Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy – Part II

Posted: 26 Dec 2011 10:49 PM PST

By Dan Kervick, a PhD in Philosophy and an active independent scholar specializing in the philosophy of David Hume who also does research in decision theory and analytic metaphysics. Cross posted from New Economics Perspectives
Reflections on Modern Money
Before considering what it would mean to make our monetary system more democratic, let’s begin by calling to mind a few familiar features of money and modern monetary systems in general, features we all intuitively understand as users of money in a modern monetary economy.
First, money obviously comes in very different forms. Not only are there different currency systems – the dollar system, the euro system, the renminbi system, etc. – but even within a single system, money can take significantly different forms. There is all of that familiar paper and metal currency, consisting of tangible objects that can be physically transported from one hand to another, and that are denominated with different face values. But money might also exist simply as “points” electronically credited to someone’s digital monetary scorecard at a bank. These points are debited from and credited to various accounts, and need never be exchanged for physical currency. We can already see a near future in which the traditional material currency of metal coins and paper notes will no longer be used. In thinking about our modern monetary system, then, it is useful to think of it as a network of such monetary scorecards. And we can think of the exchange of physical paper and metal currency as just one among several ways of adding and subtracting points from the monetary scorecards of those who exchange the money. Each individual possess such a scorecard, but so do businesses, governments and other organizations.
Conceiving of our monetary transactions in this way is compatible with the intellectual framework developed by Hyman Minsky, who said, “A capitalist economy can be described by a set of interrelated balance sheets and income statements.” However, the world of balance sheets Minsky asked us to describe contains more than just money. These balance sheets record the ownership of other financial assets – that is, promises or commitments of money rather than money itself. And they also contain accounts of real assets – items of positive value to their owners, like cars or buildings or a book collection – that are not financial assets. Finally, the balance sheets are also accounts of liabilities – things that represent negative value to their owners, such as debts that legally commit the owner of the debt to an outflow of wealth over time.
A second thing to note about modern monetary systems is that the market value of these exchangeable monetary points lies, for all of their users, purely in their exchange value. That is, the only value that attaches to the acquisition and possession of money comes from the knowledge that money can be exchanged for other things. It is true that people also seek to acquire money as a “store of value” that they save for indefinite periods and have no definite plans to spend. But the only reason one can be successful in storing value when one saves money is that other things continue to happen out in society that preserve the use of that money as a medium of exchange. If at any time people became unwilling to accept that form of money in exchange, the saver would no longer be storing value when they saved their money, but valueless points on a meaningless scorecard.
The fact that the value of modern money is purely based on its acceptance in exchange makes money different from all of the non-monetary items that we accumulate and exchange. Non-monetary items of value always have a direct practical utility, for at least some significant number of people, a utility that is not dependent on the prior exchange of those items for something else. The utility might be realized in consumption, as it is with a bar of chocolate, or in the production of some other product or service, as with a block of iron. It is true that for some specific people, the entire value of some non-monetary object might derive from the prospect of exchanging that object for something else. So, for example, I might be a philistine art collector who buys paintings only to store value over time and perhaps exchange them later for the things I really want. For me, paintings function as something like money. But I can use paintings in this purely mercenary way, as merely something to exchange for something else, only because there are other people who love paintings for their own sake.
Similarly, I might be a prisoner who trades goods for cigarettes, even though I don’t smoke, but only because some other prisoners do smoke, and are willing to give something up for the cigarettes. But money is different altogether. What makes a certain good a form of money is that its value for pretty much everyone lies entirely in the fact that others will accept it in exchange. There is no non-monetary, non-instrumental foundation for the exchange value of money. There might be a few demented misers with a perverse love for paper bills and metal coins themselves, and a few numismatic hobbyists who collect these bits of money as cultural curiosities and works of art in themselves. But the exchange value of money does not depend in any significant way of the existence of this relatively small number of people.
Thirdly and finally, it is clear that governments play a very important role in the regulation of contemporary monetary systems, and in the creation and destruction of the monetary units in that system. The monies we use have an official, legally institutionalized role in our economies, an official status that is advertized to us by the markings and declarations on the physical currency itself. Almost all money in actual widespread use is some government’s money. The government is central in preserving the value and stability of the government’s money over time. And we know that while we all have a great deal of liberty to exchange the money we personally possess for other good and services, and to exchange goods and services for money, the legal authority to create and destroy the official government money is tightly regulated and protected. It is to such official, government administered monetary systems – at least when they exist in democratic societies – that I refer when I describe a monetary system such as the dollar system as “the public’s money.”
But how do those governmental monetary processes happen? How is the monetary system stabilized over time? How is money actually created and destroyed in a modern monetary economy? The full answer to these questions is not simple. Governments are complex entities, consisting of many separate branches, divisions, departments and agencies, each with its own assigned powers and authorities, and many distinct operational centers have their hands on different aspects of the monetary system. The private sector plays a key role as well. My focus will primarily be on the processes that create and destroy money. We can put off the precise details of government monetary operations for now, and start instead with a simplified model. I will call the government in this simple model a “monetarily sovereign government”, or just a “monetary sovereign”.
Monetary sovereigns can come in different forms, but in a democracy the people as a whole are supposed to be the ultimate seat and source of the government’s sovereignty, including its sovereignty over monetary operations. Think of the monetary sovereign, no matter what individual or group of individuals constitute and exercise that sovereignty, as possessing a single monetary account of its own – a single unified monetary scorecard. Initially, the monetary sovereign’s scorecard can be thought of as very much like anyone else’s monetary scorecard. When the monetary sovereign spends, and either buys something from someone in the private sector or transfers money outright to the private sector, some monetary points are deducted from the monetary sovereign’s scorecard and an equal number of points are added to that private sector scorecard. And going in the other direction, when the monetary sovereign taxes, or when someone purchases some good or service from a government agency, some monetary points are deducted from the private sector scorecard and an equal number of points are added to the monetary sovereign’s scorecard.
But there are two wrinkles, two special circumstances that make the monetary sovereign’s scorecard very different from private sector scorecards.
First, the monetary sovereign is the seat of government, and hence the ultimate administrator of its own scorecard. If you and I exchange money, and the exchange takes place via our bank accounts, the banks that oversee these accounts administer the adjustment of the monetary points on our scorecards. And if two banks exchange money, the government, which operates a central bank that serves as a sort of bank for bankers, administers the adjustment of monetary points between the two bank scorecards. But when a monetary exchange takes place between the monetary sovereign and any other person or entity in the private sector, the monetary sovereign is the ultimate administrator or arbiter of the monetary adjustment. The monetary sovereign’s scorecard is not administered by some third party, but by the monetary sovereign itself.
It is true that the scorecard of some agency within the government might be administered by some other agency of the government. In the US system, for example, the Treasury Department’s monetary transactions are administered by the Federal Reserve System, which holds the Treasury Department’s accounts. But the Fed is ultimately part of the government, which means that the US government as a whole is the ultimate administrator of the government’s own accounts.
