Jan 13 2012

The financial system is a farce: testimony from 2006

Posted by: Nick Shaxson in: Thoughts

. . . and now for some Friday 13th dark comedy.

The New York Times has an excellent quote about the intellectually disgraced Alan Greenspan, in a discussion about some U.S. Federal Reserve documents from December 2006 that have surfaced:

“Mr. Geithner suggested that Mr. Greenspan’s greatness still was not fully appreciated, an opinion now held by a much smaller number of people.”

I can put that “smaller number” into a more precise range: it lies somewhere between zero and two, not including those numbers. To back this story up, FT Alphaville has published some spectacular testimony from the Fed from earlier that year.

VICE CHAIRMAN GEITHNER. Mr. Chairman, in the interest of crispness, I’ve removed a substantial tribute from my remarks. [Laughter]

CHAIRMAN GREENSPAN. I am most appreciative. [Laughter]

VICE CHAIRMAN GEITHNER. I’d like the record to show that I think you’re pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative. [Laughter]

With that, the economy looks pretty good to us . . .

Now look back to my recent blog looking at Michael Lewis’ book The Big Short, the confessions of a financial insider who admitted in his job earning massive sums, he simply ‘hadn’t a clue” what he was doing. Lewis describes Wall Street operations as gambling, but

what’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. . . what are the odds that people will make smart decisions about money if they don’t need to make smart decisions – if they can get rich making dumb decisions?

The book reveals the gory details of how the Wall Street system is, essentially, a gigantic fraud, and having just read it makes Geithner’s testimony all the more squirm-worthy.

Yesterday, from the financial blog Zero Hedge, making a similar but slightly different point:

the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself.

In 1973 Samuel Brittan, a Financial Times  economics commentator, published Capitalism and the Permissive Society, a book that he says he remains proud of, by and large. I haven’t read it. But I have read his article in today’s FT, which sings lustily in praise of capitalism in general – but then ends with this.

The real shortcoming of my book was that, like many others, I did not discuss the financial sector and how its activities could undermine the capitalist order even if there were no overt inflation or deflation of consumer prices. Any working market order requires there to be some way of marrying savings with the desire to borrow; a market for investible funds and some way of insuring against the vicissitudes of life as well, of course, as a better way of keeping ready cash than storing it under the mattress. But none of this justifies the threat posed by masses of invented money to institution after institution and country after country. Capitalism is a means to freedom and prosperity, not an end in itself. Improvement here may justify not merely international regulation but the retention for quite a long time in public ownership of banks and other institutions that have had to be rescued by government.

And this is the sector now running the world. We can’t seem to shake ’em. Instead, we get cheerleading from our media.

3 comments so far

Bill Kruse 1th January, 2012 11.01 am

Richard Murphy suspects the Labour party is around £20 million in the hole to the banks (I asked him). Now if you were the Labour party, or any party, and you owed your continuing existence to your overdraft, you’d be unlikely to be campaigning against the interests of your bank manager,wouldn’t you? The likelihood would be you’d wake up one day sans overdraft and out of business. So we won’t be getting any help from the politicans. The only way forward, seems to me, is to form a nationwide, worldwide even, chain of local currencies a la Worgl. Once that’s in place,we can give the finger to the banks as we’ll have an alternative money supply. Till then, as is becoming increasingly obvious, we’re screwed.

readerOfTeaLeaves 1th January, 2012 4.27 pm

Dear Mr Shaxson, a ‘tea leaf’ from the Left Coast of the USofA. I was reading about our strange Republican presidential primary, which this week stirred up a kerfuffle in which the nature of financial capitalism was called into question.

This kerfuffle is being squashed as quickly as possible by the GOP establishment, and I spotted this salvo published in Forbes by a certain Mr. Daniel Mitchell, which is probably part of the larger background efforts: “Mitt Romney and Bain Capital Were Right to Utilize So-Called Tax Havens”.

The name ‘Dan Mitchell’ seemed vaguely familiar, and I thought to check my copy of ‘Treasure Islands’ to verify whether he was the gentleman who advocates for tax havens on the claim that they provide ‘competition between taxing jurisdictions’. Indeed, it appears this is the very same Daniel Mitchell interviewed in your book:

There is currently a bit up of a dustup stateside over Mr Romney’s reluctance to release his US Federal Income Tax records. No doubt Mr Mitchell’s salvo is designed to inoculate Mr Romney from any implications that the potential use of ‘so-called tax havens’ might have sullied his patriotic fervor. It’s a fair guess that neither Mr Romney, nor Mr Mitchell, believes our financial system is a farce. Indeed, the entire GOP establishment appears hell-bent on airbrushing even the remote notion that our financial system is a farce from all public discussions.

Perhaps you should consider a new US version of your book, and title it: “Treasure Islands: So-Called Tax Havens and the Men Who Stole the World”. I should think it could find a nice little niche market here in America this election year 😉

Nick Shaxson 1th January, 2012 9.21 am

Ha! Yes, the one and only Dan Mitchell! I will try and write about this today if I get some free time

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