Vintage Labor Day Trade Card

No news.

No news about labor, on Labor Day, when unemployment is 9-plus percent and U-6 unemployment–which counts not only people without work seeking full-time employment, but also those who’ve become discouraged and stopped looking as well as those working part-time for economic reasons–is 16-plus percent. Lots of news about Sept. 11, 10 years later. News about the Grand Prix. (Which was certainly awesome!)

News about European banks, “global gloom.” The Wall Street Journal has a feature story about Jeff Immelt of General Electric. And one about how wealthy “campers” are hiring crews to set them up at Burning Man.

No news about labor. But some opinion pieces in The Washington Post. (And stupid opinion at that: “The middle-class ‘squeeze’ long alleged by politicians is finally becoming reality. In the past it’s been hyped.”)

Mother Jones has at least something. This chart idea is good, though the charts themselves aren’t all great.

At some point in the not too distant past, “labor” became, to the media, a special interest group; some small and shrinking subset of people with grievances that don’t really matter to “us.” How that happened–when “us” is people who work, or want to work–is one of the great unanswered (unasked, actually) questions of modern times.

That was in early September 2008, and the thing has played out just about that way. As of this writing there’s a nonsensical debate in Congress about whether we should raise the nation’s “debt ceiling,” with Treasury Secretary Timothy Geithner dourly warning that default would be the direct result of failure to do so, and ugly for us humans. Coupla weeks back, Standard and Poor’s even downgraded its “outlook” on U.S. government debt, triggering much tongue-clucking at least.  (Yet essentially no mention of the irony. These guys are down-rating our debt? Aren’t they the ones who told us–as they were paid to–that subprime mortgage debt was, always and everywhere, AAA? Aren’t they the ones who, whenever states tried to curb the criminality at the core of the subprime business model, threatened to not rate mortgages made in those states, thus thwarting those attempted curbs? Why, yes. Yes they are!)

The continued credibility afforded to outfits like Standard and Poor’s, the Federal Reserve, Geithner, and, say, CNBC is depressing (to say nothing of Fox News, the Asshole Class’ private ministry of propaganda). With no end to it in sight, I hereby offer my final post in this series, the better to try to preserve what remains of my own sanity.

I did get some things wrong. I thought Chrysler would be in bankruptcy for years, and that Fed Chairman Ben Bernanke might be in trouble during his reconfirmation hearings. And I figured Fannie and Freddie would cost us about $200 billion. The amount is looking more like $375 billion, though the losses ($135 billion so far) could be somewhat less than that. And I didn’t say this, though I should have: Fannie and Freddie are, at least in terms of their purported public purpose, going away, and that portends badness.

The New York Times floated that trial balloon in early March:

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Then again, a lot of things people took for granted in the 1950s are now “luxury products.”

As expensive as their forays into reckless speculation have been, the end of Fannie and Freddie’s public functions will be painful for people planning on what used to be thought of as a decent life in this nation. Figure on paying at least two more percentage points on your mortgage interest (in a couple of years, about 9.5 percent instead of the 7.5 percent you should be expecting otherwise), and a slow but steady whittling away of the mortgage-interest tax deduction. I can only hope it will be a wake-up call for folks. That awakening is decades overdue, since the model of society on which the 30-year-fixed mortgage was predicated has long since been quietly abolished.

The original idea about home ownership—that home owners are a stabilizing influence on a community—proceeded from the notion that jobs and careers were stable and would continue to be. In 1955 the typical American working man could expect to spend 25 or 30 years at the same company, if not the same job, at the end of which he would receive a guaranteed pension. His job alone often paid enough to afford a mortgage, and the pension would allow him to maintain his family’s home in retirement, as it would often be fully paid-off by then. Passed to the children free and clear, the house was the cornerstone of middle-class wealth creation. In that world, owning a home made perfect sense and renting made little financial sense for most. The trick was getting the cost of financing low enough to tip a few more folks into the “owner” bucket.

Today the home-ownership-as-a-good mantra continues even though the foundation for it–steady, secure employment at homeowner wages–has long since disappeared. By 1983, the typical 50-year-old working man had a job tenure of 11 years. By 2006 it had been reduced to eight. Pensions have been effectively abolished, except for government workers (and looks like they’re about to lose them too). This change did not go unnoticed by policymakers, though most chose to see it as “economic dynamism”—a good (or at least inevitable) thing–and few made the connection between it and home ownership, or the public subsidies undergirding it.

This shift in the nature of the job market, this destruction of job security and much of the rest of the social contract, is the major American story of the past 30 years. Aspects of it animate every facet of modern life, from what age we marry (or whether we marry) to where we live to whether we get to see a doctor when we’re sick to how much tax we pay to whether the roads get paved and the underground pipes that supply our water are maintained with those taxes (or aren’t and, instead, get handed to corporate interests). It affects whether we have children, whether they have serviceable schools–basically everything that, for a century, made the United States a desirable and accommodating place for decent people to live and work.

And as these things have changed, mainly for the worse, policymakers should have adjusted policies to reverse those trends. Instead they have accelerated them, all the while citing the major economic indicators to claim that things are actually getting better.

How could that happen?

Simply put, every measure of economic output and progress, every yardstick of general well-being, from the “poverty line” to Gross Domestic Product, has been rendered inaccurate.

All of these things were first calibrated in a world where more work meant better pay, career advancement was (usually) predicated on honesty and competence, and banks existed in order to aid factory owners and mining companies to produce useful things. That none of these things is true today—self-evident, I think, and I’ve gone into detail about it already–has thrown off all the models the big shots use to manage the economy. No one talks about this, but it’s a key cause for the disconnect between a Ben Bernanke, nattering on in his “historic press conference” about how inflation is not yet a threat, and any random Regular Person, who knows that she has not gotten a pay raise in four years and is now paying double for gas, and a lot of other things too.

“Core inflation” is not, exactly, a bogus number. But it helps to realize that when a guy like Bernanke says “inflation,” he mostly means “your pay.” Meanwhile, removing “volatile energy and food prices” from the measurement presupposes that those things always were and always will be volatile and always quickly revert to the mean.

So you may ask, well, haven’t oil prices always been spiky?

Actually not.

As this chart shows, the price of both crude oil and gasoline rose slowly and steadily from mid-century through the early 1970s. The ’73 and ’78 oil embargoes caused major disruptions, but the real day-to-day price swings came into vogue only in the 1990s and 2000s.

Over the past decade or so, the story of oil-price volatility quietly became the story of all commodity-price volatility, as the same forces that caused the housing bubble have deregulated the commodities markets and herded ever larger piles of dumb money into ever more esoteric and proprietary “commodities index funds,” so-called, in order to extract steady fees and—evidence suggests—manipulate the markets for even better profits.

A piece in last July’s Harper’s (updated for the current issue of Foreign Policy) wandered these thickets for a bit and drew the same conclusion (and prompted this carefully worded non-denial denial from Goldman Sachs), as did Rolling Stone’s Matt Taibbi in his book, Griftopia. But even if commodities markets are not being manipulated by the few big players (‘cause, as we know, those guys would never do anything underhanded or dishonest, and to suggest they would is just ignorant conspiracy theory), the fact remains that these markets are very different from those extant when the economic measures we use today—and the theories underlying them—were developed.

Consider the poverty threshold. Devised in 1964 as a quick and dirty yardstick for determining who was really poor, the poverty line starts with the cheapest of four food plans developed by the Department of Agriculture in 1955 (and never mind that nobody eats like that anymore, if they ever did), and then multiplies it by three to arrive at the figure below which one is considered poor. Because it calculated poverty using after-tax income but was (and still is) applied using before-tax income, the number began life as a lowball estimate. Food prices then declined radically as a share of a typical family’s budget, while housing and other costs continued to rise. Yet the formula, which by the early 1980s wildly understated poverty, has never been substantially adjusted.

The poverty threshold did increase, of course. But it was adjusted not according to food costs, but according to general inflation, as measured by the Consumer Price Index. The CPI has its own statistical issues tending to cause it to understate inflation.

In January 1983 the housing price component of the CPI was replaced with “owners’ equivalent of rent” because rents are more stable. Because house prices rose and fell more than rents during the housing bubbles and crashes, housing’s effects on inflation and deflation are not reflected in the CPI. General inflation, meanwhile, since 2000 or so is calculated using PCE— the “personal consumption expenditures index”—which is a measure confected specifically to obtain a lower inflation rating than the CPI would give. We know what its purpose is because it is actually called the “deflator.”

The idea behind PCE is stunningly simple: As the prices of things we actually want increase, we substitute for them other, cheaper things we don’t want. In this way the “cost of living” is maintained more nearly constant. That this is also the very definition of a falling standard of living is both obvious and completely unacknowledged, as the reporting, each quarter, of a falling standard of living would be politically impractical. The PCE is the largest part of the Commerce Department’s report on the Gross Domestic Product—or GDP.

The GDP is supposed to count the value of all goods, services, and structures produced by everyone in the United States each quarter. Until 1991 the the country  measured its national output via GNP—Gross National Product—which is similar, but with an important difference. GNP counts everything produced by Americans and American-based companies, no matter where. GDP counts everything produced in the country, no matter by whom. So if Toyota opens a car manufacturing plant in Kentucky that counts as GDP but not as GNP. As the Wiki on this helpfully explains, “this would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.”

There is more to it than that, of course. Both GNP and GDP count as production every service rendered, so long as it was (or is expected to be) paid for. That means, for GDP’s purposes, it does not matter if you’re building an electric car that gets 200 miles on a three-hour charge, or a tank that drinks 6 gallons of diesel per mile, leaves a uranium slime trail 8 feet wide, and can’t go off road without exploding in flames. GDP doesn’t distinguish between an oncologist who earned $3.5 million last year saving the lives of 40 cancer patients and a Goldman commodity trader who raked off the same amount gambling on food prices with 40 other people’s money. The $3.5 million counts the same in the GDP figures.

The proliferation of Goldman commodity trader types in the U.S. economy has been much remarked upon, yet its implications have hardly begun to be analyzed, so dominant is the idea that these banker types provide valuable services. The employment of such folks, many of whom have big brains, in such a wastrel field of endeavor has exacted tremendous opportunity costs on the economy as a whole, also as yet unanalyzed. While conveying formerly unheard-of riches to an ever narrower slice of society since the 1980s, the fields of investment banking and technology have cost tens of millions of ordinary people their jobs while making everyone who is employed—including those in the technology and finance fields themselves—feel less secure.

