American oligarchy-6: The victories of the oligarchy

(For previous posts in this series, see here.)
In his article in the May 2009 issue of The Atlantic magazine titled The Quiet Coup, Former chief economist of the IMF Simon Johnson lists the fruits of the collusion between both political parties and Wall Street interests.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

  • insistence on free movement of capital across borders;
  • the repeal of Depression-era regulations separating commercial and investment banking;
  • a congressional ban on the regulation of credit-default swaps;
  • major increases in the amount of leverage allowed to investment banks;
  • a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
  • an international agreement to allow banks to measure their own riskiness;
  • and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

Just examine that list for a moment. Did you hear about any of those important actions while they were being carried out? Were there front page news reports and commentary on them? Loud arguments? Highly publicized congressional hearings? Fierce partisan debates? When all that was going on, was there any attempt at informing the public of the potential consequences of these wide-ranging decisions? Of course not. The chances are that during those times our attention was focused on Monica Lewinsky, Terri Schiavo, gay marriage, Chandra Levy, Valerie Plame, and the like. This is why observing politics has to be like watching a magician. If you look at what your attention is being drawn to, you are missing what is actually happening. The real action takes place in obscure committee hearings, at the regulatory bodies, in private meetings between members of government and the heads of the financial firms, over lunch and dinner and on golf courses.

Did you notice how in the fall of 2008, as we lurched daily from crisis to crisis as one big firm after another like Merrill Lynch and Lehman Brothers fell, we were presented by the Treasury and Federal Reserve officials with ‘solutions’ to the problems that had been worked out seemingly overnight involving the taxpayer-subsidized purchase of one major institution by another that involved hundreds of billions of taxpayer dollars? The only way that consensus could be reached so quickly and smoothly on such major actions was if there had always been collusion between the government and the financial firms involved and they saw their interests as one and the same.

Simon Johnson continues:

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.
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This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that.

Johnson says that the same remedies that the IMF routinely gives to developing countries in similar financial crisis should also apply to the US. But they are not, because the American oligarchy is immune to the pressure that the IMF can put on oligarchies in other countries. The American oligarchy is not responsible to anyone.

As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization… Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process.
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This may seem like strong medicine. But in fact, while necessary, it is insufficient.

Then Johnson gets to the crux of the problem and what must be done. When reading it, remember that Johnson is a centrist technocrat, not some ideologue, and his understanding comes from dealing with many countries that have gone through financial crises.

The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy. (my italics)

But the IMF is not going to give this advice to the US because the US oligarchy, through the US government, pretty much dictates IMF policies.

The only way that the oligarchy will be broken is if the public demands it.

Next: Barack Obama’s role

POST SCRIPT: God as CEO

When you look at god’s actions as revealed in the Bible, you realize that he is not very good at strategic long-range planning, preferring to go for cheap and popular gimmicks. But not to worry! His apologists know how to explain away all the absurdities and contradictions.

(Thanks to Machines Like Us.)

American oligarchy-5: How Wall Street builds its power

(For previous posts in this series, see here.)

In the previous posts, we saw how people with connections to big Wall Street firms like Goldman Sachs are everywhere in government, especially in key economic policy-making positions, so that whichever party wins, their interests are protected and advanced.

In his article in the May 2009 issue of The Atlantic magazine titled The Quiet Coup, Simon Johnson explains how firms like Goldman Sachs have carefully cultivated their power structure.

[T]he American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

[Read more…]

American oligarchy-4: How oligarchies work

(For previous posts in this series, see here.)

Simon Johnson is a professor at MIT’s Sloan School of Management. He used to be the chief economist at the International Monetary Fund and in that role had to deal with many countries in financial crisis and had plenty of experience with oligarchies. He is hardly an ideologue. In fact, he calls himself a ‘centrist technocrat’, which is the kind of person that these international financial institutions usually have in their technical divisions. But yet he has no hesitation in identifying the current financial crisis in the US as caused by the same kind of oligarchies that he encountered in his dealings with developing countries in crisis. In a must-read article titled The Quiet Coup that appeared in the May 2009 issue of The Atlantic magazine, he describes how oligarchies work and how they end up ruining the economies of countries.
[Read more…]

American oligarchy-3: Welcome to the club

(For previous posts in this series, see here.)

