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PERSPECTIVE: This is the third blog in the Common Sense Revisited* series. The subject matter deals with the failures of our government—Congress and the several presidents that have guided the country over the past thirty five years. The views expressed are neither liberal nor conservative nor an attempt to impeach either political party. There are enough facts to suggest that all share in the debacle that has led this country to its current state. If there is a bias, it’s expressed in these six words—a plague on all their houses.  .





The Occupy Wall Street (O.W.S) protestors are being justly criticized for a lack of a coherent message and a specific goal— rebels without a cause. Their protests are directed against capitalism—the linchpin of our nation. And if the truth be told, the young protestors are attempting to articulate what Main Street senses—that capitalism, epitomized by the free market, is in intensive care as a result of the malfeasance and greed of the leaders of  our institutions — Banks, Regulators, Business, Government.  The symbiotic relationship between government and big business has distorted the balance of power in the country, and has led us to the brink of a national disaster.


The country has evolved to a form of a hybrid socio-capitalism, where some business entities with the right political connections can’t loose. These institutions—financial conglomerates, for-profit educational institutions, quasi government institutions—have and are still being subsidized by the taxpayer. In a sense, the shareholders book the gains and the government (i.e.: taxpayer) assumes the losses.  The bailout of the financial institutions resulting from the mortgage bubble is not in question here. Not taking action would have made the depression of the1930’s seem like a mild recession. If criticism is warranted, it’s that the government didn’t intervene soon enough to shore up the big financial institutions, and failed to use its leverage to extract much needed reforms from these same institutions to prevent a re-occurrence of the systemic failure of 2008. The Fed, Treasury Department, and the bank regulators are responsible for this failure.


The Federal Reserve Bank continues to subsidize the banks in the form of low interest rate loans in order for the banks to build up their capital base so that they could grant more business loans, which would create jobs and stimulate the economy. Instead, the banks are investing the low interest loans in US Treasury bonds and expanding their derivative portfolios—estimated at $250 trillion (95% among the top 5 banks). The banks now have approximately $3.0 trillion more derivatives on their books than they did at the height of the financial crisis. $2.5 trillion are in credit default swaps with European Banks with exposures to Portugal, Italy, Greece, and Spain—countries that are teetering on the cusp of bankruptcy. Since the banks are not required to support their derivative portfolios with capital, failure of any of these countries could set off a chain reaction which could replicate the 2008 disaster. The banks are betting that the ECU will bail out the European banks as the Fed bailed out the US banks in 2008,


One of the constructive provisions of the Dodd-Frank Act calls for regulation of derivatives and for banks to carry additional capital to support their derivative portfolios. Three years after enactment, the financial services industry lobby has managed to obfuscate the issue and delay implementation of these vital reforms. In view of the fact that the financial services industry is one of the biggest contributors to presidential and congressional elections, it’s no wonder that our morally corrupt leadership is again not using their leverage to force resolution of this issue. Considering that derivatives—credit default swaps and collateral debt obligations— were the main cause of the financial crisis, the inaction of our so called leadership, is  morally repugnant and nothing short of criminal.


The financial regulatory institutions are nothing but paper tigers, focusing on minutia rather than substance. For years the Fed and the other bank regulators paid little attention to derivatives. The Fed began to take notice after the collapse of the Long Term Capital Management hedge fund that lost a $1.2 trillion bet on derivatives, mainly with money borrowed from the banks.  A Fed audit indicated that the banks didn’t know the extent of their derivative exposure due to lax record keeping and controls. Fortunately, the paperwork issue was resolved before the 2008 meltdown, but the systemic risk that these instruments pose remains. Too big to fail is slowly but surely morphing into a too too big to fail.


The Commodities Futures Trading Commission (C.F.T.C.) is another institution that has failed to enforce the activities of the traders and the institutions they represent. Today, the biggest oil traders are the big banks, betting billions on the price of oil.  Over the counter oil trades represent 95% of the trades on a given day, and, by law, over the counter trades are not regulated by the C.F.T.C. Even if the C.F.T.C were to discover a criminal violation, they are forbidden to intervene. These facts, incredulous as they seem, are the result of the Enron loophole in the Commodities Futures Modernization Act which was whisked through Congress by Senator Phil Gramm, whose wife, at that time, was on Enron’s board. This same amendment opened the gates for banks and other speculators to trade in oil commodities. Today, speculators control 99% of the oil market, and the planet is so awash with oil that speculators are running out of storage space. The oil storage facilities in the U.S. are at capacity, and oil is now being stored on idle tankers. Consider that approximately over one billion barrels of oil are traded every day, and the daily world consumption of oil is a mere 90 million barrels. Is it any wonder that a gallon of gasoline is selling for $4.00!


