Good Layman's guide to the financial crisis

Bourbon,

What do you think about that issue? My understanding is that the SEC doesn't pay enough to compete. But doing time at the SEC is a good stepping stone to the regulated companies because the regulated entities like having someone familiar with decision making within the regulatory agency or (depending on how cynical you are) they like having someone who can network with the regulatory agency to influence decisions. The regulator worker bees thus like to start out at the lower-paying SEC with the intent of moving on to the regulated entities. Thus, the revolving-door.

The problem from my fairly uninformed perspective is that if the SEC et al are going to compete with the private sector then the expenses of the SEC et al are going to balloon quickly and the pendulum is going to swing too far away from regulatory coziness/capture toward regulated entities and regulatory agencies wholly unfamiliar with one another.

What do you think of the idea that has been floated of - to put it simplistically - permitting people to trade on insider information? Rather than continuing with this regulatory framework that seeks to root out insiders (often unsuccessfully), why not amend the securities laws/rules to exploit the new speed with which information flows by permitting insider trading and let the more perfect information be priced into assets? It seems like it would help to reign in costs and free up cash to pay more competitive wages to the fewer regulators who would remain.

Thoughts?

Quote:

---

Originally Posted by Schmedlap

or (depending on how cynical you are) they like having someone who can network with the regulatory agency to influence decisions.

---

Not cynical enough. It has gotten so bad that some of these officials are abdicating their duties during their time in government service for the prospect of a fat payday down the road. The old play-along to get-along. The SEC just recently settled an embarrassing case in which SEC officials engaged in such disgraceful activity.

Senator Grassley knows all about this stuff, he oversaw the joint staff report by the Senate Finance and Judiciary Committees into the Pequot matter (PDF: "The Firing of an SEC Attorney and the Investigation of Pequot Capital Management", caution: 24mb file). My guess, as this latest incident suggests, is that these are not isolated incidents.

I will get back to your broader question. I apologize for being so literal about this matter, but it just makes my blood boil.

Latest from James Galbraith on President Obama's Plan B for the economy.



http://growth.newamerica.net/publica...ts_on_a_plan_b

Quote:

---

Originally Posted by selil

One quibble. States by law (1 exception) are not allowed to run a deficit. States are required to balance their budgets and even scope spending quarterly based on realized tax revenues. There is also a difference between a deficit and debt. A deficit is when you spend more money than you take in. Debt is when you owe on some asset. Consumer debt isn't necessarily bad some forms are actually good (when used for realized goods or balanced by real property value). A deficit is usually a political football depending on where you allegiances lie. A deficit can be a moral issue, or an economics issue with flavors of each blending between the two.

---

Well, I studied economics with emphasis on national economics for five years, so I'm well aware of the difference between deficit and debt.
To point at debt equals pointing at a history of deficits.

Consumer debt is not good - it's not good at all at the macroeconomic level.
For every loaned buck spent by a consumer another consumer spends one buck less - either on consumption or on investment.

I know and understand that it's part of U.S. mythology that consumer spending drives the economy, but that's really not science. The economy grows because of investments larger than deprecations, workforce growth and technological progress.
More consumption can ceteris paribus at most improve production capacity usage (%) - a short-term influence.

The U.S. does not need a return to wild consumption; it needs a return to the times when it saved enough to at least sustain its industrial output without a trade balance deficit. Consumption could easily drop by a fourth at the very same time of industrial recovery.


Guess how the Germans developed their industry out of the late 40's bottom - I can tell you that story is not about wild consumption. It's about reckless austereness, savings and investments till the national capital stock closed in with the right capital stock for the nation's potential (population, skills, technology).

Quote:

---

Originally Posted by Fuchs

The U.S. does not need a return to wild consumption; it needs a return to the times when it saved enough to at least sustain its industrial output without a trade balance deficit. Consumption could easily drop by a fourth at the very same time of industrial recovery.

