Citibank

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Bank Reform Fades Away … With a Thud

There it is. Sitting on my computer desktop, pristine and unopened. The vast 650 odd page Levin report on Wall Street and The Financial Crisis. OK I had to open it to see how many pages it was, but that’s it. At this point we can all throw our hands up in despair and move on with our lives. The big banks, notwithstanding their protestations to the contrary, soundly defeated any chance of thorough reform. They are bigger than ever. They are meaner than ever. And they are just as incompetent as ever. I add this last comment because thus far there has been no evidence that all those rotten risk managers who brought us to our knees have been fired. The same is true for the traders who gorged themselves on toxic paper. The same is true for the executives who paid themselves handsome bonuses whilst overseeing the disaster. Unfortunately the same is true of the economists who dreamt up the horrible fiction that undergirds the structure of modern day finance.

Oh well.

It takes, at least for me, a heroic effort not to gag over the anemic response throughout the world to the enormous and outrageous destruction that the banks managed to get away with.

The have been no significant legal proceedings. The old guard is still safely ensconced applauding itself. The regulators still act as if they in the thrall of the bankers whose lives they should be making as miserable as the bankers made ours. And politicians hope desperately that no one notices how they caved into the lobbying and associated flood of money the banks deployed in order to maintain their ability to hold us all to ransom.

Which they continue to do.

Why is this so hard to understand?

Banks as big as Citi or JP Morgan are simply too big for our economy. They are even bigger, relatively and absolutely, than before. We are thus even more devoted to propping them up. Instead of breaking them up, punishing the mangers and shareholders, and restructuring our banking system to make it less expensive to subsidize, we went in the other direction. We made future bail outs more expensive and provided an even greater amount of subsidy. Were it not for the recent efforts of the Sheila Bair and others to”ring-fence” higher risk activities nothing of lasting value would have come from the crisis.

Yes, the banks now have more capital. So what? They remain huge, complex, largely opaque monstrosities with so convoluted organizational and tax structures that half of their own upper management hasn’t a clue what goes on. They move money around the globe, into and out of each other’s balance sheets to such a degree that untangling one, were it to fail, would bring the entire lot down. It is the ultimate blackmail gambit: I am just too important for you to let me go down because I would take you with me. So get out of my face and let me play. Oh. And don’t call me rude names. That upsets me.

If you add in the Vickers report in the UK, the total amount of pages devoted to making clear the farcical ineptitude of our expensive bankers runs to almost a thousand pages. It is sad that all that investigative effort is for nought. At least so far. I suppose the problem is that the reform effort took place before the full expose was available to embarrass the bankers. After all what is the point to publishing a huge report two full years after the crisis and during a period when our attention is focused on the debt and deficits left in the banker’s wake?

And for all you who think I am just being sour: remember that bank crises are regular features of our economy. There will be another one soon. Banking is inherently unstable and bankers are hopeless at being sensible, careful, thoughtful, or fiscally responsible. They like to gamble. Taking risk is part of banking. Gambling need not be. There is a difference, fine though that difference might be. So as we speak our brave bankers are busy creating the next crisis. Who knows exactly what it will affect?

This knowledge should have led to a more drastic reform, and to a more speedy publication of the facts surrounding the last crisis. It should have led to a decisive movement to stop the banks blackmailing us. It should have led to deeper investigations into the conflict of interest that lies at the very heart of the system. It should have led to serious efforts to bring executives to account, publicly, for their evident failures. It should have jolted shareholders out of the soporific indifference the way in which management squandered vast sums of capital.

Then again maybe not.

Given the way in which modern capitalism works none of this should be surprising.