Which brings us to the final key statistic that is no longer comparable with numbers published a few decades ago. In 1994 the Bureau of Labor Statistics revised and renumbered its several unemployment measures, while keeping in place the factors that have, more and more, skewed those numbers downward.

Here’s the Wiki on that. Notice that U-2 used to be “job losers” and became “job losers and those who completed temporary jobs.” The rise of such temporary jobs—by definition unstable—is hidden right there in plain sight. U-3 used to capture data for unemployed people 25 and over—basically what we used to think of as “adults.” U-3 is now labeled “total unemployment” and has become the Bureau’s headline, or “official” number. The old U-4 was total unemployed looking for full time work. The new U-4 is total unemployed plus discouraged workers.

Discouraged workers are people who don’t count, officially, because they didn’t look for a job during the past month.

U-5 used to be the Bureau’s main number, same as U-3 today. Today the U-5 number is the U-4 number—unemployed and discouraged, remember—plus “marginally attached workers.”

These folks are basically even more discouraged than discouraged workers. They say they’d work if someone knocked on their cardboard box and offered them a job.

The U-6 measure is somewhat improved. It used to consist of everyone looking for full-time work plus half of all those seeking part-time work, and half of everyone “employed part time for economic reasons,” as if any employment at all were not usually for “economic reasons.” The new U-6 is basically everyone counted by the new U-5 measure plus the part-timers who’d rather be working full-time. It’s the only measure of under-employment we have.

Some economists look at the late-model U-6 and see something useful, even an over-count, as it tallies up just about everyone who is not working as much as they want. The U-6 number—currently just under 16 percent—is thus comparable to the unemployment counts made in the depths of the Great Depression, some suggest.

But it is no such thing. Today’s U-6 actually still undercounts unemployment, because it leaves out everyone in the military service or in prison.

In 1936, the United States had a standing army numbering 140,000 men. This represented about .25 percent of the available labor force of 53 million. Our prison population was also far lower than it is today.

In 2011 the United States has about 1.4 million people serving in the military (not counting contractors) and a labor force of 154 million, meaning nearly 1 percent of our potential workers are serving in the military. In simplest terms, the size of the labor force has tripled—but the size of the military has increased 10-fold.

The story is much the same with the prison population, which a pair of economists estimated had lowered the stated unemployment rate by .17 percent between 1985 and 1999. About 1.7 percent of the country’s potential labor force is in prison today. Summed up, active-duty military and prison populations sideline some 4 million able-bodied people who are not factored in to the unemployment picture.

The official unemployment rate also does not count people collecting disability, a cohort that has expanded tremendously during the past decade.

The implications of all these statistical glitches have been overlooked by pretty much everyone in the business and economic press. Instead there is constant chatter about this or that “economic indicator” (Is GDP growth, revised down to a mere 1.8 percent for the first 90 days of 2011, a harbinger of a second recessionary dip?) and a pointless yet endless argument over whether the “stimulus worked.”

Lately there has been much debate between those purporting to tout the ideas of John Maynard Keynes, the early 20th century polymath and father of the “stimulus” policy, and the camp followers of Friedrich Hayek, the Austrian economist whose Markets Uber Alles theory is beloved by Libertarians and pseudo-Libertarians alike. All agree that we’ve gotten a dose of Keynes-lite (“Haste Great, More Shilling”), so the argument is about whether we’ve had too much or not enough of this medicine. As an illustrative distraction, here’s why crazy laissez-faire theories (and they were crazy from their inception, no doubt) are ascendant: better beats; better production values; cleverer presentation.

The Keynes vs. Hayek meme is cute and simple, and there is some truth to it, as far as it goes. But like the French generals who planned the Maginot Line, it overlooks new conditions. Both camps mainly take at face value the current economic indicators and the models from which these arise.

Indeed, nearly every measure economists use today makes the same fundamental error, so we get unemployment readings that, at their bedrock, assume a factory economy marked by high unionization and temporary layoffs instead of what we really have, which is a deindustrialized system marked by low job security, zero pensions, high levels of informal (or “shadow economy”) off-the-books work, and unprecedented levels of permanent workforce dropout.

Here’s The Times’ Catherine Rampell’s chart showing the changing ratio of earned income and government transfer payments as a percentage of GDP:

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Or consider this data point, marked in 2006, when corporate profits had broken records (they’re higher now, believe it): At 51 percent of GDP, U.S. wages were already lower than at almost any time since 1966:

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There are many others. The details don’t matter so much as the theme, which is that every official way of looking at economic development, growth, and general well-being is distorted by the unstated, grossly erroneous assumption that the bottom-line numbers we see today mean roughly the same things they meant in our grandfather’s time—and so, then, do the remedies.

In the 1930s, and up through the 1970s, the nation’s banking system was closely linked to its industrial output, the way a transmission works with an engine. The so-called “real economy” depended on commercial banks for its working capital, services like stock sales, mergers, and the like, and the banks in turn had no function independent of serving those actually productive industries.

But the stagflation of the ‘70s, new rules that allowed partnerships to turn themselves into stock corporations, the rise of Reaganite deregulatory fervor, and the unleashing of derivatives and bond traders decoupled the banks from the real economy.

As productive industries withered (masked, partially by our invisible statistical sophism and also by the survivors’ use of outsourcing and fraudulent accounting, a la Sunbeam Corp’s infamous “channel-stuffing” fiasco of the late 1990s), the banks quietly withered too, becoming hollow dens of compulsive gamblers utterly lacking the skills their fathers and grandfathers had.

If in the past bailing out the banks trickled-down to “Main Street” through renewed lending (particularly when accompanied by massive “make-work” public works projects and then ambitiously ramped-up arms production), today it only recapitalizes the busted gamblers. It does nothing for the moribund “real economy” and, worse, it rewards, again, the sociopaths who caused this crash—and who hollowed-out of the nation’s productive capacity since Jimmy Carter’s presidency.

The decision by George Bush and Henry Paulson and Ben Bernanke and Barack Obama to bail out the banks thus failed on every count—even as it is touted by liberal, Keynesian folks like Paul Krugman as a mild success.

What should have been done?

A policy directly punishing the culprits was never discussed, because the framework in which the crisis was seen was so distorted by both the interests of the presidents’ top economic advisers (all high rollers in, and/or owners of, the casino, all of who insist there is no casino) and the general analytical malaise that has infected institutions such as the Federal Reserve, BLS, and others. But even absent better economic yardsticks, such a policy would not have been difficult to devise. The elements of it have been discussed over the years, both at the reformist fringes and even by such mainstream commentators as Krugman, who has long advocated for higher margin requirements, for example, on stock traders.

The first element of such a policy is taxation. To put it plainly, we must tax the assholes for everyone’s own good. So instead of a marginal top rate on capital gains (so called) of 20 percent, the rate on annual gains above, say, $1 million ought to be closer to 70 percent. Sacrilege, I know, but remember: “capital gains” used to be about the sale of a business built up over generations. Lately it’s much more likely to be winnings in a currency bet or an interest rate swap. Write a rule exempting real businesses, farms, and the like from the top tax, but find and employ the most vicious, bloodthirsty litigators to run down and rip the spines out of the pink-faced little charlatans who try to get around the tax on carry trades and commodity speculation.

The details necessary to accomplish this task are many, their complexity on par with the derivative instruments they would curb. There are many who could devise simpler ways of doing it, and they should. But the principle of the thing is clear: We need to tax the antiproductive amassment of gambling winnings because such stores of wealth have proven anathema to democracy and a functioning economy.

But the people who make all their money this way are in charge—why would they do this?

They won’t, of course. The rest of us have to force them. And that starts with understanding the problem. I’ve tried to lay it out, over the past two and a half years or so, in these posts. A few of you have written encouraging things, and I thank you. Some of you have suggested I’m naïve or worse, that my shitty outlook derives from having my head up my keister. And I thank you too.

To the rest, thanks for reading. I hope I’ve occasionally written something that surprised you, or caused you to hit a link to someone whose work is smarter and better than mine.

Carry on.

Fortunately, we have Yves Smith to put this in a corrective context. Far from “dying,” investment banks’ reputations died decades ago amid the wholesale conversion of the conservative partnerships into publicly traded, quarterly results-oriented megafirms. Combined with the inevitable rise of the low-life, frat-jock bond trader mentality and a simultaneous, wholesale withdrawal of regulation, you get a crime spree the breadth of which is still not quite understood by, well, most folks at places like the New York Times.

The comments under Smith’s post offer further insight, with one of her readers likening the Wall Streeters to addicts: “And so they hate their actions, they hate the world that lets them act, and they dehumanize the victims who suffer from it as a third means of rebellion — in that instinctive blood-level way that the strong hate the weak.”

Joan Jett said it best, I think, just about the time this trend was getting legs:

Lee Farkas

Farkas, a college dropout, founded Taylor Bean–TBW for short–in 1991 with $75,000. Despite sloppy accounting and lax underwriting that moved Fannie Mae to stop buying its loans in 2002, the company grew to become the 12th largest mortgage originator in the United States, with 2,400 employees and a corporate jet, before collapsing under the weight of alleged accounting frauds totaling at least $2.9 billion. In the end, prosecutors alleged, the company sold the same mortgages to three different entities.

“It’s very common in our business to sell loans that don’t exist,” Farkas said on the witness stand last week, according to the Ocala Star Banner.  “It happens all the time. Mortgage banking is more an art than a science sometimes.”

Freddie Mac, Fannie’s smaller brother, kept the company afloat during the housing bubble. In May, 2008 it called TBW its “number one lender in affordable housing products.” Fannie and Freddie are now owned by the U.S. government. Before their takeover in August 2009, their businesses were only implicitly backed by taxpayers. Standard and Poors, the bond rating agency, estimated last fall (pdf) that Fannie and Freddie’s cost to the government could approach $700 billion.

