EconoMonitor

Great Leap Forward

WHY WE’RE SCREWED

As the Global Financial Crisis rumbles along in its fifth year, we read the latest revelations of bankster fraud, the LIBOR scandal. This follows the muni bond fixing scam detailed a couple of weeks ago, as well as the J.P. Morgan trading fiasco and the Corzine-MF Global collapse and any number of other scandals in recent months. In every case it was traders run amuck, fixing “markets” to make an easy buck at someone’s expense. In times like these, I always recall Robert Sherrill’s 1990 statement about the S&L crisis that “thievery is what unregulated capitalism is all about.”

After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system.

Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets.

Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go in firesales at prices rigged by twenty-something traders at the biggest and most corrupt institutions the world has ever known.

And since they’ve bought the politicians, the policy-makers, and the courts, no one will stop it. Few will even discuss it, since most university administrations have similarly been bought off—in many cases, the universities are even headed by corporate “leaders”–and their professors are on Wall Street’s payrolls.

We’re screwed.

Bill Black joined our department in 2006. At UMKC (and the Levy Institute) we had long been discussing and analyzing the GFC that we knew was going to hit, using the approaches of Hyman Minsky and Wynne Godley. Bill insisted we were overlooking the most important factor, fraud. To be more specific, Bill called it control fraud, where top corporate management runs an institution as a weapon to loot shareholders and customers to the benefit of top management. Think Bob Rubin, Hank Paulson, Bernie Madoff, Jamie Dimon and Jon Corzine. Long before, I had come across Bill’s name when I wrote about the S&L scandal, and I had listed fraud as the second most important cause of that crisis. While I was open to his argument back in 2006, I could never have conceived of the scope of Wall Street’s depravity. It is all about fraud. As I’ve said, this crisis is like Shrek’s Onion, with fraud in every layer. There is, quite simply, no part of the financial system that is not riddled with fraud.

The fraud cannot be reduced much less eliminated. First, there are no regulators to stop it, and no prosecutors to punish it. But, far more importantly, fraud is the business model. Further, even if a financial institution tried to buck the trend it would fail. As Bill says, fraud is always the most profitable game in town. So Gresham’s Law dynamics ensure that fraud is the only game in town.

As Sherrill said, without regulation, capitalism is thievery. We stopped regulating the financial system, so thieves took over.

A century ago Veblen analyzed religion as the quintessential capitalist undertaking. It sells an inherently ephemeral product that cannot be quality tested. Most of the value of that product exists only in the minds of the purchasers, and most of that value cannot be realized until death. Dissatisfied customers cannot return the purchased wares to the undertakers who sold them—there is no explicit money back guarantee and in any event, most of the dissatisfied have already been undertaken. The value of the undertaker’s institution is similarly ephemeral, mostly determined by “goodwill”. Aside from a fancy building, very little in the way of productive facilities is actually required by the religious undertaker.

But modern finance has replaced religion as the supreme capitalistic undertaking. Again, it has no need for production facilities—a fancy building, a few Bloomberg screens, greasy snake-oil salesmen, and some rapacious traders is all that is required to separate widows and orphans from their lifesavings and homes. Religious institutions only want 10%; Wall Street currently gets 20% of all the nation’s output (and 40% of profits), but won’t stop until it gets everything.

There is rarely any recourse for dissatisfied customers of financial institutions. Few customers understand what it is they are buying from Wall Street’s undertakers. The product sold is infinitely more complicated than the Theory of the Trinity advanced by Theophilus of Antioch in 170 A.D., let alone the Temple Garments (often called Magic Underwear by nonbelievers) marketed today. That makes it so easy to screw customers and to hide fraud behind complex instruments and deceptive accounting.

A handful of thieves running a modern Wall Street firm can easily run up $2 trillion in ephemeral assets whose worth is mostly determined by whatever value the thieves assign to them.

And that is just the start. They also place tens of trillions of dollars of bets on derivatives whose value is purely “notional”. The thieves get paid when something goes wrong—the death of a homeowner, worker, firm, or country triggers payments on Death Settlements, Peasant Insurance, or Credit Default Swaps. To ensure that death comes sooner rather than later, the undertaker works with the likes of John Paulson to handpick the most sickly households, firms and governments to stand behind the derivative bets.

And the value of the Wall Street undertaker’s firm is almost wholly determined by euphemistically named “goodwill”—as if there is any good will in betting on death.

With these undertakers running the show, it is no wonder that we are buried under mountains of crushing debt—underwater mortgages, home equity loans, credit card debt, student loans, healthcare debts, and auto-related finance. Simply listing the kinds of debts we owe makes it clear how far along the path of financialization we have come: everything is financialized as Wall Street has its hand in every pot.

Thirty years ago we could still write of a dichotomy– industry versus finance—and categorize GE and GM as industrial firms, with Goldman Sachs as a financial firm. Those days are gone, with GM requiring a bail-out because of its financial misdealings (auto production was just a sideline business used to burden households with debt owed to GMAC, the main business line), and Goldman Sachs buying up all the grain silos to run up food prices in a speculative bubble. Obamacare simply fortifies the Vampire Squid’s control of the healthcare industry as it inserts its strangling tentacles into every facet of life.

Food? Financialized. Energy? Financialized. Healthcare? Financialized. Homes? Financialized. Government? Financialized. Death? Financialized. There no longer is a separation of the FIRE (finance, insurance, and real estate) and the nonFIRE sectors of the economy. It is all FIRE.

Everything is complexly financed. In the old days a municipal government would sell a twenty year fixed rate bond to finance a sewage system project. Now they hire Goldman to create complex interest rate swaps (or even more complex constant maturity swaps, swaptions, and snowballs) in which they issue a variable rate municipal bond and promise to pay the Squid a fixed rate while the Squid pays them a floating rate linked to LIBOR—which is rigged by the Squid to ensure the municipality gets screwed. Oh, and the municipal government pays upfront fees to Goldman for the sheer joy of getting screwed by Wall Street’s finest.

The top four US Banks hold $171 Trillion worth of derivative deals like this. Derivatives are really just bets by Wall Street that we will get screwed—it is all “insurance” that pays off when we fail. Everything is insured—by them against us.

What is healthcare “insurance”, really? You turn over your salary to Wall Street in the hope that should you need healthcare, they will allow your “service provider” to provide it. But when you need the service, Wall Street will decide whether it can be provided.

Oh, and Wall Street’s undertakers have also placed a bet that you will die sooner than you expect, so it wins twice by denying the coverage.

Finally, US real estate—the RE of the FIRE–underlies the whole kit and caboodle. That is the real story behind the GFC: given President Clinton’s budget surpluses and the simultaneous explosion of private finance, there simply was not enough safe federal government debt to collateralize all the risky debt issued by financial institutions to one another back in the mid 1990s. Wall Street needed another source of collateral.

You see, all the top financial institutions are dens of thieves, and thieves know better than to trust one another. So lending to fellow thieves has to be collateralized by safe financial assets—which is the traditional role played by Treasuries. But there were not enough of those to go around so Wall Street securitized home mortgages that were sliced and diced to get tranches that were supposedly as safe as Uncle Sam’s bonds. And there were not enough quality mortgages, so Wall Street foisted mortgages and home equity loans onto riskier borrowers to create more product.

