Hiding behind the complexities of our financial system, banks and other institutions are being accused of fraud and deception, with Goldman Sachs just the latest in the spotlight. This has become the most pressing election issue of all … Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we've seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves. Just consider the roll call beyond Goldman Sachs. In Ireland Sean FitzPatrick, the ex- chair of the Anglo Irish bank – a bank which looks after the Post Office's financial services – was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US's Inland Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain. – UK Guardian
Dominant Social Theme: Bankers! Stomp on the lot.
Free-Market Analysis: The beat goes on. We identify dominant social themes for a living here at the Daily Bell, and one of the themes we have been anticipating is, "Financial firms made the mess." This is a predictable promotion of the power elite and one that was last trotted out most formidably in the 1930s. But it is so? Take America. As we have learned in the Creature from Jekyll Island, the inflationary run-up of the 1920s that led to the Great Crash and subsequent depression in the US and abroad may have had more to do with a deal between the British and American central banks than it did with Wall Street.
Yes, it was a determination (we learn), at least in part, of Britain to return the pound to its pre-war eminence versus other currencies, especially the US dollar, that caused the US central bank to start to inflate – essentially reducing the dollar's value versus the pound throughout the wild monetary ride of the Roaring 20s. The gold confiscation put in place by Franklin Delano Roosevelt (we have heard from other sources) was essentially a coverup for the Federal Reserve, which in its excitement had printed more dollars relative to gold than the law allowed.
Rather than run the risk, apparently, of having citizens converge on banks and find out the truth – that there was no gold in the coffers – FDR launched a gold confiscation drive. The central bank, only around for 20 years or so, was doubly guilty as we understand it, of (1) running up the dollar until the currency was red hot and (2) doing so in a way that abrogated the lawful ratio (then) that the Fed was supposed to observe between dollars and gold.
So it was the central banking mechanism itself that seemingly caused the "Roaring 20s" and subsequent crash. But the 1930s were not to be overly kind to this apparent truth. Instead of re-examining the central banking system itself Congress, abetted by the mainstream media, went on a Wall Street witch-hunt. Now there is no doubt that during the excesses of the 1920s, Wall Street did many terrible things to exacerbate an overly inflated monetary situation. But Wall Street did not directly cause the Roaring 20s or subsequent crash because these would not have occurred, or certainly not with such fierceness, without the Fed's monetary stimulation.
But that didn't stop a wholesale reorganization of Wall Street. Enter, the SEC, the NASD, Glass-Steagall and the idea that stock exchanges should be "self-regulatory agencies." The idea of a "public" company was invented – one that had a greater fiduciary responsibility to the public than a "private" firm that didn't go through the regulatory process of listing on an exchange. None of this was pertinent to what actually happened –monetary inflation and the subsequent crash – but all of it was sold to the public as a necessary reconfiguration in order to make sure that a terrible thing never happened again.
It was nonsensical in our opinion. The problem was not Wall Street (or securities firms abroad) run amuck. The problem was and continues to be mercantilism. This is the age-old process whereby important elements of business and society obtain monopoly government privileges that result in vastly increased profits. Instead of severing the dysfunctional relationship between the financial industry and its too-powerful regulators and central bankers, Western governments in their wisdom have opted for further regulation.
Yes, instead of destroying a corrupt system, 1930s reforms in America and abroad enshrined it. The regulatory changes only increased the financial industry position throughout the West, further established the industry's mercantilist position and strengthened the levers of government that could be pulled. And what about today? Nothing has really changed.
If regulators, bureacrats, pols and the mainstream media truly wanted to make a difference – to ensure that the current horrible crisis does not happen again, they would do away with central banking and the regulatory entities that make mercantilism possible. They would ensure the severance of the terrible relationship between financial firms and their governments.
The general public in the West is not well served by current regulatory regimes. It is a dominant social theme in our opinion. Demonize the financial industry. Make people fear capitalism and the capital-raising process. And then suggest that certain failures need to be ameliorated by further regulations and the enlargement of government powers.
Thus it is that the power elite's fear based memes are relentlessly flogged to concentrate further wealth and power. It's worked in the past, so the powers-that-be are trotting it out again with the help, of course, of a compliant press. Sure there's "criminality" on Wall Street, and Goldman Sachs probably did mislead its customers, and more than once probably. Heck, if you wanted to define criminality expansively you might say that Wall Street in its entirety is a kind of criminal enterprise. In fact, modern Wall Street is a manufactured and artificial entity, one that is a product of the relentless mercantilism that has poisoned every part of the larger Western economy.
But let's go further … ultimately the market itself is criminal (as many seem to define criminality today) in the sense that there are institutional conflicts of interest between every buyer and seller and each tries NOT to reveal more about his wares than he has to. This is the trouble with trying to regulate a market and attempting to introduce "fairness" into the process. For goodness sakes, every market is a manipulation! Every claim by the seller is likely a modest exaggeration.
What regulates a market is the Invisible Hand – competition, marginal utility and a participant's reputation for fair dealing – even in the face of institutional dishonesty. Nothing else CAN regulate a market or its innumerable transactions. (Though common law, preferably, could provide a remedy for those most aggrieved.)
The powers-that-be, as cynical and dishonest a lot as ever existed, will continue to promote regulation as a necessary corrective to "market failures" – even though the leaders of Wall Street's biggest firms love regulation and talk fondly amongst themselves of "regulatory capture." Regulators, nonetheless, will make broad accusations and prosecutors will prosecute an unlucky few. Whether they deserve it or not, a trickle of powerful men in the financial industry (expensively dressed sacrificial lambs) will likely be made to defend themselves in court. A certain number will be fined and others may even go to jail.
And what will be the result? Will things change? Will they get better? We are emphatically not apologists for Goldman Sachs, but Goldman is NOT the fundamental problem, no matter how long its "bloody snout" is. The problem is a power elite that uses corporate and business entities to engage in the mercantilism that tears down nations and ruins the middle class. Concentrate on the "criminality" of Goldman Sachs (and other such entities) and lose sight of the forest for the trees.
Regulatory democracy has been in force for nearly a century in the West. Has it helped improve people's quality of life – especially in the West? We see where all this headed. As the accusations mount against financial firms (deserved or not), more regulations may be passed –internationally this time – further tying government and the financial industry together and ensuring that the next great crisis (whenever it occurs) will be even worse. And that is just the point.
The whole idea is to tear down the capitalist system and substitute something else. The only difference is that this time, unlike in the 1930s, there is an alternative Internet press to point out the ludicrousness of what is about to occur. Instead of getting rid of central banking and the West's dysfunctional regulatory structure, those in positions of political and journalistic power will concentrate on demonizing what's left of the putative private sector. Shame! Here at the Daily Bell we are trying to do our bit. Hopefully others will as well.