The other way in which the monetary sovereign’s monetary scorecard is different from a private sector scorecard is connected with the first difference: A monetarily sovereign government reserves for itself the power of adding or deleting monetary points on its own scorecard or any other scorecard, at its own discretion, without any requirement that an equal number of monetary points are debited from any other scorecard or credited to any other scorecard. And the monetary sovereign uses its power to guarantee that it is the sole entity in the monetary system that possesses such power. The monetary sovereign, in other words, wields the exclusive power to create and destroy money in the monetary system it controls. Currency users in the private sector, on the other hand, can only exchange monetary points in ways that make the books balance. To the extent that agents other than the monetary sovereign are permitted to engage in money-creating and money-destroying operations, these operations take place only with the permission of the monetary sovereign, and under the guidance or supervision of the monetary sovereign.
There might appear to be one partial exception to the above restriction, however. Private sector banks are also permitted, within certain limits, to create new monetary points in the monetary system. When a bank decides to give a loan to some new borrower, it creates a deposit account for that borrower and credits the loaned amount of dollars to that account. In effect, it creates a new monetary scorecard for the borrower and puts some monetary points on it. As the economists Basil Moore, Scott Fullwiler, Marc Lavoie and many others have emphasized, those points need not come from anywhere. They need not be the result of a transfer of points from some other account to the borrower’s account. Although the bank might be subject to central bank reserve requirements that mandate the bank hold a certain percentage of money against its deposits, in its reserve account at the central bank, the bank typically has several weeks to meet these requirements, and can acquire the reserves after making the initial loan, either from other banks or from the central bank itself.
So bank lending can in some sense create additional money. However, in a very strict sense, what the bank borrower receives is not monetary points, but a promise of monetary points to be delivered in the future. That promise is a liability of the bank – something it now owes the borrower and that the borrower can convert into money on demand. If the borrower decides to withdraw the promised money in the form of material currency, the bank must take cash from its vault and give it to the borrower. At this point, we can see an actual transfer of money from the bank to the borrower. But the bank’s vault cash has to be acquired from the monetary sovereign, and it has to pay for that cash.
Now since bank deposits can be exchanged just about as freely as money in any form, they can be legitimately defined as one form of money itself. There is perhaps no strict line that can be drawn between liabilities for money or promises of money, on the one hand, and money itself, on the other hand. But ultimately, however we define “money”, all of these banking operations are administered and regulated by the monetary sovereign, and so the monetary sovereign’s decisions are ultimately responsible for which lending operations a bank is permitted to conduct, and whether the bank’s lending results in a net increase in money in the monetary system. The monetary system is under the ultimate control of the monetary sovereign, even if the sovereign chooses not to be very assertive in exercising that control, and passively allows banks to create money as they see fit.
So let’s return to the operations of the monetary sovereign itself. In order to bring the nature and ultimate capacities of monetary sovereignty into sharper relief, let’s consider three distinct models or mental pictures of the monetary sovereign’s monetary operations. These mental pictures are designed only to provide a more vivid imaginative understanding of monetary sovereignty. And initially at least, they might appear to be dramatically different pictures. But we will see that in the end the pictures are, somewhat surprisingly, fully equivalent in everything that is really essential and important about the monetary sovereign’s operations.
The first picture can be called the infinite account model. Think of the monetary sovereign as possessing an account or monetary scorecard that holds an infinite quantity of dollars. When it spends in its unit of currency, it credits some amount of units X to some private sector account, but debits X units from its own account. When it taxes, it debits X units from some private sector account, but credits X units from its own account. But since it possesses infinitely many units of the currency in the first place, these operations have no effect on its own balances. Currency units come in and go out, but the addition or subtraction of a finite number of units from an infinite stock of units never makes any difference. The same infinite number of units exists on the monetary sovereign’s scorecard at all times.
A second picture is the empty account model. In this case, think of the monetarily sovereign government as possessing an account that contains no money whatsoever. Its scorecard always stands at zero. When it spends, it credits X units to some private sector account, but makes no change at all in its own account. When it taxes, it debits X units from some private sector account, but again makes no changes at all to its own account. Since it never possesses any money on its books, the monetary sovereign’s basic monetary operations of taxing and spending can be viewed as simply creating private sector monetary points out of thin air and destroying private sector money, not transferring that money back and forth between the private sector and the government. On the empty account model, only private sector monetary scorecards are marked up with monetary balances, and the monetary sovereign never possesses money of its own.
Finally, there is the quotidien account model. The monetarily sovereign government is seen on this model as always possessing a finite amount of currency units – just like a private sector entity. At all times, some finite number of monetary units are on its monetary scorecard, and the monetary sovereign running a quotidien account is scrupulous about balancing the books on its monetary operations. When it spends, it credits X units to some private sector scorecard, but scrupulously debits X units from its own scorecard. When it taxes, it debits X units from some private sector scorecard, but again carefully credits X units to its own account. Since it possesses only finitely many units in the first place, these operations do have an effect on its balances. However, there is one added wrinkle: the monetary sovereign is, as before, legally entitled to create or destroy currency units on its scorecard as a separate operation. So in the end, while there are always some finite number of units on its scorecard, the monetarily sovereign government ultimately chooses exactly how many units that is, since it can add or subtract units from its own scorecard at any time. Even though the sovereign’s bookkeepers are scrupulously balancing the books when it comes to recording exchanges to and from the private sector, the fact that the government can at any time credit or debit some additional amount makes the bookkeeper’s care somewhat absurd or meaningless, at least with regard to the monetary sovereign’s own account.
Recognizing that degree of meaninglessness in the quotidien account model is the key to grasping a very fundamental fact about monetary sovereignty. When it comes to understanding the real economic effects of the monetary sovereign’s operations, it really makes no difference whatsoever which picture one employs. The three pictures are all equivalent. If the monetary sovereign is entitled to create or destroy currency units at will, it really doesn’t matter whether we imagine the sovereign as possessing infinitely many units, zero units or some finite number of units of its own choosing. All that matters is what happens to the accounts in the non-governmental sector. The monetary sovereign administers the monetary system of the real economy, and that real economy consists of the sphere of goods and services that are produced and exchanged by the world outside of the government, a world in which the government’s money plays the role of facilitating exchange, accounting for value in a standard unit of measure and making payments. Since those people and entities in the private sector economy are not permitted to create currency units at will, unless such power has been delegated to them by the monetary sovereign, their spending and savings decisions are constrained at any time by the number of units they possess at that time. And the rate at which money is exchanged for goods and services depends ultimately on the amount and distribution of money that exists out in the private sector. What ultimately matters, then, is whether some government operation has the effect of adding monetary points to some private, non-governmental sector scorecard, or deleting monetary points from some private, non-governmental sector scorecard. What happens to the sovereign’s own scorecard is insignificant with regard to the creation and destruction of value in the real economy, that is, with regard to all of the things we really care about.
Going forward, then, it will be good to use neutral terms to describe the effects of the fundamental monetary operations of the monetary sovereign, terms which do not depend on which of the three models we use to conceive of these operations. We will say, then, that taxes “remove” money from the non-governmental sector, and that government spending “inserts” money into the non-governmental sector. The monetary sovereign possesses the power of a government to make these things happen, and the insertion and removal of money from various places in the private sector can have profound effects. But what happens behind the accounting wall separating the monetary sovereign’s scorecard for all of the other scorecards makes no real difference to anybody. Whether one chooses to regard the insertion of money into the economy as a transfer of money – in accordance with either the infinite account model or the quotidian account model – or as the creation of money from nothing – in accordance with the empty account model – really makes no difference to the effects of these operations in the private sector economy.