As larger and more reckless subprime lenders collapsed in the 2006–2008 period, TBW expanded wildly, in three years tripling its loan volume to $35 billion in the fiscal year ending April 30, 2008. Though most of its borrowers were not technically subprime, meaning their credit scores were above 620, many were players in the Ponzi-like scheme the house-flipping business became in the mid-2000s, in search of the “greater fool” who would pay more than they had for a home even as the market was sinking.

During that crucial time, in Baltimore’s burgeoning Southeast neighborhoods, distressed home-flippers facing a tightening credit market could go to Joshua Goldberg to refinance their already-underwater investment properties.

Goldberg, an independent mortgage broker working for his family’s “boutique”-style lending business, and TBW, one of several non-bank lenders he worked with, appear to have specialized in dodgy loans. In a series of transactions beginning in 2007, a group of friends and (alleged) relatives borrowed more than $1 million through Goldberg in order to shuffle half a dozen houses from Goldberg’s life partner, Bayardo Alvarez, and Ken Koehler and his life partner to brothers George and Emmanuel Agelakis.  The homes were worth a small fraction of the selling prices, and the Agelakises quickly defaulted on all of them. As far as City Paper can determine, none of the participants in those transactions have been charged with any mortgage-related crimes. (The Agelakises are wanted on several unrelated criminal warrants, online court records indicate.)

By 2009 TBW’s foreclosure rate on FHA (government)-backed loans topped 9 percent—nearly 30 percent higher than FHA’s then-eye-popping average. With losses mounting, Farkas ordered underlings to hide them in myriad ways, six subordinates testified at trial. All had pleaded guilty and cooperated with prosecutors in exchange for potentially lighter sentences.

As the Star Banner reported, Farkas shrugged off those witnesses and their statements:

“I know how scared I’ve been with all that’s happened to me. I can only imagine how scared they were,” he said, elaborating just a few minutes later by saying, “I don’t think they did anything wrong and I don’t think they think they did anything wrong.”

Prosperity: For Rush, Glenn Beck, John Paulson—the nations’ “wealth creators.”

Ryan’s plan, cynically titled the “Path to Prosperity,” would give $125,000 tax break to everyone who earns a million per year, with much, much more due to those who skim off more … like this cow flop who made an estimated $32 million last year. “I love you,” Glenn Beck told Ryan, in introduction, on his radio show Tuesday. And why wouldn’t he? Ryan is proposing to give Beck $4 million in annual tax relief. (Beck, of course, may make quite a bit less next year as Fox canceled his TV gig, but he’ll still “earn” millions touting conspiracy theories and oozing anti-Semitism.)

According to Beck, unions = “communists, socialists, and revolutionaries.” I don’t think even ol’ Joe McCarthy ever got his head that far up his own rectum.

But Glenn Beck and Paul Ryan were made for each other. What is shocking is how much respectful attention Ryan—and his spooge blot of a proposal—have gotten from non-troglodytes. He’s been on NPR, and they didn’t laugh him off the air. According to the Associated Press, even the president gives the man his props:

““I’ve read it. I can tell you what’s in it,” Obama said. The plan, the president added, was “a serious proposal,” and Ryan “a sincere guy.”

Notwithstanding Obama’s habitual reluctance to speak truth to morons, Ryan’s numbers are absurdly unserious, as this analysis by the Center on Budget and Policy Priorities demonstrates.

And the seven-term congressman is, himself, a grinning huckster in the used-car salesman/televangelist tradition. Best summation of Ryan as a person is by “the collective” at (that Politburo-directed pamphlet) Esquire:

Look at him when he talks about dismantling the hard-won protections of the shrinking middle class. He is so positively lubricious about it that his teeth seem to be sweating. Pain (not his) purifies the nation. Pain (not his) makes us free. This is what Paul Ryan dreams of when he dreams of a free people.

Ryan is yet another disciple of Ayn Rand, whose upside-down and backward conception of human value and morality also animated the life work of former Federal Reserve Chairman Alan Greenspan. Like Greenspan, Ryan is also a simpering hypocrite, having lived off the public dole through high school and college. Now he’s fashioned himself a Galtian superman, heroically turning back time and halting trains—not to fight crime, but to inflict suffering on the most vulnerable.

That this guy is given any credibility or respect at all, from anyone, signals either

a) credulity, bordering on mental retardation; or

b) cowardly surrender to naked douchebaggery.

Some of this is utterly predictable. The New York Times’ David Brooks: “His proposal will set the standard of seriousness for anybody who wants to play in this discussion.”

The WaPo’s Ezra Klein: “His budget puts Republicans at risk by yoking them to a plan to privatize Medicare, slash Medicaid and cut taxes on the wealthy.”

Well, yes. It might be politically risky. But saying anything less than “Ryan’s plan means an ass-rape in the oubliette for the vast majority of innocent Americans while heaping additional riches on billionaires for no logical reason and is, therefore, beyond the bounds of polite debate,” gives it unwarranted credibility. Esquire:

The emerging default position within the Beltway seems to be that Ryan’s budget is just crazy enough to make the recommendations of the president’s Deficit Commission, which themselves were bad enough to be laughed out of the court of public opinion not six months ago, seem like a reasonable alternative.

Advancing crazy demands in order to cast a kinder light on more reasonable demands was among the most effective tactics employed by leftists in the post-war struggle for civil rights, women’s rights, and a host of social insurance programs that buoyed three generations of America’s middle class. By advancing ever more unreasonable, asinine demands backed by the full force of Heritage, Cato, and the various Koch-funded think tanks, the nation’s Asshole Class have already gutted most of that in favor of tax breaks for the super-rich and corporations.

But they’re not done yet. They want more.

Welcome to the Banana States of America, where Freedom Reigns™. Here’s your mosquito net. That’ll be $500. Payment to be made in cash—gold coins only, thank you. And what are you gonna do about it?

Lee Farkas and a jet (Ocala Star Banner photo)

According to testimony from just one of the lender’s executives who has already pleaded guilty (and–YES!–faces five years in the can), the Florida-based fraud factory should’ve been dead in 2002, when Fannie Mae dropped it like a bad habit. But Freddie Mac had faith.

As we mentioned quite some time ago,  Taylor-Bean’s collapse dragged down the then-giant Colonial Bank. Forbes’ Walter Pavlo puts an Auburn-vs.-‘Bama twist on that, and the Crimson Tide remains very high.

Though Taylor Bean was Freddie Mac’s “number one lender in affordable housing products,”  in Baltimore’s Southeastern neighborhoods it was also the source of easy money for at least one ring of, let’s say, remarkably overoptimistic house-flippers. Mostly bankrupt but still un-indicted, they continue to chase the American Dream.

One apparently has a home for sale on Guilford Avenue–just $464,000.

But still. Holy crap, every day. Here are three more stories that, once again, underscore the, uh, score. The Times comes out with this piece taking stock of the wages necessary for any kind of decent life in the United States of America. It surely won’t surprise many to learn that the figure for a single adult is about $30,000. The official poverty line, by contrast, is just north of $10,000.

But the higher figure, ginned up by the nonprofit group Wider Opportunities for Women, includes such extravagances as savings—you know, for the future?—of $1,776. If we eliminate those, and arbitrarily remove “taxes” from the equation (‘cause everyone knows the poor don’t actually pay taxes—everyone on the right anyway), we arrive at a figure of $24,000 per annum, still considerably more than twice the poverty rate.

What percentage of working Americans currently earn at least that much? According to the Economic Policy Institute, approximately 75 percent, as of 2009.

Which means that, in the U.S.A., the real poverty rate is something close to 25 percent—not the 12–16 percent usually reported. My figures are very conservative, of course, as they do not include the unemployed and other welfare cheats who are obviously undeserving of prosperity. Or food. Or housing. Since they don’t pay any taxes.

And speaking of taxes, you may have heard, as recently reported, that General Electric not only pays none, but gets billions in tax refunds, owing to its mad accounting skillz. What you may not know (unless you’re self-employed) is that paying zero taxes, mostly by salting away cash for the future, is a game even relative paupers (earning just $150k a year–i.e., the top 5 percent of U.S. earners) can play—if they take the trouble to incorporate. So says the Wall Street Journal’s Brett Arends, anyway. As he points out, the proper response to GE’s good fortune is anything but outrage:

But if you’re like a lot of people, your first reaction was probably: “Hmmm. How can I get that kind of deal?”

With billions of taxpayer dollars used to prop up GE and rest of the financial industry, folks rightly wonder who got the money, and what collateral it was lent against. As we reported,  Bloomberg fought to get the Federal Reserve to divulge that information, won the fight (at the Supreme Court, no less), and yesterday released the first bit of that informational bounty.

The headline news: Yes, of course we lent money against for worthless, defaulted debt.

The biggest borrower was Morgan Stanley:

… on Sept. 29, 2008, totaling $61.3 billion, the data show. The New York-based firm pledged $66.5 billion in collateral, including $21.5 billion in equities, $19.4 billion in unknown rated securities and $6.7 billion in junk or defaulted debt.

Also, Libya’s central bank got bailed out. Really.

More info is certainly still buried in the released documents, Bloomberg notes:

The records — 894 files in PDF form with 29,346 pages — reveal for the first time the names of financial institutions that borrowed directly from the central bank through the so– called discount window. The Fed provided the documents after the U.S. Supreme Court this month rejected a banking industry group’s attempt to shield them from public view.

Yves Smith points out why the work being done by Bloomberg’s people on this is harder than it should be:

A further remark: the fact that Bloomberg can say anything intelligent at this juncture is a testament to the cleverness of its reporters. The central bank quite deliberately responded to the request by providing the information in the most disaggregated, difficult to work with form imaginable. The central bank did a version of the same trick with its data on Maiden Lane II. The holdings of that asset management vehicle were various real estate exposures, some of which were hedged. The hedges were reported separately from the bonds and loans. Clearly, Blackrock, the asset manager, had far more useful and understandable reports that they used internally and provided to the New York Fed, but those were withheld. This data will presumably be as enticing as the Wikileaks cables, so enough eyeballs on it will eventually overcome the Fed’s efforts to hinder analysis.

And the result of that will be?

It’s not news that computers are reading—and acting on—written documents. The Asshole Class is automating its cash harvesting operations by just these means.

Prototype Koch Brothers Traderbot (also eliminates up to 1,000 lawyers per hour when in hypermode).

