Trust No More

by lizard

There’s an intangible factor that plays a significant role in determining economic activity: trust.

And if there wasn’t already bundles of evidence that Big Finance is a clusterfuck of dangerously untrustworthy individuals and institutions, driven by reckless greed and enabled by complicit politicians, then the latest scandal with LIBOR should be enough to shut up even the most craven apologists for the banksters.

First, what is LIBOR?

LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London’s importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.

LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period.

While Americans celebrated our Independence, across the pond, it became just a little clearer how dependent we are on a system that’s being rigged from the very top. This from Matt Taibbi’s blog:

This Libor-manipulation story grows crazier with each passing minute. We have officially disappeared now down the rabbit-hole of the international financial oligarchy.

Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that’s sure to bring some shocking moments. But there’s already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day.

In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from “a number of senior figures within Whitehall” – that is, the British government – expressing concern about Barclays’ high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.

Back at home, our Plutocratic Pleasing President has the jobs report to weather as the nation roasts. Over at ECW, Dave Budge has his take, which is worth reading, as it doesn’t resemble a blood-in-the-water electioneering pounce for obvious political points.

Here is Dave’s brief list of factors at play for global business:

…unworkable currency and likely recession in Europe, undiscoverable economics metrics in China, and all sorts of geopolitical risks that may lead to a real shooting war in the not-to-distant future. Combined, these factors and many others make the global business climate fraught with uncertainty that makes businesses – both domestic producers and international players – hesitant to create the supply-side activity…

Dave goes on to talk about how “We are choking on a system of restrained trade everywhere we look” but there is nothing in his look at the Big Picture about the deep, undeniable corruption that has created a lot of uncertainty for everyone.

The tea party anger was initially focused on the bailout of the banks. Three years later, Occupy sprang up to point out how the biggest redistribution of wealth in US history has created a chasm between the 99% and the plutocrats. The Ron Paul insurrection (that will be quietly put to sleep by fall) continues to justifiably rage against the actions of the Federal Reserve. And, like Charles Ferguson keeps reminding us, prosecutions are, to put it nicely, sorely lacking. From the link:

According to Ferguson, there is overwhelming public evidence in (1) lawsuits, (2) depositions, (3) government investigations, and (4) whistleblowers of highly illegal conduct in the housing bubble and financial crisis. There is a staggering amount of evidence that CEOs of Wall Street firms, like Lehman Brothers, were warned that their financial controls were inadequate and their accounting was wrong, or to put in it in plain English: ‘their books were cooked’. A prime example is a memo warning to top Lehman executives by Senior Vice President Matthew Lee, “I feel it is my ethical and legal responsibility to point out to you that there are billions of dollars of unjustified assets on our balance sheet.” (To see the memo, Google: “Matthew Lee and Lehman.”) A month later Lee was dismissed from the firm and the CEO of Lehman continued to stand by the firm’s financial statements even though warned of extreme problems, inaccuracies, and overstatements, e.g., ‘Repo 105’ transactions artificially boosted the firm’s balance sheet by $50 billion! This is illegal corporate behavior of the first order, but where are the criminal charges?

J-girl points out what happens when some laws are blatantly not enforced—the illegal behavior happens in abundance.

Exactly.

Luckily, uneducated violators of firework bans aren’t in the position to blow up the global economy with their mortar shells and roman candles.

Ivy league educated titans of finance are, on the other hand, in that position, and they continue to fight any attempt, however meager, to restrain their habitual greed and chronic corruption (for a good distillation of the absurdity of Congress’ “grilling” of Jamie Dimon, Jon Stewart does it again).

Trust, some argue, is integral to economic development. I haven’t had a chance to look too closely at at this article yet, titled Social Attitudes and Economic Development: an Epidemiological Approach, but I like how it starts:

What are the fundamental causes of differences in income per capita across countries? Although there is still little consensus on the answers to this question, it is often argued that social attitudes such as trust are one of the main determinants of economic development. As stressed by Kenneth Arrow:1 “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”

The intellectual tradition stressing the importance of social attitudes dates back to at least Max Weber, and has seen many recent restatements in political science in particular, recent ones being Robert Putnam2 and Fukuyama3. In his influential book Making Democracy Work, Robert Putnam showed, for instance, how civic attitudes and trust could account for differences in the economic and government performance between northern and southern Italy. This tradition has been so influential that it has led the World Bank to put on the top of the agenda the promotion of a new kind of capital stock to trigger economic development: the social capital. Following Fukuyama, this social capital can be defined as the “set of informal values or norms shared among members of a group that permits them to cooperate with one another”. Obviously the propensity to trust each other is likely to be key for fostering such mutual cooperation and growth.

As long as justice is two-tiered, and accountability at the top non-existent, addressing the sometimes onerous regulations that hamper small business at the local level is just fiddling while the ship sinks.

