Wednesday, July 11, 2012

Wall Street Speculation Tax Will End This Nightmare? Must Employees Engage In Company-Encouraged Illegal Behavior To Succeed? Thinking Lessons Missing and Liebor = Business Methods 101

There really aren't any last words on financial schemers. They will never stop even when the laws should make them stop and they will always be able to purchase new laws. (Ed.'s note: Blogger has gone off into outer space several times since I first tried to publish this essay last evening, so please forgive the inserted italics that the new "programmers" have decided with which to spice up my writing.)

Wall Street Speculation Tax: A Way to Address Corruption

Dean Baker

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Over the past week, the business news has been filled with stories about major British banks manipulating the LIBOR rate. While these stories are undoubtedly confusing to most of the public, which is not generally familiar with the intricacies of different interest rate indexes, the basic story is fairly simple: Big banks were caught lying about interest rates in order to make big profits.

For the most part the victims were other high-rollers who were taking the other side of bets on complex financial derivatives. However there were also pension funds and even governmental units such as school districts and park services that were persuaded by their financial advisers to get into this high-stakes game. These folks were among those who lost because of the LIBOR liars.

A Fundamental Problem

While there should be a thorough investigation that results in the guilty parties being severely punished, this incident sheds light on the fundamental problem with the modern financial industry. There is enormous money to be made by shaving a small fraction of a penny here or there. When this shaving is done on trades that can run into the hundreds of billions or even trillions of dollars, those fractions of a penny can run into really big bucks. And when we give people enormous incentive to lie and steal, it is likely that many will take advantage of the opportunity.

There is an obvious answer to this problem and a simple way to do it. The answer is to take the money away. If bankers didn't have the opportunity to make hundreds of millions or billions of dollars by manipulating the market, they wouldn't do it. And the simplest way to take away this opportunity is to reduce the size of these markets with a modest tax.

A small tax on flipping stock, options, credit default swaps and other derivative instruments would drastically reduce the size of these markets, thereby reducing the opportunities for market manipulation. Such a tax could also raise a substantial amount of money.

The Joint Tax Committee of Congress calculated that a 0.03 percent tax on all trades, as was proposed by Iowa Senator Tom Harkin and Oregon Representative Peter DeFazio, could raise more than $350 billion in the first nine years that it was in place. This is almost ten times the sum at stake with the Buffett rule and more than 10 times the amount of money that would be saved by ending subsidies for the oil industry.

A Targeted Tax

The great thing is that almost all of this tax would come out of the hide of the Wall Street crew. While many of us hold some stock either directly or through a mutual fund in a retirement account, there is a considerable amount of evidence that shows people respond to higher trading costs by trading less.

This means, for example, that if this tax doubled the typical cost of a trade (it doesn't), then most people will cut back their trading by roughly 50 percent. That means that a typical investor will pay little or nothing as a result of this sort of tax. They may pay more money on each trade, but they will make fewer trades, leaving their total trading costs pretty much unchanged.

It's also important to remember that trading costs have been falling rapidly as a result of the advance of computer technology.  While the financial industry's lobbyists have been claiming that the Harkin-DeFazio tax would be the end of the world, in reality it would just raise trading costs back to where they were 5-10 years ago.

Shrink the Financial Sector

In addition to be being less corrupt, a smaller financial sector is likely to better serve the economy. Finance is an intermediate good, like trucking. We need the financial sector to allocate money from lenders to borrowers, just like we need trucking to move goods from point A to point B. But the financial sector doesn't directly produce items we consume, like food, housing or health care. In principle, the smaller the financial sector, the better.

Recent research indicates that countries with large financial sectors have slower growth. It appears that a bloated financial sector pulls highly skilled people away from research intensive sectors of the economy such as computers and biotechnology. The sort of financial shenanigans we saw with the manipulation of the LIBOR rate also seems to pull capital away from start-ups that need to borrow to finance investment.

In short, there are some very good reasons to want a smaller, more efficient financial sector. And a tax on financial speculation is a great way to get there.

(Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980. He was the editor of Getting Prices Right: The Debate Over the Consumer Price Index, which was a winner of a Choice Book Award as one of the outstanding academic books of the year. He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio. His blog, Beat the Press, features commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in economics from the University of Michigan.)

As someone who was asked to perform several illegal actions during my past career in aerospace engineering, I can wholeheartedly believe the next essayist's thesis.

Wall Street Executives Believe Employees Need to Engage in Illegal Behavior to Succeed

Pat Garofalo

British and U.S. authorities are both now investigating Barclays and other banks for manipulating the London InterBank Offered Rate, an interest rate that is a benchmark for a host of financial products around the world. Regulators charge that the banks rigged the interest rate’s movements in order to profit and to make themselves look healthier during the financial crisis of 2008 than they actually were.

This comes on the heels of JP Morgan losing billions of dollars chasing profits with trades that were meant to reduce risk, and, of course, is just a few years removed from a crisis caused in large part by Wall Street malfeasance. But according to a survey by the whistleblower law firm Labaton Sucharow, Wall Street executives believe this is just part of the financial business. In fact, nearly one quarter of survey respondents said that financial services employees need to be unethical or engage in illegal behavior in order to be successful:

In a survey of 500 senior executives in the United States and the UK, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24 percent said they believed financial services professionals may need to engage in unethical or illegal conduct to be successful.

Sixteen percent of respondents said they would commit insider trading if they could get away with it, according to Labaton Sucharow. And 30 percent said their compensation plans created pressure to compromise ethical standards or violate the law.

Big banks, of course, have continued to fight reforms to the financial regulatory framework, even in the wake of the crash of 2008. But if this survey is any indication, Wall Street needs a mentality change, along with stricter supervision.

The ongoing financial climate has not only stolen a stable economic future from recent graduates, it's nonresolution will continue stealing the futures of those not even born yet.

Michael Baum took every substitute teaching job he found and has sent out hundreds of resumes since graduating from college two years ago. He never got a full-time offer and works as a waiter in a pizza parlor in Chicago, earning $650 on a busy week.

“It’s discouraging,” said Baum, 25, who is certified to teach in Texas and North Carolina as well as his native Michigan. His pay is just enough to cover basic living expenses.

Baum has joined the growing number of underemployed graduates in the U.S., in an election year when both President Barack Obama and presumptive Republican challenger Mitt Romney are vying for young voters with promises to restore jobs. Underemployment isn’t debilitating only for individuals whose career and income opportunities are stunted. It threatens the economic expansion as college-educated young adults have traditionally fueled consumer spending on clothes, technology, entertainment and cars.

“If you have a stumbling entry into the labor market, you risk getting stuck in jobs for which you’re overqualified and poorly paid for the rest of your life,” said Katherine Newman, a sociologist and dean of the school of arts and sciences at Johns Hopkins University in Baltimore who has studied the long- term effects of underemployment. “There’s a scarring effect, with employers you want marking you as undesirable. The economic toll is enormous.”

The underemployed include those of all ages who are working part-time but want full-time positions. There were 8.2 million people working part-time for economic reasons in June, according to the U.S. Bureau of Labor Statistics. That number had doubled to 9.1 million in the last quarter of 2009 from 4.5 million in the same period of 2007.

Rising Unemployment

Unemployment for Americans ages 20 to 24, which has topped 10 percent for four years, was 13.7 percent in June, up from 12.9 percent the previous month, according to the Labor Department. Employers added 80,000 jobs in June, fewer than forecast, and the overall rate stayed at 8.2 percent, the data showed July 6. There were 1.9 million jobless ages 20-24 who weren’t in school in June, a gain of 312,000 from May and the biggest increase since record keeping began on the topic in 1985, according to nonseasonally adjusted statistics. The age group’s labor-force participation is the lowest since 1985, and the percentage working part-time and not in school is the highest since then, data show.

