Matt Taibbi has an article in Rolling Stone called "The Big Takeover: How Wall Street Insiders Are Using the Bailout to Stage a Revolution" about the secrecy of Fed handouts to financial institutions.
As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system - transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.
He doesn't mention Russia in the 1990s in the article, but Taibbi was there. The Boston-raised Taibbi played professional (?) baseball and basketball in various godforsaken outposts of the ex-Soviet Empire, such as Mongolia, and then co-founded The Exile in Moscow in 1997 with Mark Ames. In Taibbi's retelling, Goldman Sachs sounds a lot like the American equivalent of the KGB: the best-connected insiders who expect to wind up with the eventual winners of the carve-up of the country.
Somebody else who had a lot of experience with Russia in the 1990s is Obama's chief economic adviser, Larry Summers. As you'll recall, Larry got in all sorts of trouble with the press over some plausible speculation of his about sex differences in cognitive abilities. But a much more genuine Summers scandal that got almost no coverage outside David Warsh's Economic Principals column involved his costing Harvard a huge amount of money in fines and legal fees over his defense of his best friend, prominent Harvard economist Andrei Shleifer.
Warsh writes:
It’s as good a time as any, though, to review why Geithner is at the Treasury and Summers is not.
Exhibit A is the Harvard Russia scandal – a chain of events that played a key role in Summers’ dismissal from the Harvard presidency. It is a black mark that, for some reason, rarely is taken into account when relating the key events of his career. It hasn’t become part of the record. It’s not mentioned in Scheiber’s New Republic piece, for example. But then neither did it come up in the Newsweek or Time accounts of Summers’ return to Washington, either. Not even David Leonhardt, economics columnist of The New York Times, brought it up when he explained The Return of Larry Summers last fall, though he had to ignore his newspaper’s own clips.
And yet it did happen – a story straight out of a Tom Clancy novel. EP readers don’t need to be reminded of how Summers’ protégé, Andrei Shleifer, was hired by the US Agency for International Development to head a Harvard mission to provide advice to the Russian government of Boris Yeltsin, but quietly went into business for himself in violation of his contract, got caught and fired, but retained the sympathy and protection of his mentor, even as Summers served as Treasury Secretary and president of Harvard. A US District Court judge ultimately found Shleifer and Harvard to have committed fraud. The episode has become a standard item in Russia’s anti-American lore. ...
This is by no means to accuse Summers personally of corrupt involvement in the Rape of Russia. The real issue is that this kind of stuff seldom comes up in the press for criticism. I type "lawrence summers russia" into Google and the first page is by Mark Ames and the second one is by ... me.
Did Larry learn anything from his heavy involvement with Russia in the 1990s? Few seem to have asked him. Here's a Pontius Pilatey comment Larry left on Martin Wolf's blog about America's Yeltsin policy, full of lines like:
Was loans-for-shares a necessary price for Yeltsin to pay when he paid it for winning against the communists/staying afloat? What were the right alternatives at the time?
Strobe Talbott claims Larry opposed Yeltsin's "loans-for-shares" sellout of the country's natural resources in return for campaign loans in 1996. A young banker named Khodorovsky, for example, was assigned to auction off Yukos Oil, which owns 2% of the world's reserves. He set a minimum bid of $150 million, accepted one bid (for $159 million) and declared Yukos to be sold -- to himself. Presumably the extra $9 million was his six percent commission for running the auction.
So, maybe Larry would look out for our interests. Or maybe not. Did anybody even ask him about the Rape of Russia?
Akerlof and Romer define looting as an upscale version of bankruptcy fraud, except that bankruptcy fraud gets prosecuted (in theory) but the white collar rent seeking version, where executives and staff pay and perk themselves to the point where it derails the business, somehow never is pursued in the US. From their abstract:
ReplyDeleteOur theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.
Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large or influential firms. These arrangements can create a web of companies that operate under soft budget constraints. To enforce discipline and to limit opportunism by shareholders, governments make continued access to the guarantees contingent on meeting specific targets for an accounting measure of net worth. However, because net worth is typically a small fraction of total assets for the insured institutions (this, after all, is why they demand and receive the government guarantees), bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values...
Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters' current extractions with no regard for future losses...."
But as Simon Johnson points out in his Baseline Scenario, with hastily enacted and often muddy rescue programs, the opportunities to loot are increasing. The public's skepticism of these hasty and desperate measures is warranted.
From Johnson (hat tip reader Richard):
Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses...
Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
This is the prospect now faced by the United States.
http://tinyurl.com/d39lmu
I've said before that for the enlightenment of us foreigners, it would be helpful if Americans put a brief descriptor in brackets after the names of their leading economic figures: thus, to invent a couple of examples - Paul Crookman (Enron), Lamey Summers (Russki Looter's Mentor). After all, lots of people are enjoying something similar with the real-world example of Tim Geithner (tax dodger).