What more evidence do we need that the system is rigged, and there’s virtually no political will to fix it?

I’d like to conclude this post with a ridiculous music video of the song Everything’s Ruined, by Faith No More. If you listen to the song, it fits. Stay cool Missoula!


  1. Dave Budge

    addressing the sometimes onerous regulations that hamper small business at the local level is just fiddling while the ship sinks.

    I must respectfully disagree. And I think I have history on my side to support it.

    That said, I’m on the record (several times, actually) calling for the break-up of large banks. Having spent almost all of my adult life in finance – both big and small – I can tell you that there are very few economic justifications for the amount of public risk assumed that backstops private gains. Obviously that’s a long way from what most libertarians would view as “first best option” but, then again, even strident libertarian economists, like Arnold Kling and Tyler Cowen, understand that in a pluralistic political economy often time second best is optimal in the face of the realities of public choice theory.

    But I think you (and others you’ve quoted) miss the fact that not only did fiance assume too much uncontrollable risk but they were not only not tightly regulated but were, in fact, encouraged by government to develop those overly sophisticated derivatives to control risk. The Fed, the OCC, and the EU all inside the construct of the Basal II banking accords divined a mind bogglingly arcane system of measuring risk that was ultimately unmanageable. But it’s easier to point fingers at the lack of accountability on the private side while the corporatist state actors hide under the guise of good intentions. I’m not so sure that laws were broken as much as the laws were indeterminate constructs of sentiment that were left unenforceable due to conflicting complexities in both law and regulation. And just as possible, pressing on these bankers might expose the politicians equal enabling malfeasance that hurt the system. Not a good re-election bid.

    But, all that said, the issue of trust has very little to do with our current situation for a couple of factors. First, the constraints in international finance are now mostly due to overextended sovereigns mostly in western Europe. This, too, tracks back to the Basal II accords where the ECB required NO reserves against sovereign debt. Accordingly, most large EU grew their balance sheets far beyond having any reasonable equity cushion to absorb shock. The problems of sub-prime mortgages and their associate derivatives has almost nothing to do with that current mess and, one must understand, that the size of EU debt problem makes the mortgage disaster here look like a bump in the road. On top of that, there are derivatives on those bonds that equal over 10 times the gross derivatives that are issued by all U.S. financial institutions combined. The U.S. banking system, regardless of how it has been captured by big finance, is in pretty good shape relative to Europe. But that brings us back to rules as the cause for U.S. dysfunction.

    .Let’s take community banks vis a vis large money center banks as an appropriate segway. Due to Dodd-Frank, the regulatory regime for small banks is nearly the same as it is for mega-banks. Now it’s true that small banks got caught with too much commercial real estate exposure on their balance sheets in 2008. But that isn’t unusual as it has happened from time to time in the natural swing of the business cycle. A few banks go into receivership along the way (I’m not talking about the S&L debacle, BTW, that needs it’s own discussion) but there is insurance to take them into receivership and very few depositors ever get hurt. But community banks are the life blood of small business credit and the new regulations have taken the community discretion out of community banking. Thus, credit has been highly restricted for small enterprises even though the risk associated with it has little material effect on the national balance sheet. Things used to be easier. State banking authorities had much more control of local banking but now there’s seems little rationalization at all for state oversight since all banks are tightly controlled under the FDIC.

    But more importantly, and this is where we look to history, the engine of growth in the country does not come primarily from big finance. It comes from enterprising people in small organizations that either out or seeing opportunity or necessity create businesses to serve small identified markets. There have been three huge entrepreneurial booms in the last 65 years. One after WWII, one after the Korean war, and the last in the 1980’s. In each case these booms were started in peoples homes, garages and basements. HP came out of a garage, Microsoft in a college dorm, Famous Amos in a home kitchen. The list goes on and on. The founders of both Costco and Home Depot have both recently said that today local regulatory restrictions would make it impossible to replicate today.

    Recently I have been spending some time with people at the Missoula Food co-op. I take a weekly delivery of milk for my cheese making there. It’s a good arrangement. My order enables them to get good locally produced milk since they can’t order enough by themselves for the dairy to justify a delivery without my order. But in the process it’s been interesting on how well they understand how local zoning and health regulations kill creativity and small producers. It’s a common topic as far as I can tell. Local health rules have made it impossible for them to even have fresh cooked food in their on-site commissary. And I wonder, how many people would be making artisan bread, sauces, etc. of the prospect of crossing the threshold beyond the small producer exemptions. I know I would.

    Entrepreneurs aren’t much affected by big finance. But the guy who wants to open up an auto repair shop has to consider things like the American With Disabilities Act and a someone who wants to open up a sandwich shop has to have a $10,000 exhaust hood to fry a hot dog.