Shareholders do not own the companies anymore They simply own, and trade stock. That’s a huge and material difference. Modern stockholders have no long term commitment to the businesses underlying the stock. They have abdicated responsibility. This severance of ownership from management allows managers to take enormous risks. Indeed it encourages them to take such risks since the shareholders are not driven by long term, but by short term profits and the resultant stock price movements. So pumping up revenues this year, or even this quarter, at the expense of next year’s or next quarter’s is the game managers have embraced and play so well. In banking this is a recipe for disaster, as it is everywhere, but more so in banking. It places the emphasis on the more volatile aspects of finance, and detracts from those aspects where a long term view, and steady credit evaluation play a key role. The economy suffers as money is syphoned off into gambling and away from long term investment because bankers can make more profit playing in the casino world of trading than in the more humdrum world of lending.

Very few of our top bankers ever set foot inside a bank branch. And most only have contact with small business when their assistants order flowers to decorate their second/third/fourth homes.

This is the lamentable state of our banking system.

Something we failed to fix. Something we will all come to regret soon.

But we sure wrote big reports. Like the Levin report sitting on my computer desktop. Going nowhere.

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Meanness, Mediocrity, and Bank Reform

It takes a particularly virulent form of mean spiritedness for a nation to walk away from its most vulnerable citizens at a time of their greatest need. Yet that is what the US, and by implication you and I, has just done. The Senate was unable to muster enough votes to continue the extension of long term unemployment benefits. So they lapsed. The cost would have ben small in the context of our overall deficit. The impact would have been enormous for the thousands of families whose lives have been turned upside down by the corrosive effects of long term unemployment.

Do we care?

No.

We have become a nation so narcissistic and incapable of community action that we simply don’t care.

I fear for the children of those families.

And I fear for the future of any country so implacably opposed to generosity during difficult times.

This was a supremely mean action. It will have practically no impact on the trajectory of our debt. It panders to the puritanism of the right wing who are relentless in their Victorian era desire to impose punishment on the poor, as if being poor or unemployed was driven only by moral incapacity. That horrible and nonsensical attitude still rears its ugly head in Anglo Saxon economies, and is embedded in the roots of modern economics as well. Orthodox economists believe – or at least they teach – that being unemployed is a choice. To them anyone without a job has chosen not to work. So providing benefits to the unemployed to mitigate the effects of unemployment is a distortion of the workings of the ‘free market’. Naturally the puritans love this nonsense and have latched onto it in order to provide themselves with an intellectual legitimacy for their mean spiritedness.

This nasty attitude reminds me of St Augustine who, as ever the fatalist, told the slaves of his era that they must have sinned badly in the eyes of god for him to have made them slaves. His advice was to grin and bear it. And to try to pray a lot.

When historically significant preachers set this kind of example for the elite to trample on the poor, it comes as no surprise to read of the Senate’s nasty attitude.

Moving on:

Today’s report that GDP grew only 2.7% in the first quarter has been treated both as a surprise and a disappointment by the financial markets who imagined things were going better than that. I say ‘imagined’ because the evidence has been accumulating for weeks now that we are experiencing an entirely mediocre upturn. One that continues to be very vulnerable to weakness. Much of the disappointment seems to stem form the fact that every time the government has issued a first quarter GDP report the numbers have been worse. Today’s release is the third and final estimate. The first estimate was for 3.2% growth. That was trimmed in the second estimate to 3.0%. We finally settled at the 2.7% announced today.

That is not a very good growth rate for only the second quarter of recovery. Typically the US economy goes through two or three quarters of rapid growth – well over 4.0% – before settling back down at its historic 3.0% level. That we haven’t had such an experience this time merely reinforces my opinion that the economy was much more damaged by the banking follies of earlier this decade than many others give it credit for. Allow me to repeat: recoveries following financially rooted crises are always – always – more difficult and prone to setbacks. This is an empirically supported observation. Unfortunately it is not well known in academic economic circles because it is the outcome of research by non-traditional economists. Since my more orthodox brethren don’t read heretical works, like those of Keynes or Minsky, they are blissfully unaware of the dangers we still are facing.

Having said that, even the orthodox folks at the Fed are now beginning to become concerned that growth is not what they imagined it would be. That’s a relief since it removes the prospect of a Fed tightening from the immediate agenda. Any rise in interest rates now would send us downward quite quickly. We are lucky that the gloom in today’s report is sufficient to knock some sense into even the thickest of fiscal hawks heads. Or at least I hope so.