ReplyDeleteThis is by no means to accuse Summers personally of corrupt involvement in the Rape of Russia.
ReplyDeleteHa, Ha! Then, I will...
Look, Summers spent $26 million of Harvard's money and sacrificed his Harvard presidency to keep his "best friend" Shleifer out of American prison for international insider-trading.
Does "friendship" really extend that far?...
My own strong suspicion was that Summers was Shleifer's silent partner in the swindle, and Shleifer used that to blackmail him into saving his hide: "If I go prison, you go with me!"
Losing the presidency of Harvard is pretty bad, but not nearly as bad as sharing a cell with Black Muslims or Aryan Brothers...
And it also preserved his "political viability" so that he's now been put in charge of the U.S. Treasury, allowing him to steal gigantically greater sums for himself and his various friends.
Ha, ha, ha!
"In Taibbi's retelling, Goldman Sachs sounds a lot like the American equivalent of the KGB: the best-connected insiders who expect to wind up with the eventual winners of the carve-up of the country."
ReplyDeleteAnother interesting comparison might be post-Suharto Indonesia, which is now a democracy of sorts. The process is more or less democratic in the sense that apparent most elections are 'free', meaning aren't rigged in the narrow sense (there are many types of election now besides the presidential and parliamentary elections, as a result of the extensive post-1998 decentralization policies (which allow regions at the provincial level and below to keep a substantial part of local revenues from oil, mining etc., rather than having to channel them to the central government as was the case under Suharto).
The political power gained by the winners of regional elections gives them the means to access, manipulated and appropriate such locally generated funds.
However, although voters do have clout now, in practice voting behaviour is strongly influenced by money politics and intimidation by paramilitary groups or streetgangs manipulated by the candidates who have the best networks and access to both private and public funds. Not surprisingly, in many cases those candidates are part of the old Soeharto-era elites (or have close connections to them). Without such connections, it is virtually impossible to out-manipulate your rivals into office.
Taibbi's "gonzo journalism" writing style is really annoying. The cusswords and snarky personal attacks ("a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead") add nothing to the substance of what he has to say.
ReplyDeleteNot to mention he has it exactly backwards. Wall Street is not eating Uncle Sam. Uncle Sam is eating Wall Street.
This kind of oligarchization is simply the last gasp of a dying culture, however. The KGB might have gotten some tasty slices of pie, but they ate them all up. Where are their children? They certainly didn't use those pieces of pie to educate them properly.
ReplyDeletePeople grumble a lot about the beginnings of a permanent overclass here but unless life extension is a real thing in the immediate future an overclass still has to reproduce itself. Barack Obama is the result of the education given by the Western oligarchs to their children. Those kinds of private schools, those kinds of pious obsessions, those kinds of giant freaking holes through which critical thought and huge important aspects of reality just fall through produce him and people like him. These are not rulers. They're not even looters, like their Russian counterparts. They're GIANT DOOFUSES. There is an immense vacuum here waiting to be filled by any group with self-discipline and normal attitudes towards family and children. Maybe it will be people from the Horn of Africa a hundred years from now. Maybe it will be American Mormons. But it's not anybody who's strutting around on the world stage at present, except maybe the Palins. I can kinda see Piper Palin's progeny ruling a Siberian empire in a warming world, can't you?
Goldman Sachs sounds a lot like the American equivalent of the KGB:
ReplyDeleteIt’s not mentioned in Scheiber’s New Republic piece, for example. But then neither did it come up in the Newsweek or Time accounts of Summers’ return to Washington, either. Not even David Leonhardt, economics columnist of The New York Times, brought it up
A US District Court judge ultimately found Shleifer and Harvard to have committed fraud.
this kind of stuff seldom comes up in the press for criticism
Goldman, Sachs, Scheiber, Leonhardt, Summers, Shleifer, Geithner, Bernanke, Madoff, Rahm Emmanuel...you'd almost think a number of key players in the financial crisis all had something in common.
And after reading this article on Journolist:
http://www.politico.com/news/stories/0309/20086.html
You might think that the press as a whole (Krugman, Yglesias, Klein, Ackerman, Toobin, Alterman, Judis, Klein) might have something in common.
No doubt Matt Taibbi thinks of himself as courageous, but knows that pointing this out would make the conversation about his anti-Semitism -- rather than the question of whether such overrepresentation might introduce systematic blind spots and areas of emphasis, whether consciously or subconsciously.