The Times piece is about programs that read e-mails and other documents pried loose by lawsuits. Given that a computer can read more documents than 100 junior associates, the story focuses on the threat computers pose to lawyers’ employment prospects. This is not surprising, considering how important lawyers are to journalists. Check the front page of a few newspapers and note the stories that originate in court. You think reporters stake out every court and sift through all filed cases searching for the juicy ones?

But anyway.

The remarkable part of the piece comes near the end, where University of Massachusetts Amherst computer scientist Andrew McCallum says the new computer programs are largely based on a cache of more than five million Enron e-mails he bought in 2003 and made available to other researchers:

Since then, it has become the foundation of a wealth of new science — and its value has endured, since privacy constraints usually keep large collections of e-mail out of reach. “It’s made a massive difference in the research community,” Dr. McCallum said.

This suggests that Enron’s corporate culture is the model for understanding every other sued corporation’s internal communications.

Given our experience with the Gaussian copula function, does anyone else think that using a single model based on a particular point in time might, ultimately, yield sub-optimal results?

Apocalypse Mao?

Kevin D. Freeman concluded in a 2009 report “obtained by the Washington Times” that such threats of economic sabotage do, indeed, deserve more study:

In an interview with The Times, Freeman said his report provided enough theoretical evidence for an economic warfare attack that further forensic study was warranted.

He suspects Chinese or Islamic fundamentalists. The WaTimes:

“The reality of the situation today is that foreign-based hedge funds perpetrating bear raid strategies could do so virtually unmonitored and unregulated on behalf of enemies of the United States,” the report says.

That Greenwich or Manhattan-based hedge funds (operating on behalf of heroes of the new economy) might have done it in return for gigantic profits is not discussed in the report, possibly because the Pentagon does not dispense contracts to those who seek national security threats on Wall Street.

The WaTimes article is getting a lot of cites around the web, presumably because it feeds some deep need. I can’t find too much about Freeman other than this report, so I suppose my initial theory—that the Pentagon will perpetually pay big bucks for thin research—is shot. So on to Theory B: The WaTimes will advance the ungrounded suppositions of just about any wingnut it finds. But we already know that.

Here’s a link to Freeman’s report.  (Mentions of John Paulson? 2. Citations from Free Republic? 2.)

Here’s a link to Freeman’s blog, where he reveals himself an evangelist of diabolical Chinese perfidy. Not saying he’s wrong, just that he may be overselling his intel a tad.

This is hazardous adventure, as recent events involving a company called HB Gary have shown. But more on that later.

Those who wish to root their theories in something more akin to solid earth should consult In Search of Enemies by John Stockwell and/or The Paranoid Style in American Politics by Richard Hofstadter

Here’s Jeffrey Sachs talking about President Obama’s proposed federal budget and the Republicans’ more antisocialist response (pdf), basically saying that they both cut too much while refusing to raise taxes. Key point: In December 2010, Obama gave $900 billion in revenue to the richest 1 percent of Americans, by extending the Bush tax breaks for those who make more than $250,000 a year. Two months later: crisis in revenue and the “need” to cut spending for things poor people rely on.

As if tax breaks for the wealthiest weren’t an inalienable Constitutional right!

Like I said: kah-RAY-zee!

Economist David Laibson wants it known that he had nothing to do with it

As an uncredentialed observer of the politics of macroeconomic policy, I have often wondered just how transparently cheesy the supposed smart guys will get before someone calls them on it. The answer came yesterday as I looked at this (PDF) alleged research report launched by the U.S. Chamber of Commerce on behalf of the derivative market’s most influential compulsive gamblers.

The report—all seven highly academic and technical pages of it—claims that the mild rules proposed by the Dodd-Frank Act will cost between 100,000 and 130,000 American jobs. It’s absurd on its face, and Simon Johnson at his blog The Baseline Scenario called them out and then Andrew Ross Sorkin of the New York Times’ DealBook committed journalism.  He called up the alleged “advisors” of the company—Keybridge Research—that published this laughable lobby effort masquerading as independent research.

One of these supposed advisors was the Nobel laureate Joseph Stiglitz. Sorkin:

“This is the first I have heard about it,” said Mr. Stiglitz, who just returned home on Sunday after a five-week trip abroad. He said he was surprised to be listed on the group’s Web site. After reading the study, he said, “It’s not a very good report.”

Within a few hours, two more of the firm’s seven advisors had disappeared from its web site, Sorkin writes:

When I called Keybridge’s president, Robert F. Wescott, who during the Clinton administration was a special assistant to the president for economic policy at the National Economic Council, he seemed slightly startled.

“It is true that David [Laibson] and Steve [Zeldes] asked to be removed from the Web site,” he said. “These professors did not work on this project and were not aware of it, but they helped us with other projects.” He asserted that none of their names were attached to the study, just to the firm.

He also contends that Mr. Laibson and Mr. Zeldes were distancing themselves as a result of “what happened with the movie “The Inside Job,’” not the study. “That’s how it was presented to me,” Mr. Wescott said.

Those who have seen that movie might recall that several respected economists were shown to be hacks who will say or write anything on behalf of the highest bidder. That this is still a revelation to some—two or three decades after it became standard operating procedure in the economics departments of major universities—hints at how deep the rot is. The American Economics Association reportedly is considering establishing a code of conduct.

Now the amusing part: count the number of times the Keybridge report or its figures are cited by deregulatory congress members and supposedly serious commentators during the next few months. Start right now. The House Financial Services Committee is hearing testimony on derivatives today.

Why anyone would question this obvious wisdom is anyone’s guess. But two new articles do.

First, consider Remapping Debate’s longish discussion of the Education über alles meme and what it means to economic policy.

The piece says that more higher education is not a “magic bullet”—which is itself a bold achievement in these days of near unquestioned fealty to the education mantra. But then the story goes a bit further, exploring how and why the “It’s Education, Stupid” idea has been sucking all the oxygen out of economic policy discussions for a generation.

Turns out making expanded higher education the be-all, end-all conveniently puts the blame for failure on ordinary idiots, while drawing attention away from stuff like the destruction of unions, the shrinking minimum wage, and a whole host of tax and trade laws that, by design, benefit the ultra wealthy at nearly everyone else’s expense. As is the style at Remapping Debate, the writer eases into it like he would a hot tub:

Still, the debate over what education can achieve is closely connected to far-reaching differences over policy, especially when it comes to helping workers who do not have degrees. In short: the more powerfully someone believes in the education answer, the less likely he or she is to support other strategies to boost wages or improve job quality.

You suppose? Takes him a while to get to the nub, but, five paragraphs from the story’s end, he does:

an emphasis on education holds natural appeal for analysts who approach the question of economic development and income growth with hostility toward labor market regulations or other interventions. Jason Fichtner, a senior research fellow at the Mercatus Center, a free market think tank, explained in an interview last month that he and his colleagues were worried that growing inequality would lead to increasing demand for redistribution, regulation, and government services. Mercatus has begun to explore ways to improve primary education and expand college access, he said, as a way to “avoid those policies.”

It hardly needs noting that the Mercatus Center is funded by the folks (>cough<Koch Brothers >cough<)  who derive billions of dollars from the policies that encourage outsourcing, wage erosion, environmental degradation, and job insecurity for average Americans. So I’ll not mention it either.

Jeff Faux of the Economic Policy Institute goes directly to the point in his American Prospect story titled “America’s Trade Policy of the Absurd” (HT Newstrust):

For three decades, both Democratic and Republican administrations have been making trade deals with elites of other countries that favor the interests of multinational investors over the interests of American producers and workers. U.S.-based banks and corporations get access to cheap labor and to the financial systems of other nations. In return, U.S. workers are exposed to competition from countries where wages are suppressed (Mexico) or where government runs effective industrial policies (Germany) or both (China).

And:

Not to worry, soothed the politicians and pundits: Let the foreigners make the old stuff, we Americans will get the clean, green industry jobs dreaming up and designing new products. So as their parents were downsized, many young Americans took out loans to get educated for the new high-tech service economy. But it turns out that in the new deregulated global market, anything that can be done with a computer can be offshored to India, China, and other places where first-rate technical workers get paid a fraction of American wages.

So, of course:

From Wall Street’s perspective, our trade policies are a great success. U.S. labor costs are down, profits from offshoring are up, and America’s financial elite have a growing investment in the foreign countries that are eating our economic lunch. From the perspective of America’s global elite, what’s not to like?

The cruel joke is that this is the crowd that is presumed by the press and the politicians to represent the interests of the American people. John Chambers, the CEO of Cisco Systems, puts millions of dollars into a state-of-the-art research facility in India and says that his goal is to become a “Chinese company,” but his company still gets to influence elections, lobby Congress, and otherwise drive U.S. trade policy.

(Here’s a quick way to understand how today’s savvy journalist might equate Cisco Systems’ CEO with middle America: In 2010 Chambers made about a million and a half bucks a month—about 475 times what a normal American earns on the job. But Chambers would have to work 266 years to amass what hedge fund wizard John Paulson “earned” last year alone. So: lower middle class).

Read the stories together, then reach for your sidearm the next time anyone—anyone!—starts in with that “education-for-competitiveness” bullshit.

But education does count for something—if it’s the right kind of education. Consider the smart guys and gals who dreamed up this novel way to steal taxpayer money that was supposed to go to poor areas. As Bloomberg reported Tuesday:

Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group Inc., U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion — and most of the public has never heard of it.

Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request.

We don’t tax them at rates above that which we tax normal folks. We give them tax credits. So they can build a museum for their 500 cars.

But this is not because they own the government and the economists who advise it and the reporters who interview those economists.

It’s because they’re better educated and more skilled.

And so can you!

</p>

Your theory appears to be all wet, Professor.

Krugman has centrist credentials, you ask?

Yeah. Krugman is a Keynesian standard-bearer who thinks the economic system is pretty good, and can be perfected with just a wee bit of regulatory tinkering. Part of that belief centers on his faith—oft repeated—that crazy price spikes in commodities markets can be explained by supply and demand. The converse—that speculative shenanigans are distorting the market—Krugman bats away as the bleating of conspiracy theorists and French presidents.

In Krugman’s world, it simply cannot be true that speculative interests regularly bend entire markets. Because if that were true, reform might demand something more muscular than regulatory tinkering. It’s unthinkable.