---

How can you have an industrial recovery while consumption falls? What do you propose to do with that increasing industrial output?

You can't look realistically at the US trade deficit without looking at artificially inflated value of the dollar that prevailed during the half century or so after WW2. These distortions tend to have an impact.

In any event it is easy to issue declarations about what the US needs or does not need to do. Developing policies to move a nation in such a direction is a good deal more difficult. Economies don't move by executive fiat.

Link to rebuilding Baltimore and our country in general from the Real News. Has some good backround music to:)

http://www.youtube.com/watch?v=GR7EdmQvMFY

Quote:

---

Originally Posted by Dayuhan

How can you have an industrial recovery while consumption falls? What do you propose to do with that increasing industrial output?

You can't look realistically at the US trade deficit without looking at artificially inflated value of the dollar that prevailed during the half century or so after WW2. These distortions tend to have an impact.

In any event it is easy to issue declarations about what the US needs or does not need to do. Developing policies to move a nation in such a direction is a good deal more difficult. Economies don't move by executive fiat.

---

Investment in industrial capital stock. Paying back debt with trade balance deficit.

The deficit stands, excuses don't help. A weaker dollar would make imports more expensive (thus less) and exports cheaper (thus more).
The end effect is a move towards balance and sustainability, but it also means LESS CONSUMPTION (less goods flow in, more goods leave = less to be consumed inside). Again, no cure for the illness can be built primarily on higher domestic consumption.


The problem is huge and structural. It would probably take two decades of determined policy to defeat the problem.
A necessary ingredient of any such policy is to destroy the myths that contributed to the problem; such as the "more consumption solves our economic problems" nonsense.
Equally important is to understand the role of actual investment (not what the business elite thinks is investment; financial deals, mergers & acquisitions...). You need a higher savings rate (=less consumption) to afford more investment in additional or improved industrial capacity (and infrastructure). That will lead to the production capacity that's necessary to actually justify and sustain the actual goods consumption.

A proper understanding of the importance of macroeconomic investment includes a proper understanding of the role of for example the military expenditures as unproductive state consumption. The large military doesn't help the economy; it bleeds it dry and corrupts some industries. Have a look at the extremely crappy shipyard sector. It's a joke.

The same applies to the cancerous financial sector, the overly expensive intelligence community and many, many other significant distractions from industrial performance.


Modern Western societies are rip-off societies. Groups attempt to rip off all other groups, some succeed spectacularly and others don't. The rich people and the financial sector as well as certain lobby groups (such as farmers) tend to do spectacularly well.

This ripping off is a deviation from an optimal, functioning society. It pushes our societies into unsustainability (erodes the middle class and industry) and needs to be countered.
The U.S. and UK were especially lax on the financial sector and cultivated it as a giant leech instead, misunderstanding its size for a sign of prosperity.

Germany is different; our financial industry leadership is by comparison not very powerful despite the questionable behaviour of the current government with Deutsche Bank CEO Ackermann.
Our industry - especially the middle-sized companies (SME) - is very influential, and the share of industry at the GDP is by half greater than in the U.S.. The result is a huge trade balance surplus instead of deficit (this imbalance was roughly doubled by the Euro currency which is undervalued for us).

Note: both German and Japanese industrial models are entirely based on the existence of trade surpluses with the rest of the world - they depend on our consumption to drive their own prosperity. A German preaching the moral deficit of overconsumption to the American is a bit like a drug dealer preaching to the addict about the moral efficacy of just saying no. Martin Wolf has been on fire about this for awhile - sorry Fuchs, but German sanctimony on this point is a bit rich.

Quote:

---

Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too.

---

Quote:

---

Originally Posted by tequila

Note: both German and Japanese industrial models are entirely based on the existence of trade surpluses with the rest of the world - they depend on our consumption to drive their own prosperity. A German preaching the moral deficit of overconsumption to the American is a bit like a drug dealer preaching to the addict about the moral efficacy of just saying no. Martin Wolf has been on fire about this for awhile - sorry Fuchs, but German sanctimony on this point is a bit rich.

