Why do "Free" Markets, cost SO much?

If Free Markets are the supposed Engine of Growth,

Why do they always seem to lead to a "money grab",
a greedy "land rush", with the Tax payer ALWAYS picking up the Bill?

Why do the Rich, always manage to get richer?

While those who "play by the rules", just manage to get "pink slips" and foreclosure notices?

And an endless pile of Bills?

I guess, what Free Markets really mean, is Buyer Beware!

Because, without Regulation, without Transparency, Free Markets are more a Free-for-all, than a Growth Opportunity.

In the current Economic-Housing Crisis, the only thing "growing" is the lack of confidence, and the Ultimate Price Tab.

In the "wild west" atmosphere of Free Market purists,
(One World Order, Reaganomics, Top-down, Flat-Earthers, Ownership Society)

The one thing that is ALWAYS in Short Supply --

is ACCOUNTABILITY!

(And the one thing always being exploited,
is "Quick Profits" -- damn the consequences!)

Lack of ACCOUNTABILITY is rampant in the current Big Bank Bailout Plan:


Despite rules and vows, oversight lax on bailout

By Amit R. Paley - Washington Post - 11-13-2008

     ... the Bush administration has committed $290 billion of the $700 billion rescue package.

Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.

"It's a mess," said Eric Thorson, the Treasury Department's inspector general, who has been trying to oversee the bailout until the newly created position of special inspector general is filled. "I don't think anyone understands right now how we're going to do proper oversight of this thing."

In approving the rescue package, lawmakers trumpeted provisions in the legislation that established layers of independent scrutiny, including a special inspector general to be nominated by the White House and a congressional oversight panel to be named by lawmakers.


Let me see $290,000,000,000.00 has been given away so far, and quote "It's a Mess"
and No one know how to oversee it !?

TONS of Free Money to the Big Banks --
yet there's apparently NO ACCOUNTABILITY on how it's spent?


Democrats Fed Up With Bailed-Out Banks

Leaders Threaten to Use Legislation to Prod Financial Institutions to Lend Again
By Mike Lillis 11/13/08

     Bring on the finance regulations.

That’s the message this week from a growing number of Democratic leaders, who are increasingly irritated by the reluctance of the financial industry to put capital it received from the Bush administration’s $700-billion bailout to work.

Lenders not lending. Executives keeping large pay packages. Banks distributing dividends to shareholders. The reports have been numerous. This is not, according to Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, the way the program was supposed to work.

“Let me say as clearly as I can: hoarding capital and acquiring healthy banks are not — I repeat, are not — reasons why Congress authorized $700 billion in emergency funding,” Dodd told finance industry representatives during a Thursday hearing on bailout oversight.
...

The debate is at least partly ideological. The administration and many congressional Republicans oppose more industry regulations, arguing that free markets work best when governments stay out of the way. But in the middle of an economic whirlwind caused largely by poor investment decisions by banks and other financial firms, that argument has lost some steam.

“What we’ve learned over the last number of months is that consumer protection and economic growth go hand-in-hand,” the Connecticut senator said. “In fact, when you fail to do the first, you end up doing severe damage to the latter.”

Thank you, Senator Dodd!

Please, put some watchdogs on the newly minted printing presses!

The U.S. Economy should NOT be the sole playground of the Super Rich, with all the rules, bent in their favor!

The consumer matters too!

All the millions of "Worker Bees" have a stake in how the Economic Game is played. Most workers play by the Rules -- We go to work. We pay our Taxes. We pay attention, we Vote!

Workers expect our pensions, our 401k's, our home equity, to be there when we need them some day!

So why do Investment Bankers and Hedge Funds get to avoid serious consequences, and are "held harmless" for the damage they wreak on the entire "Colony"?

In short,
Why do Bankers get Bailouts, and Worker Bees get Bumpkis?


Democrats Fed Up With Bailed-Out Banks

     Originally, the [Bailout] plan called for the Treasury to buy up toxic mortgage-backed securities and residential loans on the books of banks and other financial institutions. Treasury Sec. Henry M. Paulson Jr., however, switched gears. The government used $250 billion to recapitalize the firms in exchange for equity stakes in them. Another $40 billion went to prop up insurer American International Group.

The strategy changed again yesterday, when Paulson announced that the remainder of the bailout funds would be used to bolster consumer credit markets. But the administration must first get congressional approval, and that gives Democratic congressional leaders some leverage to alter the program, though they would have to pass new legislation to do so.

There is some indication that they will press for more transparency on how the Treasury is using the bailout money.
...

Meanwhile, the economy continues to tank. In the first week of November, the number of first-time applicants for unemployment insurance jumped to 516,000 — a seven-year high — the Labor Dept. reported Thursday.