As exhibit A: one person at Ann Althouse's blog observed that they were all of the same ethnicity, and immediately Ezra Klein counterattacked by bringing up Ann's tolerance of anti-semites, aka pattern recognizers.
PS: Attn all Ashkenazim in the audience. I adore your contributions to mathematics and physics. Finance and politics? Eh, not so much. So please don't turn every criticism into "hating". There is good and bad in every ethnic group, including yours.
1.6T in new taxes ... Let me see ...
ReplyDelete300M Americans, so that is approximately $4800 more taxes for each and every american?
Or is that, $12,000 per year more for each family?
Or, if that is paid by the top 5%, $240,000 each?
Of, if paid by the top 1%, $1.2M each.
Interesting numbers.
So who's your nominee for Putin?
ReplyDeleteAnd which parts of Russia qualify as 'Sand States'? And can you get a good burrito there?
And how many people has GS knocked off? Do they have any of those funny umbrellas, or tea that emits radiation?
And can you buy shares in the KGB? If so, what's the ticker symbol (KGB? NKVD? CHKA?) And if you really think that the KGB=GS , why aren't you buying any shares in one or the other?
(Interesting that it's the founder of the forerunner of the KGB who came from Poland)
Ah, all analogies fail somewhere.
Wall Street is not eating Uncle Sam. Uncle Sam is eating Wall Street.
ReplyDeleteNo, Taibbi has it right, and you've got it backwards. Goldman Sachs is essentially buying the US Government. They're taking taxpayer money, but unlike in socialist countries the government gets no say in how the recapitalized businesses are run.
Who's eating who?
ReplyDeleteU.S. Seeks Expanded Power to Seize Firms
Goal Is to Limit Risk to Broader Economy
By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Tuesday, March 24, 2009; A01
The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.
The government at present has the authority to seize only banks.
Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document.
Steve, Steve...
ReplyDeleteyou forgot to mention Peter ORSZAG, new Director of the Congressional Budget Office, a former adviser to Central Bank of Iceland and, for balanced cross-Atlantic approach, Governor of California.
Anonymous No.36768376478.
You'll be more than happy to hear that, although coming from a very strict Greek Orthodox family, our Peter is devouted Buddhist with penchant for impromptu trips to Katmandu. (Check it out , it's true).
All this is not nearly as interesting as is his LSE doctorate Thesis (summa cum laude):
'Dynamic Analysis of Regime Shifts Under Uncertainty: Applications to Hyperinflation and Privatization'
Nothing to worry about, let's all go back to the Shopping Channel...
Let the government seize those firms. Financials are the most fraudulent and parasitical "industries" of all, and traditionally were viewed that way (correctly) until only recently (last 50 years).
ReplyDeleteWheeling-dealing commission-hungry crooks who get paid Big Bonuses for losing billions of shareholder dollars.
Perhaps what the government is doing is trying to prevent (or stem the tide of) massive looting by these "industries."
No doubt Matt Taibbi thinks of himself as courageous, but knows that pointing this out would make the conversation about his anti-Semitism
ReplyDeleteAssuming Taibbi doesn't share your proposed common factor, of course, which he very well might. I know at least one of those two guys from Exile does.
... Summers’ protégé, Andrei Shleifer, was hired by the US Agency for International Development to head a Harvard mission to provide advice to the Russian government of Boris Yeltsin, but quietly went into business for himself in violation of his contract, got caught and fired ...
ReplyDeleteShleifer was running some sort of former USSR emerging market investment fund or pool in addition to his Harvard mission to the post-Soviet Russian Federation day job. That much is a fact.
Here's my theory:
Shleifer solicited investments from fellow Harvahd faculty members. He did so in a secretive way, knowing that his emerging market fund wasn't quite kosher, since Shleifer had access to so much inside information about Yeltsin's government. Everybody in the know at Harvard knew that they weren't supposed to blab about their buying into in Shleifer's fund.
The investment fund was not profitable. Harvard faculty members were irate. They vented their anger in an indirect way, by ganging up on Shleifer's mentor and probable co-conspirator, Larry Summers, when Summers cracked wise regarding women and science.
... If only some of this mud would stick to Prof. Jeffrey Sachs, too.
All I know is that the Jews didn't do it. I don't care what "it" is. Epic Russian oligarchal looting? Doesn't matter. I know they didn't do it.
ReplyDeleteAnybody who says they did "it" is the enemy of civilization.
That is all. Get modern, rednecks.
... and Andrei Shleifer's then wife, Nancy Zimmerman, is still considered by the NYTimes to be one of Summers' cohorts.
ReplyDeleteThe level of her involvement in that shenanigan?
Zimmerman's "fund" paid the U.S. Treasury 1.5M in fines for her part in the rape of Russia.