Chris Hedges always puts the decline of the U.S. into proper perspective (no soothing of the beast going on here).

How to Think

Chris Hedges

Cultures that endure carve out a protected space for those who question and challenge national myths
. Artists, writers, poets, activists, journalists, philosophers, dancers, musicians, actors, directors and renegades must be tolerated if a culture is to be pulled back from disaster. Members of this intellectual and artistic class, who are usually not welcome in the stultifying halls of academia where mediocrity is triumphant, serve as prophets.

They are dismissed, or labeled by the power elites as subversive, because they do not embrace collective self-worship. They force us to confront unexamined assumptions, ones that, if not challenged, lead to destruction. They expose the ruling elites as hollow and corrupt. They articulate the senselessness of a system built on the ideology of endless growth, ceaseless exploitation and constant expansion. They warn us about the poison of careerism and the futility of the search for happiness in the accumulation of wealth.

They make us face ourselves, from the bitter reality of slavery and Jim Crow to the genocidal slaughter of Native Americans to the repression of working-class movements to the atrocities carried out in imperial wars to the assault on the ecosystem. They make us unsure of our virtue. They challenge the easy clichés we use to describe the nation — the land of the free, the greatest country on earth, the beacon of liberty — to expose our darkness, crimes and ignorance. They offer the possibility of a life of meaning and the capacity for transformation.

Human societies see what they want to see. They create national myths of identity out of a composite of historical events and fantasy. They ignore unpleasant facts that intrude on self-glorification. They trust naively in the notion of linear progress and in assured national dominance. This is what nationalism is about — lies. And if a culture loses its ability for thought and expression, if it effectively silences dissident voices, if it retreats into what Sigmund Freud called “screen memories,” those reassuring mixtures of fact and fiction, it dies. It surrenders its internal mechanism for puncturing self-delusion. It makes war on beauty and truth. It abolishes the sacred. It turns education into vocational training. It leaves us blind. And this is what has occurred. We are lost at sea in a great tempest. We do not know where we are. We do not know where we are going. And we do not know what is about to happen to us.

The psychoanalyst John Steiner calls this phenomenon “turning a blind eye.” He notes that often we have access to adequate knowledge but because it is unpleasant and disconcerting we choose unconsciously, and sometimes consciously, to ignore it. He uses the Oedipus story to make his point. He argued that Oedipus, Jocasta, Creon and the “blind” Tiresias grasped the truth, that Oedipus had killed his father and married his mother as prophesized, but they colluded to ignore it. We too, Steiner wrote, turn a blind eye to the dangers that confront us, despite the plethora of evidence that if we do not radically reconfigure our relationships to each other and the natural world, catastrophe is assured. Steiner describes a psychological truth that is deeply frightening.

I saw this collective capacity for self-delusion among the urban elites in Sarajevo and later Pristina during the wars in Bosnia and Kosovo. These educated elites steadfastly refused to believe that war was possible although acts of violence by competing armed bands had already begun to tear at the social fabric. At night you could hear gunfire. But they were the last to “know.” And we are equally self-deluded. The physical evidence of national decay — the crumbling infrastructures, the abandoned factories and other workplaces, the rows of gutted warehouses, the closure of libraries, schools, fire stations and post offices — that we physically see, is, in fact, unseen. The rapid and terrifying deterioration of the ecosystem, evidenced in soaring temperatures, droughts, floods, crop destruction, freak storms, melting ice caps and rising sea levels, are met blankly with Steiner’s “blind eye.”

Oedipus, at the end of Sophocles’ play, cuts out his eyes and with his daughter Antigone as a guide wanders the countryside. Once king, he becomes a stranger in a strange country. He dies, in Antigone’s words, “in a foreign land, but one he yearned for.”

