for high character [in banking] would be cheapened and recklessness would be encouraged.” Fortunately, the authors of Glass-Steagall (and the follow-on Banking Act of 1935) prepared for this threat, authorizing not only public deposit insurance but also meaningful bank regulation, designed to ensure the safety and soundness of insured banks.

All was well for almost 50 years, creating wealth but also breeding arrogance. We began to forget the lessons of the past as memories of the Depression faded and economists fell back in love with the idealized vision of an economy in which rational individuals interact in perfect markets. We moved away from Keynes' vision of financial markets as a casino and replaced it with Eugene Fama's efficient market theory in which financial markets price assets at precisely their intrinsic worth given all publicly available information. John Meynard Keynes didn't replace capitalism as many critics feared at the time, he simply fixed it. Unfortunately, the last half a century saw a revival of the neoclassical Adam Smith style belief in 'trust the market'. Your Milton Friedmans and Schumpeters of the world convinced us to start loosening the grip on the banksters. The hubristic faith in the market omniscience was embodied by Alan Greenspan, a man who believed the market could regulate itself on everything from fraud to derivative trading. At the same time the influence the banksters could exert on public policy was growing. Finance's success in the 80's coincided with the rise of the era of Washington lobbyists which lubricated the revolving door between Wall Street and government. Just looking at the myriad of connections between Goldman Sachs and political power is mind boggling. Henry Paulson, Dubya's last Treasury secretary and present secretary is a former Goldman CEO, Robert Rubin, Clinton's last Treasury secretary spent 26 years at Goldman before becoming chairman at Citigroup; John Thain, he of the $87,000 area rug for his office, spent time at Goldman before driving Merrill Lynch into the arms of Bank of America, Robert Steel, Mark Patterson, Ed Liddy, the heads of the Canadian and Italian central banks, the World Bank, the New York stock exchange, the last two heads of the Federal Reserve Bank of New York ... you get the picture. Somehow Wall Street was able to launch a successful takeover bid of the Beltway and could now dictate its terms. Regulation needed to be eliminated in order to allow finance to continue to grow; to achieve this, in the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. In 1997 and 1998, the years leading up to the passage of Phil Gramm's fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five years.

"Human nature, in no form of it, could ever bear prosperity” - John Adams, as quoted by David Brooks in the NY Times a week ago and seven years ago - compare and contrast.

Culturally, America and her wannabes, the rest of the world, changed too. (Begin using old man voice) Back in the day, it was understood that you had to work hard to be successful. Today, that ethos has been lost as everyone and their uncle search for the next get rich scheme. Materialism has gone beyond acceptance and become the standard to which we strive. Both the public and private spheres have made their contributions as governments sponsor lotteries, gambling which disproportionately hurts the poor while we are subjected to a 24/7 media which promotes an excessive lifestyle. The effects are plain to see; between 1950 and 1980 personal consumption was remarkably stable in the US, amounting to about 62 percent of GDP. In the next three decades, it shot upward, reaching 70 percent of GDP in 2008. During this period, debt exploded. In 1960, Americans’ personal debt amounted to about 55 percent of national income; by 2007, this figure had surged to 133 percent. By 2019 the federal government's debt will be 83% of GDP with yearly interest payments of $803 billion. By the end of the Bush presidency, one that saw over $1.3 trillion in tax cuts which mainly benefited the top 1% of earners, the poverty rate had risen to 13.2% while median household income had fallen to $50,303 from $51,295 ten years earlier, adjusted for inflation. Consumerism became more than just keeping up with the Jones', it became patriotic even while debt levels were driving risk to unsustainable levels. Yet, somehow through all this, the teabaggers and their ilk have saved their anger for a Socialist/Nazi/Communist/Alien plot to destroy the nation by trying to give health care to the masses. Immodesty has become as ubiquitous as advertising as self indulgence, self-love, self-advertisement, are not only accepted but celebrated. It would seem that Ayn Rand has truly won the day.

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done” - John Maynard Keynes, The General Theory of Employment, Interest and Money

Worse yet, the warning signs were all there. Since the age of deregulation we've seen Savings & Loan meltdown, the LTCM debacle, the Asian Crisis, yet we keep marching to the same drum beat. Accounting scandals, market manipulation and an internet bubble showed us how easy it is to be lured to the dark side, yet we keep dancing to the same song. Maybe it's because we've been hypnotized by the rhythm for so long we no longer have the power to stop the music. Finance and banking exist for one simple purpose, to efficiently allocate capital. So, what happens when all the capital, both human and monetary, is all tied up in finance? Profits of the financial industry as a percentage of total global profits were a mere 5% when Reagan sat in office in the early eighties; by the time of the crisis, that number had reached 30%. Wiz kids coming out of school no longer dream of working for NASA or becoming a doctor, lawyer or engineer; the holy grail is now finance, to come up with a Gaussian copula function to evaluate or even eliminate risk. And why not, they're just behaving in a logical, capitalistic way, as pay in the financial sector has risen dramatically. From 1948 to 1982, average compensation ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007. Works intended as cautionary tales of excess such as The Bonfire of the Vanities, Barbarians at the Gate and Wall Street, have served only to increase Wall Street's mystique. 10 years ago if you'd have been walking down the main drag of my home in Poznan, Poland, Swiety Marcin, you would've been able to stop at a variety of shops. Today, you can drop by a branch of some bank and walk by empty shops squeezed out by the higher rents brought on by their well-heeled neighbours. Speak to the majority of the brightest minds entering higher education and you'll learn that most dream of a career on Wall Street. And why wouldn't they? Even after the crash, the 30,000 employees of Goldman Sachs earn an average salary of $700,000. Eight major American and European banks will pay the 141,000 employees in their investment banking units $77 billion in 2011, about $543,000 per worker.