---

Yep, I would add China to. It's called Mercantilism and is the root cause of all International trade problems.

You're patently wrong about German exports depending on U.S. consumption because said German-U.S. exports are too small.

On the other hand; sure, a large trade balance surplus is just as stupid (albeit not as dangerous for yourself) as a large trade balance deficit. The German public needs to get rid of a package of its own myths and legacies as well. These necessities are very different than the U.S. necessities, though.

Now let's think for a while why some produce surpluses and others produce deficits. The problem is called competitiveness.
Exchange rates are only a part of this competitiveness. Germany did not cheer the "post-industrial services economy" for a generation. It still cheers its SMEs and their competitiveness. In fact, we underwent a series of painful industrial competitiveness-increasing reforms while we produced major trade balance surpluses. Our education system is trimmed for a huge output of skilled industrial labour and university graduate engineers.
We aren't on a shopping spree, but on a savings & industrial production fixation.

In the end, the reduction of imbalances in world trade will be painful for countries like U.S., UK, Greece, Italy and look very much like a phase of great wealth to countries like Germany, Japan, PR China (because balancing a trade balance surplus means to increase domestic consumption).


You had your consumption party, it's over. The U.S. may pretend that a return to its old ways is possible, but that will only provoke the inevitable next and extremely painful crisis that finally dispels the deficit & consumption myth because it will wreck the remaining U.S. industry beyond denial.


The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008 (and this counts the service balance surplus as "goods produced" to be fair).
The monthly trade balance deficit was crunched to half in the crisis and is already recovering almost to the pre-crisis level.

Herr Fuchs…

I asked:

Quote:

---

How can you have an industrial recovery while consumption falls? What do you propose to do with that increasing industrial output?

---

And you replied:

Quote:

---

Originally Posted by Fuchs

Investment in industrial capital stock. Paying back debt with trade balance deficit.

---

I think this reveals a certain lack of comprehension about how business – not economics, but business – functions. Investment in capital stock doesn’t happen because some beady-eyed economic policy gnome decides that it ought to happen. It doesn’t happen because a government decides that investment in capital stock is desirable. It doesn’t happen because society decides to applaud investment in capital stock. It happens because individuals or companies with the capacity to invest determine that an opportunity for profitable investment exists. Decreasing consumption does not present an opportunity for profitable investment, because you don’t profit from your investment unless somebody somewhere buys the products or services that you invest in producing.

There is no choice between consumption and production because you can’t have one without the other. If production exceeds consumption, inventories rise. When inventories rise to a certain point, factory orders cease and production stops. Factories don’t produce goods because society esteems production, they produce goods because they have orders for goods… from consumers, or from people who believe they can sell the goods to consumers.

Quote:

---

Originally Posted by Fuchs

Our industry - especially the middle-sized companies (SME) - is very influential, and the share of industry at the GDP is by half greater than in the U.S.. The result is a huge trade balance surplus instead of deficit (this imbalance was roughly doubled by the Euro currency which is undervalued for us).

---

Confusion of cause and effect. German industry isn’t strong because SMEs are influential, SMEs are influential because German industry is strong. As you point out, this strength is supported by a favorable currency environment. The US economy didn’t assume its current shape because of policy decisions, it assumed it because an artificially overvalued currency created a long term disincentive to domestic production of goods.

Quote:

---

Originally Posted by Fuchs

You're patently wrong about German exports depending on U.S. consumption because said German-U.S. exports are too small.

---

Exports depend on foreign consumption. Part of this is the US, part is other places… but if German consumption is constant, German production cannot increase unless overall consumption increases or German goods take market share from other producers in other markets (meaning production somewhere else has to be reduced).