William Shakespeare in “King Lear” plays on the same theme of sight and sightlessness. Those with eyes in “King Lear” are unable to see. Gloucester, whose eyes are gouged out, finds in his blindness a revealed truth. “I have no way, and therefore want no eyes,” Gloucester says after he is blinded. “I stumbled when I saw.” When Lear banishes his only loyal daughter, Cordelia, whom he accuses of not loving him enough, he shouts: “Out of my sight!” To which Kent replies:

"See better, Lear, and let me remain the true blank of thine eye."
The story of Lear, like the story of Oedipus, is about the attainment of this inner vision. It is about morality and intellect that are blinded by empiricism and sight. It is about understanding that the human imagination is, as William Blake saw, our manifestation of Eternity. “Love without imagination is eternal death.”

The Shakespearean scholar Harold Goddard wrote: “The imagination is not a faculty for the creation of illusion; it is the faculty by which alone man apprehends reality. The ‘illusion’ turns out to be truth.” “Let faith oust fact,” Starbuck says in “Moby-Dick.”

“It is only our absurd ‘scientific’ prejudice that reality must be physical and rational that blinds us to the truth,” Goddard warned. There are, as Shakespeare wrote, “things invisible to mortal sight.” But these things are not vocational or factual or empirical. They are not found in national myths of glory and power. They are not attained by force. They do not come through cognition or logical reasoning. They are intangible. They are the realities of beauty, grief, love, the search for meaning, the struggle to face our own mortality and the ability to face truth. And cultures that disregard these forces of imagination commit suicide. They cannot see.

“How with this rage shall beauty hold a plea,” Shakespeare wrote, “Whose action is no stronger than a flower?” Human imagination, the capacity to have vision, to build a life of meaning rather than utilitarianism, is as delicate as a flower. And if it is crushed, if a Shakespeare or a Sophocles is no longer deemed useful in the empirical world of business, careerism and corporate power, if universities think a Milton Friedman or a Friedrich Hayek is more important to their students than a Virginia Woolf or an Anton Chekhov, then we become barbarians. We assure our own extinction. Students who are denied the wisdom of the great oracles of human civilization — visionaries who urge us not to worship ourselves, not to kneel before the base human emotion of greed — cannot be educated. They cannot think.

To think, we must, as Epicurus understood, “live in hiding.” We must build walls to keep out the cant and noise of the crowd. We must retreat into a print-based culture where ideas are not deformed into sound bites and thought-terminating clichés. Thinking is, as Hannah Arendt wrote, “a soundless dialogue between me and myself.” But thinking, she wrote, always presupposes the human condition of plurality. It has no utilitarian function. It is not an end or an aim outside of itself. It is different from logical reasoning, which is focused on a finite and identifiable goal. Logical reason, acts of cognition, serve the efficiency of a system, including corporate power, which is usually morally neutral at best, and often evil. The inability to think, Arendt wrote, “is not a failing of the many who lack brain power but an ever-present possibility for everybody — scientists, scholars, and other specialists in mental enterprises not excluded.”

Our corporate culture has effectively severed us from human imagination.
Our electronic devices intrude deeper and deeper into spaces that were once reserved for solitude, reflection and privacy. Our airwaves are filled with the tawdry and the absurd. Our systems of education and communication scorn the disciplines that allow us to see. We celebrate prosaic vocational skills and the ridiculous requirements of standardized tests. We have tossed those who think, including many teachers of the humanities, into a wilderness where they cannot find employment, remuneration or a voice. We follow the blind over the cliff. We make war on ourselves.

The vital importance of thought, Arendt wrote, is apparent only “in times of transition when men no longer rely on the stability of the world and their role in it, and when the question concerning the general conditions of human life, which as such are properly coeval with the appearance of man on earth, gain an uncommon poignancy.” We never need our thinkers and artists more than in times of crisis, as Arendt reminds us, for they provide the subversive narratives that allow us to chart a new course, one that can assure our survival.

“What must I do to win salvation?” Dimitri asks Starov in The Brothers Karamazov, to which Starov answers: “Above all else, never lie to yourself.”