The dismal figures may have emboldened Democratic leaders to press the administration to accept economic-stimulus legislation this month aimed at boosting consumer spending.

It seems Secretary Paulson has created a new kind of Entitlement Society -- the "too big to fail" Society.

Senator Dodd, held an Oversight Committee Hearing Meeting this week, to review the Big Bank Bailout program:

11/13/2008
U.S. Committee on Banking, Housing, and Urban Affairs:
Title: Oversight of the Emergency Economic Stabilization Act:
"Examining Financial Institution Use of Funding Under the Capital Purchase Program."

ie. the beginning Search for ACCOUNTABILITY

Here's the Video of the Committee Hearing

Here's are some of the Hearing Highlights:

-- Towards the end of the Hearing, most of the Panel of Experts agree on "the need for Regulatory Reform".

[who knew?]

     -- "45000 people lose their homes and go into foreclosure per week"

Time Mark: 169:00, Mr. Martin Eakes Testimony, Chief Executive Officer, Self-Help Credit Union and the Center for Responsible Lending

     "Yes, it is critical over the long run to restructure our Regulatory system ...

and I do want to here, agree with Mr Eakes again, the insufficient oversight and lack of reserving for CDS, issued by AIG, was a critical part of the problem, we are facing today.

But I want to make 2 other points. One point, this is a Global phenomena now. We are going to need Global Cooperation on Regulation. And ... it can't just be in one nation, because as we see capital flows are global.

Secondly, again FSA was not a cure-all. The U.K. had over the same period, not as much as we, an Erosion of Credit Standards. And FSA did not see that happening, or could not stop it. And at the same time as Erosion of Credit Standards, a Housing Assets Boom. This U.K crisis is similar to the Japan crisis, is similar to the Asian financial crisis.

So it's not just a better environment for regulation, a better structure, it is Better Regulation."

Time Mark: 182:00, Dr. Susan M. Wachter Testimony, Worley Professor of Financial Management, Wharton School of Business, University of Pennsylvania

     "Even with AIG, it's not really not widely reported, but what really brought that company to its knees, was the Credit Default Swaps that were traded, out of office in London. That office was able to get exempted from all of the European regulators because nominally, AIG's Holding Company was regulated by the OTS, because it owned a $2 Billion Thrift. So owning a $2 Billion Thrift, enabled this to be -- and the OTS was no way capable of looking at the Credit Default Swaps that AIG had all over the world. So I feel that that is the most critical case.

... you know, when the difference between Thrifts and Banks was established several decades ago, the Thrifts were providing 80 to 90% of Mortgage Loans. Now it's exactly the reverse -- 70 plus percent, 80% of all Mortgage Loans are made by Banks. So the two institutions have converged. And ... having a choice of Regulator, as Secretary Paulson and his staff has said, we should have Banks succeed based upon their Business choices, not based on which Regulator they happen to choose."

Time Mark: 177:30, Mr. Martin Eakes Testimony, Chief Executive Officer, Self-Help Credit Union and the Center for Responsible Lending


Click for Larger Image

Credit Default Swaps (CDS) are the "pyramid scheme" that exploited the Sub-prime Mortgage Market, making the CDS issuers very rich --

that is, at least, until the Housing Speculation Bubble burst!

Credit Default Swaps (CDS) ARE THE REASON, big Investment Banks MUST NOT be ALLOWED to FAIL now! (CDS are the root cause of the "unspoken" Financial Armageddon scenarios.)

(It seems the entire Global Economy is over-invested in this Unregulated Free Market, a market composed primary of virtual Derivative Paper)

Here's some background on Credit Default Swap Markets:

Hedging their bets -- about exactly WHO owns your Mortgage? by jamess

The naked truth about this house of cards by jamess

TheDeal Newsweekly
Soros: Credit default swaps are the next Damocles sword

TheDeal Newsweekly
The abyss

Forbes
The Great Derivatives Smackdown

     The entire market [derivatives contracts], around the world, is estimated at over $100 trillion.

TOO bad, the wealth of the entire planet is only:

     GWP (gross world product):
$65.61 Trillion
(2007 est.)

https://www.cia.gov/library/publications/the-world-factbook/print/xx.html

Who owns all that funny money, anyways?

(and more to the point, WHO holds YOUR Mortgage?
Chances are it's not who you think.)

Who's been minding the CDS Store? And why do we believe "Free Markets can do no wrong", again?