Never content, in order to suck more profit out of mortgages, Wall Street created “affordability” products—mortgages with high fees and exploding interest rates—that it knew would go bad. Even that was not enough, so the Squids created derivatives of the securities (collateralized debt obligations—CDOs) and then derivatives squared and cubed—and then we were off and running straight toward the GFC.

Wall Street bet your house would burn, then lit a firebomb in the basement.

Mortgages that were designed to go bad would go bad. CDOs that were designed to fail would fail.

Suddenly there was no collateral behind the loans Wall Street’s thieves had made to one another. Each Wall Street thief looked in the mirror and realized everything he was holding was crap, because he knew all of his own debt was crap.

Hello Uncle Sam, Uncle Timmy, and Uncle Ben, we’ve got a problem. Can you spare $29 Trillion to bail us out?

And that is why we are screwed.

I see two scenarios playing out. In the first, we allow Wall Street to carry on its merry way, as the foreclosure crisis continues and Wall Street steals all homes, packaging them into bundles to be sold for pennies on the dollar to hedge funds. All wealth will be redistributed to the top 1% who will become modern day feudal lords with the other 99% living at their pleasure on huge feudal estates.

You can imagine for yourselves just what you’re going to have to do to pleasure the lords.

This will take years, maybe even a decade or more, but it is the long march Wall Street has formulated for us. To be sure, “formulated” should not be misinterpreted as intention. No one sat down and planned the creation of Western European feudalism when Rome collapsed. To be sure, the modern day feudal lords on Wall Street certainly conspire—to rig LIBOR and muni bond markets, for example—and each one individually wants to take as much as possible from customers and creditors and stockholders. But they are not planning and conspiring for the restoration of feudalism. Still, that is the default scenario—the outcome that will emerge in the absence of action.

In the second, the 99% occupy, shut down, and obliterate Wall Street. Honestly, I have no idea how that can happen. I am waiting for suggestions.

 

148 Responses to “WHY WE’RE SCREWED”

AnonymousJuly 23rd, 2012 at 4:40 am

You're ridiculous. You complain endlessly about derivatives and Wall Street and at the same time spread the message of a theory founded by a man who has made his living designing derivatives and running a hedge fund.

You're just full of contradictions, Wray.

Scott FullwilerJuly 23rd, 2012 at 5:23 am

Speaking of contradictions, look who's so obsessed with Wray that he/she can't wait to read his next piece and be the first one to (write another stupid) comment.

$$$$July 23rd, 2012 at 6:05 am

now we understand why they want all to be educated, to obey the law, to go to job regulary. They are safe in the food chain, and they want from us to obey the rules they have created, so that they can enjoy all the benefit from their thievery. They are not afraid from institutions, which were created by them, they are afraid from individuals, fed up – individuals.

SirCadburyJuly 23rd, 2012 at 6:42 am

This is a professor of economics?? I am so fed up of everyone blaming people in the financial industry and labeling them as crooks. Guess what?? EVERYONE should learn about finance and money. Just because you are good at something and make money from it, EVEN AT THE EXPENSE OF OTHERS WHO DIDN'T WORK AS HARD OR STUDY, does not make you a thief or any sort of a criminal.

You want to know THE REAL REASON your silly example of schools, fire departments etc…. have lost????? THEIR OWN GREED!!! Instead of prudently investing their important finances in traditional, safer instruments, they went right along chasing the same high risk, high-return investments as everyone else.

For everyone out there who blames these "thieves" out there for all the worlds ails, GROW UP AND TAKE RESPONSIBILITY FOR YOUR OWN FINANCES AND POOR FINANCIAL DECISIONS!!! Good grief. The real root of the problem is the greed and selfishness WE ALL HAVE within us as HUMAN BEINGS.

I am not saying there are not crooks out there, but come ON! Demonizing people in one of the MOST vital industries with a broad brush is a joke to anyone that knows even rudimentary economics.

Deus-DJJuly 23rd, 2012 at 6:53 am

What's the matter, you don't like somebody attacking your pals that we should instead be worshipping? Seems to me you want us to worship at the high altar of the rich guys and hoping that all of us should just act normally and want to be rich like them (mind you, not that many people), and you also seem to be saying that the poor guys with regular jobs who got their pensions cut, well, that was their fault. My god, to think that somebody in 2012, after a financial crisis and scandals galore still believes in a fairy and worships to the gods wishing the rich stay rich and the poor stay poor, because it's what each deserves. This kind of silly talk would have worked on us in 2006 or 2007, but not now. Get lost.

UGGGGG69July 23rd, 2012 at 6:58 am

The banks didn't make people buy houses they couldn't afford. They might have been complicit in convincing people to buy homes, but ultimately this crisis was driven by the greed of not only bankers selling mortgages, but homeowners who wanted the "American dream" and stretched their incomes further than they should have. Blaming Wall Street alone for what has happened is ignorant.

Deus-DJJuly 23rd, 2012 at 7:04 am

There's actually much more to the criticism than you think. It's also about the way the economy is structured…financial deregulation came along from the same people that pushed for labor unions to be destroyed and for wages to become stagnant (since the 70s). The only ignorant person here is you, who can't tell the difference between an informed criticism and a rant. As Wray also noted above, fraud was a big factor here, blaming poor people and/or uncreditworthy people who were given a loan (when everyone on earth knows they shouldn't have been) rather than the banks who made the loans and crashed the economy is beyond idiotic.

Deus-DJJuly 23rd, 2012 at 7:07 am

As I said, you can't tell the difference between informed criticism and an angry rant. If you want to call something a rant, you have to read the author's previous writings to make such a claim. Maybe you should go look in the mirror sometime and ask yourself why it is you have the urge to comment against people who attack others, my guess is you believe in social harmony and that if we all just stayed quiet and tried to "fix it" rather than complain that all would be well? Go do yourself a favor and brush up on reality, I'd recommend reading Moral Man and Immoral Society by Reinhold Niebuhr for starters. Now get lost.

UGGGGG69July 23rd, 2012 at 7:11 am

Do you think all the millions of people who bought homes during the housing bubble were just taken advantage of? They were all forced to buy homes, forced to sign contracts, forced to spend more than they could afford? Of course there were crimes committed, but this article does not even mention the fact that millions of homeowners purchased homes they couldn't afford because they thought they were going to flip it for a profit.

Neil WilsonJuly 23rd, 2012 at 7:18 am

"The banks didn't make people buy houses they couldn't afford."

No they didn't. But the rules of the game are usually that when that fact is discovered both the lender and the borrower lose. That's what bankruptcy and administration enforces.

That way both lenders and borrowers learn to be more circumspect in the future.

This crisis is not really a crisis of debt. It's a crisis of lenders who refuse to take their medicine and are, instead, insisting on their assets being made recoverable.

JamesJuly 23rd, 2012 at 7:25 am

The old, "She was wearing a short skirt, so she was asking for it" argument, nice to see people like yourself have chosen to stick your head in the sand and pretend there wasn't any lobbying(bribing) by Wall st for deregulation, there wasn't a concerted effort by the nut jobs on the right to bust and demonize unions(or "ordinary working people" as they were once known) in an effort to drive down wages, to create a desperate workforce who will put up with poor pay because they've got to feed their fucking families and pay the ridiculous amounts for healthcare.

All of which left people with no other choice than to go further and further into debt to cover the cost of living.