So far, I have discussed only two main kinds of government monetary operations: taxing and spending. But I have neglected to discuss borrowing, another significant government financial operation. How should we understand the borrowing operations of a monetarily sovereign government?
To answer this question, we should begin by asking what we mean by “borrowing” and “lending”, in the financial senses of those words. What does it mean to say someone has borrowed money from some bank lender? Well it is clear that we don’t mean quite the same thing that we mean when we talk about other non-monetary acts of borrowing and lending in the everyday world. If my neighbor borrows my lawnmower from me, and I lend it to him, I simply hand over my lawnmower to him for some more-or-less agreed amount of time. He uses it for a while, and then gives it back to me. End of story. The value of the lawnmower has probably depreciated just a tiny bit as a result of the use, and my neighbor has derived some value from the lawnmower for which he did not pay me. But if, instead of agreeing to lend him the lawnmower, I am only willing to hand over the lawnmower for some more-or-less agreed payment from my neighbor, we would probably say that my neighbor has then rented my lawnmower from me, not borrowed it. So in essence, my act of lending constitutes a modest neighborly gift on my part. I give the gift and my neighbor receives it. That’s all.
But clearly, that is not at all the way we are using the terms “borrowing” and “lending” when we apply these terms in the usual way to the borrowing and lending of money. As we all know, a bank loan is no gift! In the case of money, we are talking about an exchange or trade. When people borrow money, they acquire some money in exchange for a promise, a promise to pay some other amount of money in the future – almost always a greater amount. The promise then represents a financial asset for the lender, and a financial liability to the borrower: it represents something the lender is slated to gain and the borrower is slated to lose. The financial instrument, the promise, represents a cash flow. From the point of view of the lender, it represents an inflow of monetary payments, generally associated with a fixed payment schedule. From the point of view of the borrower on the other hand, the financial instrument represents an outflow of money on the same more-or-less fixed payment schedule. A bond – such as the bonds sold by businesses and governments – are essentially financial instruments formalizing promises of this kind. In terms of a monetary scorecard, we can think of a financial asset like a bond as something like some marks on the scorecard corresponding to a schedule of pre-determined point increases. The lender’s scorecard contains the bond as well as any previously existing monetary points the lender possessed. As any one of the various times indicated on the schedule transpire, some marks indicating a scheduled payment of currency units at that time are erased, and the appropriate numbers of actual currency units are added to the scorecard. Gradually what begins as a mere schedule of monetary points to be received in the future is transformed into some quantity of actual monetary points.
People can also sell bonds that they have already purchased from some other party. Suppose A has purchased a bond – a schedule of monetary payments – from B. But suppose A no longer wants to wait for the promised money to be credited to her scorecard on schedule, and prefers some money now. Then A might be able to find some third party C who is willing to buy the remaining schedule of payments from A. A receives some money from C – that is, A’s monetary scorecard is credited by some amount and C’s monetary scorecard is debited by some amount. Now B still owes the remaining schedule of monetary points, but B now owes them to C. In accordance with the remaining schedule of payments, C’s scorecard will be marked up with additional monetary points and B’s schedule will be debited by that amount of points concurrently.
So, borrowing and lending money in financial markets does not involve any kind of gift. It is an exchange in which each party gives something up and each party receives something in return. The borrower receives present money and in return gives up money in the future. The lender gives up present money and in return receives money in the future. Generally, people are only willing to make such an exchange if it is mutually beneficial. It is important to keep the mutually beneficial nature of credit relationships in mind. There is an unfortunate tendency in contemporary discourse about credit to regard the lender as a person who has bestowed some favor, gift or act of grace on the borrower. But that is not the case. Rather, two people have made a simple mutually beneficial exchange. One party to the exchange receives from the other some money in the present; the other party to the exchange receives from the other some money in the future.
But let’s return now to the case of a monetary sovereign, and look at these borrowing and lending processes from the perspective of a monetary sovereign’s operations, in line with any one of the three models we described before. Start with borrowing. What are the effects of government borrowing from the non-government sector, at positive interest? Well, first, the private sector lender buys a bond from the monetary sovereign. At the time of the purchase, some monetary points are removed from the lender’s monetary scorecard, and a schedule of pre-determined monetary points is added to that scorecard. Then over time, some of the marks representing pre-scheduled monetary points are removed and the appropriate number of monetary points are added. These operations are likely to be very important to the private sector lender. But remember that from the standpoint of the monetary sovereign it makes no difference what happens to the monetary sovereign’s own scorecard. All that is important is what happens to the private sector scorecard: some money is first subtracted from the scorecard, and then some greater amount of money is added to the scorecard over time. And since that lender is part of the private sector, the government in this case first removes money from the private sector and then inserts money into the private sector over time, on a pre-determined schedule.
Now what if, instead of borrowing from the private sector, the monetary sovereign lends to the private sector? We can understand the effects of this operation by just reversing the time order and direction of the previously described borrowing operation. When the government lends to a private sector entity, some money is first added to that entity’s scorecard, and then some greater amount of money is subtracted from the scorecard over time. The government in this case first inserts money into the private sector and then removes money from the private sector over time, on a pre-determined schedule. But remember again that from the standpoint of the monetary sovereign it makes no difference what happens to the monetary sovereign’s own scorecard. All that is important is what happens to the private sector scorecard: some money is in this case first added to the scorecard, and then some greater amount of money is subtracted from the scorecard over time.
Now consider the monetary effects of several of these monetary operations together: taxing, transfer spending, borrowing and lending. Both money and official promises of money represent assets to the party that hold them. So the effect of these government monetary operations is the swapping around of government-issued financial assets on private sector balance sheets. In each case, the monetary sovereign is mainly adjusting the schedules on which it will insert and remove money from the private sector, and the accounts on which it will make these changes. In some cases it adjusts a schedule of money removals and money insertions forward in time toward the present; in some cases it adjusts a schedule further off in time toward the future. It is likely engaging in a large and complex combination of such adjustment operations at any time. All of these adjustments help regulate the flow of additional money into and out of the private sector.
Think of it this way: The private sector can be imagined as a collection of wells, and each well is outfitted with a collection of nozzles to which one can attach hoses. Each hose either draws water out of a well and into the monetary sovereign’s well, or draws water out of the monetary sovereign’s well and into the private sector well. Some of the hoses carry a steady flow whenever they are hooked up. Other hoses are outfitted with valves that deliver their water flow in bursts, on a set time schedule. The monetary sovereign’s various monetary operations can then be seen to consist in detaching some hoses and attaching others, sometimes swapping out one hose for another.
But just as before, remember that it doesn’t really matter what happens to the monetary sovereign’s own well. This is perhaps easiest to imagine if we think of the monetary sovereign’s well as infinitely deep – as in the infinite account model. Water flows into and out of the monetary sovereign’s well. But these flows make no difference from the standpoint of the monetary sovereign itself, since the sovereign’s well is always infinitely deep and filled with an infinite amount of water. But the flows of water make quite a bit of difference indeed to the owners of the many ordinary wells out in the private sector.
This is Part Two of a six-part series. Part One is here.

