In Defense of Goldman
By Staff News & Analysis - April 17, 2010

Even after all that has been said and written, people are still searching for a narrative to explain how a relatively small number of homebuyers failing to make mortgage payments led to such a deep recession. The 22-page Securities and Exchange Commission complaint against Goldman Sachs & Co. provides an outline of such a narrative. It has big players: Goldman Sachs and Paulson & Co. – not the former Treasury secretary, the hedge fund that famously made a winning bet on the collapse of the housing market. It has an alleged villain with a spy-novel name: Fabrice Tourre, the 31-year-old vice president on Goldman's "structured product correlation trading desk" who was selling a financial product called "Abacus." It has victims: The hapless state-owned German bank IKB, which the SEC says bought Goldman-manufactured securities and lost $150 million. It has an allegedly hoodwinked middleman: ACA Management, from which the SEC says Goldman hid the truth. There's even a cameo role for American International Group Inc. And it has motive: Paulson, the SEC alleges, essentially paid Goldman $15 million to create junk so the hedge fund would have something to bet against – and then Goldman allegedly tricked ACA to say it wasn't junk so Goldman could sell the stuff to unwary investors. Paulson made $1 billion; the investors lost $1 billion. Paulson isn't named as a defendant. – WSJ

Dominant Social Theme: Shut 'em down! The government ought to take over Wall Street the way it took over GM.

Free-Market Analysis: We have no great affection for Goldman Sachs. The firm is a mercantilist excrescence that makes obscene profits by exploiting government laws and Western-style, modern central banking. More than almost any other "private" entity, Goldman Sachs has benefited from the euphoric surges of central-bank paper-money that have propped up modern finance and made Wall Street and other major financial centers into money-spinners.

Nonetheless, this lawsuit just launched by the SEC against Goldman seems to us more political than criminal (or civil). The above article excerpted from the Wall Street Journal actually makes a good argument for such a perspective. But we would go even further: We think this lawsuit is a cynical attempt to point fingers at Wall Street when the real blame ought to be laid at the feet of Western central banking and its government and regulatory enablers. Goldman is part of that crowd, to be sure, but there are plenty of bigger fish.

Yes, Goldman is part of the problem. But if the lawsuit and subsequent reporting blame firms like Goldman for creating the current financial crisis, the power elite will have succeeded in diagnosing a cough as the culprit when the real issue, metaphorically speaking, is lung cancer. And the cancer that has metastasized involves the entire Western monetary system, which continues to teeter on the brink of insolvency in our opinion.

Of course, every great crisis needs a narrative, and now as the WSJ indicates, the SEC is providing one. The idea, apparently, is that large Wall Street firms conspired to sell worthless mortgage-related securities, thus kicking off the "sub-prime crisis" that morphed into a financial crisis that has shaken the world, destabilized the European Union and threatened even large nation states with bankruptcy. Jeez, is that what really happened?

We don't buy it. It's a kind of sideshow in our opinion. The worldwide financial implosion is much greater and more fundamental. It has little to do with the deeds or misdeeds of a single financial firm. No, it has to do with the failure of central bank paper money due to eternal overprinting, subsequent oversupply and eventual serial implosions.

Modern central banks have been overprinting money throughout the Western world for nearly 100 years. Each time the overprinting distorts the global economy, causes mal-investment and then a bust. After the bust, central banks wearily re-inflate without allowing economies to work out the distortions that have resulted in the mal-investments. Thanks to such mal-investment (and over-regulation) entire industries are created that should not exist, or exist in a different or minimal fashion.

The "green" environmental industry is one such; the vast legal industry is another; any state-run enterprise is a third. The pyramiding of debt on debt and illusory profit on illusory profit stretches skyward in an unstable mass that eventually must tumble down. This is what happened in 2008 and 2009. It has happened many times before, though not usually with such viciousness. In this case, the system was saved by furious money printing of central banks throughout the West – trillions of dollars that cushioned the fall.