UGGGGG69July 23rd, 2012 at 7:36 am

That's just another ranting comment. Buying a home is nothing like getting raped. The homeowner DECIDES to buy a home. The homeowner DECIDES which house they want. The homeowner DECIDES to sign the mortgage contract. No part of this process is forced on a homeowner. If they didn't want to buy the home then no one was forcing them to do it. But everyone saw their neighbors getting rich flipping houses and decided to get in on the action. Then they lost their shirts and people like you started blaming Wall Street so you could advance a political agenda.

Sean FernyhoughJuly 23rd, 2012 at 8:05 am

Putting GFC down to greed is a way of saying 1) it's just human nature and 2) we're all to blame. This then leads to a resignation about the problems that have arisen and to a lack of willingness to persue prosecutions.

I'm glad to see academics getting angry about this. We needed commited people hammering at the doors of the academic economics and financial sector behemoths.

One recent story that Prof Wray should add to his list is the HSBC money laundering scandal.

Deus-DJJuly 23rd, 2012 at 8:32 am

"people like you started blaming Wall Street"

As I said, a loser who worships the rich in society and wants everyone else to do so too. Big surprise, now gtfo.

Ossi OnniJuly 23rd, 2012 at 10:28 am

"No one sat down and planned the creation of Western European feudalism when Rome collapsed."

I would suggest that feudalism already formed in Rome around 200-100 bc. Latifundisation was created by "free markets" after punic wars. "Free markets" naturally mean today laissez-faire, libertarism or neo-classism whatever you want to call it. Oligarchy is the logical conclusion of neoclassical theory of value. Monopolists take over political power and along with it all monopoly rents.

KentJuly 23rd, 2012 at 10:33 am

For all you youngsters out there, I've spent the last 45 years on Wall Street and I've seen it all, so pay attention: THIS IS AN EXCELLENT ARTICLE!

Frederico CarvalhoJuly 23rd, 2012 at 11:34 am

Yes, Kent, I agree. It surely is.
It tells the truth (or at least tries to approach it); paints the reality that many people (perhaps the majority) are incapable to see, for lack of knowledge, the biased neoliberal indoctrination at major universities pretending to be education in economics.

Roger EricksonJuly 23rd, 2012 at 12:15 pm

that follows for the neoclassical theory of STATIC value, but completely misses the reality of DYNAMIC value

In biology, thermodynamics or systems theory (or common sense) we just say that "the highest return, by far, is the return-on-coordination."

In less general terms, Tom Jefferson nailed it pretty well over 200 years ago:

"I am conscious that an equal division of property is impracticable. But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. The descent of property of every kind therefore to all the children, or to all the brothers and sisters, or other relations in equal degree is a politic measure, and a practicable one. Another means of silently lessening the inequality of property is to EXEMPT ALL FROM TAXATION BELOW A CERTAIN POINT, and to tax the higher portions of property in geometrical progression as they rise. Whenever there is in any country, uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labour and live on. If, for the encouragement of industry we allow it to be appropriated, WE MUST TAKE CARE THAT OTHER EMPLOYMENT BE FURNISHED TO THOSE EXCLUDED FROM THE APPROPRIATION."
Thomas Jefferson to James Madison

28 Oct. 1785 Papers 8:68-82
in The Founders' Constitution

19 June 1786 Papers 9:76–77
Volume 1, Chapter 15, Document 32

University of Chicago Press
The Papers of Thomas Jefferson. Edited by Julian P. Boyd et al. Princeton: Princeton University Press, 1950
(reference courtesy of Tom Hickey)

LRWrayJuly 23rd, 2012 at 12:41 pm

Olly: good guess. Yes I think that FiDO/Phil/Anon/Audited/NotACPA is on the payroll. Apparently he earns enough doing this that he's able to pay for several ISPs in order to try to hide the fact that it's all the same guy.

AanotherJuly 23rd, 2012 at 12:48 pm

I think the article highlights some key problems. We can all sense there's an issue with the way western capitalism is evolves where increasing power is being placed in the hands of a few large corporates and governments who work hand in hand to protect their own interests.Resovlving human traits such as greed and lust for power is tricky because if one becomes soft hearted in business you might fail and lose money. By contrast if you re-distribute large amounts of money to large amounts of people everyone only becomes marginally better off. Smart / privalidged people are rewarded for taking calculated risks and investors invariable invest in people who are ruthless about making money since they'll do whatever it takes to win. As societies have become better educated and informed we are rightly questioning inherent human greed and selfishness that permeates large businesses and governments who'll do anything to protect their own lifestyles, who wouldn't.

LRWrayJuly 23rd, 2012 at 12:57 pm

Ah, FiDO/Phil, you found another name? You are now a Sir? That is, a prospective Lord? Keep cheering for the restoration of feudalism! Nice.

lbwoodgateJuly 23rd, 2012 at 1:02 pm

"Just because you are good at something and make money from it, EVEN AT THE EXPENSE OF OTHERS WHO DIDN'T WORK AS HARD OR STUDY, does not make you a thief or any sort of a criminal. "

Uh, sorry Cabury, but yes it does. What you're suggesting is that everyone be as smart as the underhanded dealer who engages in practices that catches people off guard. We should lower our moral standards? Honesty and Trust seem to have no place in your way of looking at things.

LRWrayJuly 23rd, 2012 at 1:48 pm

Hi FiDO: Ruff Ruff!
Wow, last week you were a professor, this week a knighted Lord and as well a grunting caveman. Can anyone say multiple personalities?

ollyJuly 23rd, 2012 at 2:20 pm

It's more likely he's just using different computers here and there. I doubt he's actually "on the payroll". I think he just hates mmt and sees it as his mission to piss you off. Some people are just crazy, you know.

CWHJuly 23rd, 2012 at 2:27 pm

If I copy a $20 bill on my color printer it's called counterfeiting. If Wall Street "creates" financial instruments it's not counterfeiting? Are they not both fake instruments?

TMLutasJuly 23rd, 2012 at 3:15 pm

The solution isn't complicated once you realize that institutions that pose systemic risks that make them "too big to fail" really are just insufficiently insured. If they are sufficiently insured, a failure would mean that the insurance company pays out and their innocent partners are made whole while their risk sharing partners take a haircut. It really is that simple.

The practical effect is that as you get into more and more complex transactions, the insurance requirements go up to maintain sufficient reserves to handle the next business cycle low where the exotic ideas that turn out to be remarkably irresponsible get paid out because these companies fail and the government doesn't step in. That's what the insurance was for. Eventually, your increase in insurance premiums exceeds the profits on your financial innovations and you stop walking out into crazy land. No government takeover needed, no revolution, no heads on pikes.

The hard part is having a clear eyed assessment of business cycle risk that is, frankly, Austrian school in nature. The blows to the economy that need insurance reserves are dealt in the boom. They are made evident in the bust and payouts happen there. Take a look at the FDIC and you will find that they gave out free insurance on the public dime during the Clinton/Bush years (Bush finally did away with it) and were thus in a poorer position to cover the massive failures to come. If the FDIC had steadily increased rates based on the complexity and systemic risk that was happening, they would have done a tremendous service, and we might have a more normal economy today. So why did they behave in the exact opposite manner?

TMLutasJuly 23rd, 2012 at 3:17 pm

Wall Street takes advantage of US Government rules to do its fractional reserve money creation. If you say "mother may I" to the feds and they say "ok" then no, it's not counterfeiting. It's something else that may be just as morally objectionable but counterfeiting it is not.

