One of the dangers of the global financial system is that it gives far too much power to a few giants corporations which can choke off access to entities they do not like or which they think threaten oligarchic interests. For example, a few credit card companies now dominate and they can and will use their power to serve the coercive needs of governments. Recall how Visa and MasterCard banned transfer of contributions to WikiLeaks to serve US government interests, even though WikiLeaks has not been accused of any crime.

Enter bitcoins, a new peer-to-peer decentralized digital currency that seeks to bypass this system. Here’s a brief video that explains how it works.

This Wikipedia page explains more about how it works. I can’t say that I fully understand it yet. But it looks promising as a way of undermining financial monopoly power.

The Attorney General of New York state has opened an investigation into the practice of mortgage loan packaging by the big banks and investment firms like Bank of America, Morgan Stanley, and Goldman Sachs. It was these practices that led to the real estate bubble and subsequent collapse.

This is a hopeful sign since we cannot expect the Obama administration’s justice department to take any serious action since the White House has long been a wholly owned subsidiary of Wall Street.

Matt Taibbi, who has been relentless in driving this story forward, is cautiously hopeful that something meaningful might come out of this.

This investigation has the potential to be a Mother of All Nightmares situation for the banks for a couple of reasons. For one thing, the decision to go after the securitization process is a total prosecutorial bullseye. This is the ugly heart of the wide-scale fraud scheme of the bubble era.
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The reason this is such a potentially deadly investigation for the banks is that they seemed to be so close to getting away scot free. There is another investigation into the banks’ mortgage abuses by the states’ Attorneys General, led by Iowa AG Tom Miller, that was rumored to be headed toward a settlement, despite the fact that nothing like a complete investigation has been done.
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Such a desire to get some kind of deal done and sweep the mortgage mess under the rug once and for all seems almost universal among high-ranking politicians, and particularly in the Obama administration, which has acted throughout like it wants more than anything to simply get all of this over with and put in the past.

I am going to wait and see how this turns out. The oligarchy is going to close ranks and pull out all the stops to defend itself and preserve its privileges and get away with a plea deal that involves just a slap on the wrist and fine.

In an article in the May 26, 2011 issue Rolling Stone titled The People vs. Goldman Sachs, Matt Taibbi says that in a just world, a new Senate report should trigger a massive Justice Department investigation and criminal charges against the people in charge of the big financial companies, especially Goldman Sachs.

The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — “a million fraud cases a year” is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin’s small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street’s aristocratic impunity and prosecutorial immunity produced since the crash of 2008.
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But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences.

Taibbi is, as always, able to make reporting about dry financial matters come alive and it is interesting to see how he does that. I think he succeeds because he couples knowledge of arcane details with not holding back when it comes to conjuring up vivid imagery and metaphors (and even profanity when warranted) to describe what is going on.

For example, to those who try to excuse the evidence of the bankers’ greed as the kind of small missteps that anyone can make, he says:

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn’t a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it’s an advanced-stage, 1,100-pound medical emergency who hasn’t left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes.

On Goldman’s strenuous efforts, once it realized that it was holding huge amounts of worthless assets, to find suckers to sell it off to and what they did after they forced the sale, he writes:

Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.

In describing the multiple ways that Goldman defrauded its own clients, the very people who were paying for its services, he says:

This is a little like getting an invoice from an interior decorator who, in addition to his fee for services, charges you $170 a roll for brand-name wallpaper he’s actually buying off the back of a truck for $63.

To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it’s betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried.

Taibbi describes the tricks used by Goldman to get the highest AAA ratings for the junk securities on its hands that enabled them to be sold off to their dupes. They did this by taking the low-rated bonds from each pool and then ranking them again within that pool and giving the best the highest rating. And then repeating the process.

This is kind of like taking all the kids who were picked last to play volleyball in every gym class of every public school in the state, throwing them in a new gym, and pretending that the first 10 kids picked are varsity-level players. Then you take all the unpicked kids left over from that process, throw them in a gym with similar kids from all 50 states, and call the first 10 kids picked All-Americans.

Taibbi’s article is well worth reading in full.

