A Study on Crony Capitalism: How the Geithner Connection boosted Wall Street Stocks

Interesting study from distinguished mainstream economists.

From the Wall Street Journal Real Times Economic Blog

Want to boost your stock prices during a financial crisis? Build ties to the next Treasury secretary.

A research paper published by the National Bureau of Economic Research finds that investors bid up shares of a handful of financial firms after news leaked that Timothy Geithner would be nominated for the top post at Treasury in 2008.

“This return was about 6% after the first full day of trading and about 12% after 10 trading days,” Massachusetts Institute of Technology economists Daron Acemoglu and Simon Johnson, University of California at Berkley economist Amir Kermani,University of Connecticut professorJames Kwak and Brigham Young University professor Todd Mittonwrote.

The reason for outperforming shares was a unique set of circumstances — the financial crisis — coupled with the revolving door between Wall Street and Washington that investors expected would bring officials to Mr. Geithner’s side, the authors write.

“Excess returns for being connected to Geithner reflect the market’s expectation that, during a period of turbulence and unusually high policy discretion, the new Treasury secretary would need to rely on a core group of employees and a small social network for real-time advice — and that these employees were likely to be hired from financial institutions with which Geithner had connections,” the authors surmise.

Click on this link to the paper

I have noted in July 2012 how the New York Fed bragged about the influence of their policy in pushing up US Stocks, the GAO audit which found the Fed’s largesse of $16 trillion in bailouts have benefited Wall Street and foreign banks during the 2007-8 crisis and lately how QE 3.0 continues to bailout foreign banks (by $1 trillion in cash as of April 2013—according to the Zero Hedge)

In the meantime, former Treasury Secretary Tim Geithner today has been reported to have taken a job in one of Wall Street’s companies. The regulator is now the regulated. This is an example of the Wall Street-US government revolving door phenomenon in action.

The above serves as more proof of legalized insider trading by means of unilateral policies designed to boost the interest of special groups with deep political connections at the expense of society.

Let  us not forget that the US government’s vast tentacles influences mainstream ‘expert’ opinion indirectly via job contracts and career opportunities.

In terms of the US Federal Reserve’s clout, according to a Huffington Post article in 2008 (bold mine)

The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship." A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That's a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list "monetary policy, central banking, and the supply of money and credit," as either their primary or secondary specialty; 310 list "money and interest rates"; and 244 list "macroeconomic policy formation [and] aspects of public finance and general policy." The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their "Financial Roundtable," the closest way they can approximate a focus on monetary policy and central banking…

The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank's money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

In short, the Wall Street-US Government ties run deep and have not been limited to revolving door political relationships, but likewise in the realm of dissemination of information.

Graphic of the Day: MIT Academes Govern World’s Money Policies

Could revolving door relationships between central banks and the highly protected banking industry signify manifestations of more than just the Goldman Sachs connection?

Central bank policies appear to have another a common denominator; they seem to be undergirded by academic pedantry from the stealth sanctums of the Massachusetts Institute of Technology (MIT). 

From the Wall Street Journal (bold mine) [hat tip zero hedge]

Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe's churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

Their monetary strategy isn't found in standard textbooks. The central bankers are, in effect, conducting a high-stakes experiment, drawing in part on academic work by some of the men who studied and taught at the Massachusetts Institute of Technology in the 1970s and 1980s.

How the world’s tightly knit central bank cabal operates, again from the same article:

Central bankers themselves are among the most isolated people in government. If they confer too closely with private bankers, they risk unsettling markets or giving traders an unfair advantage. And to maintain their independence, they try to keep politicians at a distance.

Since the financial crisis erupted in late 2007, they have relied on each other for counsel. Together, they helped arrest the downward spiral of the world economy, pushing down interest rates to historic lows while pumping trillions of dollars, euros, pounds and yen into ailing banks and markets.

Three of the world's most powerful central bankers launched their careers in a building known as "E52," home to the MIT economics department. Fed Chairman Ben Bernanke and ECB President Mario Draghi earned their Ph.D.s there in the late 1970s. Bank of England Governor Mervyn King taught briefly there in the 1980s, sharing an office with Mr. Bernanke.