TMLutasJuly 23rd, 2012 at 3:27 pm

Latifundia in the Roman model were the corrupt leasing of large tracts of public land in violation of the law (which limited holdings of public land to about 325 acres) and often without bothering to collect the rents due. The lands were parceled out due to bribes by the wealthy to public officials.

How on earth do you find the free market anywhere in this system?

Unfortunately, people are afraid to enter into the organized labor market and incumbent unions are pathetic, outmoded, violent rent seekers who are getting steamrolled by the corporatists. It is not very hard to come up with better solutions. It is much harder to see how to do so without getting crushed by extra-judicial violence dished out by the incumbents.

Some time within the next 50 years if the socialist idiots don't stop the process, we're going to run out of cheap labor that has been made cheap by poor government. The capital oligarchy will be rather unhappily surprised by the results but over all it's going to be very good for the world. I look forward to the day.

Leroy WhitbyJuly 23rd, 2012 at 3:30 pm

The Christian faith that you denigrate in this article is a faith that states in the Bible that "debt is slavery." The central, necessary component of this ongoing fraud is debt. The Federal Reserve, the Federal Government, municipalities, banks, mortgages, credit card, states . . . and the voters . . . have allowed this machinery of slavery, debt, to be built around them. Simple faith and action according to the word of God would never have allowed the problem to grow. Like most civilization level disasters, loss of faith is central.

weekend pilotJuly 23rd, 2012 at 4:02 pm

I guess his "hidden message" which I thought was so obvious, wasn't. Based on what rhetoric I hear from the media, about half the voters are told to think that regulating these thieves operations is somehow unpatriotic. These people in turn, vote for those who want to give the thieves more control.
Can't cure stupid. Wray (and me and millions of others) are waiting for suggestions to remedy this. The only suggestions I hear are, "we want more guns" or, "Lets allow the millionaires to pay less taxes". Nope. No workable suggestions from THAT crowd.

SJJuly 23rd, 2012 at 4:11 pm

Everyone is so angry. That Wall Street/FIRE is a criminal enterprise & the 99% created their misery by their own greed are not mutually irreconcilable propositions. This is how con artists have operated since the birth of the profession. Hence the axiom, “you can’t cheat an honest man.”

I can’t really blame all the schnooks who thought they would become gazillionaires by flipping houses. The very clear message was that the American Dream was available to us all. The reality of the late 20th/21st C was that no one was going to strike oil, build a railroad or fence off half of Montana & be a cattle baron… the fortunes were to be made in Real Estate. If you really thought about it, it was unrealistic for everyone to get rich selling each other houses, but what other options were there?

Joe FirestoneJuly 23rd, 2012 at 4:13 pm

And it's a crisis of politicians and judges who will not force them to take their medicine by doing justice. So, ultimately this crisis is about whether there will or will not be "justice for all."

Erik LarssJuly 23rd, 2012 at 4:25 pm

Capitalism as a system is screwed, what the keynesians and austrians always forget is too look at the tendency of the rate of profit to fall. This is what produces crisis. Just read Andrew Klimans new book "The failure of capitalist production" that shows proof for this.

We need to formulate a different mode of production.

Joe FirestoneJuly 23rd, 2012 at 4:33 pm

"By contrast if you re-distribute large amounts of money to large amounts of people everyone only becomes marginally better off."

That's true when you do simplistic re-distribution. But, if you re-distribute by raising wages and decreasing profits, by ensuring that minimum wage keeps pace with productivity gains, and by closing loopholes and raising marginal tax rates back to pre-Reagan levels, you will make the 99% much better off over time. In addition to make these things effective. you have to bring an end to the control frauds, and also ensure that the use of money in politics is strictly and severely limited. No more buying candidates and elections.

ClarkJuly 23rd, 2012 at 4:41 pm

Isn't the point of this article really ". You can't trust" institutions". Everything is a scam. At its most basic level, we can no longer trust each other. The wealth of the west is intrinsically related to our faith in each other and our institutions. We are corrupt now and are suffering the fate of Latin America and African countries. I blame business schools who taught tricks and mirrors thinking with no thought to developing character and integrity. Mbas are superior little snots who are stealing from the parents who raised them and the grandparents who loved them. My experience over the last 40 years in business is that lying and cheating have risen exponentially and when this behavior was once an individual failing, it has now become a virtue of successful institutions.

LRWrayJuly 23rd, 2012 at 4:59 pm

Now hold it Leroy: I took no position at all on any religious faith. The article was not about religion. I summarized Veblen's piece in order to update it–showing that what HE said about religion can be just as well applied to modern finance. And yes I am well aware that many religions speak against debt and for foregiveness (ie: debt cancellation, Jubilee), and indeed, have written on this in detail.

benleetJuly 23rd, 2012 at 5:27 pm

Finance went hog wild. It's clear in the numbers: financial corporate debt as a % of GDP increased from 10% in 1970 to 116% in 2007; finance's profits in 1964 were 2% of total corporate profits and in 2007 they were 40%. I'm reading William Tabb's book The Restructuring of Capitalism in Our Time. Page 41: ". . . financial profits come as an appropriation from the rest of the economy." "Financial returns exceeding the rate of profit in the real economy can be realized over an extended period only if finance increases efficiency so that discounted future earnings increase. If, as is more often the case, profits are achieved by short-term expedients: squeezing wages, [squeezing] the prices received by suppliers, [squeezing] research and development expenditures, and the sale of company assets, the rate of economic growth outside of finance slows. In a basic sense these sources of financial profits come as an appropriation from the rest of the economy." The home owners who jacked up their debt to income levels to 130% in 2007, from 60% in 1970, by refinancing during the bubble were also culpable. The mid-quintile households went the highest in debt. But as Wray says, it was all a financial boondoggle. Greed and finance, I enjoyed it while it lasted. But now I'm not enjoying it. Will the society learn anything? Apparently not. my blog, http://benL8.blogspot.com

aaaJuly 23rd, 2012 at 5:29 pm

You refer to capitalist as "undertakers"? I guess it's no surprise why your blog is named after a social campaign implemented by the Communist Party of China in the 1950's.

MarcJuly 23rd, 2012 at 6:16 pm

WTF?!! speak english you twisted freak. So let me get this straight…there is some insurance company that will be able to pay out 8 or 9 trillion dollars the next time the "austrians" blow up the world economy?? Huff that shit outside please,the smell gets in the furniture and carpet.

marcJuly 23rd, 2012 at 6:20 pm

The "Magic Underwear" comment was spurious.: "magic underwear", from all ive ever heard, is a completely american-mormon thing..No need for you ugly americans to smear Theophilus or any of the rest of the world.You americans created this monstrous economic system after all.

Joe FirestoneJuly 23rd, 2012 at 6:32 pm

How about saving this kind of crap for the tea party blogs? There's absolutely no question that finance capitalism has been comprised on "undertakers" over the past three decades. Anyone living in the real world can see that!