Quote:

---

Originally Posted by Fuchs

Exchange rates are only a part of this competitiveness. Germany did not cheer the "post-industrial services economy" for a generation. It still cheers its SMEs and their competitiveness. In fact, we underwent a series of painful industrial competitiveness-increasing reforms while we produced major trade balance surpluses. Our education system is trimmed for a huge output of skilled industrial labour and university graduate engineers.

---

Again, you confuse causes and effects. People don’t invest because they want to be cheered, they invest to make money. Societies will cheer whatever gets results, which is conditioned by the macroeconomic incentive environment. If your currency exchange rate favors export production, export production will succeed and people will cheer it. If your exchange rate environment penalizes exports and subsidizes imports, domestic production will falter, it will not attract investment, and nobody will cheer.

The problem for the US has been that because the dollar is a global currency, both produced and consumed outside the influence of US policy, the ability of policy to influence monetary factors is severely constrained.

I think you drastically overestimate the ability of policy to control economic factors, and the ability of government in a democratic society to develop policies that may not be found congenial by the voting public. It’s terribly easy to make pompous declarations about what the Americans or Germans or Chinese or anyone else should or must do. Influencing them to do it is rather more complicated.

Quote:

---

Originally Posted by Dayuhan

Herr Fuchs…

I asked:



And you replied:



I think this reveals a certain lack of comprehension about how business – not economics, but business – functions. Investment in capital stock doesn’t happen because some beady-eyed economic policy gnome decides that it ought to happen. It doesn’t happen because a government decides that investment in capital stock is desirable. It doesn’t happen because society decides to applaud investment in capital stock. It happens because individuals or companies with the capacity to invest determine that an opportunity for profitable investment exists. Decreasing consumption does not present an opportunity for profitable investment, because you don’t profit from your investment unless somebody somewhere buys the products or services that you invest in producing.

Answer I

There is no choice between consumption and production because you can’t have one without the other. If production exceeds consumption, inventories rise. When inventories rise to a certain point, factory orders cease and production stops. Factories don’t produce goods because society esteems production, they produce goods because they have orders for goods… from consumers, or from people who believe they can sell the goods to consumers.

Answer II

Confusion of cause and effect. German industry isn’t strong because SMEs are influential, SMEs are influential because German industry is strong. As you point out, this strength is supported by a favorable currency environment. The US economy didn’t assume its current shape because of policy decisions, it assumed it because an artificially overvalued currency created a long term disincentive to domestic production of goods.

Answer III

Exports depend on foreign consumption. Part of this is the US, part is other places… but if German consumption is constant, German production cannot increase unless overall consumption increases or German goods take market share from other producers in other markets (meaning production somewhere else has to be reduced).

Answer IV

Again, you confuse causes and effects. People don’t invest because they want to be cheered, they invest to make money. Societies will cheer whatever gets results, which is conditioned by the macroeconomic incentive environment.

Answer V

If your currency exchange rate favors export production, export production will succeed and people will cheer it. If your exchange rate environment penalizes exports and subsidizes imports, domestic production will falter, it will not attract investment, and nobody will cheer.

The problem for the US has been that because the dollar is a global currency, both produced and consumed outside the influence of US policy, the ability of policy to influence monetary factors is severely constrained.

Answer VI

I think you drastically overestimate the ability of policy to control economic factors, and the ability of government in a democratic society to develop policies that may not be found congenial by the voting public. It’s terribly easy to make pompous declarations about what the Americans or Germans or Chinese or anyone else should or must do. Influencing them to do it is rather more complicated.

Answer VII

---

Answer I:
I don't misunderstand anything here. You think of a closed economy, I think of an open economy. The closed economy is the model for beginners.

The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption without even getting rid of its trade balance deficit.

The "consumption drives the economy" myth is extremely powerful, especially in combination with cognitive dissonance. People can be exposed to the fact that the U.S. industry has gone downhill for three decades and still believe in U.S. ways of developing the industry. Amazing.