While the financial crisis may have been good for the planet, it wiped out a lot of wealth; US households alone saw their net worth decline by $13 trillion. There was a time when bankers had to pay a price for their mistakes; if you ran a bank, and the bank couldn’t repay depositors or other creditors, those people had the right to confiscate all your personal assets and income until you repaid. Even the idea of 'double liability' in which stockholders were responsible for twice the original value of their shares in a bank existed until the age of the Fed in the US. Let's see a few examples of what happens today:

AIG. Patient Zero of the global economic meltdown, Joseph Cassano, head of AIGFP (400 employee London-based AIG Financial Product division). After bundling the crappiest mortgages they could find and slapping AAA ratings on them, banks needed someone to insure them. Enter Joseph and the Amazing Technicolor Credit Default Swaps, CDS. AIGFP's returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary's 400 employees were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in compensation. Of course we know how this story ends, housing prices start falling, AIG's AAA credit rating begins to slide, triggering collateral calls and by February 2008, AIG is posting an $11.5 billion loss. What happens to Joseph? Burned at the stake? No, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others. When Congress balked, AIG canceled the $90 million in payments. Then, in January 2009 AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano's old unit, AIGFP, which is due to go out of business shortly! Yes, that's right, an average of $1.1 million in taxpayer-backed money apiece.

Two of the other main culprits in the financial meltdown, Fannie May and Freddie Mac, have actually gotten bigger, and therefore more dangerous.

Merrill Lynch CEO Stanley O'Neal, a man who acknowledged his mistake in overexposing his firm to subprime and thus causing its downfall walked away from the company with a severance package worth $162 million. Executives of the company had their $3.6 billion in bonus payments moved forward to December last year before the firm was taken over by Bank of America for fear of having them cancelled. Well, at least someone's trying to do something about it.

Five of the biggest US banks - Goldman, JPMorgan, Wells Fargo, Citigroup and Bank of America - posted second-quarter profits totaling $13 billion. That's more than double what they made in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the second quarter of 2007, when the economy was strong. The main argument for the bank bailouts was that they were "too big to fail", yet the net result is banks that are now even bigger. The bailout enabled mergers and acquisitions have left those banks still standing in an even more dominating position. And what happens when 4 banks (Bank of America, Wells Fargo, JP Morgan Chase and Citi) issue one of every two mortgages and about two of every three credit cards? The top four banks raised fees related to deposits by an average of 8 percent in the last quarter.

Speaking of Bank of America, take a look at this sweet deal they got.

In the UK, banks such as RBS, the Royal Bank of Scotland, behaved even more scandalously. Despite posting the largest loss in UK banking history a year ago, the former chief accused of bringing the bank to its knees, Sir Fred Goodwin, not only received a £2.7 million tax-free advance on his vast pension, he'll get £693,000-a-year as it's total worth is £16 million. I do suppose home security will be expensive for him. Well, they did say sorry, which I guess is why they figure it's OK to pay new boss Stephen Hester £9.6 million a year.

Barclay's got some of Lehman's US business, including its glitzy Manhattan headquarters, for what many regard as a fire-sale price, $1.75 billion. Well, I guess you deserve a prize for remaining the only major British-owned High Street bank to be fully independent from government capital.

Meanwhile, if you weren't best friends with the US Secretary of the Treasury, your bank may have gone out of business. Another 94 have closed their doors this year alone, while the number of 'problem' banks had risen to 416 by June 30th, up from 305 three months earlier. And guess what? The FDIC, those folks who are supposed to protect the consumer again the risk of bank default actually underestimated the risk of bank defaults. Yep, looks like they'll need a bailout soon too.

And how about Goldman Sachs? The bank paid out an astonishing $4.7 billion in bonuses and compensation in the first three months of this year, an 18 percent increase over the first quarter of 2008. It also raised $5 billion by issuing new shares almost immediately after releasing its first quarter results. Taken together, the numbers show that Goldman essentially borrowed a $5 billion salary payout for its executives in the middle of the global economic crisis it helped cause, using half baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout. And what did Goldman give back to the people of the United States in 2008? Fourteen million dollars, an effective tax rate of one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion, yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.