LRWrayJuly 23rd, 2012 at 7:40 pm

Triple A: undertaker was the name of the capitalist from the time of Adam Smith, at least. I'm bringing it back–a good conservative ought to join me in recognizing the lineage of the term.

dcbJuly 23rd, 2012 at 7:50 pm

I agree with you. I presume you're speaking about the US, but as a UK observer, I can say that people took advantage of easy credit, easy mortgages, the property boom. Bubbles cannot happen without a 'mania' phase (i.e., widespread greed). At a municipal level an example of scandalous misuse of public funds was local Public Authorities placing tax payer's money on deposit in risky Icelandic Bank's just to earn higher interest. Yes, we were seduced but just blaming the bankers is too easy and avoids taking responisbilty for the part we played in creating this mess. The Financial System needs reform, to weed out the dishonest few and a return to an ethical footing, but lets not throw the baby out with the bath water..

RayPhenicieJuly 23rd, 2012 at 11:58 pm

Before the messenger gets shot one more time, for those defending the ugly banks please answer these questions.
1. Was it greedy homeowners or greedy bankers who blew up Bear Stearns and Lehmann Brothers? Remember, the likes of Lehmann wanted cesspools of crappy debt that they knew was worthless and later admitted it was crap so they could bamboozle investors and rake in killer paychecks based on the whole scam. Who would not defend what they do if it pays 400k/yr or 800k/yr or 15,000k/yr or. .
And was not Lehmann's demise the moment of steep decline that we are still spinning away from?
2. Who created the excessively large pools of money used for the financialization of the mortgage industry-greedy homeowners with their paltry thousand or banks with their millions and billions?
3. Who argued for no guidelines, no laws, no regulations anything-goes, let greed rule, style of 'deregulation' of the banking and financial sector?

RayPhenicieJuly 24th, 2012 at 12:19 am

Could you give some numbers on this: "millions of homeowners purchased homes they couldn't afford because they thought they were going to flip it for a profit." And the overall effect on the financial sector of paltry millions of homeowners with their few thousand per house?
What about Bear Stearns -and dozens of other 'houses' on Wall Street leveraging billion$ of crappy assets that were marked 0.10 to the dollar on the day of the fire sale but previously had been leveraged at 36 times their book value. You don't think that might be a slight problem? Here's the Wikipedia article you may wish to read http://en.wikipedia.org/wiki/Bear_Stearns

As of November 30, 2006, the company had total capital of approximately $66.7 billion and total assets of $350.4 billion. According to the April 2005 issue of Institutional Investor magazine, Bear Stearns was the seventh-largest securities firm in terms of total capital.

As of November 30, 2007, Bear Stearns had notional contract amounts of approximately $13.40 trillion in derivative financial instruments, of which $1.85 trillion were listed futures and option contracts. In addition, Bear Stearns was carrying more than $28 billion in 'level 3' assets on its books at the end of fiscal 2007 versus a net equity position of only $11.1 billion. This $11.1 billion supported $395 billion in assets,[7] which means a leverage ratio of 35.5 to 1.

Ulysses S. RantJuly 24th, 2012 at 12:33 am

I appreciate your honesty at the end, Professor Wray. Many of us can see quite clearly what the problem is. The question remains: what is the solution? Right now I can't see one. Wall Street's elites have bought off all of our top political and economic leaders; they've proven repeatedly that they can do pretty much whatever the hell they want without repercussion. So how do you counteract that? A third party? OK, but who will fund it? I see dark days ahead. And, like you, I'm definitely open to suggestions.

RayPhenicieJuly 24th, 2012 at 12:36 am

"But everyone saw their neighbors getting rich flipping houses and decided to get in on the action." Everyone? I did not flip any houses, (I used to flip burgers for a living) nor did several of my friends at work, nor did anyone in my family. So you lie when you say everyone did this.
Any other half truths you wish us to consider?

WesleyJuly 24th, 2012 at 12:38 am

As for the 99%, that is a pipe dream. And don't forget where Mao said power came from. Any funny business, and the tanks will be rolled out and the drones…

RayPhenicieJuly 24th, 2012 at 1:03 am

Finally, to back up what the post said, but in terms that are a tad less obstreperous read this http://www.iif.com/download.php?id=3feWjfhHv2o=
from the presentation, done in 2008!

Causes of the crisis systemic and global;
subprime just extreme example of widespread problem
Perfect storm – 4 Pathologies
1. Excessive liquidity creation by central banks post post-
2000
2. Ex Ex-ante global saving glut from nouveaux riches
(China, GCC)
3. Nouveaux riches until recently biased towards safe
assets
4. Triumph of transactions transactions-based financial capitalism
over relationships relationships-based financial capitalism

Consequences of the 4 Pathologies
Excessively low nominal & real risk risk-free rates
Global underpricing of risk and excessive leverage in
the financial sector (& in the household sector in the US)
Huge financial sector bubble & over over-expansion: highest
profits generated by financial institutions lending to each
other & transacting among themselves rather than with
households & non non-financial corporations
Ponzi finance
– within the financial sector
– between financial & housing sectors in some countries (US, UK,
Spain, Ireland, certain CEE countries)

YantoJuly 24th, 2012 at 1:11 am

A better question to you UGGGG69 might be "Why aren't you so angry ?' Are you a happy and wealthy Squid perhaps ?

PaulJuly 24th, 2012 at 1:16 am

I waste (yes waste) a lot of time reading economics blogs, and I can confidently say that the greatest gap between the quality of a post and the comments it inspires can always be found in the thread below a Wray post. Why? I don't understand it. Prof. Wray writes clearly and consistently in expressing his position. Why does that inspire such garbage? If you don't agree with it, fine. But the barrage of strange equivocations, hostile stupidity, and the weird, repetitive chants of negation are dumbfounding. Are they like hail marys, meant to atone for having read his blasphemous words? The most positive thing I can take from this otherwise strange phenomenon is that Wray is actually getting at something that really upsets right-wingers, otherwise they would just ignore him instead of trying to cloud any discussion of his arguments with endless, rambling nonsense.

RonTJuly 24th, 2012 at 2:03 am

Because Wray is dangerous. They know he is right. If he is right and people find out, their ideology loses. Hence the anger.

Peter D. KinderJuly 24th, 2012 at 2:26 am

A superb piece. I wish it weren't so.

One interpretation quibble: I would argue Diocletian laid the groundwork for the feudal estates of the post-Roman era in the west. It is sobering to consider how long feudalism lasted and how successful it was.

That we are returning to it just two centuries after its last vestiges disappeared is disheartening but not surprising. Make people insecure for long enough and they will trade relative freedom for not so relative serfdom.

VickiJuly 24th, 2012 at 3:46 am

I am from Australia, which has suffered less from the GFC as a result of a more highly regulated banking sector and a mining boom that has traded on China's growth. Nevertheless we are under no illusion DownUnder that we will remain unscathed in the event of a systemic global failure of international banks. We had some institutional financial failures in the 1990s which made us wary and prompted a tightening of regulation and some show of daylight between 'vanilla' & investment banking. Even so, our major banks are whining that they should be exempt from Basel III. Australians have good "crap detectors", but I agree "we are all screwed" if we don't have the backbone to insist that our governments track down evidence of fraud , if it is there, & put a few of these bastards in gaol. Thanks Randall

frankiethepunkJuly 24th, 2012 at 3:49 am

I have done a lot of reading by credible of credible sources, the FT (Financial Times) (New York Times) Bloomberg, Wall Street Journal as well as numerous books. All of what Randall Wray states is an accurate representation of the state of the world economy. I don't really know your background is, but I can tell you that the whole system is rigged to enrich a few at the expense of everybody else. You have to be blind not to see this. But then, a lot of right wingers are willfully, because they have done the rigging.

