News & Analysis
US Panel Blames Banks for '08 Meltdown, but not Central Banks
Financial Crisis Was ‘Avoidable,' Inquiry Panel Finds ... The panel appointed by Congress to investigate the causes and consequences of the financial crisis has found that there is plenty of blame to go around. The Financial Crisis Inquiry Commission's nearly two-year examination of the 2008 crisis lays blame on two presidential administrations, an alphabet soup of regulatory agencies and big players on Wall Street ... The full report is expected to be released as a 576-page book on Thursday. It was based on 19 days of hearings and interviews with more than 700 witnesses. – NY Times
Dominant Social Theme: Please don't look behind the curtain. It wasn't excessive monetary stimulation that caused the financial crisis but Wall Street greed.
Free-Market Analysis: We've often indicated that one of the dominant social themes of the power elite is "Wall Street did it." When it comes to financial meltdowns and the myriad of other disasters that afflict central banking economies, the best defense is perhaps a finger pointed at fatcat bankers and their firms. It worked after the Great Depression and that's been the playbook ever since.
Now comes yet another attempt at casting blame on Wall Street for the 2008 financial crisis (see article excerpt above). Featured yesterday in both the New York Times and The Wall Street Journal, the conclusions of the Financial Crisis Inquiry Commission are right out of the elite playbook. No matter what the economic destruction, the mechanism of central banking must not be blamed. And apparently the Commission has managed to avoid doing so.
It is the Anglo-American elite that has the most to lose if central banks are identified as the main culprit of the 2008 meltdown. For the past 100 years, a small group of wealthy banking families has busily propagated central baking's debt-based money system around the world. But the damage they cause has been concealed and reports like the one that the Commission has just come up with are in our view part of a larger strategy of damage control.
Central banks, coordinated by the secretive Bank for International Settlements (BIS), constitute the financial spine of the global economy. But the booms and busts that inevitably occur as a result of central banking tend to ruin small businesses and further concentrate financial power in the hands of a few. This is the desired result from the point of view of the power elite, but it is a conclusion that is neither to be explained nor endorsed.
There is some truth to the idea that Wall Street was responsible, at least partially. But Wall Street – at root – is merely a transactional mart that creates liquidity for securities. In the 20th century, and now the 21st, Wall Street has served as an adjunct to central banking credit expansion and even facilitated it. Wall Street is in the money-service business. It makes financial widgets and markets them.
It is central banking that caused the 2008 meltdown – and as the largest and most powerful central bank, the Federal Reserve must shoulder the most blame. This is not the Commission's conclusion, however. According to the Wall Street Journal, the Commission's draft report "says that ‘the prime example' of the system's shortcomings was ‘the Federal Reserve's pivotal failure to stem the flow of toxic mortgages' over the past decade."
This is nonsense. It wasn't "stemming the flow of toxic mortgages" that caused the meltdown but artificially low interest rates and the over-printing of money-from-nothing. The Fed's ever-generous production of fiat currency caused a great euphoric boom that led to all sorts of irrational financial behavior, including offering low-rate mortgages to people who couldn't afford them.
It is amazing that this sort of finger-pointing is still taken seriously in an era when the Fed's leading critic Congressman Ron Paul is assuming oversight of the Federal Reserve for the House of Representatives. Ron Paul has been exceedingly blunt about the damages resulting from central bank money printing. One cannot now argue that Paul's argument is a "fringe" one – but it receives little play in the Democrat-driven Commission conclusions.
It should. In the 20th century, establishment critiques of central banking practices were rare. In the 21st century, the advent of the Internet has exposed the mechanics of modern finance and made its fraudulent elements clear. In concert with Congress – and Wall Street – the Federal Reserve creates money at the touch of an electronic button and transfers those electronic digits to its commercial bank currency-distribution network. It is a mad system that has replaced gold and silver with electronic digits and paper currency.