via:FireDogLake

Condoleeza Rice Wants a Do-Over After Destroying Iraq
By: Scarecrow Monday December 26, 2011 3:00 pm

Condoleeza Rice wants a do-over (photo: onewmphoto, flickr)

I don’t know if there is a single defining characteristic of the Administration of George W. Bush.  If I had to choose one, it would be the arrogant, reckless indifference displayed by people who had no ability to appreciate or correctly forecast the likely consequences of their flawed policies.  Whether it was the effects of their reckless economic, fiscal and regulatory policies or the predictable outcomes of their equally reckless foreign adventures, they showed a remarkable inability to acknowledge the likely catastrophe they set in motion.
The Bush regime believed, even boasted they could create their own reality, and the rest of us would just watch in amazement, unable to keep up.  But of course, as with all arrogant regimes, the world caught up and overtook them.  Yet the regime’s architects still don’t understand what they’ve done.  Politico quotes Condoleeza Rice regretting that she and her boss didn’t do quite enough to rebuild the nation they systematically destroyed:

Rice, who was also national security adviser in the George W. Bush administration, said immigration reform should have been pursued quicker and is still “one of our really great problems.”

And she said there should have been a greater focus on rebuilding Iraq after the overthrow of former Iraqi President Saddam Hussein.

“I think the overthrow of Saddam Hussein was done brilliantly, but frankly, looking back, I don’t think we thought enough about how to build the provinces and use the tribal networks once Saddam was gone,” she said. “Ultimately, there weren’t enough troops, which was why the surge was important.”

It does not seem to occur to Ms. Rice that one of the most important functions of a National Security Adviser is to think through the consequences of proposed national actions.  Aside from asking whether what your boss and his militarist advisers are planning is justified by facts, laws and moral principles, the job requires you warn against measures that would destroy peoples, rulers, governments, whole cultures or institutions.  You’d at least get your principals to recognize that the Pottery Barn rules apply: if you destroy something, you better be prepared to pay for it, because you probably can’t fix it.
But apparently, Ms. Rice did not understand the most basic elements of her job, and that failure cost the lives and limbs of hundreds of thousands of people.   And no, no sane society would ever give someone that reckless a do-over.

Matt Stoller: Taxpayers Paying to Defend ex-Fannie, Freddie Executives from SEC

Posted: 18 Dec 2011 06:44 PM PST

By Matt Stoller, the former Senior Policy Advisor to Rep. Alan Grayson and a fellow at the Roosevelt Institute. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller.
Last Friday, the SEC announced it was suing six top executives at Fannie Mae and Freddie Mac for misleading investors. Though the SEC can only sue on civil fraud charges, the announcement was greeted with fanfare, since it does relate directly to the housing bubble.
I noticed a tidbit in the FT that I think is more significant than commonly understood: “Fannie and Freddie are paying the legal fees of the former executives, officials said.”  To be clear, it’s not Fannie and Freddie putting out these fees, it’s the taxpayer that owns and continually pumps capital into these companies.
The Federal Housing Finance Agency, led by acting Director Ed Demarco, made the choice to pay the legal fees for these executives facing the SEC. In effect, one government agency is putting forward resources to sue six individuals defended by the resources of another government agency.
And how much will this cost? Before this SEC suit, executives at Fannie and Freddie had other lawsuits against them. When I worked for Rep. Grayson in 2009, he asked, and found out that the taxpayer had already shelled out millions. Rep. Randy Neugebauer updated the costs in 2011, and found that it had cost something on the order of $100 million for pre and post bailout costs reimbursed to executives at Freddie and Fannie.
What I heard about these suits is that because legal fees were paid by the taxpayer, Frank Raines and his cohort were deposing “everyone in town”. And why wouldn’t they? Cost was no object. You can expect something similar with this suit with the SEC. The FHFA is ensuring that these six executives will have an unlimited budget to fight the SEC.
This is yet another example of executive compensation packages creating perverse socially destructive behavior, with the twist that this is explicitly done in collusion with a government agency.  First of all, covering the legal liabilities of executives at corporations for misbehavior is a problematic risk shift.  Second, when this happens at a bailed out company and the cost is actually borne by the taxpayer, it is an indication that regulators do not think it is problematic to encourage such irresponsible misbehavior.  As we’ll see, the head of the Federal Housing Finance Agency seems to simply think that this is how business is done.
Does the taxpayer have to write a blank check to these former executives to defend them against an SEC suit?  Of course not – paying for these legal fees is simply a policy choice by FHFA Acting Chief Ed Demarco. The FHFA could have repudiated these obligations when it took the GSEs into conservatorship. FHFA officials claimed argued that canceling employment contracts would be unconstitutional and that doing so might make it difficult to attract skilled individuals to the company. I found this baffling, since the Housing and Economic Recovery Act of 2008 authorizing the conservatorship allowed the the FHFA to repudiate claims. There is the possibility Fannie and Freddie could be sued by former executives for these legal fees. It’s not clear they would win, and in the meantime, these former executives would have to pay out of pocket to defend themselves.
There’s a consistent pattern at work at the FHFA. In November, we learned that the executives at Fannie/Freddie were paid a total of $12 million in performance bonuses for 2010, which Demarco again justified as necessary for getting employees with the requisite skills.
This is nonsense. Treasury is stuffed with so-called “dollar a year” men. People will do public service at reasonable salaries, if they believe it is public service. Of course, now that the FHFA has committed to paying the legal fees of the executives that destroyed Fannie and Freddie and cost us hundreds of billions of dollars, we can see that paying for talent is not what was actually going on.
I believe Demarco, unlike many regulators in Washington, has integrity, and executes according to what he perceives of as his legal mandate. But I really don’t understand the thinking here. He overpays GSE chiefs, and unnecessarily fronts money to former GSE executives that may now actually be held accountable for misleading investors.