Many economists emerged from MIT with a belief that government could help to smooth out economic downturns. Central banks play a particularly important role in this view, not only by setting interest rates but also by influencing public expectations through carefully worded statements.

While at MIT, the central bankers dreamed up mathematical models and discussed their ideas in seminar rooms and at cheap food joints in a rundown Boston-area neighborhood on the Charles River.

This gives light to the cartel-like operations of world’s central banks, who operate in consonance or in apparent collaboration with each other. 

Experimental policies, which encompasses excessive reliance on mathematical models, centralization and presumption of knowledge, are a fatal mix to the real world. 

As Nassim Taleb wrote in The Bed of Procrustes: Philosophical and Practical Aphorisms; p.72

Academics are only useful when they try to be useless (say, as in mathematics and philosophy) and dangerous when they try to be useful.

Video: Revolving Door Relations Between Pentagon and Defense Contractors

The following investigative video is another wonderful example of crony capitalism. This can be seen through the lens of the political relationship between the military industrial complex and the Pentagon.  

We see how regulatory capture has evolved into revolving door relationships--former regulators (military officers) end up as officials for defense contractors, and where intense lobbying in shaping public policies, channeled through these former insiders, has reaped enormous "rent" profits for politically privileged firms. 

The implication is that the interventionist US "imperial" foreign policies (warfare state) are likely manifestations of the advancements of the interests of such clique.  

The Goldman Sachs-Central Banking Connection

Ever wonder why policy directions trends have increasingly been skewed towards promoting the interests of the bankers? 

EPJ’s Bob Wenzel writes,

With the appointment of Mark Carney to head the Bank of England, three major central banks will be headed by former Goldman Sachs banksters. Mario Draghi is ECB president, and William Dudley is the head of the Federal Reserve Bank of New York. Both, like Carney, are ex-Goldmanites.

More evidence of Revolving door politics.

Why Do People have Faith in Politicians?

Professor Don Boudreaux is puzzled and saddened by people’s unwavering faith in reprobate politicians,

Successful politicians – and particularly those who are successful on national stages – are, with exceptions too few to matter, master con artists.

Whatever is the reason why so many grown people respect holders of political office is, as it has always been, beyond my comprehension. I just don’t get it. Practitioners of no other profession are accorded more honor, respect, and (most importantly) power while at the same time being held to such low standards of ethical behavior. Actions that, when committed by the family dog, properly elicit scolding or muzzling or even eviction from the premises are, when committed by an elected official, greeted with oohs, aahhs, applause, and re-election to powerful office.

I share the same frustrations too.

Thanks to the principles of liberty, I have been enlightened that people who mattered most are those who put to risks their personal savings and capital and commit tremendous efforts to serve the consumers. Such people represent genuine public service.

Yet these wealth generating class of people are often unfairly painted as immoral or unethical by politicians, by their lackeys and their media mouthpieces.

Moreover, there has been little realization that while there will always be crooked people, corrupt and perverted behaviour are often an offshoot to arbitrary laws, excessive interventionism and burdensome taxes. Many unscrupulous actions are consequences of stifling regulations. And these have been the primary reasons for the proliferation of informal economies or black markets.

And in contrast, politicians who live by the forcible appropriation of people’s efforts, have ironically, been portrayed as having the moral high ground over the productive economic class.

Many don’t understand that the precept of “it is not what you know but who you know” has been grounded on the politicization of the marketplace. Where entrepreneurs, business people and corporate managers have been frequently harassed or intimidated by onerous regulatory and tax requirements, political “connections” become a byword for the protection of one’s properties and the facilitation one’s economic interests.

And analogous to Stockholm Syndrome, where hostages develop personal attachments with their captors, the populace yield or surrender to the “realities” of interventionism. Thus, the popularity of those who possess social and political control over others—or the politicians and the political class because of the unwarranted dependency relationship built from oppressive politics.

Of course the indoctrination factor through mass media, and the state captured private (crony) institutions have been party to the promotion of interventionism, the latter serves as a reason for the existence of revolving door relationships with crony institutions.