It is not just Geithner who is a slave to Wall Street interests. Key economic advisor in the Obama administration Lawrence Summers, although he comes from academia, is also enmeshed in that world. In just 2008 alone, Summers received $5.2 million from the hedge fund firm D. E. Shaw. Mind you, he was still a full-time professor at Harvard at that time, so this was for just part-time work. (Jonathan Schwarz breaks down the links to all his financial dealings.)

Summers also received $135,000 as a speaking fee for two speeches given at Goldman Sachs, the company that has been, and continues to be, a huge beneficiary of the bailout. (Recall that the previous Treasury Secretary Henry Paulson and before that Robert Rubin also used to head that same firm). At that time, Summers was already heavily involved in the Democratic campaign and it was clear that he would be a major player in either the Obama or Clinton administration. So Goldman Sach was likely buying “insurance” or, as Glenn Greenwald says, paying an “advanced bribe”, making sure that a friendly face would be in a major decision making position in the new Democratic administration, since they could not pay him once he joined the administration.

Here’s another examination by David Sirota of the close-knit and like-minded people from both parties who control economic policy.

At the top is Lawrence Summers, the director of Obama’s National Economic Council. As Bill Clinton’s Treasury secretary in the late 1990s, Summers worked with his deputy, Tim Geithner (now Obama’s Treasury secretary), and Clinton aide Rahm Emanuel (now Obama’s chief of staff) to champion job-killing trade deals and deregulation that Obama Commerce Secretary-designate Judd Gregg helped shepherd through Congress as a Republican senator. Now, this pinstriped band of brothers is proposing a “cash for trash” scheme that would force the public to guarantee the financial industry’s bad loans. It’s another ploy “to hand taxpayer dollars to the banks through a variety of complex mechanisms,” says economist Dean Baker—and noticeably absent is anything even resembling a “rival” voice inside the White House.

This financial oligarchy makes sure that those who are not with the program of letting the big financial firms have unfettered control over the economy get shut out of power. The story of Brooksley Born, former head of the Commodity Futures Trading Commission, is illustrative. She describes how her efforts in the 1990s to bring the wild derivative markets that caused the current crisis under regulation was vigorously opposed and defeated by a coalition of Alan Greenspan (then head of the Federal Reserve), then Treasury Secretary in the Clinton administration Robert Rubin (who used to head Goldman Sachs), and Lawrence Summers. Her story shows the bi-partisan nature of the protection given to Wall Street’s interests.

As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. Derivatives get their name because the value is derived from fluctuations in, for example, interest rates or foreign exchange. They started out as ways for big corporations and banks to manage their risk across a range of investments. One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling.
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Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. The economy was sailing along, and the growth of derivatives was considered a sign of American innovation and a symbol of the virtues of deregulation. The instruments were also a growing cash cow for the Wall Street firms that peddled them to eager takers.

Ultimately, Greenspan and the other regulators foiled Born’s efforts, and Congress took the extraordinary step of enacting legislation that prohibited her agency from taking any action. Born left government and returned to her private law practice in Washington. (my italics)
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Speaking out for the first time, Born says she takes no pleasure from the turn of events. She says she was just doing her job based on the evidence in front of her. Looking back, she laments what she says was the outsized influence of Wall Street lobbyists on the process, and the refusal of her fellow regulators, especially Greenspan, to discuss even modest reforms. “Recognizing the dangers . . . was not rocket science, but it was contrary to the conventional wisdom and certainly contrary to the economic interests of Wall Street at the moment,” she says.