Just to complete the survey of mediocrity I should give you the actual numbers from the GDP report:

Consumption was positive, adding 2.1% to GDP

Private investment was also positive, adding 1.8%.

Net exports [exports less imports] was negative, deducting 0.8% from the total.

Government spending was also negative, deducting 0.4% .

These numbers hide a few important points.

First: the consumption figure is decent, but not great. Usually as the economy bounces back consumption is a major driver as consumers spend more than normal in order to make up for the spending they didn’t do during the downturn.

Second: the private investment figure is misleading. All of the growth came form inventory changes and not from actual investment in things like construction or machinery. Those two sectors were flat, and construction looks to be mired in a long term slump.

Third, and final: the government spending number is very worrying. I have warned of this before. The positive impact of the Federal level deficit is being more than offset by the draconian austerity plans that the States are implementing. While these local actions may appear to make sense to local politicians and voters, they are making the economy much weaker. They are draining spending power from the national economy. In effect the States are hoping that someone else will get the economy moving. The irony is that many of those same politicians and voters then express opposition to Federal deficit spending which remains our best hope for stimulating recovery and allowing those local budgets to recover.

Overall I have to admit that the economy is moving along a track that I see as both very predictable and susceptible to risk. We should expect more mediocrity for the rest of this year.

Let me add my voice to those calling for more support to the economy. I have railed against austerity enough. I believe it to be blindly stupid. Those who want to shift the focus to the long term issues, and in particular our budget problems, are missing the point entirely. Without fixing the short term the long term is irrelevant. This was the driver behind Keynes famous dictum that ‘in the long term we are all dead’. His main point being that dealing with long term, far away, issues is always easier than dealing with immediate and more intractable issues. In his view this ease draws the attention of policy makers and economists away from the difficult and often messy problems of today, while allowing them to present a virtuous facade to the public.

In this case the mediocrity is of leadership and intellect. We suffer from a bureaucratic mindset that frames everything in terms of checklists and rules. So all the solutions on offer are tweaks to existing rules or the addition of new rules. As someone once said: if the only tool at hand is a hammer, all problems look like nails.

Maybe we need new tools.

Finally today, and to add to the mediocrity, we must mention bank reform.

After all the fuss and hand wringing Congress has managed to cobble together a reconciled financial reform bill. Presumably it will get to Obama’s desk before long. The timing of agreement was driven more by political considerations than by the need for reform: Obama is off to attend the latest G20 meeting and wanted to have legislation in hand so the US can dictate the nature of worldwide reform.

The simplest question to ask about the reform is: does it prevent future crises?

No.

What is does is to paper over a lot of the medium sized holes in the system and close down some of the more egregious consumer oriented activities of the banks. It doesn’t have enough strength to stop future melt downs. And it doesn’t prevent the need for future bail outs.

The better parts of the reform focus on the consumer. A new consumer protection agency is created but buried at the Fed. This is a typically lame response to the exploitation of consumers that has characterized banking for years. Remember though that the Fed had oversight for mortgage pricing regulation before the bubble. It did nothing to stop the activities of the worst offenders. Since the Fed remains staffed to the rafters with mathematically inclined economists rather than socially minded attorneys, I doubt this new agency will have the bite that some think it may.

Meanwhile the reform does tighten up the derivatives market somewhat although I suspect that the banks and their armies of overpriced lawyers will gut the intent of the new law within weeks. The ‘Volcker’ rule survived in muted form to reduce bank speculation, and the ‘Lincoln’ initiative also made it through to force banks to offload their speculative book of derivatives into non-Federally insured subsidiaries. Quite what this achieves I am not sure. The simple question we need to ask is: will the regulators allow Citibank to go belly up because its non-insured book of derivatives goes bust and threatens the mother ship? No I don’t think so. Thus the Lincoln plan is window dressing. The Volcker rule has more merit because it simply bans certain activities, specifically the use of low cost Federally insured deposits as a funding source for non-client based speculation. The problem is that the ban is not tight or comprehensive enough. The boys still have plenty of matches to play with.