Joe FirestoneJuly 24th, 2012 at 4:11 am

Well, you know conservatives. They're "conservative" when it suits their purpose of defending or justifying what the 1% are doing. But when being "conservative" means prosecuting, convicting, and jailing fraudsters and banksters, then all of a sudden its "always look forward never look backward!"

Benedict@LargeJuly 24th, 2012 at 5:48 am

I've been thinking of late how to talk to ordinary folks about bank regulation. You know, what is it, in words they can understand. It seems to me that nigh on 100% of it, at least that part of their regulations that deal explicitly with finance, have to do with capital valuation. Now that doesn't help much, because what is capital and what is valuation? Some stuff the banks claim is over-regulated, as far as anyone on the outside can tell.

But I came up with this. Everyone knows what collateral is. You don't get to put your teepee up as collateral for your home improvement loan. But this is exactly what bankers mean when they say they are over-regulated. They're saying that the government won't let them use their teepees as collateral.

I think most people would understand that.

ianJuly 24th, 2012 at 9:41 am

I agree with you I have portrayed a rather simplistic view since there's only one cake to hand out its been unfairly distributed since time began. Most investors require maximum returns from their investments and one of the main functions of CEO's is to maximise shareholder value which largely means profits since thats how we measure performance despite all this corporate governance stuff. Its human nauture to want to improve themselves and grow their net worth so they can enjoy life and help their families, all quite normal. Controlling these increasingly powerful olygolopy firms who work hand in hand with governments will be a difficult nut to crack and expecting them to agree to redistribute their almost guranteed wealth will require a completely new breed of moral and paintakingly honest leadership at all levels.

BobJuly 24th, 2012 at 11:48 am

There must be thousands of news stories of unprosecuted financial frauds around at the moment, constituting billions of felonies against essentially everyone alive. The LIBOR mess alone I have seen estimated as a $100 trillion USD+ crime… figured very conservatively!

Give up the pretense that there is any legitimacy or integrity remaining in the financial space because that boat sailed at least a few decades ago. Theres nothing salvagable remaining, and the whole teetering, creaky edifice of crime needs to be burned until theres nothing left before any more money is wasted on ‘bailouts’ or stolen from the people of the world in any other way.

drgizmoJuly 24th, 2012 at 12:12 pm

I think we can all agree that "this" is a system, … now all systems have limits … "they are limited by something… a finical…. "fiat" system must be limited by something… when you combine free market with fiat you have a very powerful and explosive system, "instability or sustainability" is the result… I think we can agree money can not be infinite … it must be limited … by either strict rules…or nature … the best will be free markets and sound money… more stable and sustainable… so when you combine fiat money with free markets and no strict rules it will be a disaster… a system with no limits will tear its self apart… think of a turbine, that spin too fast… or nuclear reactor…that can heat up too much… the more powerful the system the stronger the rules, or limits must be… and obeyed …. or natural forces will prevail. your reator will over heat and melt thru the earth…

The base problem is not free market or capitalism… it is the lack of rules in a "fiat" environment … FIAT with out limit is the problem… Dr. IP Gizmo.

LRWrayJuly 24th, 2012 at 1:46 pm

I wish I could write: To Peter, Paul, and Mary (but will have to put Vicki and Ron instead).

Yes there is an organized and apparently funded effort to flood the comments by one major Troll and his handlers. In any event, thanks for the nice comments and for wading through the garbage. To Peter and some others who commented on the comparison to Feudalism. Like capitalism, feudalism comes in various forms; in Europe it was initally largely shaped by tribal society, but without the democracy and egalitarianism as "lords" grabbed power. Over time the vestiges of tribal society were forced out and the power of the lords increased and the living standards of the peasants declined (hence, the Black Death)–until peasant revolutions in 1381. In any event, I admit my use of the term is vague and it just means we've got 1% of haves at the top and 99% of "peasant" have-nots at the bottom. It is not meant to indicate a literal return to the economic system of 400AD.

Melvin ShapiroJuly 24th, 2012 at 4:41 pm

We are prisoners of our DNA. It has been said that those who fail to learn history are doomed to repeat it, but the truth is that whether read and learned or not we are doomed to repeat it because that is what we are programed to do. Take any animal and confront it with a given stimulus and one gets a particular reaction. Take another animal of the same species, confront it it with the same or similar stimulus and you'll probably get the same or similar response. All history is is the script. Those that read and learn it are in a position to perhaps profit from those that fail to, but even the learned will eventually succumb, ultimately there is no choice.

viguy007July 24th, 2012 at 4:53 pm

An Open Letter to Mitt Romney:
Dear Mitt, as a lifelong Republican and proud supporter of your father George in 1968, I regret to say he would be ashamed of you. Your father established the precedent of presidential candidates releasing their Tax returns. He released 12 years of them, saying "One year could be a fluke, perhaps done for show, and what mattered in personal finance was how a man conducted himself over the long haul." When your campaign was asked to release more then two years of returns, it responded “We’ve given all you people need to know" and has stonewalled giving out this information, even as many fellow Republicans, have requested. People are starting to ask "What are you trying to hide?" This is dangerous for any candidate.

Your father was a straight shooter, he had principles and always said what he thought. But you Mitt, if I may quote you: "I believe that abortion should be safe and legal in this country." – "I support the reversal of Roe v. Wade"; “It was not my desire to go off and serve in Vietnam.” – “I longed in many respects to actually be in Vietnam and be representing our country there.”; “I like mandates. The mandates work.” – “I think it’s (mandates) unconstitutional on the 10th Amendment front.”; “I think the minimum wage ought to keep pace with inflation.” – “There’s no question raising the minimum wage excessively causes a loss of jobs.”; “I believe the tax on capital gains should be zero.” – “It’s a tax cut for fat cats.”; “The TARP program… was nevertheless necessary to keep banks from collapsing in a cascade of failures.” – “When government is bailing out banks, we have every good reason to be alarmed.”; “We have tough gun laws in Massachusetts; I support them. I supported the assault weapon ban.” – “I don’t support any gun control legislation.”; "the world is getting warmer … humans contribute to that." – "we don’t know what’s causing climate change on this planet."; “Those… paying taxes and not taking government benefits should begin a process toward application for citizenship.” – “Amnesty only led to more people coming into the country”; “I’m a strong believer in stating your position and not wavering.” – “I changed my position.” Mitt, there are many more quotes of things you said which are contradictory. What do you really believe?

Mitt, even if you actually left all operational control of Bain Capital in 1999, you sanctioned and acquiesced to the filing of false and misleading documents with the SEC until 2002. This indicate a certain unhealthy attitude towards these filings: The complete and truthful disclosure of all facts is not important. This was an attitude your father would never had. But this attitude was all too prevalent in the financial community prior to 2009. It was a major contributing cause of the Financial Crisis of 2008. Is full disclosure to the SEC one of the regulations you would do away with? What about other regulations overseeing the financial community; Wall Street and the banks too big to fail? I am not fan of government regulation, but NOT all regulation is bad. As a small investor, and businessman, I want complete and honest filings with the SEC. I can not take a chance that this will not be done; I have been burnt once already by a government that was asleep at the wheel.