None of this critique – which is widely known today – apparently finds its way into the Commission's conclusions, set for release tomorrow. This is not for lack of effort. According to the Journal, "The panel interviewed hundreds of witnesses over its year-long investigation and collected millions of pages of documents." Obviously effort was expended, but the results are no different than conclusions of, say, the 1930s, when bankers and Wall Street tycoons were generously blamed for the failures of the Fed. Here's some more from the Journal summary:
The draft report says "dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis." It also points to "stunning instances of governance breakdowns and irresponsibility," including at American International Group Inc., which made giant bets on the mortgage market, and Fannie Mae.
The report cites burgeoning mortgage fraud around the country in the years running up to the meltdown and notes that major financial institutions packaged loans into securities that they had reason to suspect didn't meet their standards. It also cited the proliferation of exotic securities such as derivatives and the rise of a lightly regulated shadow banking system. The draft report says that the failures were widespread, even including the public.
In fairness to the panel, there were tensions between the Democratic majority and the GOP minority. The Journal reports that Republicans wished to be more forceful about allocating blame to the global credit bubble, though it as yet unclear whether the Fed itself would be blamed for creating the bubble. Both sides apparently, blamed financial institutions' excessive leverage and credit-rating agencies that graded issues optimistically.
What is most ironic about this report is that central banks have issued another US$20 to US$50 TRILLION into the market in the past two years in order to try to salvage the world's essentially unsalvageable dollar-reserve system. This is money that cannot be "sterilized" or otherwise fully removed no matter what Ben Bernanke maintains.
The currency apparently is beginning to circulate now and this will cause tremendous price inflation. Food riots are already beginning in Africa and the Middle East over high food prices. The damage is just beginning, even as the US Commission is gravely determining who is to blame – and missing badly.
The Commission has arrived at misguided conclusions. It may be said that such terrible conclusions are purposefully misguided, or perhaps they are merely the result of willful ignorance. What is clear – in our humble opinion – is that the Commission misjudges the mood and knowledge of the average American. Many people are well aware now of how the money system operates and where the money comes from that has been lavished on ruined companies – trillions and trillions of dollars.
Conclusion: The anger is growing as times grow tougher. Efforts at deflecting blame from central banks will likely not have any significant effect in the 21st century. Too many know too much. It seems to us a change is coming.
Posted by Ingo Bischoff on 01/28/11 11:26 PM
"... I've been initiated into the secret fraternity of gold bugs."
Posted by Vauung on 01/28/11 06:06 PM
@ Ingo Bischoff, John Danforth
You two have convinced me -- I've been initiated into the secret fraternity of gold bugs.
Posted by Ingo Bischoff on 01/28/11 04:55 PM
@ John Danforth
"Sorry you felt the need to challenge it. Sinusoids were brought up as an example, that's all. Next time, I'll dream up a better one, via stronger coffee."
I do not disagree with you at all on the limits of exponential functions in light of Euler's constant, not at all. In this regard we have no difference.
However, I don't think you refuted my claim that the compounding of interest payments due, monetized again and again for decades has exploded into Federal government deficit which is impossible to be cleared by the income tax.
That is the point I tried to make. A discussion about mathematical theorem is not likely to be of interest to most of the readers of the DB.
Can you grant me the operation of the exponential growth function as regards the monitization over decades of interest expenses included in annual budget deficits?
Posted by John Danforth on 01/28/11 03:00 PM
"It plays an invaluable role as a price metric for the interchange of commodities (this is what privileges it as 'money' of course, and the only thing that does)."
I posit that anything that poses as a price metric without having real cost is not real money, but a fraud. In order to be real money it must have a cost to establish its value. When value is separated from the currency, you are going to be swindled.
Posted by John Danforth on 01/28/11 02:56 PM
"Anyway, finally, the reason for all this: real money is an industrial commodity (or closely-related promisory contract), and thus a diversion from alternative productive opportunities. It plays an invaluable role as a price metric for the interchange of commodities (this is what privileges it as 'money' of course, and the only thing that does). But it is also a deadweight loss to productive industrial capacity, since the economic activity directed to the mining, working etc. of money-bullion might have been directed, alternatively, to the formation of productive capital -- machinery and its precursor products, most relevantly industrial metals (including precious metals in their industrial usage)."