And here is the dilemma we face as a civilization. We march collectively toward self-annihilation. Corporate capitalism, if left unchecked, will kill us. Yet we refuse, because we cannot think and no longer listen to those who do think, to see what is about to happen to us. We have created entertaining mechanisms to obscure and silence the harsh truths, from climate change to the collapse of globalization to our enslavement to corporate power, that will mean our self-destruction. If we can do nothing else we must, even as individuals, nurture the private dialogue and the solitude that make thought possible. It is better to be an outcast, a stranger in one’s own country, than an outcast from one’s self. It is better to see what is about to befall us and to resist than to retreat into the fantasies embraced by a nation of the blind.

A famous former managing director at JPMorgan spills the beans about the long-running joke pulled on the lower classes, i.e., the short-termness of the current ripoff (for US, not them) as they benefit from the hard work they did to achieve the financialization of education, infrastructure, etc., although he evidently was playing it seriously.  He earnestly states that "what's going on in Europe is frightening" and speaks about the need for a dematerialized economy (right now!) in the face of a terrifying ecologically catastrophic future. He calls himself an "impact investor" as though he invented the concept and explains in detail how the global decision makers have obviated the necessity of the nation-state (surprise, serfs!) and that to survive we need to redefine self interest as an overwhelming concern for our connected cultures.

Due to the recent British banking scandal we are reminded about just how wrong-headed our assumptions about finance are. The British rate-rigging scandal has not been in hiding. People involved and responsible were suppose to be telling the truth about their own bank’s borrowing power. Unfortunately, private bankers, who were expected to play fair, did not.  Morality and self-interest are sadly at odds and it is not looking like it will get any better. An important question comes to mind: Is the problem with the bankers or with us? John Fullerton, a former managing director at JPMorgan, says finance drives economics. He also states: “The notion that exponential growth can go on indefinitely in a finite planet is in violation (conflict) with arithmetic and basic physics.”

Simon Johnson lifts the veil on another liar.

Lie-More As A Business Model

(For more discussion of these issues, listen to NPR’s All Things Considered, July 7, 2012.)

On Monday, Bob Diamond – the CEO of Barclays, one of the largest banks in the world – was supposedly the indispensable man, with his supporters claiming he was the only person who could see that global megabank through a growing scandal.  On Tuesday morning Mr. Diamond resigned and the stock market barely blinked – in fact, Barclays’ stock was up 0.3 percent.  As Charles de Gaulle supposedly remarked, “the cemeteries are full of indispensable men.”

Mr. Diamond’s fall was spectacular and complete.  It was also entirely appropriate.

Dennis Kelleher of Better Markets – a financial reform advocacy group – summarized the situation nicely in an interview with the BBC World Service on Tuesday.  The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays’ staff with regard to the data they reported for Libor – the London Interbank Offered Rate (with the abbreviation pronounced Lie-Bore).  Mr. Kelleher was blunt: the issue in question is “Lie More” not Libor.  (See also this post on his blog, making the point that this impacts credit transactions with a face value of at least $800 trillion.)

Mr. Kelleher’s words may seem harsh, but they are exactly in line with the recently articulated editorial position of the
Financial Times (FT) – not a publication that is generally hostile to the banking sector.  In a scathing editorial last weekend (“Shaming the banks into better ways,” June 28th), the typically nuanced FT editorial writers blasted behavior at Barclays and nailed the broader issue in what it called “a long-running confidence trick”:

“The Barclays affair may lack the spice of some recent banking scandals, involving as it does the rather dry “crime” of misreporting interest rates.  But few have shone such an unsparing light on the rotten heart of the financial system.”
The editorial was exactly right with regard to the cultural problem – within that Barclays it had become acceptable or perhaps even encouraged to provide false information.  It underemphasized, however, the importance of incentives in creating that culture.  The employees of Barclays were doing what they were paid to do – and the latest indications from the company are that none of their bonuses will now be “clawed back”.

Martin Wolf, senior economics columnist at the FT and formerly a member of the UK’s Independent Banking Commission, sees to the core issue:

“banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.”
This matters because, “Trust is not an optional extra in banking, it is, as the salience of the word “credit” to this industry implies, of the essence.”