Plan B – How to loot nations and their banks legally

By Golem XIV on December 15, 2011 in latest

Is there a plan B? That question is usually asked of governments regarding their attempts to ‘save’ the banks domiciled in their country. But has anyone asked if the banks have a plan B?
Does anyone think that if our governments fail to keep to their austerity targets and fail to keep bailing out the banking sector, that the banks will just shrug and say, “Well, thanks for trying” and accept their fate? Or do you think the banks might have a Plan B of their own?
First let’s be clear about Plan A. That plan is to enforce an era of long-term austerity cuts to public services, in part to cut public expenditure so as to free up money for spending on the banks, but perhaps more importantly to further atrophy public services so that private providers can take over. A privatization of services which will bring great profits and cash flow to the private sector and to the banks who finance them, and a further general victory for those who feel that private debts rather than public taxes should be what underpins our national life and social contract.
Plan A therefore requires that governments convince their populace that private debts should be taken on to the public purse and that once taken on, the contracts signed by governments on behalf of the tax payers/citizens, are then sacrosanct and above any democratic change of mind. If governments can hold their peoples to this,then the banks are ‘saved’ with the added bonus that democracy and the ‘Rights’ it once guaranteed will all have been redefined as subordinate to finance and its contracts, and our citizenship will have become second to one’s contractual place in a web of private debts. Debts to the private lenders will become more important than taxes to the public exchequer. And as they do the State will wither away, leaving free-market believers and extreme libertarians exactly where they have always wanted to be – in charge – by dint of being rich. It is, in my view, a bleak future which I once described as A Toxic Debt Wasteland.
BUT it does all depend on governments being able to suppress discontent and to outlaw opposition in the sense of saying to people you  may disagree but we have now declared these debts and their repayment to be outside democratic control and immune to any attempt to rescind or repudiate the agreed debt contracts. As the severity of the austerity cuts to social services (health, education, pensions etc)  becomes painfully clearer  to people and the ‘necessity’ for them is ‘regretfully’ extended year after year, it will become harder and harder to justify, let alone impose, such suffering. We will enter an era of vicious sectarian blame. We are already in it, but it will get much darker.
The banks and those whose wealth and power is tied to them, would obviously prefer Plan A to succeed. It makes governments do all the dirty work and it would profit the banks far more in the long run. If you want to bleed a man – kill him and you get about 5 litres/quarts. But strap him to a gurney with a catheter in his arm and a drip feed in his nose, and he will bleed for you for as long as his system can stand it. That is Plan A. But what if it fails?
I cannot believe the banks, with everything at stake, have not thought it prudent to have a plan B. So here are my thoughts on what that plan could be.  Let me say now, I do not think this plan was a long term conspiracy. I do not think the end game was in mind when the first elements were put in place. It has, I think, been constructed opportunistically.  But the end result is no less dark and threatening.
What I offer from here on is thinking out loud. I obvioulsy have no proof at all that there is a plan B. All I can hope to do is show you the elements which I think could make a Plan B for the banks. Then my argument is that if the mechanism I describe could work, if I have not simply misunderstood something, then I think the banks will surely have thought of it before me. And so it either already exists or it will. I think there are scraps of information that suggest it does exist and the collapse of MF Global might even be the first example of Plan B in action. The MF Global case certainly contains all the clues.
MF Global imploded when it could not get the short term funding it needed. There were two kinds of funding MF Global relied upon for its liquidity/cash flow: repo and hypothecation. For those not familiar, Repo is when a bank or brokerage ‘sells’ an asset for cash but with the agreement that it will re-purchase – hence ‘repo’ – the asset at an agreed date for an agreed price. It is not really a sale but a loan. Repo is the oxygen the financial world breathes. Repo is a $10 Trillion market.
The other main source of the essential short term funding was Hypothecation. This is when a bank or brokerage pledges an asset to a ‘lender’ in return for cash but the asset remains in the possession of the borrower. What the ‘lender’ gets is hypothetical control of the asset. Although the asset never actually changes hands, the new ‘owner’s’ hypothetical control of the asset allows her  to do what she wishes with the asset. Including re-hypothecating the asset to another bank or brokerage. If she does so then the hypothetical control passes to yet another ‘owner’. Even though physically it remain where it started.
Like repo – hypothecation and re-hypothecation are truely massive parts of modern debt-based banking. So the first thing the MF Global case tells us is that what happened is not due to some peripheral, parochial rogue trader-esque, isolated problem. What happened was as a result of a mechanism right at the very heart of the financial system.
In the MF Global collapse what ZeroHedge, and following them, I and others wrote about, was the way in which not only did MF Global go bankrupt, but so also did some of their clients when they found the money they thought MF Global was holding for them, went unaccountably missing. Client’s money went missing because it was ‘mingled’ with the brokerage’s money when it should not have been. Brokers should keep them separate. But it seems in the ‘re-hypothecation’ of assets it was mingled. Former CEO of MF Global, Mr Corzine has sworn under oath he knew nothing about his co-mingling nor the irregularities with his company’s re-hypothecation.  It has been rumoured the client’s money may now be, possibly, in the hands of JP Morgan.
This hint of illegality has grabbed everyone’s attention. But I think it is actually the legal part of the story not the possibly illegal part which is by far the more important.
In my opinion the key to the bank’s Plan B is in understanding why any money/assets were taken from MF Global after it had gone bankrupt and how exactly it went under in the first place. We all know MF Global had huge holdings of dicey European sovereign debt. But those debts have not become worthless so what caused MF to collapse? .
The answer to all these questions  lie in a change to Bankruptcy laws that happened around the world between 2002 and 05. This might seem like a detour into nerd city but it is not. It is the key.
When a company declares bankruptcy there is what the Americans call an ‘automatic stay’, which means all the assets left in a company at the moment it goes bankrupt are protected from the rush of creditor’s demands until appointed auditors can sort out who should get what. The automatic stay prevents a first come first served disorderly looting where those with the most muscle getting everything and everyone else getting nothing. As we are all painfully aware now, there is a legal pecking order to who gets paid before who, with Senior bond holders at the top. But, in America culminating in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) the order was changed. And that change is the crucial event.
At the time the law was being passed few were aware of this change and even fewer were aware of how important it would become. At the  time the furore was all about changes to personal bankruptcy. The Credit Card industry (AKA Banks) had spent more than a decade and its rumoured as much as $100 million lobbying to make bankruptcy much harder and more punitive for ordinary debtors.
An article from 2005 in the Boston Globe quoting a very senior Republican Senator, gives a flavour of what was then being said about ordinary people who fell into debt.

Senator Orrin Hatch (R-UT) has said that millions of Americans are bankrupt or near-bankrupt because “they run up huge bills and then expect society to pay for them.”

After 4 years of bailing out banks who did exactly that the irony is enough to gag on.
But what was not talked about was an amendment which was put into the bill and, as far as I know little debated. Don’t let the word ‘amendment’ mislead you. Amendments are generally not there as refinements and improvements on the original idea. Whenever a bill goes through Congress every lobby group and industry with something it wants done, gets their tamed/owned/ political friends to tack on the change in the law that suits them in return for supporting the original bill. The bill emerges from this process festooned with ‘amendments’ to other vaguely related laws. Amendments are the price of getting the original bill passed.  They are often little understood, written by and for the benefit of the sponsoring lobby group and can be far more influential than the bill they are smuggled in on. This is certainly the case here.
According to a scholarly article in the American Bankruptcy Law Review,

“the provisions [in the amendment] were derived from recommendations from the President’s Working Group and revisions espoused by the financial industry”

The President at the time was Bush and one of the most vociferous sponsors of the amendment was none other than Senator Leach whose other claim to fame was the Gram-Leech-Bliley Act which repealed most of the Glass Steagal Act of 1933 whose repeal virtually assured that the present debt crisis would happen. When bankers play pocket billiards, Senator Leach is what they prod their balls with. Ribaldry aside Senator Leach can certainly be described as one of the principle architects of our present global misery. But I digress.
What was this ammendment? The ammendment exempted repos (and hypothecated and re-hypothecated assets) and a whole range of derivatives from the automatic stay. It also allowed lower quality assets to qualify for the exemptions.
Which means,

The special bankruptcy treatment given repos and derivatives means that repo lenders and parties to derivative contracts can keep the collateral if their trading partner becomes insolvent. This exempts them from the “automatic stay”  rule in bankruptcy, which prohibits most creditors from trying to collect ahead of others.

Or as the official report from the US Financial Crisis Inquirey Commission said,

under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy. (p. 48)

So when a bank goes bankrupt, BEFORE even the most senior bond holders, the repo lenders and derivatives traders can remove, or keep all the assets pledged to them.
This amendment which was touted as necessary to reduce systemic risk in financial bankruptcies also allowed a whole range of far riskier assets to be used, making them too immune from the automatic stay in the event of bankruptcy. Which meant traders flocked to a market where risky assets would be traded and used as collateral without apparent risk to the lender. The size of the repo market hugely increased and riskier assets were gladly accepted as collateral because traders saw that if the person they had lent to went down they could get your money back before anyone else and no one could stop them.
It also did one other thing. Because the repo and derivatives traders ran no risk – they could get their money out of a failing bank before anyone else, it meant they had no reason at all to try to stop a bank from going under. Quite the opposite.
All other creditors – bond holders – risk losing some of their money in a bankruptcy. So they have a reason to want to avoid bankruptcy of a trading partner. Not so the repo and derivatives partners. They would now be best served by looting the company – perfectly legally – as soon as trouble seemed likely. In fact the repo and derivatives traders could push a bank that owed them money over into bankruptcy when it most suited them as creditors. When, for example, they might be in need of a bit of cash themselves to meet a few pressing creditors of their own.
The collapse of both Bear Stearns, Lehman Brothers and AIG were all directly because repo and derivatives partners of those instituions suddenly stoppped trading and ‘looted’ them instead.
According to Enrico Perotti, professor of international finance at Amsterdam Business School  speaking at the London Conference on The Future of Bank Funding, held in June of this year, 2011,

The financial crisis happened when repo lenders and derivative parties lost confidence in the mortgage-backed securities they’d accepted as collateral for repo loans and credit default swaps. They demanded to be paid, forcing their troubled trading partners into fire sales of their holdings to raise cash. They were  unconcerned that they might drive their trading partners into bankruptcy, because they were exempt from the automatic stay.

