AS GLOBAL MACRO-FORCE
By Wayne Jett © May 20, 2010
Financial fraud drove the U. S. and global economic collapses of 2008, and continues unabated. A U. S. Senate sub-committee heard testimony May 5 titled “The Role of Fraud in the Financial Crisis” by a notable Keynesian, James K. Galbraith. Galbraith called economics “a disgraced profession” for failing to study financial fraud. He said the heart of the U. S. financial crisis was “a breakdown in the rule of law in America.” However, there is a catch.
Both premises are true. But “control” fraud in executive suites of business firms which inspired Galbraith’s testimony is not the problem. Control fraud is neither as prevalent nor as destructive as financial fraud emanating from Wall Street. Deceitful and manipulative trading practices in U. S. financial markets destroyed major firms, wiped out shareholders and siphoned trillions from the Federal Reserve and Treasury. This financial terrorism has maneuvered U. S. sovereign debt towards the precipice of default.
Don’t Blame Main Street
Enron’s collapse in 2001 was said to be the result of control fraud. The legislative response was Sarbanes-Oxley, a burdensome regulation of Main Street business. Enron was fundamentally securities fraud perpetrated by a business firm in close collaboration with major financial firms of Wall Street. After Enron’s demise, Wall Street and its hedge fund allies took the crude oil derivatives business and ran. Wall Street was left completely unfettered, while Main Street toils under the costly and wasteful constraints of Sarb-Ox.
Popular anger over Wall Street fraud and domination of federal policy in the 2008 financial collapse is strong and growing. Pointing the finger of blame at control fraud diverts attention from Wall Street and again wrongly accuses Main Street. Senator Arlen Specter chaired the sub-committee which heard Galbraith’s testimony about fraud as central player in the financial collapse. As a Republican, Specter investigated and exposed scandal at the Securities & Exchange Commission in 2005 after the agency spiked prosecution of a major hedge fund for insider trading and price manipulation. Coincidentally, Specter lost his Senate primary race as a member of the Democratic Party.
Wall Street Dominates Senate & Fed
Specter’s May 5 hearing was the zenith, so far, of the Senate’s consideration of legislation falsely called financial reform. Banking chairman Christopher Dodd’s bill drew its essence from Wall Street aims to expand its domination of the U. S. economy. Dodd was impeded in that design by rank-and-file senators insistent upon audit-the-Fed (Edward Kaufman and Sherrod Brown) and stop-oil-speculation (Blanche Lincoln) provisions regulating derivatives. Audit-the-Fed provisions were badly watered down by a strange coalition consisting of majority leader Harry Reid, Dodd and Charles Schumer among other Democrats orchestrating Wall Street’s opposition to real reform, in combination with Republicans Mitch McConnell and John Shelby delivering votes to back filibuster threats to provisions most objectionable to Wall Street.
Again demonstrating the Federal Reserve is dominated by Wall Street even more than is the Senate, Fed chairman Ben Bernanke, as if on cue, wrote a May 12 letter to Dodd opposing a Glass-Steagall-like prohibition of commercial banks from trading swaps derivatives. Bernanke was “concerned,” he said, that if commercial banks cannot trade directly in swaps derivatives, “the U.S. financial system [would be] less resilient and more susceptible to systemic risk … [which] is inconsistent with the important goals of financial reform legislation.”
SEC Licenses Securities Law Violations
Meanwhile, the SEC continued its “wrist-slap” treatment of big players who profit from naked short selling (essentially counterfeiting) of corporate shares. Deutschebank was fined $575,000 for five years of naked short selling violations, a unit of Fidelity funds was fined $350,000 for similar violations, and Goldman Sachs paid a $450,000 fine for 521 violations. The SEC surely knows illicit profits from naked short selling one stock on one trading day can easily surpass all three fines combined. This is the manner in which the SEC licenses the largest players in the markets to violate securities “laws” by payment of minor fees. This is the true version of “breakdown of the rule of law in America,” enabled by the co-opted agency which serves only Wall Street.
American Mercantilism Cripples Europe
Wall Street, the Federal Reserve and the SEC are culpable in financial crises dogging European economies and the euro. Fed devaluation of the dollar since 2003 erected a financial wall around the U. S. market more impenetrable than Smoot-Hawley. Prices of imports into the U. S. rose 11.4% in March, 2010, year over year. Shut out of the U. S. market, European businesses cut production, unemployment increases and national governments have difficulties reducing their expenses. Sovereign debt growth of Greece, Italy, Spain, Portugal and Ireland destabilize fiscal planning of those nations and, ultimately, of all European Union members plus the U. S.
Chancellor Angela Merkel of Germany, pressed by the burden of lending to Greece, unwisely abandoned her own fiscal design for lower taxes and higher economic growth. Europe’s leading government is now ensnared in the unemployment/high-debt/high-taxes/low-growth design of the mercantilist elite. Merkel, after witnessing the financial attack against Greece and the euro, ordered an immediate ban on naked short selling of certain corporate shares, credit default swaps and German government bonds, seeing “[incalculable] consequences for us in Europe" if she failed to prevent the “destructive” financial attacks from continuing. Yet the financial sector commentators attacked Merkel’s actions as irresponsibly banning all short selling and blaming her for global markets dropping in response.
The American Crisis
The U. S., not a well-led government, is already deeply ensnared in the same mercantilist design as Europe. The U. S. federal deficit and total debt burdens are significantly worse than Germany’s or Greece’s as percentages of GDP, and will grow still worse by 2012 under President Obama’s agenda. An attack on the dollar and/or Treasury debt would cause current low interest rates to rise sharply, taking the federal deficit up with them. Even absent such a financial attack, Treasury rates are abnormally low because federal policies (including permission of financial fraud) have driven private capital to shelter in Treasuries, so the extent of present debt burden is partially hidden. But Obama does nothing to reduce U. S. exposure, much less to assist Merkel's Germany by preventing sale of naked credit default swaps on German sovereign debt.
Current U. S. policies, left unchanged, will lead to default in U. S. sovereign debt in the mid-term to short-term. Investors will remain in the dollar and Treasuries only so long as they see reasonable prospects for timely policy changes. The November, 2010, U. S. elections are a major pivot point for those prospects, and a disappointment in the election outcome will have “incalculable” consequences, as Merkel would say.
Every American must act decisively to cast votes only for candidates devoted to middle class principles and interests – not for one beholden to influence of the dominant elite. Members of both major political parties have this duty and burden to identify allegiances of their own candidates. No one willing to act against middle class interests should hold government office. The fate of the nation – in the short run and in the long run – hangs in the balance. ~