I believe that the closer you look at this, the more you'll come to believe that the fact that real money has cost to produce is the key to its ability to act as a store of value. And further, the blessing that we get in return for its use--a division of labor economy--is hundreds of times more productive than the cost of producing the money.
It is not a deadweight loss. It is a productive tool, even if you count its cost as overhead. Just like a telephone.
In order to act as a 'price metric' honestly, it has to have a price. In order to be capital, it needs to be actual saved previous production.
The effort it takes to make it is our only protection against the rip-off we suffer under now.
Posted by John Danforth on 01/28/11 02:42 PM
"exponential growth in the physical world is not common which would bring it to the attention of the average person" ...
I already gave the example of the common cold or flu. Happens in your body, and happens if an epidemic breaks out. Gets your attention. I'll grant you most people don't recognize it; isn't that why they fall for compounded interest?
Now, I didn't say that a graph of compounding interest is sinusoidal--it isn't. But it does have an amplitude limit. So it will come crashing back down, inevitably, even if only because the game ends.
My point was that many things that appear to head to infinity, like the slope of compounded interest trending to vertical or the population of virii in your sinus, turn out to have limits when you take a few steps back and realize that infinity turns out to be hard to reach in reality. People go bankrupt and sick people die.
I know we agree that hanging our prosperity on a one-way function is tantamount to suicide.
Sorry you felt the need to challenge it. Sinusoids were brought up as an example, that's all. Next time, I'll dream up a better one, via stronger coffee.
Posted by Ingo Bischoff on 01/28/11 01:50 PM
Here again, we differ on terminology. What is "technological capital"....???
There is "Technology", which is in my book not an economic term, and than there is "Capital". "Capital" in classical economics is "Wealth" used in production of more wealth. The definition of "Wealth" is any material thing, having exchange value, which is the result of application of "Labor" on or to "Land".
"Labor" is all human exertion in the production of wealth. "Land" in classical economic terms is the natural universe, except man and wealth. However, "Money" is not a term defined in classical economics. Maybe deliberately so, but you cannot use a term in arguments unless there is a definite term for it. I define "Money" as a "commodity with constant or near constant marginal utility".
For millennia, the commodity which turned out to be "Money" under my definition is gold. Gold is "Wealth", but it is not capital, unless it is used in physical production of satellite solar panels, computer components and the like. Gold as capital in the form of an industrial commodity constitutes less than 1% of the use of gold. In the case of gold jewelry, there is such a close flow from stock to inventory that to consider gold in this case as capital is unnecessary.
What kind of wealth is GOLD....??? It is the singular kind of wealth which is "MONEY". J.P. Morgan saw "Gold as Money and nothing else". It is for that reason that gold accumulates so that today there are 80 years worth of annual production of gold which is kept in vaults the world over.......Furthermore, the exploration and mining of gold goes on and on just to end up in vaults............Why.....???
You say......"I wonder whether the age of information technology might bring an end to this bifurcation between money and productive capital, due to the essential universality of the computer, with its general purpose capabilities and comprehensive utility. Might not 'liquid' (Internet-traded) data storage exhibit 'constant or nearly constant marginal utility', as well as minute divisibility and immediate communicability?"
There is no bifurcation. Money is Gold and Gold is Money. Except for the little bit of gold used in industrial production, Gold is not Capital. Gold is merely Wealth used for the singular purpose, which is the use as Money.
"Information technology" evidenced in the sophisticated, physical design of computers is integral to Capital, while the knowledge of the specialist who designed the computer or program is an attribute of Labor. The computer if used as a robot in industrial production is capital. If the computer is put to personal use or is used to provide a service, the computer is wealth. No consumption or service could be possible without the production of wealth first which requires Land, Labor and Capital.