Professor Perotti went on to say,

As often in financial regulation, this leads to unintended consequences. As a default leads to repossession of collateral for all safe harbor claims, repossession accelerates fire sales, resulting in a disorderly resolution, with a rush to sell collateral ahead of others, creating a downward spiral in valuations. The timing of the jumps in risk spreads on Lehman, two days after the default, demonstrates this effect, as does AIG.

Should the bankers and their political fluffers like Mr Leach have known? Well they were warned at the time. In 2005 a paper entitled “Derivatives and the Bankruptcy Code: Why the Special Treatment?” by Franklin R. Edwards and Edward R. Morrison, in the Yale Journal of Regulation
http://www1.gsb.columbia.edu/mygsb/faculty/research/pubfiles/1666/Morrison%20%26%20Edwards%20Yale%20Rev

VI. Conclusion
… the Code’s special treatment of derivatives contracts cannot be justified by a fear of systemic risk…. Indeed, exempting derivatives counterparties from the automatic stay may make matters worse by increasing systemic risk….Our analysis, however, should worry members of Congress and legislators in other countries. They have been lobbied heavily by special interest groups (such as ISDA) to expand the special treatment of derivatives on grounds that such legislation is necessary to prevent a systemic meltdown in OTC derivatives markets should a derivatives counterparty suffer financial distress.
Our analysis casts serious doubt on this proposition. Systemic risk may be a real threat, but bankruptcy law has no role to play in addressing it.”

The same changes to the bankruptcy laws were also adopted in the UK and throughout Europe. In fact they may well have preceded them. I simply have not done that research yet. And the changes in the UK and Europe were also lobbied for and sponsored  by the banks via among others the ISDA (International Swaps and Derivatives Association). Most of the Big banks are ISDA members.
OK all of that was the back-ground to show you how we got here and that it is all ‘legal’. On the basis of laws sponsored by the banks  of course. Now lets come to the present.
MF Global is where I started. There was something about its collapse which did not seem right to me. Mr Corzine’s claim that he ‘didn’t know’ where his clients’ money had gone might be true, but I was and am still, left with the feeling that there is a deeper story here. When I wrote about MF Global and the renewed crisis of bank lending, I came across the fact that in the six months to June 2011 the global trade in Derivatives increased by 18% to an astonishing $707 trillion in nominal value (the face value of all the contracts). And remember the Repo market is $10 trillion.
Somehow MF Global’s collapse and the huge increase in derivatives trading felt related. For me it was not the huge exposure to risky European bonds which MF Global had deliberately amassed, it was the nature of its demise, the trigger, and what happened to its assets afterwards, which were key. MF Global collapsed because it could not get short term funding. It could not get other financial institutions to accept its assets as collateral for Repo agreements nor hypothecate tham any longer.
When MF Global went down it did so because its repo, derivaitve and hypothecation partners essentially foreclosed on it. And when they did so they then ‘looted’ the company. And because of the co-mingling of clients money in the hypothecation deals the ‘looters’ also seized clients money as well. The co-mingling story is what brought the whole thing into the light but also provided a wonderful distraction.
The important point is that the change in the Bankruptcy laws. The change, as illustrated by Bear Stearns, Lehman Brothers and AIG has made the markets more not less systemically unstable. Yet the banks have defeated all attempts to reform these unwise laws. The Dodd Frank financial reform act in eth US did nothing to address them AT ALL.  Mr Dodd was lobbied very hard to make sure of this.
Why?
Here, finally, is my answer.
Let us say you are a bank or broker that has bought up a lot of European bank and sovereign bonds from Italy, Spain and Greece for example. You would be very exposed to great losses should those countries or their banks default. You are relying on the politicians forcing their tax payers to bail out you and the other banks you trade with. What if they don’t?
One solution would be to sell as many of those bonds as you could accepting the inevitable losses as being better than a much larger loss if the banks or nations or both, defaulted.  The other solution, counter-intuitively, would be to do more business with them. But make sure it is repo lending and derivative trading. Specifically offer the banks in troubled nations CDS insurance on their own bad debts and currency swaps. How would this help?
First, lets keep in mind that the trade in both these types of derivatives did increase by 18% in the first 6 months of 2011 precisely as the Euro crisis has worsened.
If a bank or nation was to default on you as a mere bond holder, you would have to wait in a the queue of creditors to see what you were going to be given back. And some ‘hair cut’ would be likely. But if you had done rather a lot of derivatives trading (CDS insurance and currency swaps are both derivative trades) then you would not have to wait. You would seize all the collateral the bank had pledged to you for repo lending or derivative trading and walk away. Now you will say that if  you had done CDS insurance then you might well have to pay back out the money you had seized. Except that possession is nine tenths of the law. While lawyers set about arguing about what you owe, the critical fact is that in the mean time, in the height of the crisis you HAVE the money. JP Morgan allegedly has MF Global money while other people’s lawyers can only argue about it.
This will also be true if you have also rather wisely been on the right side of lots of re-hypothecation deals and repo deals with the collapsed bank. In both cases if the collapsed bank had pledged to you assets for Repo or hypothecation then you get to keep all those assets in the case of the bank going bankrupt.  We have the clear proof of this already. As Zerohedge reported some days ago, “HSBC Sues MF Global Over Disputed Ownership Of Physical Gold”. It seems HSBC’s gold may have been hypothecated or re-hypothecated. Someone else, some other bank, has their gold and all they have are lots of lawyers charging them fat fees.
So what we have, courtesy of the change in the bankruptcy laws is the means for banks to loot each other. Simply become a major short term funder via repo or hypothecation or a major counterpary in derivatives deals with the ailing bank and in both cases should the bank you are lending to go bankrupt, you will keep all  the assets it pledged to you before any other creditor get a chance.
If I am right then MF Global was the first hint of Plan B in action. The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can. To me, this gives a possible answer to why there has been such a surge in derivatives trading.
If I am right about all this, I think this means that some of the biggest banks, themselves, have already constructed and greatly enlarged a now truly massive trip wired auto-destruct on the banking system. If they have and they have explained any of this to our politicians then it would explain why our governments have been so abjectly willing to bail out any and all of the biggest banks and sacrifice anything else in the process. Any hint of relucatnace and the banks can make veiled reference to the extreme ‘risk’ of systemic ‘panic’ and forced liquidations. None of which is really a panic, since they have engineered it.
Are the banks threatening us? No, no, good lord no! Just pointing out the reality of the state of the system. There just happens to be a gun pointed at our head and the banks just happen to find their finger on the trigger. All they ask is that we do nothing to make them feel that their best interests are served by pulling it. And all we have to do to avoid that is stick to plan A. Simple.
But now I come to the really ugly part.
For the last four years who has been putting money in to the banks? And who has become a massive bond holder in all the banks? We have. First via our national banks and now via the Fed, ECB and various tax payer funded bail out funds. We are the bond holders who would be shafted by the Plan B looting. We would be the people waiting in line for the money the banks would have already made off with.
It is the money we have been putting in to bail out the biggest banks which they have then been using as collateral for offering weaker banks in weaker nations, repo loans or hypothecation. And the money or government bonds the weaker banks are using to pledge as assets and collateral for those loans or in  derivative deals with the bigger banks is also from us. We have and are funding both sides of the deal.
The result is that the assets which the big banks would be legally allowed to seize and keep in the event of the failing bank actually going under would be ours.
To give a concrete example. Spain or Greece puts its tax payer money in to one of its insolvent banks.That bank then uses that money to get a short term repo or hypothecated it for loan. Or it uses it to hedge its currency problems via a currency swap or buys CDS insurance on assets it is deeply worried about. If the weak bank then goes down all those assets are seized by the big bank who was lending or was the counter-party to the derivative deals. The tax payer gets zero. And there is no redress. It was legally done. And the money the Big bank would have used to get themselves into this position would be the bail out money we had earlier given to the mega banks. They would have used that money against us – again.
The largest banks, those with the greatest exposure to bank and sovereign bonds from the most indebted euro nations, have the most to gain from doing derivative. repo and hypothecation deals with the troubled euro area banks and nations. The more assets the weak banks and nations have pledged in deals with teh Big banks, the more theBig banks will walk away with in the event of a crash.  I suggest this is why, even as this crisis has worsened, the Big banks have been increasing by 18% their trade in derivatives and why Repo and hypothecation is as large or larger than even before the crash.
I am sorry this has been such a long piece but I wanted you to see exactly how I came to this because I hope you can show me how I am wrong. Please do so politely and I will go downstairs and celebrate my stupidity with a cup of tea, before apologizing to you all.  I would very much like to be wrong.
But if I am not wrong, then the banks have created a financial Armageddon looting machine. Their Plan B is a mechanism to loot not just the more vulnerable banks in weaker nations, but those nations themselves. And the looting will not take months not even days. It could happen in hours if not minutes. Our leaders would have only a few hours to decide who they would side with: the banks or us. The past four years give me no faith they would chose us.