    No, it’s not tinkering on the edges. It’s the heart and soul of business creation. Don’t believe me? See what it would cost you to open a food truck. I’ve done it. And the regulatory cost increased over $10,000 from 1997 to now in Missoula. For those that need to create their own jobs out of necessity that’s can be the difference between starting or not. At the margin it means everything.

    • lizard19

      I think we would agree that our economic system is not designed to benefit small businesses, no matter how much lip service the two wings of the plutocracy pay to empty rhetoric.

      but I have a hard time understanding how you can claim entrepreneurs “aren’t much affected by big finance”.

      once upon a time, it was the role of banks to provide credit to people with good business ideas, was it not? now it’s all fractional banking and ponzi-derivatives and cooked books and spineless regulators, while the Fed’s “quantitative easing” pumps the parasites with nearly 0 interest “liquidity” which the banks then make money off of.

      then you have the corporate world reporting record profits and record productivity, which they are extracting from squeezing labor and slurping up subsidies.

      I think you make great points about how some regulations stifle the development of small business. and precisely because those businesses are small, they can’t compete with the lobbying power of Big Business to install loopholes and carve out subsidies for themselves.

      even though the situation is untenable for a number of reasons, I’m afraid both parties will protect the status quo because their job security depends on it. I hope I’m wrong.

      • Dave Budge

        I think you’re looking at the wrong metrics for small business finance. You know that I think what the Fed is doing is really bailing out banks with artificial rates. They’re also bailing out Congress by making artificially cheap credit to the Treasury. The big lie is that the Fed is not monetizing the debt. Over 50% of all Treasury auctions go to big banks (AKA primary dealers) then, when those debts are barely seasoned, the Fed buys them to keep pressure on rates. This is, in essence, what the Fed call The Twist. I’m not sure if the policy is as bad as I think since there is compelling arguments both pro and con for really smart people (like Scott Sumner) for doing what’s called market monetarism. But my bias is to think it’s really just a gross tax on savers and especially retired savers.

        But credit is not restrained to small business by a lack of liquidity and the regulatory captured profits of big finance. There is plenty of excess reserves available to community banks and, even though the largest 5 banks now control 70% of deposits, small banks – the historical source for small business – have plenty of deposits to lend against. The thing to look at is the rates on “brokered deposits” which indicates that small banks need deposits to meet regulatory guidelines. That market is almost dead which shows that community banks have adequate core deposits (as they are known in the industry.)

        Where big finance has done a huge disservice to small business is in the regulatory capture of bank regulators. This gets heavily into the weeds and it’s hard to explain but the short story is that regulators, with the lobbying pressure from big finance, have now required small banks to use the same credit metrics for lending to small businesses as to Fortune 500 companies. It’s impossible for small business to have the same quality of financial information as large companies and most small businesses only hire an accountant to do taxes. Under new regs there is little allowance for community banks to use non-financial measures – such as the knowledge and character of the borrow – to make credit judgements. Additionally, since the new regs require a higher certainty in the financial situation of small businesses loans made to borrowers that do not provide audited or reviewed financial statements have a lower credit ranking and thereby require higher loan loss reserves per the rules. Ergo, it’s the new lending standards and not system liquidity that cause the lack of small business lending.

        Now, perhaps I wrongly led you to believe that big finance doesn’t have an impact on entrepreneurialism. It does for sure, but not by crooked or unethical manipulations of rates and returns but by bullying regulators to stack the deck in their favor by making it harder for small banks to serve small borrowers.

        That doesn’t excuse the bad behavior of big finance. Far from it. To me it bolster the case to break-up big banks or, at a minimum, progressively increase their capital requirements with size. But I thing that both Congress and the Administration have a vested interest in keeping the big banks big for both the enabling of government to borrow and campaign support that regulatory favors do.

        • Adam

          That was the most articulate and concise explanation I’ve read about the current financial environment. I’ve tried explaining that to friends and family and you’ve made it much easier. Thanks Dave.

        • lizard19

          thanks for taking the time to make these comments, Dave. now let’s go break up the banks ;)

  2. We have things backwards. A nation, a state, a town’s economies and their markets should serve the social needs of its people and the planet inhabit. Our first obligations are to the care of humans and the planet; food, shelter, clothing, story telling come first. The making of extra stuff for humans should be secondary. There is no sense in over production. And speculation and gambling serve no societal need and should, at the very least, be discouraged.

    How? Well not by giving bankers presidential cuff links and not by fawning over them and saying “You’re huge”.