It is the value of the commodity "Gold" which serves as the standard against which the value of Land, Labor and Capital is judged. Therefore, the value of each of these factors quoted in "Prices" is in fact a fraction of the value of GOLD.
GOLD is the ultimate standard of value. All things are judged against this standard. As long as this standard is the result of the decision by billions and billions of individuals, it will always be the ultimate standard. This is in line with Austrian economists' "free market" thinking, though the Austrians do look at money differently than J.P. Morgan.
If you find consistency and logic in the terms I use to describe my model of economic reality, you should be able to follow my arguments. As I mentioned before, it all rests on the definition of terms one uses.
Posted by Bill Ross on 01/28/11 12:37 PM
Because anything REAL is the sum of the matter / energy that goes into it, exponential functions are regulated by the availability of the resources required to sustain them, such as locusts (or elites) gorging their way to starvation.
JD's comments regarding sinusoids and other natural phenomena being expressible in terms of exponentials is accurate. However, the range of the exponential is limited by natural factors. Thus, a sinusoid is an oscillation within the natural constraints of the environment it occupies.
Similarly, elite exponential excesses are also constrained by the environment in which they exist, in particular, the tolerance of "we, the people" for the predatory costs they impose.
Posted by Ingo Bischoff on 01/28/11 12:11 PM
@ John Danforth
I have waited for a challenge to your statement........ "But exponential functions are not one-way in nature, generally. They wrap around on themselves. The hockey stick is only a snapshot of part of the cycle. That's how you get such a thing as a sine wave, the equation for which is riddled with exponents, and which describes a fundamental aspect of nature. Or a parabola."
So far, I have seen no one question the veracity of your statement. You leave the impression that exponential function are quite common in every day life and that they are like a sinus curve or a parabola, intimating that "things go up" and "things come down" and that it applies to compound interest as well. Nothing could be further from the truth.
Since no one challenged your assertion, I will do it here and now.
While the exponential function is an integral part in every software program employed in manufacturing, etc. and quite common in financial and industrial applications, exponential growth in the physical world is not common which would bring it to the attention of the average person. They mostly see things grow linearly.
There are all kinds of exponential functions, but when it comes to the exponential function that governs compound interest, we are talking about an exponential function which arises whenever a quantity grows or decays at a rate proportional to its current value. In this case, the derivative (rate of change) of the exponential function is the exponential function itself.
The importance of exponential functions in mathematics and the sciences stems mainly from properties of their derivatives. To compare the exponential function that applies to compound interest with the differential function that applies to sinus curves or parabolas makes no sense at all.
The exponential function curve applying to compound interest is "hockey stick" like and asymptotic. You can not draw an inference from a sinus curve or a parabola just because a part of it looks like an asymptotic curve.
Posted by Vauung on 01/28/11 08:07 AM
Yes, that's a stickler (quanta of computational capability seem problematic as a 'good stores of value', to say the least). I was hoping to find an example of a generally exchangeable resource that was inherently productive (rather than 'technologically dead'), i.e. a potentially monetary form of working capital, but after your casually devastating observation I'm not seeing any option other than ignominious retreat ...
One thing's for sure, on the basis of Gresham principles, in a parallel currency system of computer cycles and bullion, the tech-money would reach extraordinary velocity.
Posted by Bill Ross on 01/28/11 07:55 AM
"economic activity directed to the mining, working etc. of money-bullion might have been directed, alternatively, to the formation of productive capital"
Now, you approach the truth. Money, as a "mutually agreed medium of exchange", after a long history of voluntary consensus by uncoerced (free) traders converges to TRUTH: "Money IS stored production" (the life energies of producers) and is equivalent and thus suitable to "quid pro quo" trades in kind. Trading something with REAL money as a medium of exchange is not an apples for oranges trade proposition (two different things), but, a trade of the productive energies involved in producing apples, oranges and money respectively.
What we observe now, after a long history of creating "faux money" from nothing is that the productive energies (life) of mankind have been exchanged for worthless currency and investments using the same fraudulent measure of value. The productive life has been sucked out of civilization and, the attrition cost remains and is increasing.