Bill Black: Dante’s Divine Comedy – Banksters Edition

Posted: 15 Dec 2011 10:38 PM PST

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives
Sixty Minutes’ December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.

I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal.

Obama did not explain what Wall Street behavior he found least ethical or what unethical Wall Street actions he believed was not illegal. It would have done the world (and Obama) a great service had he been asked these questions. He would not have given a coherent answer because his thinking on these issues has never been coherent. If he had to explain his position he, and the public, would recognize it was indefensible.
I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment. I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush’s “Presidential Amnesty for Contributors” (PAC) doctrine. The financial industry is the leading campaign contributor to both parties and those contributions come overwhelmingly from the wealthiest officers – the one-tenth of one percent that thrives by being parasites on the 99 percent.
I have explained at length in my blogs and articles why:

• Only fraudulent home lenders made liar’s loans
• Liar’s loans were endemically fraudulent
• Lenders and their agents put the lies in liar’s loans
• Appraisal fraud was endemic and led by lenders and their agents
• Liar’s loans could only be sold through fraudulent reps and warranties
• CDOs “backed” by liar’s loans were inherently fraudulent
• CDOs backed by liar’s loans could only be sold through fraudulent reps and warranties
• Liar’s loans hyper-inflated the bubble
• Liar’s loans became roughly one-third of mortgage originations by 2006

Each of these frauds is a conventional fraud that could be prosecuted under existing laws. Hundreds of lenders and over a hundred thousand loan brokers were “accounting control frauds” specializing largely in making fraudulent liar’s loans. My prior work explains control fraud, why accounting is the “weapon on choice” for fraudulent financial firms, and why liar’s loans were superior “ammunition” for committing massive accounting fraud. These accounting control frauds caused greater direct financial losses than any other crime epidemic in history. They also drove the financial crisis that produced the Great Recession and cost millions of Americans their jobs.
In considering my scale of unethical conduct it is important to keep in mind that it is highly likely that anyone that causes very large numbers of people to lose their homes will cause multiple suicides and indirect deaths that arise from the greater vulnerability of the homeless and the blue collar crime effects of destroying neighborhoods inherent to widespread foreclosures. I ignore for this purpose the fact that the fraudulent loans caused the bubble to hyper-inflate and drove the financial crisis that caused millions of people to lose their jobs. The financial accounting control frauds are the weapons of mass destruction of wealth, employment, and happiness. I also ignore the fact that the frauds described here made the perpetrators wealthy. My scale, therefore, systematically and dramatically understates the perpetrators’ moral turpitude. I have also excluded the massive foreclosure frauds from my scale because they did not cause the underlying crisis. When Obama reveals the bankers actions he claims to be legal but highly unethical readers should keep my conscious understatement of the moral depravity of the illegal acts by bankers that drove this crisis in mind when they compare the relative ethical failings.
As a criminologist, I do not favor sentencing criminals to the fates they richly deserve. I would never torture prisoners or place them at risk of assault, rape, or psychological trauma. I do not believe that extremely longer terms of imprisonment are desirable except in rare circumstances. As a lawyer and a criminologist I emphasize that any sentence should come only after a conviction in a trial providing due process protections or a guilty plea. My scale provides a label for the comparative moral depravity of the perpetrator, the deserved punishment (which when vicious is not the far more humane one I would actually impose), and a brief description of the specific frauds that are characteristic of this level of immorality and the number of perpetrators falling in each category. My inspiration was Dante’s circles of hell as described in his Divine Comedy.
The Scale of Ethical Depravity by the Frauds that Drove the Ongoing Crisis
Level 10: Septic tank scum
Eternal Hell: these banksters deserve a physical hell of infinite torment and duration
Officers that directed control frauds that involved making predatory loans to more than 10,000 homeowners who lost their homes as the result of the frauds. Predatory loans in this context mean deliberately seeking out the elderly or minorities for such loans because they were easier to con into taking loans they could not repay – at a premium yield (interest rate). Dozens of CEOs fall in this category.
Level 9: Pond scum
Time in Hell: These banksters deserve a term in hell
Officers that directed control frauds that led to more than 10,000 homeowners losing their homes. Hundreds of CEOs fall in this category.
Level 8: Generic scum
Gitmo: Hell’s starkest suburb
Officers that directed control frauds that led to more than 1,000 homeowners losing their homes. Thousands of CEOs fall in this category.
Level 7: Dante’s deserved denizens
Supermax: No view, and no way out
The professionals that aided and abetted the overall control frauds by inflating appraisals, giving “clean” audit opinions to fraudulent financial statements, “AAA” ratings to toxic waste, and accommodating legal opinions to the frauds. Thousands of professionals fall in this category.
Level 6: Aspiring to great wealth through fraud
Alcatraz: Great view, but no way out
The senior lieutenants of the control frauds who committed the frauds that caused more than 10,000 homeowners to lose their homes. Thousands of senior officers fall in this category.
Level 5: A large cog in a smaller fraud
Generic Hardcore Prison: A life of boredom and the almost total loss of freedom
The senior lieutenants of the control frauds who committed the frauds that caused more than 1,000 homeowners to lose their homes. Thousands of senior officers fall in this category.
Level 4: The banksters who cost us our money instead of our homes – Goldman Sachs & friends
Generic Prison: A life of boredom and a severe loss of freedom
The officers that led the control frauds who targeted their customers for the purchase of more than $10 million in fraudulent product. Dozens of officers fall in this category.
Level 3: The banksters’ senior lieutenants who cost us our money instead of our homes
Prisons designed for serious, but less physically dangerous felons
The senior officers of the control frauds who targeted their customers for the purchase of more than $10 million in fraudulent product. Scores of senior officers fall in this category.
Level 2: Banksters who defrauded other bankers (who were willing to be defrauded)
Privatized prisons: Let them enjoy the consequences of their odes to privatization
The largest control frauds sold tens of billions of dollars of fraudulent loans to each other through fraudulent “reps and warranties.” The kicker here, as Charles Calomiris has emphasized, is that the control frauds on both sides of the transactions knew that they were engaged in a mutual fraud. Hundreds of senior officers fall in this category.
Level 1: Small fraudulent fry
Catch and release: Convict them and put them on probation if they cooperate with the investigations
The small fry are the loan officers, loan broker employees, and borrowers who knowingly participated in making fraudulent mortgage loans. Over 100,000 individuals fall in this category.
We Need to End the PAC Doctrine
To date, Bush and Obama have prosecuted none of the mortgage frauds in the top nine levels. I urge reporters to ask him to explain three things about his statements to 60 Minutes.