There is one thread that stands out in all this chicanery, and that is the symbiotic relationship between the government and the financial services industry. People move freely between both camps. Gramm’s wife was the C.F.T.C . regulator prior to her appointment to the Enron board. Enron supported James E. Newsome to head up the C.F.T.C. Newsome was subsequently hired by New York Mercantile Exchange (NYMEX) and appointed CEO of the very same institution he was regulating before he resigned from the C.F.T.C. When the exchange went public, he walked away with over $50 million.  The last three administrations appointed a treasury secretary that had previously been employed by Goldman Sachs. Robert Rubin, President Clinton’s treasury secretary, and the same Senator Gramm were instrumental in repealing the Glass-Steagall Act without implementing the necessary safeguards to prevent the abuses that led to the enactment of the Act in the first instance. They, together with Alan Greenspan, were also responsible for preventing the C.F.T.C. from regulating derivatives. The Enron loophole also exempts over the counter derivative trading from CFTC regulation. Thus the $600 trillion derivative market is running wild with no oversight over the products and the traders that make the market, and like the oil market the derivative market has no transparency. Subsequently, Rubin was hired by Citigroup, shortly after the repeal of Glass Steagall legalized the pending Travelers/Citicorp merger. He subsequently presided over its dilution. Not to worry, he walked away with upward of $120 million for his service or more aptly his disservice while the shareholders lost upwards of $240 billion. Senator Gramm was appointed vice chairmen by UBS after he retired from Congress, and you can guess who inherited Enron’s trading business when they went bankrupt—UBS.  Gramm, a free market advocate, through his role in rigging the Enron loophole, is singularly responsible for the derivatives debacle and subsequent recession and the consumer paying $4 instead of $2 dollars for a gallon of gas.


Capitalism and the free market have had a schizophrenic journey over the past century. The advent of the robber barons, the trusts, the investment/ commercial bank excess that led to the stock market crash of 1929, greenmail and junk bond scandals, savings bank-S&L and commercial real estate debacles, and the dot com and mortgage bubbles were all driven by greed and untrustworthy individuals in business and government. The theory that free markets allocate capital better than regulated markets is a myth, given the realities of the moral fiber of the individuals who populate our institutions. The one lesson to be learned from past history is that capitalism and free markets work well only when they are wisely regulated, are populated by honorable honest leaders, and the penalties for violating the rules are so draconian that they act as a deterrent to those who would game the system. At a minimum, violators should be prosecuted under the Rico Law, with long prison terms in max security prisons, and confiscation of all family wealth regardless of when and where it was generated. As the gipper would say, “trust but verify.”


Main Street is still absorbing the brunt of the pain from the collapse of the mortgage bubble—21% unemployment and underemployment, over $2 trillion in savings and asset losses—while the perpetrators walked away with huge paydays even though their institutions were brought to the brink of failure. The systemic failure of 2008 was caused by the derivatives, (aid and abetted by the regulatory and rating agencies), and pure fraud and greed, led by the likes of Goldman Sachs, A.I.G. and the other major international banks. But what is really criminal is the lobbying by these same institutions, in consort with the political hacks, to prevent the implementation of the needed reforms. Is it any wonder that people are protesting?  And is it any wonder that Main Street is fed up with Wall Street, Pennsylvania Avenue, and Capitol Hill?


In conclusion, the efforts of the O.W.S. protesters and their counterpart —the Tea Party—would be best directed to pressure the Congress to: repeal the Commodities Modernization Act, enforce those substantive provisions of the Dodd Frank Act, and to pressure the state legislators to call a constitutional convention to amend the constitution to provide for term limits and federally funded congressional and presidential elections. This later action is required to rectify the root cause of the problem— the symbiotic relations between government and big business purchased by campaign contributions. Nothing short of these actions will begin to resolve the fiscal problems faced by the nation and prevent another financial disaster.





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