All this occurred during Bill Clinton’s administration during which Republicans controlled both houses of Congress for most of the time. So the concept of ‘divided government’ applies only as long as Wall Street interests are not involved. We see that all these people from across the political spectrum, so-called conservatives and so-called liberals, Democrats and Republicans, united to give Wall Street a free hand by removing restrictions from the financial institutions and thus sowed the seeds of the current crisis, showing how the financial oligarchy maintains continuity even though political parties come and go.

Alan Greenspan was such a die-hard Ayn Rand devotee that he even told Bonds that he did not think there should be any laws against fraud because the market would take care of things. We saw how well that turned out. The problem is that in an oligarchic system as currently exists, market forces only apply to powerless people. When the markets turn against the big financial interests, they have the power and influence to get the government to use taxpayer money to bail them out. Oligarchies never lose unless there is a popular revolt.

POST SCRIPT: The need for strong oversight

Jon Stewart has an excellent two-part interview with Elizabeth Warren, chair of the Congressional Oversight Panel on TARP (Troubled Asset Relief Program), who has been charged with overseeing the current bailout.

Part 1 explains what is going on now and part 2 explains clearly how we got into this mess and what we need to do in the future.

Part 1:

The Daily Show With Jon Stewart M – Th 11p / 10c
Elizabeth Warren Pt. 1
thedailyshow.com
Daily Show
Full Episodes		 Economic Crisis Political Humor

Part 2:

The Daily Show With Jon Stewart M – Th 11p / 10c
Elizabeth Warren Pt. 2
thedailyshow.com
Daily Show
Full Episodes		 Economic Crisis Political Humor

My concern is that because Warren seems to be honest and smart, she may be seen as a thorn in the side of the oligarchy which will try to make her serve as the usual window dressing to make it look as if there is accountability when in reality there is none. It seems clear that she is already being slowly frozen out of the information loop by the Obama administration. I wonder how long it will be before she quits in frustration, like Brooksley Born.

American oligarchy-2: The fraud on the American people

(For previous posts in this series, see here.)

Obama’s nominee to be chief performance officer, Nancy Killefer, had to withdraw her nomination following the revelation that she had a mere $946.69 lien on her property in 2005 for failure to pay taxes ($298 in unemployment compensation for household help, $48.69 in interest, and $600.00 in penalties.) This was a fairly trivial issue.

Health and Human Services nominee Tom Daschle had to also withdraw over the failure to pay a much larger amount of $140,000 in taxes but there was a faintly plausible case of ambiguity there. I was glad Daschle withdrew for a different reason, because he is completely enmeshed with all kinds of lobbying interests.
[Read more…]

American oligarchy

If there is one thing that the current financial crisis has revealed, it is the stranglehold that the big financial interests have on the American government. From the beginning it has been clear that the same interests that caused the financial crisis are the ones that control both the Bush and Obama administrations and that they are making sure that they are the ones who benefit most from the various high-cost “rescue” and “stimulus” packages that have been floated. Nowhere is this more clearly displayed that the way in which the Obama administration is slavishly adhering to satisfy the needs of the major financial interests on Wall Street.

This will be unwelcome news for those Obama fans who thought their candidate would be different. So far Barack Obama’s administration seems to be acting consistently with the model that states that the US is run by a pro-war/pro-business one party oligarchy with two factions that differ only on some social issues.

Exhibit #1 is Timothy Geithner, the current Secretary of the Treasury. He was one of the many Obama nominees who had problems with their past tax payments. But Geither’s case was the most serious because it was clear that he was not paying taxes in a manner that suggested willful deception. There is no way that he could not have known that he was doing something wrong by not paying his Social Security or Medicare taxes while he was at the International Monetary Fund, unless he is such a financial idiot that he should not be Treasury Secretary. The Wall Street Journal describes the problem:

As an international body, the IMF doesn’t withhold taxes for U.S. citizens, and employees are responsible for paying their taxes. The IMF pays employees additional tax allowances to cover federal and state income taxes, and the employer’s portion of payroll taxes.

