classical economics
for analysis,  forecasting
and policy design

Recovery vs. Reality

No Better Times Until Policy Changes
By Wayne Jett © June 20, 2011
     Face it, people. U. S. government policies are not about economic recovery. Each is a matter of politics. The same was provably true in 1932, 1939, and 2008, as it is presently. A pertinent question is: what “matter of politics” is being served by policies which drastically shrink production and employment while debasing the currency? Hint: the interests served are not those of the poor or the middle class who need jobs and better pay.
     As a result, repeating what has been stated here consistently, no economic recovery is in sight and none will appear until federal economic policies are changed to permit it. Current events discussed here demonstrate that no significant policy change has occurred, and business as usual will continue the depression.
Financial Fraud Remains Endemic
     First and foremost, the dominant macro-force in the U. S. economy is rampant, systemic fraud in financial markets. This is not fraud by corporate officers in conducting production operations or in stating financial conditions.  The overwhelming problem is fraudulent practices in trading securities – the kind of fraud which reached a crescendo of intensity in 2008 as one major firm after another was destroyed and their holders robbed of hard-earned capital. All this was done in broad daylight. But the Securities & Exchange Commission was completely feckless at the time and has done nothing since to bring the criminals to justice.
     Current SEC investigations of insider trading by hedge funds are significant only in the sense that the agency’s executives ordinarily do nothing but bow, scrape and facilitate activities of their future patrons. Insider trading appears to be, in practice, the only violation of federal securities law the SEC is capable of bringing to court. This point merely proves the need for legislative reform – including abolition of the SEC as the Street’s people inside government – because insider trading is such a minor part of financial fraud it can hardly be called the “tip of the iceberg.”
      A primary form of financial fraud is selling short without delivering the shares to unwary buyers – commonly called naked short selling. Institutional investors are notified when shares they purchased are not delivered, so they can waive the trade and keep their money. Retail investors are not told when shares newly bought remain undelivered; their purchase funds are taken anyway, and they get mere electronic entries in their brokerage accounts – what the SEC calls “entitlements” to sue their brokers for damages if they lose money because they actually own no shares.
      One private journalist, Mark Mitchell, separates himself from the blind and silent elite media by reporting that “wash trades” play a more important role in share price manipulations than previously believed. Before the SEC repealed the uptick rule in July, 2007, wash trades were used by manipulators to nullify the important anti-bear-raid intent of the rule, which prohibited short sales of shares except after trades at a price higher than the previous trade.
      To avoid the uptick rule, wash trades (in which the buyer and seller are the same or affiliated parties) simply pretended to be “long” sales and the trades were made at ever lower prices. To do a short sale (almost always a naked short sale), the manipulator does a wash trade at an uptick price. With each manipulator holding a naked short position, the naked short counterfeit shares combine with fake wash trades to destroy the share price, thereby fooling other investors into believing the target company’s share price is collapsing.
      Manipulators do this for a very basic reason – not merely for entertainment – they loot enormous amounts of capital from investors. The town sheriff is nowhere to be found, and no production job matches  financial market manipulation if you wish to gather mansions and put a Ferrari in each garage. Young people get no warnings from academics or media about ethical and criminal implications of work in the financial sector, so inordinate numbers now choose to study “finance” rather than agriculture or engineering, leaving food un-grown and real problems unsolved.
      If bright, idealistic Americans were the only ones attracted by opulent life as a U. S. financier, the national dilemma would be much less poisonous. Mark Mitchell is reporting (“The Miscreants Global Bust-out,” 17 chapters, so far) astounding details of extensive participation in the U. S. financial sector by international organized crime and terrorists. Mitchell puts a lot of “meat on the bone” of the formerly classified Department of Defense report that financial terrorism was involved in the 2008 destruction of major U. S. firms. In this crime-infested environment, the Securities & Exchange Commission, the Federal Bureau of Investigation and the Justice Department do nothing other than press a few show trials involving insider trading.