• Why are there no prosecutions of the felons that drove the crisis and occupy the nine worst rungs of unethical and destructive acts?
• Explain the five unethical acts by elite financial institutions that you consider the most destructive and least ethical – but which you believe to be legal. How do you rank the degree of unethical conduct and destruction in those acts?
• What specific statutory provisions did you propose to make those five unethical acts illegal? As enacted, which provisions of the Dodd-Frank Act made those five unethical acts illegal? Who has been prosecuted for those formerly legal but seriously unethical and destructive acts that were made illegal by the Dodd-Frank Act?

Reporters will have to be persistent in coordinating their follow-up questions to get Obama to provide direct answers to these questions.
I request that private citizens write President Obama to ask him to provide specific, written answers to these three questions. I will be proposing a series of questions that I will urge citizens to demand answers to because it is clear that the regular media will rarely ask demanding questions of elite politicians or bankers. It is up to us to hold them accountable and end the doctrine of Presidential Amnesty for Contributors.

via :FireDogLake

Occupy Oregon Re-Occupies, Police Violently Evict Then Occupiers Re-Take Park
By: Kevin Gosztola Sunday December 4, 2011 9:18 am	Tweet346

Festive atmosphere in the evening as Portland is re-occupied. (photo: Interdome)

In Portland, Oregon, Occupy Oregon (also known as Occupy PDX) re-occupied Shermanski Park last night. They setup tents, tarps, and folding tables at 4:35 pm PST. A police officer drove by and informed the occupiers it was illegal to “camp” in a public park. The occupiers continued to setup the new encampment. Families with their children were there and a kitchen went up in the park too. They even had a bat signal shining on a building that was able to broadcast text messages from people all over the world.
There were signs of a buildup of Portland police forces to evict the camp that had just gone up but nothing happened until around 9 pm PST. The Portland Parks Department ordered the park close 30 minutes early over a PA, per an “emergency ordinance.” People slowly took down tents that had gone up. Storm troopers showed up and surrounded the camp. Motorcycles, bicycles, vans, mounted police, all funded by Oregon taxpayers, went into formation to evict the camp with occupiers shouting, “SHAME! SHAME! SHAME!”
A blog for the Portland Mercury described the forceful eviction of occupiers:

Several lines of riot police stretching the entire width of the park advanced into the park, using their batons to jab protesters who stayed put. It was definitely a rougher confrontation than previous interactions between Occupy Portland and the police. There were several reports of injuries, say Denis Theriault and Matt Bors, with several protesters showing split lips and bruises. One protest organizer named Mike Bluehair was shoved to the ground by police and allegedly kicked.
“They shoved me and fell to the ground, then they started kneeing me and kicking me. But they let me up, though,” says Mike.
There was no use of pepper spray, or even a warning that it might be used. An ambulance were called to treat injured protesters, though it’s unclear right now whether any are serious. A number of people who refused to leave the park were also arrested…

Portland Mercury also reported occupiers did have a plan to split off: some would stay and get arrested and others would march to City Hall. That is exactly what happened next. Three to four hundred people took off. It was a “raucous party” and at one point someone had “a Christmas tree and there [was] a dude with a gas mask up on the balcony” outside a Portland commissioner’s office.
Occupiers left City Hall around 10 pm PST and was in Old Town. The police kept a distance and followed the occupiers wherever they were going to go. Then, suddenly, the occupiers ran at full speed to the park where they had been previously. “A Michael Jackson dance party” with 600-800 people broke out. Only a handful of police officers were around. And more people were there than before the police raid.
Finally, the Portland Mercury live blog reported police did exactly what one would have expected: they amassed around the park for another raid. But then here’s what happened:

Over the police scanner, an officer said, “Is there anybody who’s not in position?” Then the order was given to “roll”… swiftly followed by an order to hold off. Then, at about 11:50, a voice over the scanner said, “All units return to Central, where we’ll write reports & hopefully have pizza. I’ll explain when I get there.” The order was repeated: “I want every officer who was out here tonight to return to Central and write reports.”

At 2:20 am PST, a police statement was issued.
A few sections of the statement merit attention. Max Blumenthal wrote about the “Israelification” of national security in America so it is worth noting the language here about children:

Officers noted during the clearing of the park that there were some children, ages ranging from approximately 8 to 12, near the front line of the demonstration. Officers advised to the parents to get the children out of the park but in one case, a small child was pushed to the front by an adult in apparent attempt to use the child as a human shield. There are no reports that any children were injured or had police contact and they ultimately left the park with adults. [emphasis added]

Using children as “human shields” is what Israeli military accuse Palestinians of doing. It is what the US military has said before of “terrorists” in war zones when military strikes wind up killing not only “militants” but also children.
Then, there is this peculiar section. It is the standard section included to make the demonstrators look nefarious but which instead seems raise more peculiar questions about the police and what they were doing at the protest:

Officers walking the area after the park closure located a cluster of spent shell casings on the east sidewalk of Southwest Park Avenue, along the back side of the Arlene Schnitzer Concert Hall. The shell casings appeared to be .22 caliber and 9mm (photos attached). There were no reports of gunfire and it is unclear why they were on the sidewalk in an area that demonstrators had been standing. In an earlier demonstration (different date), officers reported that someone in the crowd threw empty .223 shell casings at the police officers. It is not clear why or who is bringing empty shell casings to a demonstration.

Maybe it isn’t clear because someone within the camp—I don’t know, perhaps an undercover or “embedded police officer”—left the shell casings as a nice touch to help justify inexcusable police violence. Perhaps someone whom other officers aren’t supposed to acknowledge was there and left them. Maybe he is the same one who in an earlier demonstration threw empty shell casings at officers. I’m no more sure of the motive or whether an undercover is doing this than the Portland Police is of demonstrators having shell casings. But, that won’t stop me from speculating in my official blog and I fully expect all who read this to begin to wonder about the integrity of Portland Police because, who would drop empty shell casings around an area where people were protesting to make it seem like there were occupiers who were violent and needed to be looked out for, like maybe a “lone wolf” that could strike any time?
Photos from the action last night show police brutality took place. They also show just how much fun the occupiers were having. Here are a few circulating:

Photo via @Jason_Darnell

Photo via @OccupyPortland

Photo via @DrunkenMonkey42

Photo via @Interdome
And here is a photo of a 15-year old who was bloodied last night that is being considered “iconic” by some this morning:

Photo via @C0d3Fr0sty
Video shows storm troopers surrounding the park to evict occupiers just after 9 pm. Dispersal orders can be heard:
This video shows occupiers facing down the storm troopers after being pushed into the street. They are being shoved back by batons:

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