Other aspects of reform are also humdrum. The big banks will have to cough up some cash to create a bail out fund, so that future bail outs will not come from the taxpayers. This raises the interesting question: why do we need this provision if the reform ‘stabilizes’ the financial system, which is Geithner’s claim? The obvious answer is that no one really thinks we will avoid future bail outs. Nor is the amount anywhere near enough in the context of the behemoth banks that now populate our system.

Finally the much ballyhooed liquidation process for big banks, while it sounds great, will immediately run afoul of international complications. Unless there is a uniform world wide and coordinated approach to bank bankruptcy procedure no amount of huffing and puffing here in the US means much. It certainly does nothing to end too big to fail.

And that is, in my mind, the really big issue. This reform does not eliminate banks that are too big to fail. All it does is to provide some nice rules for future bankruptcy procedures and to mitigate some, but not all, the causes of the past crisis. Our legislators are intent on, and content with, planning to fight the last war. That makes them feel good, but does not solve our central financial problem. While the dinosaurs still roam and dominate finance we are destined to endure more crises and suffer through an oligopolistic market where competition is stifled by the lumbering bureaucracies we call the big banks.

Oh well. I suppose some other president can solve that problem. The current incumbent wants to punt.

Mediocrity indeed.

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Double Dip?

It’s extraordinary how quickly we can go from over-estimating the recovery to near panic over fears of a double dip recession. This volatility of the markets should kill off once and for all the ludicrous notion that markets are somehow ‘efficient’ or ‘rational’. Those two concepts are pillars of text book economics which has now ben exposed as rubbish. Unfortunately it is rubbish held dear by most of the key players in banking, and so I doubt that we can expect any improvement in the tone or quality of their reactions to events any time soon.

But what of this double dip threat?

For those of you who read my comments here regularly, the fact that the recovery will be a long slow and very hard slog should be no surprise.

Let me repeat: recoveries following a financial crisis are always – always – difficult and slow. This is because a key mechanism fueling recovery, notably the banking system, is preoccupied with healing itself rather than in performing it role of being a credit supplier. Without this flow of credit a recovery is likely to stall at the slightest hiccup. And we have hiccups aplenty.

Last week’s report on employment was the most immediate source of panic in the markets. On the surface it looked good: well over 400,000 jobs produced in one month. That’s the number we generated in the entire Bush presidency! However the devil was in the details. Only 20,000 of those jobs came from the private sector. The rest were directly attributable to the government hiring of census workers.

This was not so good.

In fact it was very bad.

The result was a massive sell-off on Wall Street [which remains overvalued in my opinion anyway],and the sudden burst of dire predictions about a double dip recession.

My view is a little different.

I have always argued that the recovery would be very difficult, and that job generation would be extremely slow. By any measure this was an awful recession and the damage has been huge. We should not fall prey to the news media’s need to move onto to a new story: the economy is still very fragile and will remain that way for months if not years. Yes, years.

Having said that a mere 20,000 new jobs is very worrying. Clearly private business is in no mood to lead the way. I have to assume that businesses everywhere have difficulty planning for a surge in sales and have hunkered down to weather the presumed storm. This, of course, simply ensures the arrival of a storm since the process of hunkering down sets in play a self-fulfilling spiral downwards. At least the planners look good. Every one else suffers the consequence.

The fear that seems still to grip business is only partly justified. The recovery is well established, we have now had three quarters of growth, two of which have seen good growth. As with all recoveries the early stages have been unbalanced with some sectors getting going sooner than others, but the encouraging news from the recent GDP report was that all sectors are now showing signs of life. We seem set for continued growth.