Pulling Levers of Power
    Manipulative traders, brokers, asset managers, even hedge fund managers, however, though overpaid, are mere hired help of the dominant elite. They do important work of harvesting capital from the productive middle class. But they are not the dominant elite – the owners of giant capital pools which pull levers of power in government, academia and media.
    The Federal Reserve, U. S. Treasury, Securities & Exchange Commission and Commodities Futures Trading Commission levers of power are controlled by the dominant elite. These institutions have abused power more during the past three years than at any time in their history. In these three years, for example, the Fed has more than trebled the U. S. monetary base. Stated another way, in that time the Fed has created more than twice the number of new dollars as were built up in all years up to 2008. Why?
    Fed rhetoric about restoring employment and economic production is eye-wash. Bank reserves June 15 rose to another historic high of $1.69 trillion, up $62 billion from two weeks earlier. This compares to total bank reserves of $46 billion in June, 2008. Bank reserves are nearly 37 times the reserves before the financial crash, yet bank lending remains stagnant. No bank lending to medium-and-small business, the job creators and traditional customers of banks, is in the cards.
     The relevant facts are these: (1) Treasury can borrow sufficiently to increase national debt by $1.5 trillion per year only if the Fed steps up to buy Treasury securities; and (2) the Fed can devalue the dollar sharply – actually destroy it as the international reserve currency – only if Treasury issues lots of new debt securities. Each hand washes the other, and both actions are horribly destructive. Enormous debt enslaves present and future generations, assures default and threatens constitutional government. Dollar devaluation transfers value of earned capital from all productive users of the currency to whatever “winners” government chooses.
     One observer of the Federal Reserve asserts the Fed will “go bankrupt.” That scenario is highly unlikely in any conventional sense. The Fed is positioned to bankrupt the federal government, the private economy and banks other than its largest members, which will protect themselves, but the Fed already receives Treasury underwriting of its worst risks.
Goldman Sachs Business as Usual
     Goldman Sachs just reduced its estimate of second quarter GDP growth to 2% annualized, meaning one-half of 1% growth in April-June.  Far more than that measly margin is due to prodigious Fed debt monetization and federal spending reflected primarily in earnings of big companies. 
     Goldman Sachs made a greater contribution to national well-being and understanding by paying a $10 million fine to Massachusetts to settle without admission of wrong-doing a matter “related to communications on trades among its staff and certain clients.”  The press coverage makes Goldman’s conduct appear no worse than favoring certain clients with its best advice.
     The official settlement document, however, is more descriptive. It relates that Goldman’s “research” staff conducted “huddles” with “certain ‘priority’ clients … about potential short term trading ideas.” The “short term trading ideas” were sometimes based upon a “specific catalyst” which ran counter to the published price target of a Goldman research analyst, and was expected to produce a predictable result within a limited time frame. Goldman’s “asymmetrical” client communications intended to “move the needle” of trading revenues and, if a favored client failed to respond by feeding Goldman more trades in line with recommendations in the “huddle,” Goldman removed that client from its list and moved to another client.
     This “huddling” conduct at Goldman occurred at least from 2006 to the present.  The “specific catalysts” expected to drive market prices within limited time frames almost certainly involved un-sourced rumors and/or journalistic hit pieces written and leaked by allied financial writers. What else might the catalyst be – fundamental performance data unknown to the market and likely to move the price higher? No, that would be insider information.
     Rumor and hit piece scenarios played out time-and-again since 2005 as bear attacks obliterated target companies and their shareholders. But describing Goldman’s conduct in such terms would have required securities law prosecution rather than settlement. Government agencies almost always choose settlement and fine, not prosecution, because the fine is paid to the government and prosecution is avoided. Looted investors are none the wiser; they just made “poor investments.”
     America’s reality is this: economic depression continues (including at least one instance of American self-immolation), with housing price declines already exceeding those during the Great Depression. Former Fed chairman Alan Greenspan prefers to blame Greece,  but the truth is that U. S. economic contraction continues due to “truly miserable,”  perniciousmalevolent U. S. economic policies. ~