Another Inside Job | Hacker News Reader

Another Inside Job

nytimes.com

85 pointsbakbak67 comments

What I hate about all of this is that, to the baby boomer generation, any point of view that wants to hold banks and Wall St. accountable for what they have done is "communism" or "socialism" or "fascism" or some other nonsense. It's like anything that goes against any business is automatically discredited.

It is absolutely plainly obvious that banksters basically hate you and the government is right along with them. Look at the UBS whistleblower Bradley Birkenfeld, who is in prison right now while every single one of the 19,000 tax cheats who diverted billions in taxes are free (save for one guy on a two-year probation). He was wealthy right along with his clients... but he went against the grain. It's interesting to note that Eric Holder was a lawyer and represented UBS at one point, and won't touch the case.

But you just can't make this point in some circles.

I'm not sure if it's baby boomers or rather just the people who are part of the establishment. The establishment rallied pretty hard to get TARP pushed through despite massive public resistance. And now all we have gotten for it is low interests (again) and a junk bond bubble waiting to explode in our faces.

Sorry, but even Paul Krugman, as well as every other Nobel Laureate in economics, supported TARP. A collapse to the financial system would've wreaked havoc to the economy (ala The Great Depression). "All we have gotten now" is a stablization to the system that didn't collapse, and didn't cause massive bankruptcies and unemployment.

Wait and see. We're not even close to out of the woods yet.

GDP is up. Dow is back to 12,000. Banks are liquid. Output is as high as it's ever been. Krugman and friends, not to mention the more conservative economists, do not share your views. I really don't understand the populist sentiment.

Most of that is government stimulus which cannot last forever. The banks are definitely not liquid. They are basically insolvent. You can tell this because they don't mark their assets to market.

The government stimulus (QEs) can last forever because we have a monopoly on our currency. The Fed can print as much money as it wants. Of course, too much stimulus causes inflation. Banks have the cash, and are lending.

Now I agree with you. The bank bailouts were supported by just about every economist with a brain. They worked, not ideally, but well enough, and better than some expected.

But the populist sentiment comes from that the lowest bracket of society is still not out of the recession. The recession is over in the technical meaning, but tell that to the down-and-out and see how they react. It's also not the case that the financial system is totally repaired, though thankfully it looks like the perverse incentives in home mortgages are going away, at least.

Well, GDP growth doesn't exist in a vacuum. It's spread throughout every demographic. Every demographic is consuming more than it's ever consumed (highest GDP). Now, I'm assuming you might mean high unemployment as your main complaint. We have more funds now than we've ever had to subsidize unemployment checks without affecting inflation rates. The unemployment checks are going out to many and are in abundant supply. Contrary to what you might hear, the most disadvantaged brackets are being taken care of.

>"the lowest bracket of society is still not out of the recession"

If by the lowest bracket you mean "the bottom 80%", then yes.

"If we don't do what I want it will be the Great Depression" is an unfalsifiable claim with little evidence to back it up.

The main evidence it has supporting it is the a "post hoc, ergo propter hoc" claim (there was a bank crisis before the great depression). But this ignores a huge number of other factors which also contributed to the GD - massive ecological disaster, huge drops in trade caused by Smoot-Hawley et al, new anti-competitive laws and onerous regulations, new technology making millions of workers obsolete.

The claim that a banking crisis caused the GD is popular mainly because banks are easy to model. It's kind of the economic equivalent of looking for your keys near the streetlamp rather than in the dark alley where you lost them.

The overwhelming cause for the Great Depression was tight monetary policy, and trying to let the market "sort it out" without providing any stimulus (e.g., QEs). When you have a highly illiquid economy with no spending or consumption, you get no growth; that factor prolonged the Depression. That conclusion is supported by economists across the aisle, from Paul Krugman to Milton Friedman, to everyone else in between -- including all living Nobel Laureates in Economics. That premise is the Fed's main justification for the recent QEs.

The government did not try to let the market sort it out. That is simply revisionist history.

Please go read up on the New Deal as well as the Hoover administration (Hoover doubled the budget deficit in an attempt to spur recovery, resulting in FDR calling him a Socialist during the election campaign).

That's absolutely untrue and intellectually dishonest. The Feds, as indicated by Friedman and Krugman, were tight with the money supply. Because money wasn't flowing, the economy wasn't running. Please go and read the causes for The Great Depression on any economist's website (or even Wikipedia).

http://en.m.wikipedia.org/wiki/Causes_of_the_Great_Depressio...

I didn't dispute that the feds were tight with the money supply. I disputed the claim they tried to let the market sort it out. They didn't.

Among other things (since you want to take a 100% Keynesian view), the government created sticky nominal wages and prices (with minimum wages and price floors). Hey, remember why Keynesian economics claims we need to print money?