Mr. Geithner prepared his own federal-tax returns during the first two years he worked at the IMF, 2001 and 2002, according to the Senate Finance Committee report.

“The IMF informs U.S. employees about their tax allowance and what it covers and doesn’t cover — and that includes paying your payroll taxes,” said Michael Mussa, a former IMF chief economist, who is now at the Peterson Institute for International Economics. “The IMF doesn’t leave this out.”

An IMF booklet on taxes, which Mr. Geithner told the Senate panel he received, instructed employees that “you pay the employee’s share of U.S. Social Security taxes.”

Mr. Geithner’s quarterly tax-allowance payments also included a statement of what the money was to be used for, and had an entry for “SE tax” — meaning “self-employment” taxes. In a wrinkle in U.S. tax law, U.S. citizens at the IMF pay Social Security and Medicare taxes as if they were self-employed. Current and former IMF officials said that U.S. officials widely understood “SE tax” to mean payroll taxes.”

I, like Geithner, do my own taxes and there is no way that you can do that without knowing what ‘SE tax’ means. I have been paying self-employment taxes (to cover Social Security and Medicare) every year on the small extra income I get from book royalties and consulting and speaking fees. It is quite simple and straightforward.

Current and former IMF officials said the fund provided numerous warnings to U.S. employees about payroll taxes. According to IMF documents released by the Senate Finance panel, Mr. Geithner regularly received information about his tax obligations.

Mr. Geithner didn’t make any Social Security or Medicare tax payments on his income during the years he worked for the IMF, though he did pay income taxes. After the Internal Revenue Service audited him in 2006 and discovered the payroll-tax errors, Mr. Geithner corrected them for 2003 and 2004. Only after Mr. Obama picked him for Treasury secretary last fall did Mr. Geithner pay the Social Security and Medicare tax he owed for 2001 and 2002.

So even after being audited and having paid back taxes for two years, he did not pay for the other years even though he must have known that the same problem existed there. To me, this was such an egregious act that Geithner’s nomination should have been rejected. But he was confirmed quite easily, which immediately indicated to me then that he was a faithful servant of the oligarchy and that he would faithfully serve Wall Street interests.

As veteran investigative reporters Don Bartlett and Jim Steele said :

The reason we said that Geithner’s was far more egregious is this. He signed a piece of paper acknowledging that he owed both taxes while he was employed by the IMF. He then collected the money from IMF to pay the taxes. Now, most of us, you know, the payroll taxes are withheld. We don’t get reimbursed for those taxes. It comes out of our own pocket. But Mr. Geithner not only signed a paper acknowledging he owed taxes, he collected money to pay the taxes and then didn’t pay them and pocketed the money. This is why it was far more egregious for him and why—you know, the New York Times demanded that Tom Daschle withdraw, and he did. But the same demand was not put on Mr. Geithner.

If this was a real two-party system, you would think that the Republicans would jump at this chance at embarrassing the incoming president by highlighting the faults of his important cabinet pick. But in a one-party oligarchy, it is the interests of the oligarchy that must be served first and Republicans know that.

A number of senators, including Republicans, continued to express their support for Mr. Geithner. “These are not the times to think in small political terms,” said Sen. Lindsay Graham, a South Carolina Republican. “He has a great résumé.”

Yes, he certainly does. A resume that screams that he will do Wall Street’s bidding, and what’s not to like about that?

POST SCRIPT: The other side of piracy

Johann Hari of the London Independent says there is another side to the pirate story that we are not being told.

In 1991, the government of Somalia collapsed. Its nine million people have been teetering on starvation ever since – and the ugliest forces in the Western world have seen this as a great opportunity to steal the country’s food supply and dump our nuclear waste in their seas.

Yes: nuclear waste. As soon as the government was gone, mysterious European ships started appearing off the coast of Somalia, dumping vast barrels into the ocean. The coastal population began to sicken. At first they suffered strange rashes, nausea and malformed babies. Then, after the 2005 tsunami, hundreds of the dumped and leaking barrels washed up on shore. People began to suffer from radiation sickness, and more than 300 died.