AIG makes for a unique Case Study in the Lack or Regulation, and the consequences of the watchdogs "looking the other way" ... just check out this AIG Timeline from a year ago ...

propublica.org -- journalism in the public interest
AIG’s Spiral Downward: A Timeline
by Paul Kiel, ProPublica - November 14, 2008

     ...
Late October, 2007: Goldman asks AIG to post another $3 billion in collateral. AIG privately agrees to post $1.5 billion.

November 7, 2007: In an SEC filing, AIG reports $352 million in unrealized losses from its credit-default swap portfolio, but says it’s "highly unlikely" AIG would really lose any money on the deals.

The company also discloses that there have been disagreements with some of its counterparties (the banks in the U.S., Canada and Europe that had purchased the swaps) about the "collateral required." The report does not disclose how much collateral AIG has been forced to post, however.

November 29, 2007: An auditor from Pricewaterhouse Coopers, AIG’s outside auditor, privately warns AIG CEO Martin Sullivan that AIG could have a "material weakness" in its risk management of the swaps.
...

propublica.org - journalism in the public interest
Was AIG Watchdog Not Up To The Job?
by Jeff Gerth - November 10, 2008

     U.S. regulators responsible for supervising American International Group (AIG) now acknowledge that they failed to grasp the impact of provisions in the complex derivative contracts that pushed the world's largest insurance company to the brink of collapse.

Terms of the insurance-like contracts, called credit-default swaps, required AIG to post billions of dollars in collateral in the event of a market slide or credit downgrade.

"We missed the impact" of the collateral triggers, said C.K. Lee, who ran a little-known team in the U.S. Office of Thrift Supervision, or OTS, which oversaw AIG's finance unit. He said the swaps were viewed as "fairly benign products" until they overwhelmed the trillion-dollar company.

The government announced this morning that it had restructured and expanded its aid package for AIG, bringing the total to $150 billion in loans and investments.
...
Instead, examiners mostly concurred with the company's repeated assurances that any risk in the swaps portfolio was manageable.
...
A report by the U.S. Government Accountability Office last year said the OTS lacked the needed expertise.
...
Despite such signals, the OTS never took formal enforcement action.
...
The OTS already has been targeted by critics who say its inaction, along with that of other regulators, contributed to the failures of Washington Mutual and IndyMac, both federal banks. Earlier this year, Treasury Secretary Henry Paulson proposed abolishing the agency, with a $250 million budget and 1,000 employees, as part of a broad overhaul of financial oversight. Democrats in Congress have said reforming financial regulation will be a priority next year.

An earlier financial crisis gave birth to the OTS.
...
In 1999, Congress passed legislation allowing banks, insurance companies and securities firms to compete with each other. The new law allowed for a range of possible regulators, from the Federal Reserve to the Securities and Exchange Commission, depending on the mix of financial services a company chose to offer. Holding companies that owned one or more thrifts had the possibility of being regulated by the OTS.

"There was a stampede by commercial and financial firms to get a thrift charter," said Bart Dzivi, a former counsel to the Senate Banking Committee and now a financial-institutions lawyer in Northern California, "so that OTS could be their consolidated supervisor."
...
The OTS focused on its traditional mission of helping thrifts make home loans. But by then, the global financial landscape was changing.

When you let Bankers CHOOSE their own Regulators, (by setting up as a Thrift Bank), how is such Deregulation, suppose stop a Greed Stampede?

It seems, in the case of AIG, as with so many other "investment" Banks, the 1999 Deregulation Act, just opened the gates to the Sub-Prime "Land Rush" of the last Decade.

Those Banker and Hedge Funds (and their clients), made out like bandits, while the Consumer is left "holding the bag".

Exactly HOW does a "wild west" Free Market hold GREED Accountable? (Especially, when the "forces of capitalism" simply "fire up" the Presses again, whenever their need, arises.)

How does unfettered Competition weed out the "Bad Apples", when their "transactions" occur on a "playing field" that no one ever sees?

... on a "playing field" where the Refs simply "look the other way"?

The evidence seems clear, that the "top down", "trickle down" Free Markets of Reaganomics, HAS FAILED!

And At what cost?
To who's pension, 401k, or Mortgage?

The Accounting of that Cost to the Consumer, still waits to be tallied ..

One thing for sure, in the Economics, that favors the Wealthy,
the one thing that is ALWAYS in Short Supply in their Free Markets --

is their ultimate ACCOUNTABILITY!

There's no time for that, when there's "Quick Profits" to be made ...

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Comments

I like the way that it visually translates the financial failures into their impact on everyday people struggling to make ends meet.

If I have a criticism it is one that I always have about the handling of this subject on Progressive blogs. It is that it fails to acknowledge the vital contribution that these poorly regulated capital markets make to the US and UK economies. They are the "invisible earnings" on our balance of payments that are vital to our economic survival at the moment.