Answer II:

You completely ignore investment and export. Production output moves on hold, into consumption, into investment or into export.

You forgot half of the channels, and the result is no understanding a tall.

Answer III:

You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.
I as a German economist are well-entitled to claim to know better about the importance of the German SMEs. Most research about them was never published in another language than German. These either very old family businesses or 1950's origin companies are way more efficient and at the same time much more long-term oriented than the big corporations. They are superior and the backbone of the German industry. We didn't allow them to be ruined by larger corporations or banks.

Answer IV:

Now you're looking too much on the national level. Export is also a business thing, and individual businesses can very well gain additional market shares and turnover on markets with "constant" consumption.
Your point is therefore completely wrong.

Answer V:

"People" rarely invest at all. Companies do most investments. "People" consume and save.

And "people" don't just save because they want to make money - that's just one explanation. Much is being saved as a precaution against risks, much is being saved for buying a house, life insurances, buying a car, pensions and in some countries even things such as being able to afford university for children.

Answer VI:

You do again use exchange rates as a simple explanation / excuse. It's not the only problem.

You're also wrong about the "attract investment" thing. For one, many if not most direct investments are for marketing purposes. Trade balance deficit countries therefore experience much foreign investment. The U.S. does experience much foreign investment. The problem is that the savings rate of the U.S. is close to zero and therefore the U.S. itself does not contribute to substantial domestic net investment.

Answer VII:

Competent politicians with guts can influence the economy very much. Disunity of top politicians can lead to political impotence, but the state itself is extremely powerful. It's the ultimate power in regard to the economy - the politicians merely need to decide to use that power. Those politicians who claim that the state cannot set the direction for the economy are incompetent or liars or both.
The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual.
There are thousands of levers to be used, and new instruments can be introduced. The laughable trajectory and result of the health care debate shows the real problem, and probably explains why you don't believe that policy can change much: The U.S. political elite and the political system is dysfunctional.

The same is true in Greece, Italy, Iceland, Poland and several Eastern European states.
The German political elite is dysfunctional as well, but only so if you have above average expectations.

Quote:

---

Originally Posted by Fuchs

The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption

---

This is really an extraordinarily bizarre statement. How is the US supposed to “easily” have four huge growth years with frozen domestic consumption? Where are all the products of this industrial production supposed to go?

Of course I know about open systems, everyone does. I also know, as does anyone paying attention, that in this case it doesn’t make any difference at all. There are only three things that can happen to the goods you propose to produce. Either they are sold domestically, or they aren’t sold at all, or they are exported.

If we assume frozen domestic consumption, the only way increased domestic output will be sold domestically is to take market share from other locally produced goods or to take market share from imported goods. The latter is an attractive option on paper, but barring self-destructive protectionism it isn’t likely to happen in the real world, unless the US suddenly discovers some miraculous and hitherto unknown competitive advantage.

Not selling product isn’t an option: the factory won’t have revenue and will be unable to cover its costs.

But of course it’s an open system, and we can export… if you’re an ivory-tower economist with no connection to real world constraints. Realistically, who is going to buy the stuff? For the US to export its way into “four huge growth years with frozen domestic consumption” there would have to be either an extraordinary increase in global consumption or US goods will have to seize market share from somebody else’s goods. Again, this would require US goods to US to suddenly discover some miraculous and hitherto unknown competitive advantage.

The export “solution” doesn’t exist, outside the realm of theory. Individual businesses will be able to find or create niches and increase market share. Other individual businesses will lose. On a larger scale, driving up US exports to the level you’re discussing is simply not going to happen. If US goods were export-competitive this situation wouldn’t exist in the first place. Classic example of the old economist joke… “assume a can opener”. You might get a competitive US export economy if you could drop the dollar another 30% and wait a couple of decades for previous distortion to unwind… but the US doesn’t even have an effective way to control the value of the dollar, which has become a global currency and is not fully responsive to US policy.