So Krugman goes on today (as he has previously here and here and here and here) about how fundamentals rule every market and “what really stands out is the extent to which severe weather events have disrupted agricultural production,” then sums up his greenhouse theory succinctly:

As always, you can’t attribute any one weather event to greenhouse gases. But the pattern we’re seeing, with extreme highs and extreme weather in general becoming much more common, is just what you’d expect from climate change.

Hmm. Well, global climate change is almost certainly a fact, but bad weather has not always led to monster global food price disruptions.

So I’d like Prof. Krugman to consider this tinfoil hat idea: What if, in addition to global climate change, we are also experiencing a global market change? And what if, just as CO2 is invisibly polluting the climate, the flood of dollars desperately searching for yield, combined with the recent removal of effective financial regulation, plus absurd, short-term incentives linked to supervillain-level compensation, have together produced a certain sort of hedge-fund wanker who has, in turn, radically altered the global commodities markets?

Phibro oil speculator Andrew Hall’s castle. Really.

In 2003 the total amount invested in commodity price index funds was $13 billion. By early 2008 that figure was $260 billion. (Here’s a report that refers to some of the 2008 speculation).

Krugman always hedges just enough to protect his left flank, as in his Dec. 26, 2010, “The Finite World” column, where he wrote:

This doesn’t necessarily mean that speculation played no role in 2007–2008. Nor should we reject the notion that speculation is playing some role in current prices; for example, who is that mystery investor who has bought up much of the world’s copper supply?

Indeed, who is that mystery investor? (Turns out, as had been widely reported by the time Krugman speculated,  it was J.P. Morgan. And why does Krugman—or anyone—just accept the notion that we’re not allowed to know who owns 50–80 percent of the available copper?) Ah! But never mind such trifles, Krugman’s larger point is that conservatives are idiots, or thinking that speculators control markets is childish, or that we live in a finite world, or whatever point Krugman is trying to get to.

Ever the sensible centrist, Krugman is even on record in favor of taxing speculators, agreeing that today’s hyperactive financial markets are “‘socially useless.’” He just can’t quite take that next logical step and say that, worse than useless, the hyperactivity is socially harmful. No, Krugman says, the harm we see—Third World people facing starvation, lighting themselves on fire in protest, sad SUV makers unable to fill their showrooms—is all about physical limits and not about malevolent speculation.

How does Krugman know? In 2008, Krugman helpfully spelled out his thinking on futures market mechanisms:

Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?

The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.

His Nobel prize in economics notwithstanding, Krugman seems incapable of grasping that commodity speculation is more than Joe Schmoe betting a price will rise while Harriet Who takes the opposite side of the bet. Krugman’s illustration is straight out of any classic economics text, which is to say it’s a highly oversimplified model that bears little relation to how the game is actually played. Want evidence? If speculation using futures contracts, credit default swaps, and derivatives really had no effect on an underlying commodity, then the U.S. housing market would not have inflated and crashed. And commodities futures—including currency swaps—are a bit more complicated than the CDOs and CDS’s that blew up the housing bubble.

It’s really not news anymore that, during the 2000s, oil pricing moved from transparent markets into a netherworld dominated by hedge funds and other large financial players.

Consider this paper (PDF)  by Eduard Gracia regarding oil’s bubble pricing—in 2006.

Or look at the effect of the Commodity Futures Modernization Act and so-called ICE Futures (Intercontinental Exchange), which moved trillions of dollars worth of contracts from transparent open commodities markets to opaque over-the-counter (OTC) markets controlled by a few big banks.

Or read Ken Silverstein’s long and colorful story “Invisible Hands: The Secret World of the Oil Fixer” in the March 2009 Harper’s.

Or just think: The amount of money that can be applied at any given minute to a given market—any market, be it corn, soy, copper, silver or AOL stock—is now far beyond the total value of the actual product. The people in control of this money have faster computers than you do. And they work in secret. And they always have a strategy. Big hedge funds will make market-moving plays on any item if they think they can pull dumb money in behind them and then sell their positions while shorting the same commodity. It’s a momentum play, and it’s illegal, and it is done routinely (as the infamous Jim Cramer explained in this classic video), and to imagine, in the absence of effective regulation, that it’s not being done in today’s global commodities markets is to endow bond traders and hedge fund assholes with a rectitude bordering on the divine.

Jim Cramer says, basically, fuck you. Fuck you all.

As Cramer said, “It’s a fun game, and it’s a lucrative game.”

They cheat, Dr. Krugman. It’s what they do. Factor it in.

McBride was ringing regulators’ phones half a decade ago to ask what gives. He says he was told the (now familiar) refrain, that then President George W. Bush’s political appointees were preventing grunt-level regulators from doing their jobs—and, of course, the Godfather:

… one person told me “Greenspan is throwing his body in front of all efforts to tighten standards.”

The report apparently pulls few punches citing the failure of credit rating agencies, banks, over-the-counter derivatives, and

a systemic breakdown in accountability and ethics.… For example, our examination found, according to one measure, that the percentage of borrowers who defaulted on their mortgages within just a matter of months after taking a loan nearly doubled from the summer of 2006 to late 2007. This data indicates they likely took out mortgages that they never had the capacity or intention to pay. You will read about mortgage brokers who were paid “yield spread premiums” by lenders to put borrowers into higher-cost loans so they would get bigger fees, often never disclosed to borrowers. The report catalogues the rising incidence of mortgage fraud, which flourished in an environment of collapsing lending standards and lax regulation.

Hardly anything about the Community Reinvestment Act. No wonder the Republican members dissented.

Now let’s watch them dissent even more if anyone has the temerity to try to change the game.

Freeland is among the media elite

It’s hard to fault Freeland’s prose, given that (as the former “superstar” editor of the Financial Times, now at Reuters) her livelihood depends on continued access to the wealthiest plutocrats and oligarchs the world has ever known. Without them—without entrée to their parties and invitation to speak at their conclaves—she’d be a wretch like me.

And she has come out in favor of universal health care, at least as an element of national economic growth.

So I suppose it’s churlish to hold her accountable for the horse shit in this piece. But here goes anyway.

The article’s chief weakness is asserting that those who have these billions earned it—by innovation, by changing the world for the better. In taking this assumption as an article of faith and extending it generally to the world’s billionaires, the author blunders badly. Consider:

When the oligarchs of the former Soviet Union first burst out beyond their own borders, they were Marxist caricatures of the nouveau riche, purchasing yachts and sports teams, and surrounding themselves with couture-clad supermodels. Fifteen years later, they are exploring how to buy their way into the world of ideas.

As every Russian knows (and as Freeland herself hints, later in the piece), those “oligarchs” are Mafiosi. And the “world of ideas” to which they aspire is mainly a world of politically engaged think tanks whose principle mission—as Pete Peterson’s billion-dollar Institute for International Economics (renamed the Peterson Institute for International Economics in 2006) demonstrates—is to extract more from those with little and, indubitably, funnel more to those with much.

The story goes through great logical contortions in order to portray today’s million-a-day asshole class as “meritocratic.” The paeans to this group’s alleged work ethic are predictably laughable: There at the 300-acre Grove Hotel resort, “This is not a group that plays hooky: the conference room is full from 9 a.m. to 6 p.m., and during coffee breaks the lawns are crowded with executives checking their BlackBerrys and iPads.”

Imagine the calluses!

To stretch the point that these folks are self-made, Freeland includes even the odious Koch brothers, cackling heirs to a multimillion-dollar oil fortune even before their machinations vaulted them into the Asshole Class stratosphere:

Of the top 10 figures on the 2010 Forbes list of the wealthiest Americans, four are self-made, two (Charles and David Koch) expanded a medium-size family oil business into a billion-dollar industrial conglomerate, and the remaining four are all heirs of the self-made billionaire Sam Walton.

Well … one could quibble some even about three of the four—Bill Gates (father a big lawyer, mother on the board of a bank), Warren Buffett (congressman’s son), and Larry Ellison (adoptive father had made, then lost, a fortune in real estate)—who are self-made. But whatever. Moving on.

On Freeland’s hands, the kid gloves wear like velvet pillows, as in this account of a book party for Peterson’s novelist daughter:

As an example, she described a conversation with a couple at a Manhattan dinner party: “They started saying, ‘If you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJet thing’”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“‘and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.’”

The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.”

Fair enough, I suppose, to use the words of one obscenely rich and privileged person to hold a mirror to the others. But why not insert the facts? I suppose it would have hurt Freeland’s standing among her patrons if she took the opportunity, right there, to point out that the income tax rate paid by those earning 20 (those who deign to pay taxes, anyway), averages less than 25 percent (and only 15 percent for hedge fund winnings). “Twenty,” in the United States, equals (at least) 15, not 10.

Throughout the piece, Freeland seems unaware of her story’s contradictions, particularly the clash between the modern plutocrats’ up-from-nothing, jobs-making propaganda and the actual nature of their primary endeavors. Of Stephen Jennings and his company, Renaissance Capital, she writes: “Renaissance’s roots are in Moscow, where Jennings maintains his primary residence, and his business strategy involves positioning the firm to capture the investment flows between the emerging markets, particularly Russia, Africa, and Asia.”

This description perfectly epitomizes what the new global elite actually do. They do not, by and large, create wealth. They do not invent world-improving products. They “capture the investment flows.” This is the secret of wealth, today and always: the skim. The extraction of vigorish. And it is also the secret to the elite’s self-referential global society—the ostensible subject of this long story—and to the many nonprofit foundations and think tanks and endowed chairs at the University of Chicago School of Economics the Asshole Class, on a strictly tax-exempt basis, so generously funds. Because to continue to extract the skim, these folks require a legal and social structure that not only allows it, not only defends it, but actively encourages it. By the alchemy of economic theory, think-tank position papers, endless propaganda, and strong-arm lobbying, the act of skimming must be transmogrified into production—into “work.” And thereon into the “engine of the economy.” The Asshole Class must create the illusion that they are essential. And furthering that process is what this article, and this author, are bound to do.

