Bankers As Oligarchs: Okay, Now We're Fucked.

[peristaltor.livejournal.com]

There's a new Rolling Stone article coming out soon that shows how corrupted our political process has become, but worse, shows how it is so bad that I doubt anyone will be able to do a damned thing about it.

Okay, remember how I keep harping about how banks create money? You go to a bank for a loan, and they create money and give it to you along with a repayment schedule. The money they create goes out into the world to be spent by you, and you return it in time with a little interest. As long as banks lend, there is enough money to move business along. Easy peasy.

Where should people seeking speculative investments go if they wanted money to invest in projects too long-term or risky for commercial banks? Investment banks. In an investment bank, individuals deposit their own money to be used in such speculation; no money is created with the issue of a loan. In a growing economy, such endeavors often prove more lucrative. Riskier, but lucrative. Again, easy peasy.

Then along come those tools Gramm, Leach and Bliley with a bill that gave the store away and led to the bubble that crashed our shit in '08. You see, money creation, according to Winthrop W. Aldrich in the 1930s, should be very, very specific:

This experience as a bank official, coupled with the testimony which was presented to your committee . . . had convinced me that many of the abuses in the banking situation had arisen from failure to discern that commercial banking and investment banking are two fields of activity essentially different in nature. I came to believe that while it was essential that there should be coordination between these two types of banking, such coordination could best be protected from abuse and thus enhanced in usefulness through absolute separation of interest between the two fields.

(Aldrich, quoted in the Stock Exchange Practices. Hearings before the Committee on Banking and Currency Pursuant to S.Res. 84 and S.Res. 56 and S.Res. 97, aka the Pecora Commission Report, p. 155. NB: Links to a PDF file; also, page numbers in PDF are different than those of the report. I use the page number here found in the report. I underlined.)

That "failure to discern that commercial banking and investment banking are two fields of activity essentially different in nature" essentially led to the banking crash of 1929. What should commercial banks lend/create money toward? Mr. Aldritch continues:

Its primary credit function is performed by lending money for short periods to finance self-liquidating commercial transactions, largely in the movement of goods and crops through the various stages of production and distribution; and in the making of short-term loans against good collateral.

(Ibid.)

And here's the kicker, immediately following the above. "The commercial bank cannot safely make loans to a borrower who lacks capital of his own or who cannot in the normal course of his business repay the loan within a reasonable period of time."

The service commercial banks should perform is to evaluate individual borrowers; they cannot do this if their relationship to those borrowers is too close. Therefore, investment and credit issuance were separated. Why is ably summerized in the Pecora Report as this screenshot illustrates.


Pecora Report, p. 156.

Ah, but things are now worse than they were in '29.

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Whenever best practices are criticized for not being "innovative" enough, you can bet there's profit involved. "Innovation" brought the country combined commercial and investment banks and the myriad conflicts of interest that inevitably led later to the resulting crash as Pecora's postmortem investigation revealed.

Think of speed. Yes, we can build cars that can regularly do over 100 miles per hour. Going faster allows commuters to get from points A and B with less time involved in travel. Since travel is essentially commerce, allowing people to do things faster increases our economy. It allows for innovation.

So, does that mean that the average driver should drive at such speeds? Look around you on a commute one day at the idjit drivers in other cars eating their corn flakes with both hands, doing the crossword on the steering wheel, zoning out into their text message typing. We've all seen this. We all know it happens.

Now picture those exact nimrods doing their nimrodish idiocy at 100 mph.

That's innovation. Worse, though I pointed out years ago that the 1999 Gramm-Leach-Bliley Act, aka the Financial Services Modernization Act of 1999, repealed the firewall between commercial and investment banking—essentially raising the universal speed limit of banking to over 100—I had no idea the act further allowed for drivers to roar and careen at such speeds straight through school and hospital zones.

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Matt Taibbi has another piece at Rolling Stone that delves further than anyone I've seen yet into how this 1999 abomination of a bill has screwed the country—if not the world—deeper than could be imagined. "A tiny provision in the bill," he writes, "also permitted commercial banks to delve into any activity that is 'complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.'"