Ahmedou Ould-Abdallah, the UN envoy to Somalia, tells me: “Somebody is dumping nuclear material here. There is also lead, and heavy metals such as cadmium and mercury – you name it.”
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At the same time, other European ships have been looting Somalia’s seas of their greatest resource: seafood. We have destroyed our own fish stocks by overexploitation – and now we have moved on to theirs. More than $300m-worth of tuna, shrimp, and lobster are being stolen every year by illegal trawlers. The local fishermen are now starving.
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This is the context in which the “pirates” have emerged. Somalian fishermen took speedboats to try to dissuade the dumpers and trawlers, or at least levy a “tax” on them. They call themselves the Volunteer Coastguard of Somalia – and ordinary Somalis agree. The independent Somalian news site WardheerNews found 70 per cent “strongly supported the piracy as a form of national defence”.

No, this doesn’t make hostage-taking justifiable, and yes, some are clearly just gangsters – especially those who have held up World Food Programme supplies. But in a telephone interview, one of the pirate leaders, Sugule Ali: “We don’t consider ourselves sea bandits. We consider sea bandits [to be] those who illegally fish and dump in our seas.” William Scott would understand.

Did we expect starving Somalians to stand passively on their beaches, paddling in our toxic waste, and watch us snatch their fish to eat in restaurants in London and Paris and Rome?

The whole article is worth reading for its history of how pirates arose in the 17th century as a reaction to the extreme hardship and cruelties suffered by sailors in the merchant and regular navies of that time. Rather than being thought of as evildoers, they were initially seen by the general public as romantic heroes, rebels against oppression. Their transformation in the public mind into senseless and savage bandits was the result of a concerted propaganda campaign by the British government.

Financial frauds-6: The danger of having an oligarchy

(For previous posts in this series, see here.)

In a provocative article, Pulitzer Prize-winning war correspondent Chris Hedges warns that those people who have elite educations often make the biggest blunders because they have been trained to think highly of themselves, and thus become less reflective and more overconfident.

These institutions [i.e., elite prep schools and universities], no matter how mediocre you are, feed students with the comforting self-delusion that they are there because they are not only the best but they deserve the best. You can see this attitude on display in every word uttered by George W. Bush. Here is a man with severely limited intellectual capacity and no moral core. He, along with Lewis “Scooter” Libby, who attended my boarding school and went on to Yale, is an example of the legions of self-centered mediocrities churned out by places like Andover, Yale and Harvard. Bush was, like the rest of his caste, propelled forward by his money and his connections. That is the real purpose of these well-endowed schools — to perpetuate their own.
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Barack Obama is a product of this elitist system. So are his degree-laden cabinet members. They come out of Harvard, Yale, Wellesley and Princeton. Their friends and classmates made huge fortunes on Wall Street and in powerful law firms. They go to the same class reunions. They belong to the same clubs. They speak the same easy language of privilege and comfort and entitlement. They are endowed with an unbridled self-confidence and blind belief in a decaying political and financial system that has nurtured and empowered them.

These elites, and the corporate system they serve, have ruined the country. These elite cannot solve our problems. They have been trained to find “solutions,” such as the trillion-dollar bailout of banks and financial firms, that sustain the system. They will feed the beast until it dies. Don’t expect them to save us. They don’t know how. And when it all collapses, when our rotten financial system with its trillions in worthless assets implodes, and our imperial wars end in humiliation and defeat, they will be exposed as being as helpless, and as stupid, as the rest of us.

Hedges is perhaps too pessimistic, sweeping, and apocalyptic. At least I hope so, as otherwise we are done for. There are genuinely clever people who go to these elite schools. They are not the problem. The problems are those who suffer from what William Deresiewicz, a professor of English at Yale, called ‘entitled mediocrity’. i.e., people who see themselves as smart merely because of their background and privileged opportunities and not out of any personal achievement. He takes elite universities to task for having lost sight of their mission and becoming instead essentially narrowly focused trade schools, although the trades students are being prepared for are the professions.