Earlier in your political career, you said “I would like to have campaign spending limits”, however now your position is “the American people should be free to advocate for their candidates and their positions without burdensome limitations.” While in theory I agree with your later view, the necessity of your earlier viewpoint became apparent during the Republican primaries. The ability of one candidate, whose connected to the establishment and monied interests on Wall Street, to outspend his rivals by 5, 6, 7, 10 times distorts the electoral system. Good men could be destroyed by a barrage of negative misleading ads, and lack the ability to fight back. It is no longer a level playing field where the best man emerges victorious.

I do not feel confident that I know anything about your character, or the policies you will follow if you are elected president. I may very well be representative of a majority of the American people, you know "you people." I ask you, please drop out of the presidential race for the good of the party, so we can nominate another candidate. Although I supported you in the primaries, I can not vote for you again.
Charles Gallo

stoneJuly 24th, 2012 at 5:27 pm

Replace all current taxes with a flat tax on all gross assets. That would reverse financialization and allow the real economy to prosper again. Financialization breeds on credit fueled asset bubbles. Credit fueled asset bubbles happen because asset values are currently disconnected from paying for the civilization that protects them. Asset bubbles are a sink and diversion that bleeds the real economy.

purplefrogJuly 24th, 2012 at 5:34 pm

Every con man knows that the mark's greed is the basis of the successful con.

Hey, don't play the game. No players = no con.

RussJuly 24th, 2012 at 6:32 pm

Randy … honest and to the point. Hopefully, if this could go viral, the truth will set everyone free. But we may see an economic collapse in the interim; the question is whether we can deal with it.

HannibalJuly 24th, 2012 at 8:11 pm

"…the 99% occupy, shut down, and obliterate Wall Street. Honestly, I have no idea how that can happen. I am waiting for suggestions."

Dont consume, dont bank, dont borrow, dont swipe, pay with cash only.
See you got to "starve the beast",… its the only way.

ehswanJuly 24th, 2012 at 8:53 pm

How to shut down the vampire squids? Simple. Identify them. Hint, they are overwhelmingly comprised of a small ethnic minority who have handled money for centuries.

LRWrayJuly 24th, 2012 at 11:33 pm

Oh, Olly: Economonitor wanted a pix of me for the masthead and I skimmed thru my computer and found that one from Guilin. China. I had a course on the Cultural Revolution in 1971 by a "China Watcher"–a profession that died out when Nixon went to China. I guarantee you this was no pinko commie trying to indoctrinate us. But, if anyone doubts that China made a "great leap forward", they are living in a barrell in the deepest cave on earth. Took longer than Mao might have expected–but, hey, patience paid off. I really could care less what a paid troll like AAA (aka Phil Fido) thinks of the title.

Joe FirestoneJuly 24th, 2012 at 11:37 pm

The people who concluded those mortgages have paid a steep price, so we can blame them or not, but their foolishness has been rewarded with financial loss. On the other hand, we've neither blamed the bankers nor made them pay any cost for their crimes. So let's start by blaming, move through the criminal justice process, and also re-possess their ill-gotten gains. That would be justice, and that's what we most need now.

LRWrayJuly 24th, 2012 at 11:41 pm

Marc: not sure what your beef is. Smearing Theo? Not moi! I gave him credit. Which monstrous system did America create? Religion? Well, true, many of the world's religions came from America, especially the Northeast or from the writings of America's science fiction writers. I used the correct term for special undergarments–but few readers would have known it so I also included the common term now the subject of discussion in the US since there's a fair chance our next president will be wearing them. Are American's ugly? Well, perhaps some, but I've seen some pretty ugly people abroad, too. You have something against ugly?

Joe FirestoneJuly 24th, 2012 at 11:41 pm

It will. But we've re-dressed the balance before and we can do it again. I don't expect the oligarchs to agree to a more equitable distribution of wealth. I expect them to obey laws we pass to redistribute that wealth.

LRWrayJuly 24th, 2012 at 11:45 pm

Ug: Either stupid or ignorant comment. Approx 70% of the trashy mortgages at the peak were REFINANCING homes. Loan pushers targeted minorities, elderly womena, and so on to put them into mortgages they could not afford.

Jon RuddJuly 25th, 2012 at 3:34 am

If by "feudalism" we mean "extractive oligarchy" then the term fits. Late Republican Rome was characterized by a kind of agrarian crony capitalism wherein members of the senatorial oligarchy gradually annexed for their own profit what were supposed to be public lands. The very same oligarchy was also running the imperialist foreign policy that generated the slave labor needed to work those public lands. The immediate losers were the common people of Rome and of Rome's Italian allies. The ultimate loser was, of course, the senatorial oligarchy itself. Unable either to tolerate significant reforms–see the fate of the Gracchi brothers–or to manage the consequences of its policies, the elite finally lost power to the military strongmen. End of Republic, but by the time we get to Caesar and Pompey the Roman Republic is basically finished anyway.

ClothcapJuly 25th, 2012 at 8:58 am

The reintroduction of supported currencies would end all the scams, debt currency ponzi, fractional reserve banking, derivatives and control of economies by national debt driven by deficit spending. The last was the principal reason for the ending of the gold standard, giving gov't a virtual credit card with no limit. More effective in destroying sovereignty than giving control of the world's nuclear weapons to a four year old.

ClothcapJuly 25th, 2012 at 9:11 am

TMLutas, the tax payer has been straight jacketed into the role of insurer. Your idea of a private insurer would merely mean introducing another middleman between banks and the tax payer.
I still prefer heads on pikes. The institutions knew what they were doing, at tax payer expense.

FinallySomeoneGetsItJuly 25th, 2012 at 10:48 am

For anyone wanting to know EXACTLY what is going on in the world, this article is a must-read. Take 10 minutes of your time and READ it, don't scan it.

It contains a lot of technical details on exactly how this was pulled off. It is the most spot-on detailed article I've read in a long time.

Vassilis SerafimakisJuly 25th, 2012 at 12:02 pm

One of the most revealing and honest pieces of reporting I ever read about the current crisis.

It's reporting and not an editorial or an "article" because the Reality is in every sentence of it.

bangerJuly 25th, 2012 at 1:07 pm

We do need to look in the mirror. The issue is a systemic one and it has relatively little to do with greed. Greed is pretty constant as a motivator–it's more important today because reputation and status depends mainly on wealth rather than moral reputation and all the traditional virtues Aristotle might have recognized. The system is constructed to reward what once was considered criminality and that standard is now normal and required in the financial sector. That you don't realize this and talk about "responsibility" makes little sense–clearly you aren't a systems thinker. Without understanding systems theory we cannot understand our current reality.

PZJuly 25th, 2012 at 2:46 pm

You can create financial instruments just like wall street does. Write down a contract that says whoever legally posesses this document is entitled to receive specified amount of money from you on demand. This process creates new financial asset and purchasing power, but it is still not counterfeiting. It's building leverage.

TdVJuly 25th, 2012 at 4:44 pm

Judging by the number of right wing troll posts, I suspect this article has struck a nerve. And to said right wing trolls, have fun defending the bankster mafia. You deserve the world they're creating for you.

Lou54July 25th, 2012 at 8:34 pm

It seems you're missing the main point of FRAUD, even LEGAL FRAUD.

Using a moral argument to DO NOTHING is immoral which we all are beyond your "kinder, gentler" supposedly universal greed if we stay quiet and say nothing.

Call foreclosures UNLAWFUL when they are. Identify the FRAUD when they claim mistakes on the basis of our Constitution and human rights which trumps any law or court and that will be a start.