And that means. . . .

Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government's ruling coalition, as the Danish public wondered how an American investment bank could possibly hold so much influence over the state energy grid.

A pic from that protest.
There are more eclectic interests, too. After 9/11, we found it worrisome when foreigners started to get into the business of running ports, but there's been little controversy as banks have done the same, or even started dabbling in other activities with national-security implications – Goldman Sachs, for instance, is apparently now in the uranium business, a piece of news that attracted few headlines.

At the moment, according to Taibbi, these banks are using their near-monopoly to restrict supply of metals like aluminum (I provided the link within the above quote for interested parties). This has, according to the article, driven the price of aluminum "$3 billion in just the past year" for some heavy users. As Blythe Masters puts it in a quote found in the article, "We need to be active in the underlying physical commodity markets . . . in order to understand and make prices." "Understanding" markets is one thing, but for a seller to make prices should be very, very concerning an attitude.

The possibility for them to do more, though, is very, very real. Why? Because it has happened in our past, in the roaring past before the Great Depression, and in the roaring years that punctuated the smaller depressions before that Great One. Morgan, Rockafeller, Carnegie; all the giants of industry and finance have a legacy of abuse that reaches far beyond the statues and buildings and institutes and even cities that bear their names. In many well-documented instances, their fortunes were built on the suffering they inflicted on others.

Today, folks, we are those others.

Hat tip to solarbird for the article link and heads up.

Comments

[kylinrouge.livejournal.com]

"also permitted commercial banks to delve into any activity that is 'complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.'"

It's like being allowed to take your kids mountain climbing without any safety equipment and if your kid dies, not only are you not liable, but the government will give you bereavement funds.

[hardblue.livejournal.com]

Then along come those tools Gramm, Leach and Bliley with a bill that gave the store away and led to the bubble that crashed our shit in '08.

No, no, I have been led to understand that that crash was due to Democrats and government making laws to making housing more affordable to lower-income people, and that blew everything up!

[sandwichwarrior.livejournal.com]

well that was part of it.

Removing the speed limit is one thing.

Adding monetary rewards for low split times another .

[mikeyxw.livejournal.com]

Well, it's is a bit strange that the government's role in ensuring lower interest rates and higher home ownership rates is ignored when talking about a recession that was essentially caused by a housing bubble inflated by cheap money. Bankers played a key role no doubt, they facilitated all of the cheap money, but the government was one of the major sources. I guess it's not surprising that "it's all the banker's fault" is the reason that resonates, they're not a group it's easy to sympathize with.

[kylinrouge.livejournal.com]

The government gave them the gun. I would say they're liable as an accessory.

[hardblue.livejournal.com]

I don't think it's easier to be sympathetic to government in our free-market loving nation,
and I don't doubt that the government is a partner in the economic meltdown, but I think
most of that responsibility rests on the deregulation that let our financial institutions run
a little too wild. I am mainly addressing that ideology that holds that private corporations can
hardly do wrong on their own, placing all the responsibility on democratic government.

[mikeyxw.livejournal.com]

Both commercial banks and investment banks were failing at their traditional roles (commercial banks were giving loans to those with no ability to pay them back and investment banks were selling junk disguised as AAA bonds) in addition to a bunch of sovereign wealth funds and other trying to find something safe that delivered a decent yield since T-Bills were returning somewhere around zero. Okay, the low capital requirements the SEC put on investment banks was certainly a case where deregulation (or bad regulations) contributed, but this just increased the impact of the easy money that was already being shoveled into the market.

No analysis is complete without looking at corporations who were not only behaving irresponsibly but incented to behave irresponsibly, but, yeah, the government, both democratic and republican, making it easier for low income people to get loans was a big factor.

[anfalicious.livejournal.com]

Who deregulated huh? The government, that's who!

[hardblue.livejournal.com]

It's a tough debate - gov vs. megacorporations -
because they are really the same people, just putting on different hats.