At the end of the day you can talk all you want about investing in capital plant and boosting industrial output, but you can neither compel nor persuade companies to invest in capital plant that aims to produce goods that the investors don’t believe they can sell.

Then of course you get into policies designed to increase competitiveness… but these take time, and most of the ones recommended offer a whole range of side effects and potential unintended consequences, many of them unpleasant.

Quote:

---

Originally Posted by Fuchs

You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.

---

What other country has to cope with having its currency used as the medium of international trade, completely divorcing demand for currency from domestic economic conditions or domestic policy? What other currency has had to cope with 40 years or so of being the world’s default medium for investment? There hasn’t been a currency as radically overvalued as the dollar since the British Pound of the late imperial era… and the US doesn’t have an empire to shove its goods on.

These distortions can be managed up to a point, beyond which the impact becomes overwhelming and they start to control the direction an economy takes. Why do you think the Chinese are so determined to suppress the value of their currency? Because it matters. It may not be the ony factor, but it’s the herd of elephants in the drawing room.

Quote:

---

Originally Posted by Fuchs

The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual. There are thousands of levers to be used, and new instruments can be introduced.

---

Possibly you should consider revealing them. We wait with bated breath.

Quote:

---

Originally Posted by Dayuhan

Possibly you should consider revealing them. We wait with bated breath.

---

I would like to see some of this new stuff myself.

Fuchs,

At the risk of piling on here, you're not making much sense. Germany's economy depends on exports. If those export markets dried up (for whatever reason) you would be screwed no matter how much you invested. One might say Germany is in a worse position than we are since Germany's population is contracting which means there isn't much room for domestic growth.

Interview of the naked capitalist on the max keiser show. Slide the bar over to around the 15 minute mark to fing her interview. Really good stuff in the interview. Brings out good points about how there are NO truly private companies. I doubt she has ever read Karl Marx on economics but what she is talking about and maybe not realizing it, is that Marx said long ago that you cannot separate politics from economics... the 2 are intertwined.


http://www.nakedcapitalism.com/2010/...iser-show.html

in the broadest sense. Thus morality as seen by many and politics as practiced by an equal or greater number will always include economic aspects and concerns. Everything does. Even warfare -- to include well beyond my favorite "'economy of force' and 'flexibility' will almost always defeat Mass." (Note the 'almost' -- that's allowing for the invisible foot / the penalty of the tragedy of the commons, squared...:D)

I think the Pharoahs figured that out before Karl and Fred (LINK) got around to it and that link proves that Karl's guesses weren't always correct... :wry:

Tha's life... :cool:

Quote:

---

Originally Posted by Ken White

in the broadest sense. Thus morality as seen by many and politics as practiced by an equal or greater number will always include economic aspects and concerns. Everything does. Even warfare -- to include well beyond my favorite "'economy of force' and 'flexibility' will almost always defeat Mass." (Note the 'almost' -- that's allowing for the invisible foot / the penalty of the tragedy of the commons, squared...:D)

I think the Pharoahs figured that out before Karl and Fred (LINK) got around to it and that link proves that Karl's guesses weren't always correct... :wry:

Tha's life... :cool:

---

Sorta, his diagnoses of the problem(his original book(On Capital) Das Kapital) was correct...however his solution.... well frankly Scarlett it sucks:D

Why Isn't Wall Street in Jail?: Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them, by Matt Taibbi. Rolling Stone, March 3, 2011.

Quote:

---

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-a** prison for one six-month term, and all this bulls**t would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is f***ed up.

Just ask the people who tried to do the right thing.

---

Unfortunately, I believe the problem is actually worse than he describes; which, if you read the article, is hard to fathom. He doesn’t get into the public corruption issue, which is lingering in the background here.

The Congressional Research Service recently released a report about the distribution of income between 1996 and 2006.

Quote:

---

Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

---