This is getting a little absurd. First, I'm specifically referring to the Feds in its tight control of the money supply during the Depression. They restricted the money supply. If you have another term for what the Feds did (note the difference between the Feds and the federal government), then so be it.

Loose monetary policy during a drought is not just supported by Keynesians (who really emphasize more expansionary fiscal policy), and is definitely not a 100% Keynesian view. Monetarists, for instance, support it widely. As do other economists. Friedman supported it, as does Bernanke, Greenspan, Summers, Mankiw, et al. To claim that an expansionary monetary policy is 100% Keynesian is just absurd and distorts the positions of other economists.

Let me repeat: I didn't dispute the existence of tight monetary policy. I disputed that the federal government tried to let the market sort it out. Also, when you said "Feds", I assumed you meant people in the Federal Government (including the Federal Reserve, but not limited to it). Typically the Federal Reserve is simply shortened to "the Fed".

Lastly, if you read your own link (to the Wikipedia article on causes of the GD), you'll discover that there are many proposed explanations (including, for example, protectionism).

That's it for me.

Never mentioned is the fact that the government had a fixed exchange rate for gold, yet was inflating the dollar from 1914 on. By 1929, the dollar had nearly halved in value, yet there was the same exchange rate for gold. What this essentially means is you could double your money by exchanging cash for bullion.

This precipitated a run on exchanging dollars for gold, a run that continued to collapse banks until FDR suspended exchanging dollars for gold.

Do you even attempt to check your statements, or do you believe an appeal to consensus will simply make people listen to you?

Nobel laureate: http://en.wikipedia.org/wiki/Joseph_Stiglitz

Dissention: http://www.telegraph.co.uk/finance/recession/5045421/Geithne...

There's an interesting split in the libertarian movement over these kinds of issues. The "paleolibertarians" associated with folks like Murray Rothbard, Lew Rockwell, Ron Paul, etc., see large businesses, especially in finance, as corruption-ridden entities deeply entangled with the state, rather than any sort of free-market entities, and so see dismantling them and holding them to account as properly part of a libertarian agenda. The "D.C. libertarians" or "business libertarians", associated with folks like Cato, the Koch brothers, Club for Growth, etc., are more likely to see the American business community as essentially on the correct (i.e. libertarian) side of things, and advocate for them to be unfettered more from government regulation as a way of improving things.

you dont need to dismantle them actively. take away the protections they enjoy and watch the market eat them.

What exact protections are you talking about? The market is already rewarding the most efficient banks.

treating liabilities (demand deposits) as assets, using theoretical selling prices of assets to leverage. in this they are protected by legal tender laws and FDIC. banks basically get heavily subsidized insurance for their investment business at taxpayer expense.

Sorry, but that's highly misleading. Demand deposits are liabilities on the commercial bank's financial statements. The "cash" is an asset, which is owed to the depositor. That's very basic financial accounting.

Banks pay for FDIC coverage, like you or I pay for car insurance.

Government-supplied insurance is a bit different than private-sector-provided insurance, though. It's essentially the "public option" for banks.

they absolutely do not pay an amount commensurate with the amount and risk insured. In a for profit insurance system the insuree is paying more than their expected liability, the banks pay much less than this and the taxpayer adopts the rest of the burden.

also banks use demand deposits to back their loan liabilities. the only reason customers put up with such a thing is again FDIC.

That is absolutely untrue. Taxpayers do not pay for any FDIC insurance.

In all fairness, those of you downvoting the parent need to address the following:

The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.

Source: http://www.fdic.gov/about/learn/symbol/index.html

I remember there being some talk about FDIC potentially needing to borrow from the Treasury during the financial crisis however as far as I know, it didn't happen.

That's a bit like the way Fannie and Freddie received no direct appropriations... before they collapsed. They had an implicit guarantee, which was worth just as much as cash, and wound up costing a lot.

When people trust the FDIC, it's not based on the idea that they're an independent entity charging sufficient premiums to handle any eventuality. They're not; they predict they will be below their legally-required reserve level through 2017 and not hit their target reserve level until 2027 (with rosy economic assumptions):

http://problembanklist.com/fdic-deposit-insurance-fund-to-re...

http://problembanklist.com/fdic-projects-losses-of-billion-o...

The FDIC only inspires confidence because of the understanding that if necessary the full resources of the government would back it.

Not so far, but if we ever let more than one of the TBTF banks go, then the FDIC will be taking out billions in loans at sub-market interest from the taxpayer.

Are you thinking about things like patents and copyright? It may help, but it probably won't be sufficient: being big gives an influence that tend to feed on itself. Monopolies for instance, may last long.

> ...being big gives an influence that tend to feed on itself. Monopolies for instance, may last long.

This is exactly why I don't believe that unregulated markets will necessarily be competitive ones.