Freeland presents the skim as a fait accompli, the need for more as an immutable law of nature, and the dilemmas arising from this natural law a challenge—not to refuse and rebel and rebuild, not to rethink or re-imagine—but to adapt:

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

Peterson could not have said it better. But, indeed, today’s CEOs and hedge fundies receive not 10, but 100 or more times the compensation their forefathers did. Do they deliver those multiples of value? Freeland does not, apparently, think to ask the question.

Or, perhaps, she thinks better of it.

Toward the end, Freeland momentarily goes all sappy and populist, quoting that old rabble-rouser Paul Volcker:

Critiques of the super-elite are becoming more common even at gatherings of the super-elite. At a Wall Street Journal conference in December 2009, Paul Volcker, the legendary former head of the Federal Reserve, argued that Wall Street’s claims of wealth creation were without any real basis. “I wish someone,” he said, “would give me one shred of neutral evidence that financial innovation has led to economic growth—one shred of evidence.”

By her own research, Freeland offers none, of course, just more assumption that it has. And with that she segues without grace or logic into

the dilemma: America really does need many of its plutocrats. We benefit from the goods they produce and the jobs they create. And even if a growing portion of those jobs are overseas, it is better to be the home of these innovators—native and immigrant alike—than not. In today’s hypercompetitive global environment, we need a creative, dynamic super-elite more than ever.

And so, in conclusion:

The lesson of history is that, in the long run, super-elites have two ways to survive: by suppressing dissent or by sharing their wealth. It is obvious which of these would be the better outcome for America, and the world. Let us hope the plutocrats aren’t already too isolated to recognize this. Because, in the end, there can never be a place like Galt’s Gulch.

Well. If only.

But there is such a place, and that place is Davos, and Sun Valley, and everywhere else the so-called Masters of the Universe land their jets and dock their yachts to the exclusion of us, inviting Freeland to moderate their discussion panels and bring us the troubling news of their ever-expanding needs—and our need to accommodate them. Ayn Rand’s crazy fantasy was not that the elite would go on strike. It was that the elite were actually productive, and most of the elite still believe it—after all, aren’t they on their BlackBerrys, making big deals?

But the evidence suggests the elite are parasites on the rest of us, inserting their blood funnels into “capital flows” while demanding that we take pay cuts and benefit cuts and work longer hours to buy their newest obsolete monopoly software while handing over at least 8 percent of our meager and heavily taxed paychecks for their minions to manage (after extracting a small annual fee, of course) for our retirement.

NAFTA, the “Flat World,” the 401(k) , the coming (renewed) attack on Social Security, the U.S. Supreme Court’s decision to allow unlimited corporate contributions to political campaigns, and the Excess of Stupid running from Accuracy in Media to Rush Limbaugh to Fox News—all of these are products of Galt’s Gulch.

The strike is ongoing; it began in the 1970s, and you are probably too young to remember the world before. With Freeland and the Atlantic Monthly guiding, you are meant to remain too awestruck and ignorant even to imagine something better.

HAFA, as it’s commonly known, was unveiled with great fanfare in February of 2010. The idea was to stop pretending that every “struggling homeowner” just needed a pinch of Uncle Sugar and a reasonable repayment schedule in order to stay in their homes, and face the reality that some significant number would never be able to afford the houses they’d bought at the height of the bubble. HAFA was a program to facilitate short sales—wherein the home owner sells the place for less than he owes the bank. Under HAFA, banks were encouraged to take a hit and dole out a little moving money to the home owner. The feds would chip in some to soften the blow.

The original program allowed “broker price opinions” to substitute for real appraisals, opening the door to fraud.

But there were other rules, some of which were designed to foil some of the more obvious short sale abuses. Say you’re underwater on your mortgage. You want to list it short, so you call a Realtor to start the process. The Realtor says house is worth $100,000 less than you have in it, even though similar houses nearby have sold lately for only $40,000 less than your mortgage balance. But who are you to argue with the experts? And what do you care, anyway—you just want out.

So your house gets listed and a few weeks later it’s sold, for a bit under the listing price. Turns out the Realtor’s brother-in-law buys houses. He resells your former house six days later for a quick $50,000 profit. Again, none of your business, right?

That’s called flopping and it’s just one of several games being played right now all over the country by folks with mad real estate skilz. And yeah, it’s illegal, and every so often someone gets nailed.  But who in the banking/real estate sector fears the cops anymore?

So far, HAFA has played little role in the scams. As CNBC’s Diana Olick reports, the old HAFA has only done 661 sales and spent $4.3 million total, which would never do:

The program wasn’t doing so well by the end of the year and had come under quite the criticism from the industry for being too complicated and too strict.

HAFA required arms-length sales and a series of means tests to make sure the seller was truly in dire straits and could not make any kind of reasonable payments. Or it did, anyway, until now. (Here’s a PDF of the updated rules—“Supplemental Directive 10-18”)  They boil down to this:

1. Instead of proving their financial hardship, borrowers now must sign a financial hardship affidavit. (This will be a boon to the rich, dumb would-be flippers who bought near the peak and just want out of a bad investment).
2. The new rules also allow for the sale of houses vacant up to a year (not three months). The owners merely must assert that the place had been their principal residence before they left (previously they had to prove that they were compelled to move at least 100 miles away for job reasons).
3. Payments to second mortgage holders can be modified slightly, but are still capped at $6,000 total.
4. And the speed is increased—borrowers requesting a HAFA short sale are required an answer within 30 days instead of 90.

As a savvy real estate pros know, “you can’t steal in slow motion.”

I’m going to quote Black’s piece and add just a couple caveats and clarifications. William Black:

It was the industry that created liar’s loans and it is liar’s loans that made so many [loan] officers wealthy.

Right. This was a central point of Mike Hudson’s excellent book, The Monster, reviewed here. A lot of subprime loans were liar’s loans, but not all, and a lot of liar’s loans were made to people who were not prototypical subprime customers. Liar’s loans were made to folks in the mortgage industry so that they could get in on the frenzy. Black continues:

There were two groups of borrowers who had acute needs to avoid disclosing their income and wealth — those engaged in tax fraud evaders and those seeking to deceive their spouses or defraud their prior spouses and children in order to evade alimony and child support payments. (Remember when one of “C’s” in lending referred to “character” and we taught loan officers why one should not lend to those of bad character?) People who will cheat their kids are certain to be willing to cheat their lender.

There is, of course, a third group: criminals. In Baltimore, as in other cities, drug dealers (who actually have money, but for reasons of personal philosophy often choose not to pay income taxes on it) and hustlers (who often have no money but just know they’re gonna make it really big in, say, six months) saw great advantage in buying houses with borrowed funds. The first group wanted to launder their drug proceeds—remember, the profits from the sale of a home are often tax free—while the second wanted to profit from the flips until it went to hell and they could walk away with the banks’ cash. Black:

and private and public investigators have confirmed that it is lenders and their agents (loan brokers and loan officers) who overwhelmingly put the lies in liar’s loans.

This is an often-missed detail, but it is central. In many cases—not all; many—the person who took the loan was something of a patsy, a naïve tool of the loan officer or paid off with trinkets. Sometimes they didn’t exist at all. Black:

Consider what would have happened if the securitizers, credit rating agencies, or auditors had actually looked at any reliable sample of the liar’s loans for evidence of fraud. They would have reported, as did Fitch in November 2007, that there was evidence of fraud in the nearly every file.

Again: Fraud was not the exception. Fraud was the rule. Fraud was the business model. That this is still news to anyone in America in 2011 says volumes about the failure of our journalistic institutions and our law enforcement system.

Only the lenders and their agents had the inside information and expertise to know how to optimize the deceit in the loan application process. Many of the housing speculators who bought a material number of homes and sought to flip them were industry insiders, and many of them also committed fraud by indicating that they intended to make each of the houses (simultaneously) their principal dwelling.

We saw a little of that here in Baltimore, eh?  Because tax-free profit (as well as tax breaks for ownership) come only from sale of a “principal residence.” Black:

Yes, it does appear to have been common for the loan brokers and officers to create the false loan applications and even forge the borrowers’ signatures. Some of the lenders are reported to have referred to these practices as “Arts and Crafts” weekends. We don’t know how common this level of lender fraud was because the regulatory agencies and prosecutors have not publicly reported their investigations. Indeed, there is no public evidence that the regulators or prosecutors are even conducting comprehensive investigations.…

Oh wait, there’s that “Operation Broken Trust” sweep the Justice Dept did a few weeks back. Oh, wait, that was mostly window dressing.

So there it is, laid out: What happened to our economy was a huge crime wave, and basically nobody has yet been put in the dock for it. Which means the people who did the crimes are still at large, still in business. (Forbes says that’s probably a good thing.)

No one ought to think those folks are retiring.

But Naked Capitalism has a better take on what seems to have happened.

Wonk Warning: Naked Capitalism isn’t for beginners, and this post is especially confusing.

So I’ll break it down for anyone who is interested. What the Goldman boys were talking about doing (they now claim it didn’t work) is a “short squeeze.” This is when the biggest, richest players in a market can fuck smaller players—even when those smaller players are correct—by flooding the system with money. Sort of like a poker player who is way ahead. He wants to shut down a weaker player who has a better hand, he raises the bet to a level this player cannot make, and that player then folds.

By early 2007, all sensible people realized the housing market in the United States was going to collapse. Finding a way to make money on that was the tough part. Eventually, several folks hit on the idea of buying credit default swaps (CDS) on mortgage bonds, called collateralized debt obligations. A credit default swap is like an insurance policy. If the bond tanks, the issuer of the CDS pays off. And CDS issuers did not require their customers to have any interest in the bond being insured.

To buy CDS on a given billion-dollar bond was exceedingly cheap in 2006. A few hundred grand would do it every time. But by 2007, word started getting around about the craptastic, fraud-filled subprime mortgages composing those bonds. Traders in CDS saw more buyers than sellers, so the prices rose. Now they might charge $500,000 a year to insure a $1 billion bond, or $1 million. Smart people who bought CDS early were making money—the value of their CDS was rising. They were attracting investors and buying more CDS, always (this being Wall Street) with borrowed money.

These speculators were considered “short” because they were betting the market would tank. They were betting against mortgage banks, Countrywide, New Century, and homeowners. By early 2007, the short position was completely rational. But there is an old saying that “the market can stay irrational longer than you can stay solvent.”