But that growth will not be as strong as the prevailing wisdom suggested. The Fed has fallen prey to the hoopla and has raised its forecast for GDP to above 3.0% for the year. I don’t agree. But if you are an optimist and have moved your forecast upward, that jobs report must come as a nasty shock. Hence the sudden backpedaling.

Just what are the chances of a double dip?

Oddly I think the primary cause of renewed recession would be more a failure of policy than a feature of the economy itself.

Given my premise that the recovery will be slow, and will only eke out growth rather than boom ahead, any tampering with the stimulus or with interest rates will, in my view, cause a downturn. The economy is simply too weak for us to take any pressure off stimulus. The jobs report supports that view. This week’s retail sales report – due Friday – is being heralded as confirmation of a renewed weakening. Rumors are that consumers cut back last month from the relatively lively pace of the month before.

But.

This does not mean we are doomed to fall into recession.

If you hold my view, it was inevitable that the economy would drop away from its fourth quarter 2009 and first quarter 2010 pace. Both those periods were heavily distorted by the effects of the stimulus. Anything more than a cursory review of the numbers would have shown that the underlying rate of growth – with the training wheels kicked off – was much slower. All that is going on at the moment is that we are regressing to that underlying rate, which is much lower than the 3.0% to 3.5% that had become the norm being kicked around in the media.

Within a weak growth scenario such as mine any efforts to cut back on the Federal deficit or to raise interest rates to head off inflation would be a massive mistake and would produce a more pronounced slow down, and, maybe, even a renewed recession. Without any changes in policy, however, I think we can look forward to weak, possibly very weak, growth, but growth nonetheless.

What of those calls for budget cuts and higher rates?

They are foolish and premature.

The will always be people advocating a tighter federal budget or higher rates. These ‘hawks’ are usually politically rather than economically motivated. Right now there is no evidence of an impending surge in inflation. So raising rates is not necessary. On the contrary, inflation has all but disappeared, and the bigger risk is of deflation rather than of inflation. Nor are international money markets clamoring for a tightening of policy. US Treasury interest rates are lower now than they have been for a while. Were the markets calling for budget cuts or anti-inflation moves rates would have started to climb. They have not. The so-called market sentiment is a figment of the imagination of people who are predisposed to such policies. There is no pressure at the moment for change.

But there are risks, and they are increasing.

The credit markets are jittery due to the backwash from the Euro mess. It is an over simplification to extrapolate from the Greek debacle to the US – or the UK for that matter. The circumstances are very different and so the policy options are also very different. Bank risk measures are moving back towards post-Lehman spreads largely because of the potential losses that the Greeks could impose on European banks. Plus there is a growing swell of commercial construction credit losses here in the US. That puts the banks back at the center of things over the next few months.

But we have fixed that problem … no?

No.

The so-called bank reform making its turgid way through Congress at the moment includes a few nifty things like better controls over derivatives and better consumer product regulation, but it fails – totally – to deal with the root causes of the bank implosion of 2007/2008. The banks remain too big and too complex. They remain impossible to regulate. They remain too powerful. Too interconnected. Too prone to swings in asset values. Too able to game the system. And way too concentrated. This last point being the most important. Our banking system has become more risky, not less risky. The share of total assets held by the big six is now much larger than it was before the crisis. They are more, not less vulnerable. And, since they are all much larger, we have become more enmeshed in ‘too-big-to-fail’, rather than less. The fact that the reform includes procedures to wind up a massive behemoth like Citibank doesn’t mean that the regulators will have the courage to call for such an action. More likely is another bail out. In Citi’s case bail outs are a frequent event. This last one was not the first and will not be the last.

So.

If we add the chance that policy makers will go off the deep end and tighten prematurely, which is unfortunately looking probable, to the edginess in the credit markets, and to the continued fragility of our banking system, it is easy to get downcast.

The common theme to all those problems is that they are entirely contrived. They are not outcomes of the economy. They are outcomes of weak leadership, poor analysis, or irrational fear mongering. In other words they are within our ability to avoid.

The fact that we botched bank reform doesn’t bode well for the others.