As the FT editorial put it, “The bankers involved have betrayed an important public trust – that of keeping an accurate public record of the key market rates that are used to value contracts worth trillions of dollars”. 
In the words of Mervyn King, governor of the Bank of England, “the idea that my word is my Libor is dead.”  Translation: No one will believe large banks again when their executives claim they could have borrowed at a particular interest rate – we will need to see actual transaction data, i.e., what they actually paid.  Presumably there should be similar skepticism about other claims made by global megabanks, including whenever they plead that this or that financial reform – limiting their ability to take excessive risk and impose inordinate costs on society – will bring the economy to its knees.  It is all special pleading of one or another, mostly intended to rip off customers or taxpayers or, ideally perhaps, both.

Mr. Kelleher has the economics exactly right. 
Global megabanks have an incentive to deceive customers, including both individuals and nonfinancial corporations.  Their size confers both market power and the political power needed to conceal the extent to which they are engage in economic fraud.  The lack of transparency in derivatives markets provides them with an opportunity to cheat, but the abuses are much wider – as the Libor scandal demonstrates.

The rip-off is not just for retail investors; chief financial officers of major corporations who should be up in arms. 
Boards of directors and shareholders of companies that buy services from big banks should be asking much harder questions about all kinds of derivatives transactions – and who exactly is served by the terms of such agreements.

As Mr. Kelleher puts it on his blog,

“They like to call themselves “banks,” but they aren’t banks in any traditional sense. They are global behemoths that are not just too-big-to-fail, but also too-big-to-regulate and too-big-to-manage. Take JP Morgan Chase for example. It has a $2.35 trillion balance sheet, more than 270,000 employees worldwide, thousands of legal entities, 554 subsidiaries and, as proved by the recent trading losses in London, a CEO, CFO and management team that has no idea what is going on in their own bank.”

“Let’s hope for the sake of the global financial system, the global economy and taxpayers worldwide that Mr. Diamond’s resignation is the first of many. What is needed is a clean sweep of the executive offices of these too-big-to-fail banks, which are still being governed by the same business model as before the crisis: do whatever they can get away with to get the biggest paychecks as possible.
(Remember, CEO Diamond paid himself 20 million pounds last year and was the UK banking leader insisting that everyone stop picking on the banks.)

Lie-more is just the latest example of why that all has to change and the sooner the better”


markets.aurelius | July 8, 2012

Once again, a great public service, Simon.

I agree with a lot of what you said, but I think the issue is far greater. Libor is the reference rate for every conceivable credit-based transaction in the world. Borrowers pay Libor-minus or -plus depending on where they stand in the credit hierarchy.

Understanding the implications of this world-historical fraud will take a long time. Generations of economists will be trying to figure out the costs of this fraud. What exactly is the counterfactual to fraud of this scope: How do you answer the question of where individual economies — and the global economy — would be if credit markets had cleared as a function of the supply of and demand for credit instead of the made-up numbers reported by the banks in the Libor-setting ring? How was the Fed’s monetary policy distorted — and that of the other central banks — by this odious manipulation of interest rates that, at the margin, subverted monetary policy around the world? Who can answer such massive questions?

If Barclays and that cohort of bankers reporting their borrowing costs at the 11 a.m. setting consistently lowballed their rates, was global creditworthiness and credit risk persistently mis-stated? Signals from interest-rate markets are a key variables — if not the critical variables — central bankers use to gauge and calibrate their monetary-policy decisions, and to revise their policy. Did the Fed and the other central banks not provide enough credit to the global financial system because the Libor setting was telling them things were not as bad as they actually were? Was Congress not sufficiently aware of how bad things actually were, giving its partisans an apparent open field to bicker over senseless trivialities while the economy’s collapse threw more and more people out of work?