When elite universities boast that they teach their students how to think, they mean that they teach them the analytic and rhetorical skills necessary for success in law or medicine or science or business. But a humanistic education is supposed to mean something more than that, as universities still dimly feel. So when students get to college, they hear a couple of speeches telling them to ask the big questions, and when they graduate, they hear a couple more speeches telling them to ask the big questions. And in between, they spend four years taking courses that train them to ask the little questions—specialized courses, taught by specialized professors, aimed at specialized students.
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Since the idea of the intellectual emerged in the 18th century, it has had, at its core, a commitment to social transformation. Being an intellectual means thinking your way toward a vision of the good society and then trying to realize that vision by speaking truth to power. It means going into spiritual exile. It means foreswearing your allegiance, in lonely freedom, to God, to country, and to Yale. It takes more than just intellect; it takes imagination and courage.

Among the elites there is also a clannishness, a willingness to shield their own from the barbarians at the gate, i.e. ordinary people. You can see it in the way that the Obama administration is seeking to avoid taking any action against those members of the Bush administration that have been involved in the most outrageous acts of criminality and violations of the constitution, such as torture, war crimes, warrantless wiretapping and the like. The Obama administration is trying to impose even greater secrecy than Bush did and fighting the efforts of those who want openness and investigations of wrongdoers. Such acts (lawlessness and the closing of ranks to cover them up) are the signs of an oligarchy.

It used to be the case that Americans would laugh at the ‘banana republics’ of South America as countries where ruling elites would violate laws with impunity, confident that even their supposed political opponents would protect them because of their common class interests. And yet, on April 7, Peru became the first country to convict a former democratically elected head of state for ordering killings and kidnappings by his security forces. Alberto Fujimori was sentenced to 25 years in prison.

We could learn something from the so-called banana republics.

POST SCRIPT: Why I don’t watch TV news

It looks like TV news is as almost as pathetic in England as it is here.

(Thanks to Earth-bound Misfit.)

Financial frauds-5: The problem with smart people

(For previous posts in this series, see here.)

Many of the people who were swindled by Madoff were those who suffer from what William Deresiewicz, a professor of English at Yale, calls ‘entitled mediocrity’. These are people who see themselves as smart merely because of their background and formal education and not out of any actual achievement. In a recent article in The American Scholar titled The Disadvantages of an Elite Education, Deresiewicz reflects on his own rising self-awareness of the limits his privileged education has created.

I never learned that there are smart people who don’t go to elite colleges, often precisely for reasons of class. I never learned that there are smart people who don’t go to college at all.

I also never learned that there are smart people who aren’t “smart.”
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The second disadvantage, implicit in what I’ve been saying, is that an elite education inculcates a false sense of self-worth.
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There is nothing wrong with taking pride in one’s intellect or knowledge. There is something wrong with the smugness and self-congratulation that elite schools connive at from the moment the fat envelopes come in the mail. From orientation to graduation, the message is implicit in every tone of voice and tilt of the head, every old-school tradition, every article in the student paper, every speech from the dean. The message is: You have arrived. Welcome to the club. And the corollary is equally clear: You deserve everything your presence here is going to enable you to get. When people say that students at elite schools have a strong sense of entitlement, they mean that those students think they deserve more than other people because their sat scores are higher.

It’s no coincidence that our current president [George W. Bush at the time of writing], the apotheosis of entitled mediocrity, went to Yale. Entitled mediocrity is indeed the operating principle of his administration, but as Enron and WorldCom and the other scandals of the dot-com meltdown demonstrated, it’s also the operating principle of corporate America.