If we get a double dip recession it will be our own fault.

In this crisis we have, as someone once said, ‘fear itself’, but we also have weakness and incompetence. That’s a toxic brew.

But if we manage to dodge those self-inflicted wounds we will muddle through without a double dip recession. And that’s good news.

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Fix Wall Street … Please

I apologize to those of you who are sick and tired of the flood of Wall Street news. You want to know more about the ‘real’ economy, and less about finance.

Well, blame the banks.

They have co-opted our economy, and are abusing it for fun and profit.

They have to be stopped.

There is no credible story within the domestic affairs of America larger, or of more importance, than the state of our banking system. I mean this not just as a comment about the economic sphere but about the political sphere.

The financial crisis of the past two years has exposed the incredible choke hold the big banks have on our democracy. They can, and they did, expect taxpayer assistance to defray the cost of the compound and manifold errors of judgement that they made. They expected us to pay them for their mistakes. They expect us now to go back to being compliant as they pile up vast profits and pay themselves massive bonuses even as the millions of workers who suffered as a result of their errors still wallow in fear and poverty.

I say no.

I hope you do as well.

It is time to rebalance the economy and cut back the stifling weed that Wall Street has become.

A banking system, like the oil in your car’s engine, should be effective and anonymous. It should enable other sectors of the economy to generate wealth. It should be constructed on trust and relationships. It should enhance and supplement industry. It should be responsible with, and respectful of, your money. In short should be a supportive and essential cog in the overall economic machine. It should never become the be all and end all of the economy it is supposed to support.

Unfortunately our system outgrew that proper role. It became a rapacious, short term, deal oriented cesspool where it is expected that your banker is trying to take advantage of you. Relationships be damned. Short term profit be praised.

As Blankfein of Goldman Sachs says repeatedly – sophisticated investors should know what they are getting into when they trade with his firm. Absolutely: they are trading with a business whose word cannot be trusted.

In the ‘anything goes’ vision of the marketplace that infuses and informs the Goldman Sachs culture anyone can and should do anything. Anything. Get the deal done. Pocket the profit. Move on. No remorse. No looking back. No consideration. And, above all else, no ethical qualms. The presumption is that all players in the market are equally capable of stabbing all others in the back. So Goldman simply does it first.

This is a recipe for failure.

But only in the long run.

In biology we have learned that the most survival effective strategy is that called ‘tit for tat’. This means that when you defraud me, I will defraud you. In other words we all apply the golden rule. As Confucious first wrote, and as Kant famously argued, we should all act towards others the way we would want to be acted towards.

The crucial aspect that makes ‘tit-for’tat’ effective is that all the actors in the game know that they will cross paths again and that the playing field is level at each meeting. Plus all players will remember the way in which they were treated in the past. So an actor who cheats will be cheated upon in turn, and learn, eventually, not to cheat.

Goldman evidently disagrees.

They have abandoned the time honored banking principle of protecting and nurturing clients, and adopted a deal driven ‘attack at all costs strategy’. In their game, there are no clients, just sources of information. There is no confidentiality other than that needed to shroud the next deal. Because the deal flow is so large, and because Goldman’s size enables it to cast a wide net into that flow, it no longer fears the repercussions of cheating on a client. Tit-for-tat is useless when there are no opportunities to get even. And it is especially useless when one or two players get to be so big that even past victims have to continue to deal with them.

This is the state of Wall Street.

What was already a very restricted choice of players to partner with, is now even more narrow. The game has been tilted even more Goldman’s way. The failure of Lehman and Bear Stearns has handed more power to the remaining players. Now even more they can ignore any pretense and go for the jugular. That this is so is evidenced by the 91% jump in Goldman’s first quarter profits.

The economy, you and I, may languish, but Wall Street is back to its trading, raging, best. Those profits, and those at Citi, JP Morgan Chase, or Bank of America were driven, not by good old fashioned banking – lending so the economy can grow – but by trading exotic made-up products back and forth between each other. No value was injected into the economy other than the ability of the traders to go and spend those big bonuses.