This appears to be somewhat plausible, given the revisions to GDP for 2007-09, doesn’t it? The BEA states, “The revised estimates show that for the period of contraction from 2007:Q4 to 2009:Q2, real GDP decreased at an average annual rate of 3.5 percent; in the previously published estimates, it had decreased at a rate of 2.8 percent. The cumulative decrease over the six quarters of contraction is now estimated as 5.1 percent, compared with 4.1 percent in the previously published estimates; both the revised and previously published estimates of GDP show that the recession was the deepest contraction since the beginning of BEA’s quarterly real GDP estimates in 1947.” (See . Bloomberg does a good job of piecing it all together: )

For individuals and firms engaged on the “real” side of things — oil producers, car makers, homebuilders, …, you get the idea (it’s the stuff that hurts when it falls on your foot or breaks when you drop it) — an enormous fraud has been perpetrated for years: Massive amounts of capital have been misallocated because of this fraud. A policy response consistent with magnitude of the economic disaster wrought by persistent fraud (first in the mortgage markets, then the credit markets) was not undertaken. As a result, the economic consequences for those not directly controlling policy response — i.e., the bankers and their regulators — were far more dire and long-lasting than they otherwise would have been. This means unemployment has been kept higher than it would have been had credit markets been clearing as a function of the supply of and demand for credit. It means factories did not get built. Houses could not be sold. Or built. A generation of young people is without prospects or hope.

But, hey, it’s not all bad. In 2007 bankers’ bonuses were off the charts. In 2008 and 2009 they were looting their respective treasuries while the economies in which they were domiciled were in a state of freefall. The bankers were the only ones the central banks were listening to and looking out for: The central bankers made it their lives’ mission to ensure the bankers under their supervision got paid in the manner in which they were accustomed, and that no one got any whiff of how bad things actually were. (They could take comfort from the fact that, yes, things were bad, but Libor’s not going crazy, so things aren’t that bad … we arrested the collapse before it got too serious … .) God forbid the true state of the world ever be revealed. What would happen if everyone saw that yet another massive fraud had been perpetrated upon taxpayers worldwide, in addition to the world-historic mortgage fraud that leveled the so-called developed world? And that averaged citizens were once again paying the price?

What would happen if taxpayers suddenly woke up and realized they’ve been lied to repeatedly, while the folks they’ve elected — and their appointees — aided and abetted these frauds? And that the only ones to pay the price for this were those same taxpayer-voters? You know, the ones who’ve been thrown out of the jobs and homes, and watched as their families became more and more impoverished, while the cohort that’s been protected by those same elected officials and their appointees — and held harmless for their recklessness — has gotten richer and more arrogant. All of which has allowed that cohort (in the public and private spheres) to gain even greater control over the political apparatus — it’s lawmaking and regulatory functions.

What more do the megabanks have to do to demonstrate they are adversarial to the societies in which they are domiciled?

markets.aurelius | July 8, 2012

One more thought: The knock-on to the initial fraud was that, after the initial fraud apparently encouraged by UK central bankers, Libor deliberately was mis-stated by reporting banks so that interest-rate derivatives books could post a profit. Something of a quid-pro-quo world among the traders at the different Libor-reporting banks.

It is highly unlikely the banks or their regulators will reveal the complete scope of this fraud, or how extensive it was. This is so for two reasons: 1) The persons committing the fraud were way smarter than the folks that were supposed to be catching it, so a lot of it will never see the light of day; and 2) it is so massive that to admit to its existence, and continuance, under the very noses of those charged with catching such things would be to admit these “markets” truly are out of control.

Leave all that for history.

There is something akin to morbid fascination to the whole thing: Trying to imagine the world’s allocation of capital bouncing along trying to find direction as markets interpret the signals coming out of these Libor settings is mind-boggling. Is it even conceivable the world’s capital allocation was a function of the actions of a gaggle of 25-year-olds gaming the Libor setting so they could max their comp based on their derivatives books’ performance?

One begins to appreciate how Einstein must have felt contemplating the vastness of the universe.

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