I am not making a value judgement about this but the failure to properly address this issue, and the potential loss of these earnings to every family in our countries if improved but heavy-handed regulation is introduced, has to be considered. Obama will have to do this and may well find it a constraint on his actions.

...It is that it fails to acknowledge the vital contribution that these poorly regulated capital markets make to the US and UK economies. They are the "invisible earnings" on our balance of payments that are vital to our economic survival at the moment.

I am not making a value judgement about this but the failure to properly address this issue, and the potential loss of these earnings to every family in our countries if improved but heavy-handed regulation is introduced, has to be considered....

That is sort of like the cheating husband telling his wife if she just understood him better and appreciated him more, he wouldn't have betrayed her. 

Maybe I am being harsh and assuming you have kept up with all that has come out about many corporations reckless abandon of ethics, business judgement and even the laws they were still required to abide.   

I for one would like the corporations that continually whine about regulation to understand the capital markets they so value benefit from transparency that provides the relationship of trust for us to invest in them.

...rather than corporations.

Both the US and the UK rely heavily upon the earnings from these.

Russia, France, China (among others)would like to see the dominance of our two countries end in this regard. Over-regulation is a way to ensure that this happens. No one knows what the tipping point will be between sensible regulation and excessive regulation.

I do not pretend to know either. My comment was merely meant to warn.

"Proper Regulation!" is a great slogan. In practice it is very threatening to key national earnings at a time when we can least afford to loose them. It is one of those areas with which Barak Obama will have to deal but where options are far less than superficially appear to exist.

I shall try and write more intelligently on this subject later, if I have a chance.

I agree something has to be done.

has worked to increase the way that alll of our markets are connected, I would be in favor of working to come up with global standards.  We have seen the ampification of the ties as this quickly went to a global systemic crisis. 

But we have to keep in mind corporations will always be looking for areas they can exploit.  In spite of everything they say about regulation in the U.S. hurting the competitiveness of the U.S. capital markets, the area where they really got into trouble was an area that is completely unregulated.  And ironically, in AIG's case with AIGFP, the little oversight they were under was by their choice deferred from a European agency back to an entirely unequipped agency in the U.S. Treasury.  The article jamess linked to from ProPublica - Was AIG Watchdog Not Up To The Job? is an excellent read on the topic. 

My point is that we need to strike a balance where there is good or as you say proper regulation of the markets.  The constant roar against Democrats and their desire to regulate has been abused by the corporate world and extension, the Republicans for years.  But the reality of the situation we find ourselves in today can be traced back to some very specific steps taken to loosen the regulations put in place almost a century ago to prevent such events from happening again. 

...that I disagree with in what you say.

I suppose that I am just a bit jumpy at the moment. There are too many other countries seeking advantage out of the current disorder and who are no friend of the dollar. Their new world financial order has little to do with advancing our progressive goals on mitigating the adverse consequences of globalization and a lot to do with national advantage.

The language used seems to imply a commonality of purpose with our own but its hidden agenda is something entirely different.



thanks for the feedback Welshman



your points are well taken.





I've written about "balance of payments" before a few times,


but frankly I don't feel I understand it well enough, to be definitive.



Debt can be an engine of growth,
in "bottom up" infrastructure type of New Deal investment programs.



And I think there is even a place for Trade,

if the "playing field" is level,
in term of wages, working conditions, and environmental standards.



Recklessly turning a $5 trillion surplus,

into an $11 Trillion deficit, however,

is entire another story!

What did Keynes know about technology? 

 

He was 20 years old when the Wright brothers flew.

He was 25 when Ford introduced the Model-T.

 

Consumerism was just getting started when Keynes criticised the settlement of World War I.  Freudianism was just being introduced into advertising to manipulate the consumers.  So his most famous economic work came out in 1936 before there were televisions and the first television commercial was broadcast in 1941.  One year after the introduction of the term "planned obsolescence."  He died in 1946 and probably never saw a TV commercial.

 

So now we have a big hullabalu about our economic problems but how many economists are talking about how much Americans have lost on the depreciation of automobiles since the moon landing, or how about the end of the Vietnam War?  Wasn't that about Capitalism and Communism?

 

Useless changes in cars meant they cost more so consumers borrowed more and insurance was more expensive too.  But it all got poured down a rat hole of depreciation that economists won't talk about but they called it economic growth when we bought more new cars.  Buyer beware is right.  We were sold delusional economic theory along with the cars.

 

So what of our economists and Keynesianism?  Give a pseudo-intellectual some new knowledge and he will come up with more complicated ways of being stupid.

Kill an economist for Karl