To make matters worse, Jamie Dimon, CEO of JP Morgan Chase bemoaned just yesterday that he and his fellow bankers lacked access to the political process. This lack of access, Dimon suggested, is leading legislators to wrong conclusions: the banks need to be left alone to do their business – ‘God’s work’ to quote Blankfein – and not fettered by silly little things like new regulations.

This is, frankly, absurd. The banks employ approximately 1,500 lobbyists, and contribute millions, if not billions, to the coffers of politicians. Plus the records of Tim Geithner’s telephone calls show that he spoke to Dimon more often that he spoke to his boss, Obama. Bankers crawl all over Washington. They dictate legislation. Literally in the case of the changes to the bankruptcy code enacted under George Bush.

Dimon does not need more access, he needs less.

Or at least the rest of us need a voice in what goes on in Wall Street.

Ultimately we all need to realize that the financial crisis was also a political one. It showed just how deeply the banks have managed to burrow into the center of our economy. By discarding the regulation that had served society well for 70 years we unleashed not only an economic whirlwind, but a distorting force in our national politics. No one can talk of economic policy without negotiating with the banking system. The banks, and their attitude and power, intrude into every single conversation we have about how to fix the economy. The way in which we structure solutions, and even the way in which we allocate our wealth, all have to pass muster with Wall Street. The traders there can disrupt policies they don’t like. Which would be fine if those traders knew anything about long term finance. But as we now all know: they don’t care beyond the next deal. Anything with a maturity beyond the next bonus cycle is irrelevant to their thinking.

So bank reform is not just about putting the banking genie back into its old bottle, but it is about ridding ourselves of an unwanted voice at the political decision making table.

We need a banking system that is quiet and humble, not one filled to the rafters with hubris and that thinks the economy dances to its every whimsical tune.

Our bankers have outgrown their social value. They are now a malevolent force in society. They forgot what banking is.

We need to teach them.

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A Mockery of It All: Wall Street, The Joke’s On Us

Here I am, late at night reading accounts of the implosion on Wall Street. We are sufficiently past the peak of the crisis that we now have a few good books that explore or describe in detail what went on. They penetrate deep into conversations and exchanges that took place at the epicenter of the disaster.

And I am stunned by the arrogance, stupidity, cluelessness, and outright willful lack of ethics.

More to the point I am overwhelmed by the total abrogation of economic theory. Everything we know as standard economics is wrong. Totally and completely.

And I must admit, I love the idea of having to start over. There is nothing more exhilarating than learning. And boy do we all have a lot to learn.

Wall Street, hallowed as it is to market magic theorists was a demented fools game, rigged and self-serving, and completely beyond anything resembling what we read in economics text books. It was a colossal failure as a market. It was inhabited by people who had no idea what they were doing: bankers, lawyers, and accountants who were so incompetent that they genuinely believed in the inanity. They misled each other. They lied. They spoke in jargon in order to cover up the fact they didn’t understand even that most basic of banking rules: get your money back. They fell prey to the laudatory sewage published in the financial media, whose depth of analysis was so shallow that I doubt that even today, with the benefit of hindsight, that the commentators we see there actually have a clue as to what happened.

What we have just witnessed, folks, is a collapse of an entire elite. Wall Street has been exposed as an intellectual fraud of epic proportions.

Deals were made with the full knowledge that the paper being exchanged had no value. banks with sterling names and reputations were inhabited by idiots and dolts who sold assets they knew were valueless and yet swore up and down that those same assets had enormous value were they still on their own balance sheets.

We witnessed CEOs who knew little or nothing about the details of deals sufficiently large to sink their banks.

We saw risk management systems replete with elaborate math and sophisticated models, whose sole purpose was to obfuscate and hide the lie long enough for it to be traded to some other sucker.

We watched as traders larded their own bank accounts while not caring a jot about the bank where they worked. And we watched as the supporting cast of ‘professionals’ sliced and diced the legalese so finely that no one knew anything about reality.