Now, you may appreciate why I am so adamant regarding the grim reaper of "Mathematics of Rule" which proves that force / fraud, left unchecked is the historical destroyer of civilizations and, is well on the way to destroying ours:
Click to view link
Posted by John Danforth on 01/28/11 07:50 AM
The cost of technology assets drops continuously.
Posted by Johan on 01/28/11 05:28 AM
Isn't it fantastic that we always feel a need to blame someone and that we always have... As Nassim Nicholas Taleb points at in his famous book: There are things that are just too complex for us humans to foresee. Our need for an explanation to all things will be fulfilled with this book they are soon releasing. We are satisfied with that and we will continue life just as before.
The next crisis comes and we do the same things over and over again. Once you realise that you cannot control everything you might do like I did. I moved to Asia and really started to enjoy life here in paradise. Visit
Click to view link or their facebook page Click to view link and they will for sure help you like they helped me.
Posted by Vauung on 01/28/11 01:35 AM
There's an additional remark that might help to crystallize the peculiarities of my angle on the money question. You describe (very helpfully and informatively) a series of crucial 'developments' in the evolution of money, prior to its disastrous devolution into non-redeemable fiat paper.
While whole-heartedly subscribing to the DB (and Austrian) mantra 'let the market decide', there's a further development I would very much like to see in coming years: the emergence of generalized or 'liquid' technology as a monetary medium, first data storage and later abstract machine intelligence.
Historically, the diversity of technological capital has prevented machinery serving as a general medium of exchange, since the nature of such machinery has been highly heterogeneous and of utility only to specialized economic actors. Furthermore, machines have lacked other money-like properties found in precious metals (portability, divisibility, aesthetic value, etc.).
I wonder whether the age of information technology might bring an end to this bifurcation between money and productive capital, due to the essential universality of the computer, with its general purpose capabilities and comprehensive utility. Might not 'liquid' (Internet-traded) data storage exhibit 'constant or nearly constant marginal utility', as well as minute divisibility and immediate communicability?
Perhaps in time the non-productive or 'technologically dead' character of money might appear as the expression of an undeveloped age. Whether or not this SF scenario comes to pass, machine intelligence will support vibrant economic expansion, with intrinsic social value, whilst the value of metallic money will remain predominantly extrinsic -- with an ultimate worth determined by what it can buy (and thus by developments outside the monetary sphere itself).
Posted by John Danforth on 01/27/11 10:34 PM
Just so, although the pundits almost always get the trends wrong. Affluent societies drop their birth rates, we keep discovering new oil, the weather gets c-c-cold, people tire of being ripped off via paper money, etc...
Let's hope the trend towards freedom is inexorable. Or rather, let's keep making sure it is.
Posted by Ryan on 01/27/11 10:16 PM
Here is another article that brings out the "German Guilt" aspect they're trying to promote with this panel report:
Click to view link
Posted by Swainsong on 01/27/11 09:02 PM
"such terrible conclusions are purposefully misguided, or perhaps they are merely the result of willful ignorance"
Oh, sorry, wrong thread – I thought we were talking about the 9-11 Commission Report :)
Posted by Vauung on 01/27/11 08:10 PM
@ John Danforth
"But exponential functions are not one-way in nature, generally. They wrap around on themselves. The hockey stick is only a snapshot of part of the cycle. That's how you get such a thing as a sine wave, the equation for which is riddled with exponents, and which describes a fundamental aspect of nature. Or a parabola."
Absolutely. But this is also why that comparatively narrow range of strongly historical (i.e. one-way) trends, associated typically with capitalist modernity, are of such enormous interest. Growth in nature is usually episodic, or -- in cases that seem to represent continuing trends such as total biomass or biological complexity -- resistant to easy empirical definition. Thanks to capitalism, modern history, in contrast, is profoundly continuous, with long-range acceleration as a basic feature.