    Yeh, we are supposed to be a nation of laws. Laws are the handshakes that we make in order to govern ourselves. These crooks (“Snakes in Suits”) stole with the help of government officials upwards of $350 Trillion (NPR) to $800 Trillion (Taibbi). That’s trillion. There are 7 billion people in the world. Do the math. There’s plenty of “money”. Yes, it needs better distribution. One way to do that is to provide a Basic Income Guarantee (BIG). Those who want to work more can then do so. Those who don’t mind tedious work should do it and be rewarded with more leisure time. Those who want to paint or sing or dance should have space to do it. This isn’t Utopian. There are places that have always existed like it. There are other ways of organizing other than by hierarchy or around markets. Thatcher was wrong. There is an alternative.

  3. Turner

    I hate to sound even more pessimistic than the other posters, but I don’t see any way to resist the powerful forces that seem to run everything.

    If you start talking about the obvious negatives of unregulated capitalism, you’re called a socialist or a communist. There’s still so much cold war thinking in our country that anything but a full-throated commitment to Randian capitalism is unacceptable to most people.

    Maybe we just have to wait for the whole thing to come tumbling down. But what then? Gated and well-guarded communities for the rich and massive starvation, crime, and squalor for the rest of us?

    • Dave Budge

      I think there’s a lot between the status quo and anarcho-capitalism. I think you despair far too much. How about we start by thinking about some concept of progressive regulation where the bigger an enterprise the more appropriate the regulation? The binary discussion of good/bad doesn’t help and changes no minds. But, like I’ve been trying to impress, there are a lot of things we can work on at a local level to make it easier for people to be self-employed or, at least, add some revenue to their lives doing things they like. Let’s think “progressive regulation.”

      I think you’d find support among most libertarians – both left and right.

      • Turner

        I think you’re right about the futility of good-bad thinking, at least when if comes to economic issues. Actually, I’m not fully despairing (though I sounded like it above). I suspect that if things get too bad, people will stop putting up with obvious, widespread injustice.

        I have no idea what this not-putting-up-with-things will look like. I hope it won’t end in bloodshed.

        And, yes, I’m aware of how superficial this sounds.

      • I like this idea. Less regulations at the local level. Here my husband still runs his canal association on handshakes and good sense. Other associations need a ditch rider. Most disagreements to not involve lawyers. But then my husband is a man of his word. You can take it to the bank. That’s how we started this conversation. We have weasels at the top of every institution from banks to governments to churches to oil companies. Weasels (sorry to the animal weasels for use of word). Can’t take their word. So they need “the force of coercive law”.

  4. Big Johansson

    Cut the BS guys. KISS-Kept it simple. Gold standard/simplified tax code/reduced regulation/reduced bureaucracy/freemarkets=wealth creation.

    What Steve Forbes said. http://www.zerohedge.com/news/steve-forbes-how-bring-back-america

    • Big Johansson

      And Levin agrees.

    • Dave Budge

      Great idea Swede, but study a little public choice theory and tell me how realistic that is. Unless you want to find the Island called Libertopia and get it populated with like minded individuals. Go there and build a hut, put the wild boar on the fire then send for me.
      I’ll show right up.

      In the mean time we have to deal with the reality of a pluralistic society. Which means we just might have to push for the second best option. And if we hope to even get there we need to convince people that government isn’t always the best solution.

      • Big Johansson

        “public choice” like where’s my free stuff?

        Have you read Rodgers lately?

        http://www.moneynews.com/Headline/JimRogers-US-Default-One/2011/07/12/id/403311

        We’re changing regardless of public opinion.

    • I just saw Steve Forbes on Chris Hayes’ “Up” on MSNBC. The sad thing is that both the conservative Forbes and the liberal Hayes agreed that we have to increase revenue. They differ on using taxes for that purpose. But should we really be increasing anything? Growth is not always good-like cancer. Small farms seem like a much better idea than big industrial agri-business. Governing more locally makes sense to me.

      The U.S. is too big. I started a conversation in, of all places, a sewing store on main street in Bozeman with some Australians, the woman who worked there, and some guy who walked in. We talked about what if we broke up the U.S., Canada, and Mexico into regions. The guy had read a series of books about that. The Australians, by the way, were on a 6 week vacation to discover America and Americans. They get 4 paid weeks off. Imagine if all Americans would travel all over the world. Maybe we would come up with other ideas than this crazy neo-liberal predatory capitalist system.

      It was fun. And the woman who worked there was a conservative. This is all I can do right now. Start conversations about another way of organizing ourselves built around the idea of devolution or more local control.
      That’s why I’m pissed at Bullock for not winning the Supreme Court case by using the 11th Amendment argument. We need to retain as much power locally as possible.

      Also it might have been a better idea to stick with the original “Articles of Confederation” than the flawed constitution that we have that gives the 1% and their lackeys all the power. Read Jerry Fresia “Toward an American Revolution: Exposing the Constitution and Other Illusions.”




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