The deal became the driver and be all of life. Anything more substantial, sensible underwriting for instance, became seen as retro and passe. Risk was something to be traded away not managed. Everything, absolutely everything, revolved around the next bonus. And since the next deal was the source of that next bonus, the deal became the reason for being. Shareholders, responsibility, longer time frames, and even the truth itself were tossed overboard in pursuit if the next deal. Quantity of effort dominated quality of effort. Mediocrity could masquerade as brilliance as long as it put in the hours.

The mockery this makes of standard economic theory is difficult to describe to anyone who isn’t familiar with the details of that theory.

It destroys it.

It is a total repudiation of everything we learn in introductory economics.

The market, and remember the money market is always held up as the closest approximation we have to a text book market, was a shambles. It was so far from the perfection we read about that it seems almost surreal when people who still advocate market magic theory try to defend it. I have to pinch myself when I hear anyone mouth a defense of free market economics. Exactly what about the implosion do they not understand? Markets, it turns out, are riven through with inconsistencies, errors, and foibles. They are not the perfectly smooth all knowing, infinitely adjustable, and hyper sensitive mechanisms for exposing the ultimate truths of an economy. On the contrary they are murky, dark, and dingy places full of mistakes and misalignments.

Free market economics has always been more an ideology than a science. To make the models work in order to defend the notion that markets are better at asset allocation than anything else they have to be so perverted as to be utopian and almost mystical.

The greatest of the free market advocates: Hayek, Friedman, and others worked very hard in order to avoid taking into account the real world. They cut away vast swathes of reality from their modeling in order to distill the ‘essence’ and explore the efficacy of the unreal world of their ‘perfect markets’.

Generations of students have been taught free market economics subsequently, but few have been told the exact nature of the sham it represents. The American population at large has been persuaded that markets work magically in ways that other forces – usually the government – cannot. Somehow the market achieved mythical status, and to attack it was to expose your ignorance or lack of sophistication.

And always Wall Street and its heroic denizens, those multi-millionaire whiz kids and their super suave managers, were held up as the epitome of the truths embodied in free market economics.

Well no more.

They are incompetent fools with very limited ability and even more limited ethical standards. They may make fortunes, but they make those fortunes by rigging and twisting the market not because they inhabit or understand the market’s magical forces.

There never were any magical forces.

It was all an illusion.

An illusion inside people like Hayek’s and Friedman’s minds. An illusion they forced into existence in order to justify their political views rather than to provide a scientific explanation of reality.

The big banks would not make a penny were it not for our subsidy of them. None of them. Not Goldman, not Citi, not JP Morgan Chase, not Wells Fargo, not Morgan Stanley, and not Bank of America. They all rely on us, and in particular our guarantee that they will not fail.

Don’t believe the hype: none of these organizations is well run or sophisticated. They are all a sham. They would all crumble back to a much more humble level were it not for our constant support.

The sad part, the truly sad part, is that most of them don’t realize the mockery they have made, not just of decades of economic theory – that is way too abstract for them anyway – but of themselves.

They have become a caricature. Like the grotesque figures of Hogarth’s satires, they are exposed as deluded, corrupt, and venal. They are cartoons to laugh at as they continue their incompetent ways.

Even worse, they continue. And this is, perhaps the biggest mockery of all: their ability to continue and make fortunes as they wallow in blissful ignorance, safe in the knowledge that we will bail them all out again, mocks our intelligence. It is a slight to all those who try to do the right thing, or who try to work honestly. It is an insult to those who seek to learn and apply knowledge diligently in the hope of a fair reward. And it is a total mockery of the notion that the American economy rewards those with the most merit or those who work the hardest. they are the exact opposite of the story book reward for hard work. They are being rewarded despite their continuing incompetence.

Wall Street, as we now know it, is a ship of fools.

They mock us. They mock economics. They mock themselves.

Truly: they made a mockery of it all.

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