It is this smug self-assurance of one’s own smartness that leads these people to fall prey to those who know exactly how to play on their weaknesses. Recently a hedge fund manager Andrew Lahde decided to retire after he had made enough money to live comfortably for the rest of his life, and he had some harsh parting words about the kinds of people that made it so easy for him to be so successful at making money. He said that the so-called ‘smart people’, who had a high opinion of themselves that was not based on any real achievements, were the easiest ones to take advantage of.

I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades.

Lahde was making money at these people’s expense legally but the people at the losing end were the same kinds of people who were swindled by Madoff.

America prides itself on being a meritocracy, that people get to the top by virtue of their ability and hard work. It is not clear if that was ever really true but there are definitely reasons to doubt it now. It is true that there are no legacies of a feudal system like a formal aristocracy and inherited titles. But we do now have in place a system that seems to perpetuate a ruling class. Wealthy people have created a system whereby they can send their children to elite primary and secondary schools and colleges (often starting with elite pre-schools!) where they move around largely with people like them and develop the contacts that, coupled with their parents’ network of business and social relationships, enable them to get onto the fast track of business and government. So we end up with a self-perpetuating elite.

What we have now is a one-party pro-war/pro-business form of government controlled by a wealthy elite that sees its role as preserving the privileges of the already privileged.

America has become an oligarchy, and that is not a good thing because it is usually a sign of impending collapse.

Next: The dangers of being ruled by an oligarchy.

POST SCRIPT: Telling the truth about religion

British comedian Marcus Brigstocke riffs funnily, but accurately, on the violence and hate and demands for special treatment that permeates the three so-called Abrahamic religions (Judaism, Christianity, and Islam) and the so-called ‘moderate’ religious people who are its enablers, something that I have said before.

Financial frauds-4: Bernard Madoff’s scam

(For previous posts in this series, see here.)

While Bernie Madoff has pleaded guilty to various charges of fraud, what he actually did has not yet been unraveled and who else was involved not revealed, though all the signs are that it was a pyramid, or ‘Ponzi’, scheme in the classic tradition, pretending to have a business that made money while merely taking money from newer investors to pay off the obligations to the older ones.

As with Charles Ponzi and Allen Stanford, there had been clues long before that Madoff was running some kind of fraudulent scheme, but those who suspected it were not sure exactly what. As long ago as November 2005, Harry Markopolos, an investment hedge fund manager and derivatives expert, sent a confidential report to the Securities and Exchange Commission, the supposed watchdog agency, saying that based on his analysis Madoff could not be providing his returns legitimately. In his report, Markopolos listed 29 red flags about Madoff’s operation.

As Eamonn Fingleton, a former editor for Forbes magazine and the Financial Times, explains in the CounterPunch newsletter of Feb 1-15, 2009:

Markopolos’ interest had been first piqued as far back as the 1990s, when colleagues told him of this amazing fund manager who was ostensibly using a conservative options-based hedging strategy to generate consistently superlative returns. As an options expert, Markopolos quickly determined that what Madoff was claiming was impossible (in this conclusion, he was joined by many Wall Street authorities, not least analysts at Goldman Sachs). Either Madoff was faking or he was pursuing a quite different investment strategy, in all probability a shady one, known as “front-running” (more about this in a second). At a minimum, Madoff was a liar.

What is front running?

Front-running refers to the practice by brokers of exploiting privileged knowledge about future buying and selling by large financial institutions to make private profits. A typical instance might start when a broker receives a big order from an institutional investor to buy shares in, say, IBM. This is more or less guaranteed to send the price shooting up, and if the broker can nip in seconds ahead with an order for his personal account, he or she is guaranteed an almost certain, risk-free, and instantaneous profit. Front-running is pandemic on Wall Street and, as Madoff’s more sophisticated investors realized, almost no one was better placed to profit from it than Madoff.