Enter Goldman Sachs. As the WSJ puts it:

Michael Swenson, who ran Goldman Sachs Group Inc.‘s asset-backed securities trading desk during the subprime-mortgage crisis, told traders working for him in 2007 to “start killing the shorts in the street” and “cause maximum pain.”

With way more money than the little fellas who had figured out the strategy first, Goldman wanted to crush them. And as the charts posted by Yves Smith indicate, it’s possible they—or someone else—did, in some cases. By flooding the sell side of the CDS market, Goldman (or someone) caused prices to drop. Smaller players started losing money, angering their investors and facing “margin calls” from their lenders.

And that opened up an opportunity for players like Goldman, Lehman, BoA, Citi, and others to buy CDS on their own crappy bonds—as well as bundle them and sell them to dumb investors—for a few more crucial weeks and months before the final reckoning.

A Goldman spokesman told the WSJ that the firm didn’t engage in a “short squeeze, and we find no evidence of unusual trading,” the paper reports.

Don’t know why anyone would doubt that.

The so-called “99-ers” are still dropping off the unemployment rolls as scheduled this month. Few newspapers other than the Reno Gazette-Journal have made this clear.

The “unemployment extension” most other news outlets mention is the ability of the newly unemployed to collect for as long as 99 weeks, and that deal will go through the end of next year under a “tier system” that uses the unemployment rate in each state to set the maximum length of unemployment benefits (Maryland’s is 73 weeks). That tier system is explained here by the Center on Budget and Policy Priorities.

Tax breaks for the rich? Those are extended for two years.

CNBC got the story based on a little-noticed Oct. 1 press release. HT CJR

These old hundreds are still “legal tender for all debts public and private.”

Bottom line: The new Benjamins—which are supposed to have new and more sophisticated security strips to thwart counterfeiters—keep folding over during the printing process, so the resulting bills have a blank line on them. Some 30 percent of the bills were coming out bollixed, so the presses were shut down and the cash stashed in a special vault, to await sorting the good hundreds from the bad. And this, it seems, is the problem, CNBC’s Eamon Javers reports:

Because officials don’t know how many of the 1.1 billion bills include the flaw, they have to hold them in the massive vaults until they are able to develop a mechanized system that can sort out the usable bills from the defects.

Sorting such a huge quantity of bills by hand, the officials estimate, could take between 20 and 30 years. Using a mechanized system, they think they could sort the massive pile of bills, each of which features the familiar image of Benjamin Franklin on the face, in about one year.

It is certainly mere coincidence that these defective (not to say worthless) hundreds are to be the first affixed with Timothy Geithner’s signature.

Eric Holder

U.S. Attorney General Eric Holder announced a giant sweep of scammers today during a noon press conference at the Department of Justice. More than 500 people have been charged in various Ponzi schemes, mortgage frauds, securities frauds, and the like during the past three and a half months as “Operation Broken Trust” fanned out across the land. Maryland U.S. Attorney Rod Rosenstein’s office issued two press releases ahead of the announcement on Friday, updating two recent fraud cases they’re prosecuting.  But the cases presented were already in the pipeline before the “sweep” began, Rosenstein confirms.

“When the department announces sweep, what we do is we elevate the priority of those cases that fall into that category… you wind up getting more resources devoted to those cases and you push them more quickly,” Rosenstein says. The department then publicizes those results “so you can get that deterrent value from those cases.”

Here’s a link to Holder’s prepared remarks, which he stuck to, except for repeating the word “staggering” where he spoke about the $8 billion those criminally charged allegedly stole. Sample quotes:

Operation Broken Trust is the first national operation in history to target the many different types of investment fraud schemes that prey directly on the investing public.

In fact, many of the scam artists we’ve identified were preying on their own neighbors—and on the most vulnerable members of their communities.  Several of those prosecuted during this operation solicited victim investors from their own churches. One man in Texas allegedly targeted his fellow parishioners, asking them to invest with him and claiming that his success in foreign exchange trading was “a blessing from God.”

In Ohio, a former police officer operating a Ponzi scheme solicited investments from active and retired police officers and firefighters.

That fits the description of police officer Raymond Thomas, who allegedly stole $889,000 from about 25 trusting investors. Holder’s statement continues:

Many of the criminals we’ve identified used investor funds to support lavish lifestyles. One man operating an $880 million Ponzi scheme in Florida duped investors from across the country—and used the money to buy floor seats at professional basketball games and to make payments on his personal yacht, his beach house, and his Mercedes.

Holder’s statement doesn’t say it, but that would be Nevin K. Shapiro, the former owner of Capitol Investments USA, Inc., who pleaded guilty in September, according to this Business Week article.

None of which is bad. These kinds of low-level scams present a major challenge to small investors and teach everyone paying attention a habit of cynicism. But consider the original purpose of the Financial Fraud Enforcement Task Force, announced just last November with President Obama’s Executive Order 13519:

“This task force’s mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening,” Attorney General Eric Holder said. “We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.”

Forgive me if I got the wrong idea—I thought you were going after the big fish. Shapiro and Thomas might be bad guys, and I’m sure glad they’re caught, but guys who steal $1 million from their buddies by claiming they have a “system” to beat the market are a dime a dozen. Even major mortgage scams like “Metropolitan Grape Vine” (one of the Maryland cases) ought to be routine collars. And that particular investigation was well underway by 2007, two years before Obama’s task force existed, if this Maryland Attorney General press release is any indication.

So today’s announcement appears to be a public relations ploy, in which every fraud case available is mustered in an effort to show that the administration is doing something about the fraud.

And I’m not the only one who expected bigger things from this task force. As The Washington Post put it when the thing was announced:

Created by executive order, the Financial Fraud Enforcement Task Force targets fraud related to mortgage lending and modification, securities law, stimulus spending, and the government’s bailout of the financial sector.

Still waiting on those bailout prosecutions.

We might wait quite a while. The current task force replaced an earlier Corporate Fraud Task Force, established by then President George W. Bush in the wake of the Enron and Worldcom accounting frauds. Don’t recall that task force? Like this one, they had a press conference a year after they started, in 2003. Securities and Exchange Commission Chairman William Donaldson did a little horn-blowing. With some 350 convictions, “including 25 CEOs,” that earlier Task Force was off to a swimming start, said Donaldson, who would later come to be known as one of the more active and forward-thinking SEC chairmen in recent history. Stock markets were rising in 2003, and Donaldson took credit even for that:

“When you’re talking about confidence in a regulatory agency, and in my case the SEC, I think that our actions speak pretty loudly in terms of what we’ve done,” he said. “I think there’s a building confidence that the cop is on the beat.”

Confidence. Now that’s what’s needed.

“I hope we’ve seen the worst of it,” Donaldson said, in July of 2003. “From here on out, the country and the nation, the business community is well informed of the risks” of committing corporate fraud.

Aaaand Holder, earlier today:

With this operation, the task force is sending two messages.  A message to the public: be alert for these frauds, take appropriate measures to protect yourself, and report such schemes to proper authorities when they occur.  And a second message to anyone operating or attempting to operate an investment scam: we will use every tool at our disposal to find you, to stop you, and to bring you to justice.  Cheating investors out of their earnings and savings is no longer a safe business plan.

60 Wall Street; J.P. Morgan HQ

The Wall Street Journal floats a story today that the Securities and Exchange Commission is “in talks” with several big banks on a possible settlement to the regulators’ investigation of banks selling doomed-to-fail collateralized debt obligations (CDOs). Those are those mortgage bonds—aka “toxic assets”—that devastated the world’s economy by the end of 2008. From the article:

… the move to try to work out deals with each bank is a sign of interest by all sides in ending the probe without a rerun of the public fight between the SEC and Goldman Sachs Group Inc.

You may recall Goldman paid a “record” $550 million to settle SEC claims in July. Didn’t even get to deny any wrongdoing. I was hopeful that someone might run with this, one of the biggest parts of the biggest heist in world history. As the WSJ sums:

Banks churned out more than $1 trillion of CDOs. They often created them at the request of investors who made bets against the deals. Some banks made their own bearish bets. Such bets paid off when the mortgage market crashed, though financial firms also suffered steep losses from CDOs stuck on their books.

Perhaps it wasn’t illegal after all. Here’s what I think happened.

The scene: Conference Room, 57th floor of Megabank Intl., Dec. 3, 2006:

Megabank CEO (looking over draft financial report): Oh shit! You idiots! You fucked up! We’re fucked. We’re idiots!

Head of Bond Unit (sardonically): Jamie, a lot of other people are also idiots.… What if they’re dumber than we are? They must be. They don’t have access to our financial reports—not the precleaned ones, anyway … so they don’t know yet.

Megabank CEO: Keep talkin’ …

Head of Bond Unit: What if we can keep them from realizing how stupid and doomed all this is for a while longer? Could we make money on that?

Megabank CEO: Well, could we?

Head of Bond Unit: What if we make more of this crap and sell it to them as if nothing bad is happening in the housing market?

Megabank CEO: I like what I’m hearing. Let’s do that!

Head of Bond Unit: Yes, boss, we’ll do that. But it won’t make up for all the losses we’re about to take on the crap we’re holding.

Megabank President: Oh no! Can’t we sell that too? What do I pay you all $60 million a year for?

Head of Bond Unit (calmly): Sir, you pay me to be smarter than you are in certain esoteric fields of play. Allow me to earn my meager keep.

Megabank CEO: Please continue.

Head of Bond Unit: We’re gonna take the crappy mortgages we have on our books now—the ones that are failing, the ones that are about to fail, and remix them into new bonds, which we will tranche up and sell to stupid Germans and Midwestern pension funds and Iceland as triple-A rated investment-grade stuff.

Megabank CEO: I like it. But don’t we need to hold the bonds we have, for legal and tax reasons?

Hedge Fund Manager (stepping forward): If I may. Of course. You’re just going to make copies of those shittiest mortgages and bundle them up into synthetic bonds. And we’re going to bet against them using credit default swaps.

Megabank CEO: And you are?

Hedge Fund Manager: My name is immaterial. Suffice it to say that, without me, your Bond Unit Chief here would be nowhere near as valuable to you as he is. Also, I made 10 times his meager salary last year.