Will the Justice Department prosecute? Don’t hold your breath. Starting with Bill Clinton, there has been a continuous bipartisan sellout to Wall Street and I don’t expect anything more from Obama. What I predict will happen is that if the rest of the major media raise a fuss about this report (which itself has a low probability given the media’s alliance with the oligarchy), then the Justice Department might be forced to look as if it is doing something. They will open a highly publicized investigation, then strike a deal with Goldman Sachs to have them pay a fine which will seem like a lot to us (say a few hundred million dollars) but will be peanuts to Goldman which will look on it as just the cost of doing business.

But no one will go to jail and there the matter will end.

The Lewin subcommittee’s hearings figured prominently in the wonderful documentary Inside Job that I reviewed two weeks ago. The producers of that documentary received Academy Awards for it in February and what they said on that occasion pretty much sums up the corrupt nature of US politics.

The attempts to stigmatize the poor continue apace. I wrote earlier about the move to give welfare recipients their allocation via orange debit cards so that everyone would know they were on welfare. Now a Michigan legislator wants to ban foster children from using that state’s $80 per year clothing allowance to buy any new clothing item. Instead the clothing vouchers could only be redeemed at second hand stores.

There is nothing intrinsically bad about buying used clothes or any other item. I would guess that almost all people have done so. It is the idea of forcing poor people to have only that option, that new things are too good for them and they do not deserve them, that makes me find such stories revolting. What kinds of people spend their time thinking up such things? Maybe they will next give poor people permits that allow them to get their food from dumpsters.

One of the enduring puzzles is why so many poor and middle class people are so supportive of policies that benefit only the rich. The often cited reasons are that these people are either stupid or that they have a fantasy that they will be very rich someday and are protecting their future interests.

But via Kevin Drum, I heard about a new study that suggests another reason, which is that people have a highly distorted idea about where they themselves stand in the economic pecking order. The study asked people in Argentina in the ten income deciles to rank themselves as to which decile they thought they were in. “They found that everyone thought they were basically middle class. Poor people consistently overestimated their rank, and rich people consistently underestimated their rank.”

Why is this? “The authors suggest that this misperception may be related to the types of people respondents interact with, and therefore use as a reference point. If you’re mostly exposed to people earning about as much as you, you’re likely to think your earnings are average.”

The solution? Make people better aware of their true position. “In the Argentina study, for example, respondents were eventually informed about whether their own rankings estimates were too high or too low. This news changed people’s policy attitudes. People who thought they were relatively richer than they actually were started to demand higher levels of income redistribution when told they were actually relatively poor.”

These results are consistent with a study done in the US that I wrote about late last year which showed that people here think that wealth is more equitably distributed than it really is.

He discusses his new book Money and Power: How Goldman Sachs Came to Rule the World. The title pretty much says it all.

Part 1 of the interview:

Part 2, where he really dishes the dirt:

Reader Mark sent me this article that says that an IMF report predicts that in 2016, China will overtake the US as the world’s largest economy. There is some dispute about this because economic measures are hard to quantify, especially when purchasing power is factored in, as is done here. But the disagreements center on the date of overtaking. There seems to be a consensus that China will overtake the US at some point in the fairly near future.

As one analyst explains, “What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

The article speculates on the psychological effects on the US public of losing its place as the worlds biggest economy, a position it has held for over a century. My feeling is that the people in the US already have the sense that they are rapidly losing ground economically and so this will not come as a shock. What will come as a shock is when the US is no longer the world’s greatest military power. That will take longer to arrive since military power lags behind economic power.

This fierce advocate for those of us who are not part of the oligarchy reveals the fights that are taking place behind the scenes to prevent the oligarchy from gutting the measures she has proposed to give ordinary people the tools to avoid being suckered by the big financial interests.

She points out how the system really works. When debates are held in the open, ordinary people tend to win because their case is so obviously just. So what the oligarchy and its allies in government do is utter bland generalities in public and move the actual policy making into the back alleys where they can stick the knife in unseen and then pretend that they did not know what was going on. The metaphor is apt because the oligarchy are truly gangsters just with better clothes and manners.

The interview is in three parts and well worth watching in full. The latter parts are prompted after the first one.

Sometime ago, in my series on how poor people have dignity too, I praised the recent adoption of debit cards instead of food coupons as a good way for them to purchase food without others knowing that they were down on their luck.

But some people want to deny even that minimal level of dignity and label the poor with a scarlet, or rather orange, letter. An Arizona Republican legislator wants the debit cards to be a bright orange color. Of course, his stated reason is to prevent ‘fraud’, that useful word that disguises hateful motives as noble ones.