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How the Servant Became a Predator: Finance’s Five Fatal Flaws
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist who has spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Originally published at New Deal 2.0
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What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
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. The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector’s parasitism.
Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator Statehttp://books.simonandschuster.com/Predator-State/James-Galbraith/9781416566830, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:
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The Top 12 Reasons Why You Should Hate the Mortgage Settlement
As readers likely know by now, 49 of 50 states have agreed to join the so-called mortgage settlement, with Oklahoma the lone refusenik. Although the fine points are still being hammered out, various news outlets (New York Times, Financial Times, Wall Street Journal) have details, with Dave Dayen’s overview at Firedoglake the best thus far.
The Wall Street Journal is also reporting that the SEC is about to launch some securities litigation against major banks. Since the statue of limitations has already run out on securities filings more than five years old, this means they’ll clip the banks for some of the very last (and dreckiest) deals they shoved out the door before the subprime market gave up the ghost.
Freddie Mac Bets Against American Homeowners
Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.
No evidence has emerged that these decisions were coordinated. The company is a key gatekeeper for home loans but says its traders are “walled off” from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules.
Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”
But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.
“We were actually shocked they did this,” says Scott Simon, who as the head of the giant bond fund PIMCO’s mortgage-backed securities team is one of the world’s biggest mortgage bond traders. “It seemed so out of line with their mission.”
The trades “put them squarely against the homeowner,” he says.
Those homeowners have a lot at stake, too. Many of them could cut their interest payments by thousands of dollars a year.
Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get loans and on what terms.
The Federal Housing Finance Agency effectively serves as Freddie’s board of directors and is ultimately responsible for Freddie’s decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.
Freddie and the FHFA repeatedly declined to comment on the specific transactions.
Freddie’s moves to limit refinancing affect not only individual homeowners but the entire economy. An expansive refinancing program could help millions of homeowners, some economists say. Such an effort would “help the economy and put tens of billions of dollars back in consumers’ pockets, the equivalent of a very long-term tax cut,” says real-estate economist Christopher Mayer of the Columbia Business School. “It also is likely to reduce foreclosures and benefit the U.S. government” because Freddie and Fannie, which guarantee most mortgages in the country, would have lower losses over the long run.
Freddie Mac’s trades, while perfectly legal, came during a period when the company was supposed to be reducing its investment portfolio, according to the terms of its government takeover agreement. But these trades escalate the risk of its portfolio, because the securities Freddie has purchased are volatile and hard to sell, mortgage securities experts say.
The financial crisis in 2008 was made worse when Wall Street traders made bets against their customers and the American public. Now, some see similar behavior, only this time by traders at a government-owned company who are using leverage, which increases the potential profits but also the risk of big losses, and other Wall Street stratagems. “More than three years into the government takeover, we have Freddie Mac pursuing highly levered, complicated transactions seemingly with the purpose of trading against homeowners,” says Mayer. “These are the kinds of things that got us into trouble in the first place.”
Children’s medicines coated with brain-damaging aluminum
(NaturalNews) Aluminum Lake food coloring, used to heavily coat liquid medicines for children, contains dangerous amounts of aluminum and harmful synthetic petrochemicals. These “petrochemicals” are carcinogens containing petroleum, antifreeze and ammonia, which cause a long list of adverse reactions. Aluminum poisoning can lead to short and long term central nervous system (CNS) damage, such as memory impairments, autism, epilepsy, mental retardation, and dementia.
Research shows that just 4ppm of aluminum can cause the blood to coagulate. This is what causes Alzheimer’s Disease and has been documented to inhibit learning. Aluminum consumption can also be associated with the development of bone disorders, including stress fractures.
Also known as tartrazine, FD&C Yellow Aluminum Lake is a chemical concoction derived from coal tar. It is known to be a reproductive toxin. All artificial colors contain Aluminum Lake, so when your child gets to pick between red, blue or green medicine, they’re really choosing which poison they get to consume. Several chemically enhanced food colorings contain ammonia and therefore produce compounds proven to cause various cancers in animal studies, according to CSPI, the Center for Science in the Public Interest. (http://www.cspinet.org/reports/chemcuisine.htm)
Most widely used food colors and their damaging actions:
• Blue #1: Research shows it causes kidney tumors in mice.
• Blue #2: Research shows even higher incidence of tumors, specifically gliomas in male rates (a type of tumor that starts in the brain or spine).
• Red #2: Toxic to rodents, even at modest levels, and causes tumors of the bladder.
• Red #3: FDA recognized it in 1990 as a cause of thyroid cancer in animals. It was banned in cosmetics, but still allowed in food and medicine.
• Red #40: Most popular dye of all. Debilitates the immune-system in mice. Allergic reactions common.
• Green #3: Causes bladder and testes tumors.
• Yellow #5: Affects behavior and induces severe hypersensitivity reactions.
• Yellow #6: Causes adrenal tumors in animals.
You, Me, and the SPP
‘You, Me, and the SPP: Trading Democracy for Corporate Rule’
What do secrecy, police provocateurs, an assault on democracy and infringements on citizens’ rights have in common? The Security Prosperity Partnership.
‘You, Me, and the S.P.P: Trading Democracy for Corporate Rule’ is a feature length documentary which exposes the latest manifestation of a corporatist agenda that is undermining the democratic authority of the citizens of North America. Two processes, the Security Prosperity Partnership (SPP) and the Trade Investment Labour Mobility Agreement (TILMA) are rapidly eroding and eliminating standards, civil liberties, regulatory systems and institutions put in place over generations through the democratic process. Proponents of the SPP and TILMA say that they are needed to keep trade flowing, opponents say these agreements not only undermine the democratic authority of citizens they threaten the sovereignty of the three nations through the integration of military, security structures and regulatory regimes.
What is SOPA and how does it work?
The Internet is in an uproar over the Stop Online Piracy Act. The battles lines are drawn. Big Media (the record labels, movie studios and TV networks) support the bill while Big Tech (search engines, open source platforms, social networks) oppose it. The bill, introduced to Congress by Representative Lamar Smith, is ostensibly supposed to give the Attorney General the ability to eliminate Internet piracy and to “protect U.S. customers and prevent U.S. support of infringing sites.”
There is a lot that may be wrong with SOPA, but putting the power to censor the Internet into the hands of the government is chief among citizens’ concerns. The law would force Internet Service Providers and search engines to cut off access to infringing sites as well as give the government the ability to stop payment to those sites. How would SOPA work? What do you need to know about the bill heading into 2012? We take a deep dive into everything you need to know below.