[peristaltor.livejournal.com]

And the money pays for the hats.

[kylinrouge.livejournal.com]

I like hats.

[anfalicious.livejournal.com]

It doesn't have to be that way. Campaign finance reform should be the #1 issue in the US.

[peristaltor.livejournal.com]

While I agree absolutely, I fail to see how executing it would be possible. Seriously, consider this:

A) The politicians need to pass the legislation, and they depend upon the money to stay in office.

B) The media needs to mention how important it is, but they depend upon the very same sources to stay on the air and in print. (We have no true public telly or radio in the US; long story.)

C) People need to care, but we have a land where (in my town, for example) almost a million people will turn out to watch millionaires who won a bunch of games against other millionaires parade through the streets, but a group of a few hundred are branded "freaks" if they dare raise their voices.

It's just about pitchfork time, I'm thinking. Though I am not pitchforkian myself, I fear nothing else may work.

[anfalicious.livejournal.com]

Yep, it aint happening. Doomy doom doom doom. Then come the pitchforks.

[existentme.livejournal.com]

You speak of these two as if they were entirely separate entities. They're not - its just the one: them.

[silberstreif.livejournal.com]

The Rolling Stones article is excellent. Thanks for linking it.

[sandwichwarrior.livejournal.com]

Any "right thinking" individual would tell you that the system is functioning exactly as designed, and for great justice!

All those imaginary assets have to be backed by something. ;)

[brother-dour.livejournal.com]

There's one way. Just wait another twenty years or so.

Hint: it involves guillotines

[peristaltor.livejournal.com]

Or necklaces, or machetes, or muskets. . . . That's kinda what I'm afraid of.

[brother-dour.livejournal.com]

Another reason the Left needs to back off of gun control. It's really hard to fight a 21st century government with bolt-action hunting rifles.

(Note to NSA: I am not in any manner advocating armed insurrection against any government. I am simply speculating on one of many potential future worst-case scenarios. I'm too old for that crap, anyway).

[anfalicious.livejournal.com]

You can beat the US military with bombs built out of ordinary household items, you've just got to be ready to go guerilla.

[usekh.livejournal.com]

It seems many in power have forgotten what happens when you remove hope from working people.

[peristaltor.livejournal.com]

Drop hope, grab pitchfork. Yup.

[existentme.livejournal.com]

Yes, the presence of hope is actually that which stifles any action at all. As long as hope is in place, nothing ever gets done, for the only thing that ever gets anything done for those not a part of the power structure, is open revolt.

This is why, when I read about all of the various (NSA) reforms (to name but one), I am like, whatevs. Nothing substantial will change in the banking industry until executives and their families begin to die - to suffer, in other words.

[paft.livejournal.com]

What action would you like to see taken?

[existentme.livejournal.com]

To be honest, I'm not entirely sure. However, I do feel that at this point in US governance, along with probably almost every other national government in the world, nothing (capslock if you wanna), any one of these governments do is going to be to the greater good of the people. Nearly all of these governments are owned by various business factions and no one else. This is why, to be even more honest, I always think you are silly with your left vs. right bs, particularly when you rely upon the "left" as expressed by whichever left wing of the right wing is in the west wing. None of those people are on your side.

If you want me to come out and say that I would like to see the Jamie Dimons and the Koch Brothers and the rest of their ilk lain beneath the blade of the guillotine, fine - I'll say that, too, because I have come to believe it is the only kind of action that is going to move that class to save their greedy skins, and thus, perhaps a bit of the planet and the balance of the population.

If you want me to say I think the people of the various countries in which they reside ought rise up and seize control of the wealth and the assets and the power of their control of the world's richest 1000, or 1,000,000 I'll say that too, because it is not theirs, it never was - it belongs to the planet which belongs to us all.

Just don't ask me to vote another one into the same corrupt system, or sign some sniveling petition begging for what already belongs to us all.

[peristaltor.livejournal.com]

Well put.