William Black’s five fatal flaws of finance

William Black is a white-collar criminologist who has written a compelling account of how the bloated parasitic financial sector is ruining America in his recent post at Huffpo. These are Black's five "fatal flaws" of finance:

1. The financial sector harms the real economy. Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large.

2. The financial sector produces recurrent, intensifying economic crises here and abroad.

3. The financial sector's predation is so extraordinary that it now drives the upper one percent of our nation's income distribution and has driven much of the increase in our grotesque income inequality.

4. The financial sector's predation and its leading role in committing and aiding and abetting accounting control fraud combine to: A) Corrupt financial elites and professionals, and B) Spur a rise in Social Darwinism in an attempt to justify the elites' power and wealth.

5. The CEOs of the largest financial firms are so powerful that they pose a critical risk to the financial sector, the real economy, and our democracy.

The Solution: Fix the real economy, if you can find it. "The real economy came off the rails at least three decades ago for the great majority of Americans." I was highly impressed with William Black after seeing him interviewed by Bill Moyers. And now, after reading this detailed by accessible analysis, I'm even more impressed. We can't begin to fix the economy unless we begin to implement basic principles we can actually understand. Fixing the real economy and making sure that finance is merely the servant of the real economy are clearly steps one and two, for each of the reasons listed by Black.

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Matt Taibbi on economic death by short-selling

In this month's Rolling Stone, Matt Taibbi once again takes on Wall Street with an article entitled "Wall Street's Naked Swindle." This article is not yet available online. Taibbi's focus this time is naked short selling. Taibbi has proven to be an excellent teacher of abstruse financial concepts, including the concept of short selling, and also including the insidious practice of naked short selling. With this technique (and others) Wall Street has turned the economy into "a giant asset-stripping scheme, one whose purpose is to suck up the last bits of meat from the carcass of the middle class." Taibbi's article is an excellent read, which is not at all surprising given Taibbi's track record. The bottom line is that naked short selling is a "flat-out counterfeiting scheme." How bad is the widespread use of this technique?

That this particular scam played such a prominent role in the demise of [Bear and Lehman] was supremely ironic. After all, the boom that had ballooned both companies to fantastic heights was basically a counterfeit economy, a mountain of paste that Wall Street had built to replace the legitimate business it no longer had. By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs.

As Taibbi then reminds us, there is more than one way to counterfeit. Consider credit default swaps:

If you squint hard enough, you can see that the derivative-driven economy of the past decade has always, in a way, been about counterfeiting. At their most basic level, innovations like the ones that triggered the global collapse-credit default swaps and the collateralized debt obligations-were employed for the primary purpose of synthesizing out of thin air those revenue flows that are dying industrial economy was no longer pumping into the financial bloodstream. The basic concept in almost every case with the same: replacing hard assets with complex formulas that, once unwound, would prove to be backed by promises and IOUs instead of real stuff.

In this related piece, Taibbi further discusses "naked short selling":

Again, a lot of this stuff is complicated and not only hard for people outside the finance world to follow, but kind of, well, boring as well. But it’s through these tiny regulatory loopholes, these little nooks and crannies, that the economy gets manipulated. The effect of all of these regulatory gaps has been to transform Wall Street from a means of connecting capital to good business ideas into a giant casino, where the object of the game is shaving little slices off the great flows of money as you push them back and forth using a great big toolbox of manipulative techniques. This is one of the tools.

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How to not-audit a DOD contractor

Listen to the scolding being delivered by Senator Claire McCaskill of Missouri with regard to what appears to be a fraud committed by a major Department of Defense contractor and subsequent incompetence by the GAO. How many other millions and billions of tax dollars are being wasted by the pentagon and its contractors? Where are the tea-parties protesting pentagon fraud?

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The ACORN hypocrisy

Over the past few weeks, videotapes have been trickling out that purport to show ACORN employees offered tax advice to those seeking to engage in child prostitution or other salacious activities. Having viewed the tapes, it's obvious that they have been edited extensively, and that alone should make one wonder what the original tapes may show. Further, Media Matters has a lengthy critique of the credibility of the conservative activists and the manufactured news story that they have created, including failing to report that in at least one instance police were called and the filmmakers were removed from the premises after inquiring about underage prostitution. But really, whether ACORN employees did or did not do everything they are accused of is a side issue. The Huffington Post yesterday pointed out that the legislative zeal to cut off funding for ACORN may have created an even bigger problem: it may eliminate the entire military-industrial complex. You see, the legislation prohibits federal funding or promotion of organizations that, among other things, "has filed a fraudulent form with any Federal or State regulatory agency". The Project on Government Oversight (POGO) maintains a database of companies holding federal contracts that also have "histories of misconduct such as fraud" that would ostensibly bar them from receiving any further governmental funding under the "Defund ACORN Act". Top violators include Lockheed Martin, Boeing, Northrop Grummond, Raytheon, KBR (former Halliburton subsidiary).... and a staggering number of other large corporations doing business with the federal government. House Republican leader John Boehner released a statement congratulating house Republicans for all they "have done to hold ACORN accountable for its abuse of taxpayer dollars and the public trust.” One wonders whether he will hold these other corporations to the same standard that they require of ACORN? After all, the scale of the violations by the weapons industry dwarfs anything ACORN is accused of. For fiscal year 2007, Lockheed Martin had federal contracts valued at $34.2 billion (with a b) dollars, and the cost of their misconduct since 1995 is valued at $577.2 million. ACORN has only received $53 million in federal funds since 1994, and none of the allegations show any actual harm was done to the government. In other words, Lockeed Martin has committed fraud to the tune of over 10 times the total amount of federal funding ACORN has received.

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James (Amazing) Randi is still debunking and his $1M challenge fund is still safe

My local alternative weekly newspaper, The Riverfront Times, just published a detailed article on James "The Amazing" Randi, professional magician and debunker of claims of the paranormal. I learned a lot. Here's an excerpt:

Randi has debunked more than 100 psychics and faith healers in a quest to rid the world of hucksters. It also makes him the subject of scorn among purveyors of the paranormal, true believers who say Randi has made himself rich, pulling in nearly $200,000 a year from his foundation, at the expense of others' careers.

Now, however, Randi's work may be in jeopardy. His foundation has been hemorrhaging money, and Randi, who has spent his career challenging the notion of an afterlife, now faces his own mortality. He has intestinal cancer and may not have long to live. Randi has been a commanding presence for four decades, but it's unclear who could fill his role as the face of the skeptic community.

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