Thursday, March 18, 2010

Thieves in their own corporate treasuries: how to keep the foxes from guarding the foxes in the henhouse? by gimleteye

Last week, Federal Reserve Bank of Dallas President Richard Fisher was speaking at the Dallas Fed's conference, "The Euro and the Dollar In The Crisis and Beyond." According to Dow Jones News Service, "He did not mention specifics on monetary policy, and made no mention of key interest rates, during his initial remarks." But he did, as other governing board presidents have tried to do, address the cause of the economic crisis I call a time release depression. "Helping to trigger the crisis was an ignorance of basic human nature, Fisher said. Lenders "forgot the basic rules of credit," making loans to people with little regard for their ability to repay, he said. "We deceived ourselves to think that we could somehow avoid the way people are."

Fisher's comments echo the regret now expressed by former Fed chair Alan Greenspan who is 'chagrined' that his faith in markets to self-correct proved to be 100 percent wrong during an unprecedented financial crisis in corporate America, triggered by historic low interest rates and a political willingness to allow the nation's top corporate executives to act as thieves in their own corporate treasuries. How self-enrichment became the de facto standard for corporate America and especially through the passive assent of corporate boards serving America's largest corporations is the point of Gillespie and Zwieg's "Money for Nothing: How the Failure of Corporate Boards is Ruining American Business and Costing Us Trillions."

One of the great tragedies of the current turmoil over health care is the extent to which this debate-- and the rabble rousing that amounts to an uncontrollable fire in the halls of Congress -- camoflagues the rotted core of the health care problem-- vast profits accruing to individual corporate officers and chief executives of large insurance companies under a system of rewards and prerequisites of finance that is scarcely touched by regulation at all. It is not, as its defenders pretend, a 'free market': it is 'money for nothing'.

"Greatly exacerbating the problem of flawed governance is the vast support system that has evolved to offer services--from expert analysis of account books, to the deciphering of legalese and various forms of cover--to CEO's and board, for considerable costs. This almost diabolically complex and often interconnected network of hundreds of thousands includes: compensation consultants; proxy vote advisors; ratings agencies that evaluate companies' governance; agencies that rate company debt; directors' and officers' insurers... a legion of lobbyists; and of course huge armies of lawyers, accountants, and investment bankers... " (Page 209)

To understand the true scope and scale of the disaster, the Federal Reserve chiefs would have to come down to local government councils, like the Miami-Dade County Commission, and perform their own forensic analysis how rezoning in farmland and wetlands provided the grist for the mill connecting platted subdivisions to mortgage backed securities, and how the campaign finance system supporting unreformable majorities-- like the county commission-- was constructed to be an enforcement racket (worthy of RICO prosecution, in my opinion) so votes would be reliably aligned to speed zoning changes and building permits forward irrespective of regulatory thresholds to support a political orthodoxy that operates even today under the banner of conservative values.

"Consider the profits made by some of the ratings agencies," write the authors of 'Money for Nothing'. "When the two companies that rate almost all debt securities, Moody's and Standard & Poor's, report operating margins that are close to 50 percent and several times that of Exxon-Mobil, it is reasonable to conclude that customers have been paying too much for their services. Moody's, in fact, had the highest profit ratio of any company in the S&P 500 for five years in a row. In 2007, Moody's earned a pretax profit of $1.1 billion on revenue of $2.25 billion, a ration that Cali cocaine dealers might envy."

In Dallas, Fisher warned of "little growths, little cancers", suggesting that the Federal Reserve needs tools to cut out the disease but so far there is nothing in Congress-- absorbed in misdirection over the health care crisis-- that shows any willingness to diagnose the systemic illness afflicting American business: a culture of corruption waiting for fresh capital and renewed consumer demand to do it all over again.


CATO said...

Audit the Fed,
Having a quasi governmental org control the currency is not part of capitalism.
Markets aren't perfect, neitther are people (except for maybe Gimspierre)but the depth of this and other crisis are worsened by the Feds monetary policies and government complicity.
See the geat recession of 1920-1921 the actions taken and results as opposed to Hoover/Roosevelt actions in 29

Anonymous said...

This is a really interesting and lucid piece. Too bad that only a relatively small number of Miami-Dade residents will ever read it.

All of the large economic problems start as small local pieces of the puzzle.

David said...

Our money system is unsustainable left to its own devices. Money comes into existence as credit. Every dollar in circulation is borrowed into creation, but not the interest. Therefore, the money supply must continue to increase to provide funds necessary for interest payments, as the principal is extinguished when paid back, the same way it was created when it was borrowed into existence.

The expansion of the money supply follows an exponential curve. Eventually, the curve turns towards, and will left to it's own devices, become vertical. This is unsustainable.

The Fed must then shrink the money supply to put us back on the flat part of the money supply curve. They do this by selling US government securities to banks licensed to do receive them, and extinguish the cash they are paid for those securities. As that money is removed from the economy, credit tightens and we undergo a recession or depression.

This is not rocket science. The banks will lend if they are below their reserve ratios. When money is pulled out the economy, it has the effect of making the remaining money more precious and therefore more expensive, and removes reserves from the system, making it more difficult for banks to lend.

The Fed has absolute day to day control over the size of the money supply at the open market desk of the NY Fed by buying or selling government securities. Recessions and depressions are not accidents. They are purposefully created to control the money supply.

The fact that the stockholders of the NY Fed are the largest banks in the US, many of whom have ties to Great Britain; and the fact that they profit immeasureably by buying up undervalued stocks during the downturns the NY Fed creates is purely coincidental. And if you belive that...

Congress abdicated (unconstitutionally in my opinion) its constitutional duty, and greatest creative prerogative to "coin money and regulate the value thereof" (debt free I might add) in 1913 with the passage of the Federal Reserve Act. That act privatized control of our nation's money supply, to our continuing great detriment. It is akin to Congress passing a law today that authorizes General Motors to declare war for the United States.