My belief is that without a strong central government, monopolies engaging in anti-competitive behavior will make the market inefficient.

there is one protection already taken away..

What do you think the amount of reserves banks have to have on had is now? Its the lowest its been 20 years...02%

What does that mean?

That means each bank bank, individually, has to have .02% cash reserves or by law it has to close until it gets cash from the Federal Reserve to bring it up to that total..

Translation: all it takes is some depositors pulling out $200,000k to make a statement to any bank branch and put in a credit union which by most state laws cannot enter into transactions that bet against the customer..

This has already happen in Wisconsin..after that vote to ban unions..

We have the power folks..will we exercise it or sit on our lazy asses?

This has already happen in Wisconsin..after that vote to ban unions..

I'm pretty sure the vote you describe never occurred.

because turning everything into either an emotional or moral appeal is the best way to have a systemically sound economy right? this illustrates exactly why populist systems don't work.

Are you saying we have a populist system today?

yes, currency creation is public via legal tender laws.

It's interesting to note that Eric Holder was a lawyer and represented UBS at one point, and won't touch the case.

This is bad? It's exactly what he should be doing.

I don't think that this is a criticism of Eric Holder, I think it has more to do with the fact that someone besides the Attorney General would have to take the lead on this.

"...while every single one of the 19,000 tax cheats who diverted billions in taxes are free..."

Maybe because we live under a rule of law that says you're innocent until proven guilty.

Plenty were proven guilty. They were just rich enough to get away with it.

Birkenfeld was sentenced in August of 2009. UBS paid $780 and avoided all criminal charges. Individuals have since been fined or put on probation, or set free... except for Birkenfeld.

Extremely wealthy tax evaders can afford to pay measly slap-on-the-wrist fines for their crimes. $780 million for UBS is a complete joke compared to the billions in evaded taxes.

Can you cite specific sources? I'd like to know specifically what you're referring to.

I don't know why you'd want to discuss this issue at all when you know that the people who disagree with you happen to do so out of base motives.

Incidentally, "every single one... save for one guy," might not be the best way to phrase it.

I understand that differences of opinion can exist on the function of the government and it's interference in private commerce but seriously:

"First, the proposed settlement only calls for loan modifications that would produce a greater “net present value” than foreclosure — that is, for offering deals that are in the interest of both homeowners and investors. The outrageous truth is that in many cases banks are blocking such mutually beneficial deals, so that they can continue to extract fees."

Can we not all agree that practices like that are predatory and an abuse of power? I really want to hear an argument about how an institution that holds as much sway over someones life as a mortgage holder would be justified in taking actions like this. The Republican party is traditionally ani-government intervention but they are elected by people, a non-trivial number of whom have to be getting screwed as badly by this as people who vote Democrat. I can't really see any grey area here unless the article is grossly misrepresenting the facts of the situation.

This is just an observation about such distress calls, but I am trying to learn economics, and something shocks me every time I read up about it.

Absolutely no major book, be it pop or a college text touches on the role of power in the relationship. It might be easier to project and create models by assuming human beings to be rational beings, but that still doesn't mean you need to ignore the calculus of power.

What we have over here is something most economists simply don't study. Systematic use of power. These banks strut like mafia bosses, because they're exactly like mafia bosses.

Their strength and survival depends on having power to push the consumer into beneficial deals. Their survival also depends on pulling the carpet from underneath when the consumer fails to jump through enough hoops.

Yes, it's all related to capital in the markets etc., but it's all driven by power.

I don't know why we want to ignore this, but as a society these power relationships lurk everywhere. It doesn't mean that they are immoral or anything like that. They're just a fact of human nature. Every contract signed or transaction made is made with the assumption that someone with power will ensure that it will go off without a hitch.

What is a contract except for the threat of violence sublimated into abstruse jargon? Think about the robber barons and their ideological descendants wall street bankers. The only difference is that now they're holding a gun made out of paper (or a database).

In this case, of course the law makers and everyone else are on their side, but like everything else it's all a matter of time. As things change power will get redistributed from Morgan to Milken.

What I'm trying to say is that I think that economics doesn't make sense without this variable. These people call the shots, because they have power. Not capital assets. Those are just symbols of power they have accumulated by various means.

Yes, this can't explain everything, but it's just a very different way to look at it and things just make sense after this.

I'm not sure it's sufficiently studied, but there is some study of power relationships in economics, mostly in areas of economics that argue over the effects of entity sizes and coordination. The theory of both antitrust law and labor law is mostly based on arguments over power imbalances, e.g. whether cartels exercise coercive power that distorts markets, and what power relationships are involved when an individual negotiates with a large corporation (or on the other side, when a large union negotiates with a smaller employer).

I wish I could upvote this more than once.

Absolutely no major book, be it pop or a college text touches on the role of power in the relationship.

I recommend reading up on game theory, which might as well be understood as the study of the role of power in relationships.