RonJuly 25th, 2012 at 9:31 pm

…………..now, it's all academic. With Five carrier groups poised to launch against Iran, the on going war is goes nuclear. I only hope those russian MIRV's takeout Wall Street and DC
first and turn these ivy-league, overeducated sociopaths into french ( freedom ? ) fries. As
Corporal Hudson would say, " Keeping up on current events, we just had our asses kicked."
Good Luck !

VanJuly 26th, 2012 at 12:13 am

At what point in history has the majority of humanity operated with integrity? What human endeavor is without corruption? Medicine? Pharmaceuticals? The Food Industry? Lots of corruption.

Everyone should live in a foreign country for awhile, say Russia, or Argentina, or China, Brazil, India to really know MASSIVE corruption.

The US Financial system is the envy of the world. It just needs cleaning up. Nowhere else in the world does the financial system work so well as in the USA.

Stop fighting everyone and just fix the problem. All the wasted energy in anger is not solving anything.

How do you do this?

Nothing can be accomplished in the Financial system until the Political system is fixed. So, fix it, yáll.

The problem with Democracy is THE VOTERS. Think about it…

So stop being stupid and face the real problems. If you don’t fix the political system the USA is going to be like Brazil, Argentina, Russia, or India where corruption IS THE NORM.

EEBJuly 26th, 2012 at 7:48 am

Well, FYI, back in the Biblical days, they had something called "Jubilee" years, in which, once every 50 years, all debts were wiped out and everybody started with a clean slate. That's why "God would never have allowed the problem to grow". Really, it's that simple, provided that the rentiers are not allowed to have any power. You just declare a universal 100% haircut, by fiat, once every 50 years. It worked for the ancient Israelites!!!

CybrWeezJuly 26th, 2012 at 11:51 am

No, there is one institution to blame above business schools, government. The biggest institution of all.

CybrWeezJuly 26th, 2012 at 11:56 am

Yep. The biggest, and most corrupt, institution is our govt. Yet, many want to increase its size and power. And who puts people in charge in our govt? Voters. Who buys the mortgages that were doomed to fail? Voters.

estiengorcockJuly 26th, 2012 at 12:18 pm

"As Sherrill said, without regulation, capitalism is thievery. We stopped regulating the financial system, so thieves took over." This kind of statement borders on the insane. Who in their right mind could believe this? The financial sector is not only super regulated. It consists of cartels of state-private interests organized on a Fascist model. Central banks exist to finance state deficits for the prosecution of war and welfare wealth transfer policy. To equate that with capitalism simply because the crooks in charge have subverted the system is absurd.

quinnroninJuly 26th, 2012 at 2:27 pm

Professor Wray does have quite a bit of emotion behind his remarks, but it doesn't invalidate what he's saying. If you don't agree, why don't you give a reasonable explanation with some kind of evidence to back it up? Ridiculing him makes you look ridiculous instead of the reverse. _BTW running a hedge fund does not necessarily make someone either immoral or deceptive. The Mad Hedge Fund Trader, a long time hedge fund manager and the founder of the first global hedge fund is a man of high principle, insight and integrity, as well as a philanthropist. _Try looking at the facts. It only hurts a little at first!

quinnroninJuly 26th, 2012 at 2:38 pm

You've been watching too much Fox News, haven't you? It's really sad the way Rupert Murdoch can brainwash the gullible into believing that the banksters are not responsible for what's happening! Amazing!

I could give you a long list of reasons why what you're saying is total nonsense, but obviously you've got your mind made up and you wouldn't know the truth if it bit you in the but! ;^D

quinnroninJuly 26th, 2012 at 2:43 pm

Angry or not, if you look past the emotion, it has some good points that the emotion does not invalidate. Reacting to the anger is no different than being angry. The truth is lost in the emotion and judgmental attitude either way.

quinnroninJuly 26th, 2012 at 2:49 pm

Latifundisation? Did you swallow the dictionary by any chance? Did it hurt?
Big words can disguise categorical thinking.

quinnroninJuly 26th, 2012 at 2:53 pm

At last! Someone who knows what the heck they're talking about. Tell me Kent, how is this mess ever going to be straightened out when people cannot even recognize the bald-faced truth? Misperception rules the day!
I've been a prop trader with one of the biggest firms clearing through Goldman and I hardily agree with you! Amen, brother!

Joseph WardJuly 27th, 2012 at 3:45 pm

Restore feudalism?

How in the world is that the default? Who would be King? THERE IS NO DEFAULT!

This is awful, awful, dreadful analysis.

CoreyGTexasJuly 27th, 2012 at 7:28 pm

This is all starting to leak out to the main stream media… finally. We just need to KEEP THE HEAT on them. We will soon be posting new petition and email campaign info as well as protest ideas. We just need more people following this group and we can use resources from the Tea Party, Occupy and other groups. THEY win as long as they can keep us arguing with each other.
WE need to come together with people we wouldn't normally work with to bring these criminals DOWN! Spread the word, others have carried the load of exposing this activity. Now we the people NEED to come out and make it a major issue in the news and in this political cycle. http://www.facebook.com/BankAndPoliticianFinancialCorrup...

Jack MurphyJuly 29th, 2012 at 3:10 am

The hostility towards homeowners is an indication of how seriously controlled people are. The Banks keenly understand that controlling the message purveyed in the media is key to allowing them to get away with such a horrendous situation. If one looks at the Washington Post, a major story was devoted to a homeowner, that a Bank (which was not even mentioned) allowed to “purchase” on an enormous designed to fail loan. Contrary to one previous comment, both sides shouldn’t “lose” when it comes to buying a house, a Bank, under *regulated conditions would have an interest in making sure* the homeowner could pay the loan back. Banks didn’t care if the homeowner could pay. They handed out loans like candy and the argument from fools is still the homeowner should have known. If Bankruptcy were fair, homeowners would be able to reduce the principle on their one and only major possession. If you are rich, you can use Bankruptcy to reduce principle on your vacation home(s), private jet, cars and so on. Do we wonder why the law is written so unfairly against the individual who owns a home? Orrin Hatch and the other Banksters perhaps?
Again, Banks knew full well what they were doing to homeowners, they made money no matter what happened, with the complicity of regulators, the GSEs and the Treasury Department.

Kalim_AlakaAugust 1st, 2012 at 2:15 am

If he did swallow the dictionary, I would postulate that the pain from swallowing would be insignificant compared to the agony experienced when evacuating the same.

David T. NowakowskiAugust 8th, 2012 at 1:47 pm

Have you looked at U.S. corporate profits recently? Soaring! Unlike banks, corporations were very prudent in the years after the dot-com / TMT bubbles burst, and are doing amazingly well, clearing around $2 trillion per year, much more than the pre-crisis peak. They pay about 25% of this in taxes.
Capitalist production seems to be working just fine.

William AllenApril 1st, 2013 at 7:59 pm

I also have quite a bit of time on Wall Street, about 35 years ….and a good bit of that time in the world of derivatives and structured products. And I agree with Randy and believe this is not only a well-written article, but also that its message needs to bounced repeatedly off the thick skulls of our political and business leaders.

Most Read | Featured | Popular

Blogger Spotlight

Emre Deliveli The Kapali Carsi

Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

Economics Blog Aggregator

Our favorite economics blogs aggregated.