Head of Bond Unit (to Megabank CEO): We can’t do this all by ourselves. When the bonds crater and we make a bunch of money while police and fire pension funds fail it will look too cynical.

Megabank CEO: You may have a point. What is your solution?

Head of Bond Unit: Hedge Funds. We cut them in on it. Everyone hates them already. They pick the bad mortgages we bundle, they buy the first insurance, we come in behind them and make the deal work—for a reasonable fee, of course—and we also place our own bets. Spread the responsibility around. Plausible deniability, etc.

Megabank CEO: So crazy it just might work! But wait, but what happens when the SEC gets wind of this?

(All in room burst out laughing.)

Forbes’ big news was old and incomplete, but still .…

Yesterday Bank of America’s stock plunged after a Forbes interview with Wikileaks founder Julian Assange republished allegations that Assange will release a huge cache of upper-level documents from a very large bank. Assange would not tell Forbes which bank, but astute readers recalled and dug up a 2009 Computer World interview in which Assange claimed to have basically a hard drive’s worth of documents from the computer of a Bank of America honcho:

“At the moment, for example, we are sitting on 5GB from Bank of America, one of the executive’s hard drives,” he said. “Now how do we present that? It’s a difficult problem. We could just dump it all into one giant Zip file, but we know for a fact that has limited impact. To have impact, it needs to be easy for people to dive in and search it and get something out of it.”

In unrelated news, Sarah Palin has apparently called for Assange to be “pursued with the same urgency we pursue al Qaeda and Taliban leaders.”  As if that would make Assange’s life any different. Supposedly the United States is mulling espionage charges against the Australian as well.

Assange has been in hiding, facing sexual assault charges in Sweden. This week, as he rolls out embarrassing (but, so far, fairly tame) State Department cables, London’s The Guardian has promised the juicy stuff shortly. Then again, that stuff is allegedly about Russia and “bribery and corruption in other countries, particularly in Central Asia,” according to Guardian Investigations Executive Editor David Leigh.

Really. If corruption and bribery in central Asia would be news to you, you’ve seriously got to start paying better attention.

The bank e-mails and documents could be a bigger deal—not that we’d be unable to guess what they might contain as well. Whenever highly paid analysts claim something will have no effect, it’s a good time to go short.

What’s interesting to me is how Assange (the “old-fashioned anarchist”) is really just evening the score. The government and large corporations already know just about everything about us, their “citizens,” subjects, and customers. What will happen if suddenly the tables are turned, and we peasants get to know everything—or at least the relevant stuff—about how our government officials conduct their business and, most staggeringly, how the heads of those large institutions make their pay?

If you were wondering what the crazies think of all this, surf on over to hotair.com and read the comments.

And pass the popcorn.

Having failed to block financial reform, Wall Street is now focused on the next best thing: ensuring that the law is loosely interpreted and weakly enforced.

Reporter Nathaniel Popper simply looked at the visitor logs and summaries available from the main financial regulators—the CFTC, the Federal Reserve, FDIC, and SEC—tallied them up, and noted that nine out of 10 meetings regulators held were with bankers, hedge funds, consumer finance companies, and/or their lawyers. If you ever wondered why the laws Congress pass often amount to nothing, here’s your explanation. The rules by which these laws and regulations are enforced are usually heavily influenced by the industries the regulations target.

Just the sheer number of meetings slows the process down, according to one regulator Popper quotes:

“I want to be professional and polite and courteous, and I’ll let them say their peace,” said Bart Chilton, a member of the Commodity Futures Trading Commission. “But I don’t think it’s a very valuable use of their time or mine, because that is not the direction we were instructed to go by Congress.”

Chilton tells Popper he saw the same lawyers three times in two weeks, representing different companies but always making the same argument. “I have to say, the third time I had the meeting my attention span was dwindling,” Chilton said.

This raises a good question the story doesn’t answer, Columbia Journalism Review’s Ryan Chittum says: “Why can’t he just refuse the meetings? I have a feeling the answer just might be illuminating.”

I’ll second that.

For those with an interest, here are the links to the visitors data the LA Times used for this story:

CFTC

SEC

FDIC

Federal Reserve (I think … these are links to big PDFs in which the relevant stuff might appear.)

According to government data released Oct. 15, last year the richest 74 Americans increased their wage income by a factor of five.

David Cay Johnston lays it all on in his long post at Tax Notes.

The top category of “earners” tracked by the Social Security Administration is those making at least $50 million per year (discounting dividends, interest, and other unearned income). In 2008, the average wage for these highly productive people was $91.2 million. That’s not even $2 million a week! Poor dears. But in 2009, even though the total number of people in this rarefied club decreased (lazy bitches!), the total take of those remaining shot upward. The average last year: $518.8 million.

That’s more than 10 Limbaughs worth!

It’s also more than $1.4 million in income every day.

Hey, Invisible Overlords, here’s an interesting fact: If you took last year’s stated income out of the bank in $100 bills and had your legions of economists pile it up neatly, that stack would stand 1,729 feet high.

If you then jumped off it the world would be improved. (Ha! Just kidding! Please don’t have me killed!)

All this earned income while unemployment skyrockets and median wages fall.

How do they do it?

Well, Johnston has some kind of fancy-pants theory about “rent seeking” and politics. Yawn. Loser.

The winners know better. As Austan Goolsby has observed (and a senior staffer at the Federal Reserve Bank of Richmond confirmed for me personally last week): It’s skill.

Long hours too, no doubt.

Thought of another way: It’s roughly three A.I.G.s.

It’s 100 John Paulsons (the super-hot FY 2007 model).

More relevantly, it’s about $1,200 for every man, woman, and child currently residing in the U.S. of A.

Luckily, however, that figure is inflated by the dividend payments F&F are making back to Uncle Sugar. Exclude those, and the real net loss to taxpayers is (as CBS News reported) more like $250 billion—or about $800 for every American. So, no worries, right?

But wait! The Journal’s updated story—at the same URL as the earlier, panicky, $363 billion story—says the additional cost is most likely to be in the $19 billion neighborhood. Barely more than five Paulsons.

Kinda makes you go hmmmm.

The weird thing? The document on which these stories are based hasn’t changed. Here’s a link to the 13-page pdf.

Uh, The Producers.

Here’s Krugman on the “mortgage morass” now enveloping the foreclosure machine like a blob. He’s got this relatively well pegged (dig his dig on the WSJ plutocrats). But one of his commenters has a theory I think deserves some consideration.

What if, as Mike O. of Oakland, Calif., suggests (actually, asserts), the banks and securitizers deliberately obscured all the lines of mortgage ownership in order to resell the same asset multiple times?

It’s a variation of the classic scam in “The Producers,” in which a theatrical producer and his accountant sell 50% of a play’s proceeds to dozens of investors, knowing that the play will fail and so nobody will ask for their money.

This brings to mind a very wealthy fellow I profiled more than a decade ago. Beginning in the 1970s, he’d buy 1,200– and 1,000-acre tracts of undevelopable land, subdivide it into lots of 1.25 and 2.5 acres each, and sell them, one at a time, to gullible pensioners in the Midwest and overseas through his boiler room operation. Each buyer would pay maybe $120 per month for 10 years to purchase their $10,000 piece of paradise (actual value: $2,000).

It was a compelling enough scam on its face, but an allegation I heard from one of the lawyers who’d sued him—an allegation I was never able to corroborate—was that the swamp seller was reselling the same lots to multiple investors.

Since the lots were not platted—not registered with the county as individual lots—no one really knew what land they had bought. And since the mortgage contract and deed was held by the seller, unrecorded in the public record, there was no way to independently check the ownership. Those few buyers who completed their purchases and asked for deeds were given the runaround. Meets and bounds were variable, at best. To me it seemed possible that the swamp seller was pulling a Producers–style operation on top of the raw scam of selling swamp at inflated prices.

Is it possible that Lehman Brothers or other packagers of mortgage-backed securities did something similar? Mike O.:

You can’t take an individual mortgage and sell it to 50 different investors because people would notice. But if you cut 1,000 mortgages into 100 pieces each, shuffle them together and then sell chunks of the resulting amalgam over and over again, it’s almost impossible to drill down to the individual mortgage level to find out what happened. It’s fraud on an unprecedented level and could bring down the economy.

The only problem with Mike O.’s theory is this: It’s already perfectly legal to do something very much like this, through the magic of credit default swaps and “synthetic CDOs.”

To recap: CDOs, or “collateralized debt obligations,” are those bundles of mortgages or other debt to which Mike O. refers. For more than a decade the numbers of mortgages, subprime and other, barely kept up with the desire of investors to buy the right to collect the income stream from all those homeowners. At the peak of the frenzy, all those mortgage brokers and boiler room operations could not keep up with the demand for dicey, high-interest mortgages on overpriced property. So the banks fashioned “synthetic” CDOs from the indexes of the real CDOs, which were further sliced and diced into new bonds—just betting slips, really—with new credit default swaps placed against them.

A credit default swap, remember, is an insurance policy on someone’s payment stream. For a few thousand bucks you could buy from an allegedly solvent company (AIG, for example) a guaranty that bond X would pay off in full. If you thought bond X was poo, you could buy two or more policies, potentially getting paid double if the bond fails. You did not need to own any part of the bond to buy this protection. It was just a bet too. So a credit default swap on a synthetic CDO was a bet against the bet on the original (non-synthetic) bond.

This is what the Magnetar deal was, and the ABACUS arrangement that helped John Paulson clear a reported $3.7 billion profit in 2007.

So if the big banks could already resell shadows of the same crappy loans over and over to impressionable, dumb money “investors” (and clean up by betting against those same bets), then they’d have no reason to further screw things up with faulty paperwork and fraudulent affidavits on the real mortgages come foreclosure time. So what’s the “mortgage morass” really all about?

Occam’s razor can guide us. Or, at least, Calculated Risk.

Bill at Calculated Risk reread a 3-year-old “uber-nerd” post by the late Tanta and posted the best explanation I’ve seen so far.

Turns out mortgage servicing companies are just like any other business. They have overhead, and they have expenses, and these expenses shift in interesting and sometimes unpredictable ways. Lately, expenses for mortgage servicers have been way up. Income has been down. So they’ve been trying to save money by cutting corners. Robo-signers are but one manifestation of this phenomenon.