Interestingly enough, your portrait of banks abusing customers is a lot like my view of how I abuse my bank. They give me risk-free credit, help me manage my money, and make basically zero revenue from me. All I really have to do is read the fine print and avoid going into debt, which isn't especially hard.

Milken is an interesting guy to mention, actually. He started out as a great example of powerlessness--a low level employee who happened to be one of the few Jewish guys at a sleepy, Waspy firm, where he was stuck analyzing the stuff nobody else cared about. I guess he had some secret reserve of power that helped him fake his way into basically running the company and making a killing before getting shut down by some overzealous regulators. Milken doesn't contradict your theory, but he does fill in the missing variable--power is something people accumulate, and very often they accumulate it within their lifetimes.

You've studied a cleaned-up, simplified (and likely ossified) version of economics so far. Economists analyze market power all the time, and game theory is a good suggestion. Putting it all together in macro terms is difficult, though.

I think you may be interested in the older version of economics, political economy. As I understand it, political science is all about analyzing power relationships.

This is an example of why I think the next crisis won't be many decades into the future, but much sooner. Basically, nothing changed after the crisis of 2008 - no one was punished, laws were not changed (they were tweaked at best) and the most important, the culture of fraud and criminality on wall street has only been emboldened.

I don't expect Wikileaks to change anything either. They may have helped the Tunisian revolution along, but no matter how complete and damning their evidence against BoA is, nothing will be done against BoA.

The "culture of fraud and deception" is illegal. Acts of deception can range from fines to decades in jail. Wall Street firms make money from customers who choose to do business with them. Any hint of deception completely destroys any future business with that client, as well as many other clients. I know this might sound like a shock to some of you, but banks make their money by providing services to customers who choose to pay for those services. It's basic capitalism.

You're obviously a troll. You aren't seriously trying to claim that Wall Street firms don't engage in deception are you?

Please cite specific examples of common deceptive practices (not just anomolies) if you're claiming that Wall Street fully practices deception on a daily basis. To claim that they do so is just absurd. Taking a populist opinion without understanding specifically how the banking industry works, and what it can and can't legally do, just wreaks of the Dunning-Kruger effect.

What's the point? You can google for yourself.

If I bring up examples they will be flawed because they are populist and because I don't understand banking as well as you do.

The banking system is flawless but you have to be a banker to understand this.

Well, if you cite specific examples about what you're referring to that's from a factual and objective source (since there could be thousands of different viewpoints), I would know your premise. Simply calling a whole industry as engaging in deceptive practices as a common occurence -- and freely accepted among those in the industry -- is unfair, absolutely untrue, and does nothing to help the financial system become more effective for society at large.

I didn't call out the whole industry as engaging in deceptive practices as a common occurrence. I do however think there is some deception occurring and that if it isn't uncovered and corrected, it will grow.

You did however did claim that any hint of deception would destroy their business and that therefore deception is not happening.

I think your claim is absurd and does nothing to help the financial system become more effective for society at large.

It's simply impossible that you've been following the politics/economics/finance for any longer than a week and you haven't heard of stuff like Dual-Track or Robosigning or document fraud (especially allonges).

I'm so old I can remember when Krugman was an economist, rather than an op-ed columnist.

Tragically unsurprising. And the tip of the iceberg, considering that private banks basically create money out of thin air, then loan it at an interest.

We could, I dunno, give back the control of the money to elected people?

actually we need non-centralized currency. centralized currency regardless of who is in control is bad, just like with any other good.

what we need is at the very least state currencies that float against each other.

So what about BitCoin? It seems like a thoroughly decentralized currency. The only problem is the limited size of the Bitcoin economy. There is currently 5.68 million BTC, or $5,108,175 USD, worth of Bitcoin in the world right now, with a max of about 21 million.

Could multiple open distributed digital currencies work?

the number in the world doesn't limit anything. bitcoins float against the dollar. if demand for them increases their value will increase dollar wise.

money is not magical, it is a convenient commodity of exchange. the rules of supply and demand govern it.

I see. I also did not know that BTC was divisible into very small amounts.

Where are the accounts from the people who maned the phones and signed the letters that made all this possible? I doubt any BOA executive picked up the phone and told a customer to default on their mortgage. That would have been someone like me or you just doing their job, doing what they're told.

Where are their accounts of what the were told to do?

I'm worried that these people don't care about the people they helped screw over. I hope thats not the case, but I'm worried that it is.

It's like being a guard in a death camp, just a job that someone has to do. Or so you think.

I'm worried that these people don't care about the people they helped screw over. I hope thats not the case, but I'm worried that it is.

Or they are just more worried about the NDAs they signed and the army of lawyers the bank's employ.

Perhaps. But there's ways and means to get their accounts out into the open. And no NDA can prevent a person from speaking in court.

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