For environmentally-inclined critics of modernity, this is a stigma, a mark of its 'unsustainable' character, and the provocation for some kind of 'green' revolution. For pro-capitalist modernists, on the other hand, it is a core validation of liberty-oriented social arrangements. Accelerate the process!
Posted by John Edwards on 01/27/11 07:12 PM
I think you can map the trajectory of the Bernank/Fed continuing introduction of QE into the ailing world economy onto the life cycle of a serious injecting drug addict.
The highs that both the Bernank/Fed and the junky wish to rediscover are unobtainable in their present, respective circumstances. This will only result in a 'steady state' (no real growth) for both parties until the underlying stress factors that these ongoing stimulus/injections give wreak such havoc that their life/economic support systems collapse/fail.
I dare to predict this is the end game for Central Banking, but I'm fearful of what will emerge to take it's place. I assume TPTB are well acquainted with this metaphorical allegory as drug abuse amongst the wealthy has been a constant throughout history.
I leave it to TDB and its dear readers as to how this scenario will play out in actuality, over time, and 'Brzezinskian' geopolitical terms.
Posted by Vauung on 01/27/11 06:47 PM
Thank you for this exchange. It is a great learning opportunity for me. There are many elements of your thinking and of this discussion that I would ultimately like to pursue (leading eventually to the importance of real bills), but one preliminary building block is this important declaration:
"The distinction between a barter system and a money system is not at all fluid."
While agreeing with the crucial characteristic of desirability, an aspect closely linked (in both directions) to the emergence of a 'mutually agreed medium of exchange' as Bill Ross notes, it still seems to me that the boundaries between barter and money in Austrian thinking are less pronounced than in mainstream ('neoclassical') economics, and for important reasons.
Fiat money behaves as no industrially produced substance possibly could (its expansion is controlled solely by social and mathematical laws, not be physical constraints. Run out of paper, and you go digital. Not even Bernanke can run out of electrons). Gold or silver, however, need to be mined, worked (even into bullion), and physically stored. Honest money takes the form of metal specie, warehouse receipts, or an intelligibly related contract.
It is noteworthy in this respect that 'gold bugs' typically reveal a healthy interest in silver, and perhaps in other precious metals. There are actually quite a number of reasons for this, which is interesting in itself. Not only do all precious metals behave similarly (from a socio-economic point of view), i.e. publicly broadcast price levels, silver coins, bullion, and jewelry, they also have similar institutions involved in the entire chain from mining to crafting, exchange, and deposit-banking. Gold money therefore smears, and has always smeared, into a more general category of monetary metals -- with silver as the historically predominant competitor.
Even more relevant though IMHO is the emergence of futures contracts in a wide range of commodities that all begin to behave somewhat like historical precious metals, that is to say, as close-enough gold substitutes when people want to 'get physical' (which is to say, get the hell out of the fiat swindle). The value of all these commodities is precisely that they are not 'magical' in the fiat money sense, but must rather be produced industrially. Use of money is the way society spontaneously negotiates the distribution of production, and 'physical' money makes this quite overt (hence its denunciation by a demand-obsessed Keynes as a 'barbaric relic').
Anyway, finally, the reason for all this: real money is an industrial commodity (or closely-related promisory contract), and thus a diversion from alternative productive opportunities. It plays an invaluable role as a price metric for the interchange of commodities (this is what privileges it as 'money' of course, and the only thing that does). But it is also a deadweight loss to productive industrial capacity, since the economic activity directed to the mining, working etc. of money-bullion might have been directed, alternatively, to the formation of productive capital -- machinery and its precursor products, most relevantly industrial metals (including precious metals in their industrial usage).
It is this equivalence, and thus a realistic estimation of the role of money as diverted production, that is easily lost by an over-narrow gold-bug reading of the Austrian insight.
Gold does not grow, productive capital does. That means that any discussion of exponential process applied to money in a narrow sense will always find it exorbitant and unnatural, and tend to denounce interest (as 'usury' or 'riba' etc). I know that you are not doing this, but your tight money focus does lead to an emphasis on debt restraint, rather than compensatory productive capital formation.