So this is the scheme that Madoff led his investors to suspect that he was carrying out. While it is technically illegal (since it involves using insider knowledge), it is not uncommon because it is hard to prove and prosecute. What aroused Markopolos’s suspicions is that, as in the case of the Ponzi and the Afinsa/Escala business models, while it was superficially plausible, the returns being provided implied a scale of operations that simply was not possible. But only people who understand the business model being used and do the calculations realize this. As Fingleton writes:

[A]fter years of piecing together information from a wide variety of mainly private sources, however, Markopolos became convinced that front-running was not the explanation. That left only one possibility: Madoff was running the biggest Ponzi scheme in history.

But others had also had their suspicions aroused, though they did not make them public.

For years, [Madoff] had been pegged as an outright Ponzi artist by Goldman Sachs and Credit Suisse, for instance, and he was blacklisted also at Deutsche Bank, Merrill Lynch, and UBS. Indeed, as far back as 1991, CounterPunch contributor Pam Martens, in her capacity as a Wall Street broker had told him she was on to his game and had so advised a client.

The business media and the regulatory agencies also dropped the ball. Markopolos’ now famous dossier was also given to the investigative reporter John R. Wilke of the Wall Street Journal. As Fingleton says:

It is hardly an exaggeration to say that, on the strength of an afternoon’s research, a good reporter could have worked up any one of Markopolos’ points into a cracker of a front-page story. Taken as a whole, the dossier represented the biggest “career development opportunity” any journalist has been handed since Deep Throat delivered the goods on Richard Nixon to Woodward and Bernstein a generation ago.

And yet, nothing happened. Neither the SEC nor the Wall Street Journal picked up on Markopolos’s investigation. Even the New York Times, which had to have been aware of all the worried whisperings about Madoff that were circulating in the elite social circles that their own editors inhabited, did not investigate or reveal these misgivings until after the scandal broke. Why?

Infected by the “greed is good” virus that has ravaged political discourse for nearly three decades, American financial regulation has now become so corrupt and incompetent that it would embarrass a Third World kleptocracy. What is news – at least to those who lack independent sources of information – is that top American editors and reporters now seem no more willing to tackle wealthy and well-connected crooks than their avowedly venal and cowed peers in, say, Jakarta or Harare.

This is what Jon Stewart excoriated Jim Cramer for in the now famous interview. But Cramer was merely a pathetic minor representative, a circus clown, of the financial reporting industry. The sickness runs deep. Consider the recent decision by Andrew Rosenthal, editorial page editor of the New York Times, to publish an an op-ed piece by one Daphne Merkin saying that there were no “victims” in the Madoff case since “no one was holding a gun to anyone’s head, saying sign up with Mr. Madoff or else.”. It is certainly true that some of the investors who gave Madoff money were driven by greed. But who is Daphne Merkin? In her piece she coyly says parenthetically that “I did not know Mr. Madoff nor did I invest with his firm, but have a sibling who did business with him.”

But as that excellent blog Talking Points Memo pointed out, there is far more to this connection.

That sibling is Ezra Merkin, the financier and former chairman of GMAC, who was the second-largest institutional investor in Madoff’s funds, losing billions of other people’s money. In a civil suit filed this week by New York Attorney General Andrew Cuomo, Ezra Merkin, who collected over $40 million from Madoff’s funds, was charged with “betraying hundreds of investors” by lying to them about how much of their money he had invested with Madoff, and by failing to disclose conflicts of interest.

So there were many people who were swindled by Madoff because other money managers like Merkin gave him their money, sometimes despite explicit instructions not to. When TPM contacted Rosenthal to question why the full extent of Daphne Merkin’s connections with Madoff was not made explicit and why she was given this platform to mitigate Madoff’s crime, he refused to answer, which suggests how complicit the media has become in the face of massive government and financial corruption.

Next: The problem of ‘entitled mediocrity’

POST SCRIPT: Biblical torture

The story of Job is one of the weirdest in the Bible, which is quite an achievement when you consider that it is a book full of truly weird stories. God essentially allows the devil to torture an innocent man for no reason other than to prove a point. This animation gives you a quick and accurate synopsis of the story.