One reason that the American Fed, for instance, doesn't want to reveal where its trillions went may be that the money propped up virtually every major entity in America and perhaps Europe too. It would bring home the gravity of the crisis and raise fundamental questions about how the Fed is able to print money out of thin air and give it to whomever it wants – justifying its giveaways in the name of "stabilizing" the financial system. It is in fact, a system that ought to have been allowed to fail. It is failing anyway and central banks have merely once again – if their latest money pumping is successful – put off the day of reckoning.

Right now the system is once again functioning, though it is still on life support. The entire Western financial industry was bankrupt in 2008 and even in 2009. The system didn't seize up; it failed. Paper money failed. The dollar, the world's reserve currency, teetered on the edge of worthlessness. People were starting not to believe in Western, central-bank style money. For a fiat-money regime, lack of confidence is perhaps the most devastating of all occurrences. If people don't believe in the economic system, how long will it be before they stop believing in the governments that stand behind that system?

By printing TRILLIONS of dollars and handing these dollars to banks and financial companies, central banks were able to provide the illusion of stability and, to the greatest degree possible, business as usual. Some of the money that was printed or provided electronically has found its way into stock markets, forcing them higher and furthering the illusion that steps taken by central bankers and governments have addressed the crisis and ameliorated it.

In fact, the crisis continues both in the United States and in Europe. In the US, the joblessness that afflicts some 20-30 percent of the potential work force remains stubbornly present because the country's industrial base has been so deformed by the overprinting of paper money. Tens of millions of US citizens work for the government (or military) in some capacity. And it is even worse in Europe, where government sectors are absurdly bloated and paper money overprinting has now begun to destabilize whole countries – Greece, Spain, Ireland, etc. (We think we could add Britain and France to the list as well.)

The power elite, that coterie of incredibly wealthy families and individuals that has organized the current Western monetary system, was successful back in the 1930s in creating a narrative that blamed the financial industry (Wall Street, etc.) for the crash and subsequent Depression. As books like the Creature From Jekyll Island have shown us, it was the formation of a modern central bank, in tandem with modern regulatory democracy that caused the monetary failures that led to the Great Depression.

It was inevitable that the elite would again try to shape the narrative of the modern money crisis, and in the largest sense, we think the Goldman lawsuit is part of the process. We are not necessarily implying, by the way, that the powers-that-be sat down in a conference room and decided to blame Goldman for everything that has gone wrong. But just as the Western mercantilist money system itself eventually yields up chaos, so the system, with its farcical and dysfunctional regulatory apparatus, eventually yields up culprits. And it has been designed that way.

Of course, there are plenty of conspiracy theories swirling about the Goldman announcement. In the gold community, people point to the fingering of major gold-and-silver player Paulson & Co. as a way to destabilize a gold market that has been remarkably buoyant in the past weeks and months. On Wall Street, the supposition likely is that Goldman was damaged goods, and the powers-that-be, by launching the SEC lawsuit are attempting to show that the regulatory process itself is one of impartial justice and rigor.

In fact, in a better and freer world, the market ought to decide what industry can and cannot do. The idea that "regulators" (mostly youngsters fresh out of university doing the "grunt work") get to decide how complex businesses ought to run their affairs is a dominant social theme that suits those in power but is essentially authoritarian in nature. Again, Goldman likely deserves everything that is coming to it and more, but not because it somehow manipulated mortgage securitizations. Goldman, a mercantilist irritation, is a cynical organization and part of a larger mercantilist problem. But as we pointed out earlier, it is pretty much a symptom (a cough) that is signaling the presence of the larger cancer.

From our point of view, the system has pretty much imploded. Sovereign debt, commercial real-estate problems and the general deformation of Western capitalism will continue to haunt Western economies for years to come. Meanwhile, we believe the market itself will likely take care of the true culprits of the Great Unraveling. Thanks to the Internet, a hefty minority of informed Western citizens will understand where the real blame goes.

After Thoughts

Yes … forgetting the finger-pointing, the real blame may well come to rest with those operating behind the scenes who set up and control our central banking government systems – which is where it should be. And the outcome, after the wreckage is thoroughly sorted through (or the continued unraveling makes retrenchment necessary), could be some sort of privately based gold and silver market-based standard that would ameliorate the worst excesses of the current fraudulent paper-money system. That would be progress. The Goldman Sachs lawsuit, less so.

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