classical economics
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Congress Punts Investors

No Jobs, No Recovery, No Reform, No Justice
By Wayne Jett © July 1, 2010
    Little change or hope is delivered to equity investors by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 passed by the House on June 29. Fraudulent, manipulative sales of non-existent corporate shares will continue in U. S. financial markets the next two years while the Securities & Exchange Commission studies “the failure to deliver shares sold short” or “delivery of shares on the fourth day following the short sale transaction.” Congress, like the SEC, is captive of Wall Street predators, who take buyers’ money, deliver nothing and drive down share prices.
Dodd-Frank Go Easy on Fraud
    Section 417 of the Dodd-Frank Act (p. 547 of the Conference Report) orders “a study, taking into account current scholarship, on the state of short selling on national securities exchanges and in the over-the-counter markets, with the particular attention to the impact of recent rule changes and the incidence of (A) the failure to deliver shares sold short, or (B) delivery of shares on the fourth day following the short sale transaction….”  The SEC is ordered to report to Congress the results of the study, including recommendations for market improvements, within two years after the date of enactment.
    The historical records of Congress and the SEC preventing financial fraud are dismal. After five years of putrid fraud ripped U. S. financial markets, in 1934 Congress created the SEC and gave the agency “discretion” to investigate and to prosecute financial fraud. The agency uses its discretion to shield Wall Street’s biggest players from prosecution – always hearing nothing, seeing nothing and speaking nothing, unless small-fry fraudsters are involved.
Why Tell the Public?
    Section 417 requires a second study to be done within one year to determine whether short positions in publicly listed shares should be reported in real time to the public, or perhaps only to the SEC and the Financial Industry Regulatory Authority. No mention of possibly reporting real time data on failure-to-deliver positions of listed shares, or of requiring real time disclosure of FTDs perpetrated by specific hedge funds or other institutional investors, is included in the bill.
    As Germany, France and the European Economic Community proceed towards banning naked short selling (selling short without borrowing or delivering) this summer, Congress tells the SEC it is business as usual. No reason for the SEC to fear pressure from Congress to do anything about the rampant looting of investor accounts, which was so central to stock market collapse of 2000-2002 and the financial collapse of 2008-2010. No reason to do anything about the “innovative” high-frequency-trading which front-runs every buy or sell order, extracting capital and bending prices at will.
Financial Innovation?
    The only glimmer of hope in the SEC studies is that they are to be done by the new Division of Risk, Strategy and Financial Innovation, which is run by Henry Hu, who came out of the University of Texas to take the job last year.  So far, Hu has done nothing at the SEC (except attract talented senior staff) to engender great confidence on the part of investors. But his reputation and his short tenure at least leave open the possibility that an honest assessment of the scope of destruction done by naked short selling may come out of its work. If that happens, it will score a first for the SEC.
This is a Mercantilist Economy
    U. S. financial markets are governed by laws intentionally designed to benefit certain favored parties – not the general investing public. With that being the case, it is both logical and true that U. S. monetary policy and fiscal policy are likewise designed and implemented for the same purpose. The Federal Reserve manipulates the dollar’s value and interest rates so financial sector insiders may profit from it without risking federal prison.
    The trillions of dollars in new money created by the Fed, borrowed by Treasury and funneled to favored parties have zero chance of restoring jobs and growth in the private economy. There is no recovery, so there can be no “double-dip” recession – only a single, big dip.
    A transparently false impression of economic growth in announced data during the past year came from borrowing and spending money created, not from “thin air” but from past U. S. economic good will and earning power of American workers. The store of good will built over two-plus centuries is almost entirely dissipated and will soon be gone. If anyone suggests financial market performance gives credence to economic recovery, consider that the Dow Index of 30 industrials at the close on July 1, 2010, will buy about  one-third as much gold as was the case on the date of the market low of about 7,500 in October, 2002.
    The government infrastructures built during decades when private economic growth was permitted to proceed cannot be supported by the shrunken economy produced by the mercantilist policies which regained power in 2006. Already Obama-Biden are echoing political messages of the 1890s and 1930s that millions of jobs are permanently gone, never to return. This is the perennial message of elites who shrink the economy to fit their business monopolies, and then design “enlightened” social solutions to deal with the castoffs for whom they have no room.
    Paul Krugman of Princeton University and the New York Times sees the policy foundation for economic depression has been laid. At the price of tacit concession that the $787 billion “stimulus” bill of 2009 did not work, he urges still more wasteful borrowing and spending of the same nature.  Surely Krugman knows, as vanguard of Keynesian apologists for mercantilist policies, the primary and most lasting product of government “stimulus” is a lower living standard for the American middle class.
    Too many Democrats and Republicans in Congress clothed themselves in robes of Wall Street shills as they pandered for the financial sector’s big money political contributions. The Dodd-Frank Act will not be something they tell their children or grand-children about. ~