The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations. Previously, a dozen or so big banks formed the top tier. Now Goldman Sachs and JPMorgan Chase are clearly the strongest, with Morgan Stanley struggling to compete. Bank of America and Citigroup are the weakest big banks, heavily reliant on government guarantees to survive. The extensive government support that began after Lehman collapsed will lead investors to assume that governments will always prevent major banks from collapsing. The Greenspan put has been replaced by the Bernanke put (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments) so investors will continue to lend money to the financial industry on easy terms. In turn, financial institutions will use that cheap money to make risky loans and trades. The banks will keep the profits when their bets pay off, while taxpayers will swallow the losses when the bets go bad and threaten the system. Economists call the phenomenon moral hazard. Bankers have a different term: I.B.G. The phrase implies that by the time a deal goes sour, “I’ll be gone,” after I get my huge bonus.

Even when someone in a position of power raises the issue of whether parts of our financial system have become dysfunctional, s/he faces heavy criticism from all quarters. Witness the reaction faced by the UK’s chief financial regulator, Adair Turner, when he suggested just that, and called for greater capital requirements at banks and pondered how it would be possible for regulators to preserve the valuable parts of our financial system while regulating to limit the harmful parts. For some reason it is a given that the rich deserve an advantage of say, 30 milliseconds. Or that it's a good thing that financial gurus are giving up bundling mortgages in favour of old and dying people's life insurance policies. Or that instead of betting on you to default on those mortgages, now there just making bets on nations defaulting on their sovereign debts, in index form, and not just Argentina. Wait, even better, remember all the slicing and dicing, with the tranches and other voodoo they did to turn those crappy mortgages into AAA securities? Well, apparently, with a little more alchemy and sharper knives, they can be re-rebundled in order to further lower bank capital requirements. Hooray, it's the re-remic!

But what's the problem you may ask. Markets are up, nations are emerging from the recession, the financial industry is back to inventing new ways to make profits, all will be well in the world once again, maybe we do live in the best of all possible worlds. Wrong. Someone has to pay when the bubbles burst, and who has been paying the bill upfront for the taxpayer to this point? - China. And just as investment firms such as Goldman Sachs had insurers like AIG protecting their exposed behinds while they placed their bets on various financial derivatives, China is busy trying to hedge their bets on the US economy. After AIG wrote hundreds of billions of dollars of credit insurance and had no money to make good on its promises when the bonds defaulted, the US government was there, but who will be there when the US government can't find someone to buy their debt to pay the bills? So China is covering their bets by putting their money on themselves, with a little help from glittering gold. Realizing the world will not continue to support a fiat currency that can simply multiply itself at will to solve any problem and thereby reduce it's value (simple economics), China seems to be putting all the pieces into place to make themselves the world's store of wealth. Aaah, yes, competition. With nowhere else but US Treasuries to invest until now, the world has been forced to support the bubbles that America has chosen to create. September 28th saw an important volley in the coming financial war as 6 billion yuan worth of government bonds went on sale in Hong Kong. Taken together with the push for increased importance of the International Monetary Fund's Special Drawing Rights and lust for gold, it's clear they're looking for other avenues of investment. Any good investor knows that you have to limit your downside risk, and the financial industry's debt along with the increase it has caused in government debt pose significant systematic risk. While everyone moaned and groaned about the $700 billion TARP bailout, the real cost to the taxpayer is clouded by secretive operations with names no one has heard of such as Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or how about something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III. No one even knows where the bailout money has gone or how it's being paid, but the bottom line is a potential price tag of $23 trillion, yes trillion with a 't' for the US tax payer to pay for the mistakes of the financial industry and China knows that not even they can finance that. History is replete with examples of financial experts telling us that this time it's different, but if there is one common them to financial crises it is that excessive debt accumulation, whether it be by governnment, banks, corporations or consumers, often poses greater systemic risks than it seems [to do] during a boom.

No ideology can stand alone in the world. That would be a monopoly. Capitalism has stood unchallenged for 20 years now as an unchallenged monopoly (What do we really call China's system these days?). Monopolies are cancerous to the capitalist system. The defeat of its only legitimate rival, communism, has brought about a situation that has slowly killed what capitalist, neo-cons and Reaganites dreamed of creating. Is that irony? Or some kind of meta-level parallel. I don't know, but it's become clear that the monster created by this untethered beast, the financial system, is ever closer to destroying the world that it's trying to control and there's no one trying to stop it. Back in 1907, they say that JP Morgan single handedly saved Wall Street guaranteeing tens of millions of dollars to keep the wheels of finance turning. Today, the people, through their governmental agent, the Fed are guaranteeing trillions due to the latest bubble, and I'm afraid the bubbles have to get bigger each time to keep the party going. Oh no, the G20 meeting might force new regulations onto the industry, not! More likely they would be encouraging instability in order to smooth the way for the FSB (the Financial Stability Board, not the new KGB). Oh no, President Obama is giving a speech to bankers about their responsibility to act prudently, well, what self-respecting banker would bother going to be lectured to? If you wonder why they don't need to listen, just ask yourself whose money put Obama in the White House. Then perhaps you may realize as Voltaire's Candide did, that Dr. Pangloss really is just wearing rose coloured glasses.