In the Philippines many aspire to be lawyers, that’s because lawyers are perceived to be a heartbeat away from politics. And politics has been seen by many, if not most, as a paragon of public service and career success which is entirely a popular delusion.

People hardly understand the system of ethics from which democratic politics operates on.

Basically, in arguing for the protection of society’s welfare, politicians take away people’s freedom, which is used as basis for the second step, the arrogation of people’s property. Then, the state through incumbent political leaders redistributes plundered resources to their wards and gives some of the plundered resources back to the taxpayers (e.g. welfare, public infrastructures) and claim the moral high ground of being ‘compassionate’. Yet most of such actions have been meant at securing votes to keep them in office.

I am reminded by the pungent Bennett Cerf quote in Nathaniel Branden’s book Judgment Day: My Years With Ayn Rand

You have to throw welfare programs at people — like throwing meat to a pack of wolves — even if the programs don't accomplish their alleged purpose and even if they're morally wrong.

And of course, the rest of the taxed resources are kept for themselves in the form of salaries, perks, perquisites and other benefits (such as junkets), not to mention income from under the table transactions.

People hardly realize too that the political office have been magnet to people with sinister motivations. The great Friedrich von Hayek said the worst people usually get to the top of the political world.

Writes Doug French at the Mises Blog, (bold emphasis mine)

F.A. Hayek famously argued in The Road to Serfdom, that in politics, the worst get on top, and outlined three reasons this is so. First, Hayek makes the point that people of higher intelligence have different tastes and views. So, as Hayek writes, “we have to descend to the regions of lower moral and intellectual standards where the more primitive instincts prevail,” to have uniformity of opinion.

Second, those on top must “gain the support of the docile and gullible,” who are ready to accept whatever values and ideology is drummed into them. Totalitarians depend upon those who are guided by their passions and emotions rather than by critical thinking.

Finally, leaders don’t promote a positive agenda, but a negative one of hating an enemy and envy of the wealthy. To appeal to the masses, leaders preach an “us” against “them” program.

“Advancement within a totalitarian group or party depends largely on a willingness to do immoral things,” Hayek explains. “The principle that the end justifies the means, which in individualist ethics is regarded as the denial of all morals, in collectivist ethics becomes necessarily the supreme rule.”

The bottom line is that ignorance, indoctrination, propaganda, the belief in the politics of heaven (abundance) on earth (scarcity), the seduction of easy life from political redistribution, dependency on political relations as means to preserve one’s property, the popularity of social control or political power, traditionalism, peer pressures, and the Stockholm syndrome applied to political relations, among many others more, may have contributed to people’s undeserving faith in politicians.

The Illusions of Technocracy

Professors Daron Acemoglu and Simon Johnson writes,

In 1979 Paul A. Volcker became chairman of the Fed and tamed inflation by raising interest rates and inducing a sharp recession. The more general lesson was simple: Move monetary policy further from the hands of politicians by delegating it to credible technocrats.

I hope the world operates in such simplicity. We just hire the right persons of virtue and intellect and our problems would vanish.

But that’s not the world we live in.

First of all, too much credit has been given to the actions of ex-US Federal Reserve chief Paul Volcker, who may just be at the right place at the right time.

Here is Dr. Marc Faber on Paul Volcker, (bold emphasis mine)

In the 1970s, the rate of inflation accelerated, partly because of easy monetary policies, which led to negative real interest rates, partly because of genuine shortages in a number of commodity markets, and partly because OPEC successfully managed to squeeze up oil prices. But by the late 1970s, the rise in commodity prices led to additional supplies and several commodities began to decline in price even before the then Fed chairman Paul Volcker tightened monetary conditions.

Similarly, soaring energy prices in the late 1970s led to an investment boom in the oil- and gas-producing industry, which increased oil production while at the same time the world learned how to use energy more efficiently. As a result, oil shortages gave way to an oil glut, which sent oil prices tumbling after 1985.

At the same time, the US consumption boom that had been engineered by Ronald Reagan in the early 1980s (driven by exploding budget deficits) began to attract a growing volume of cheap Asian imports, first from Japan, Taiwan, and South Korea, and then, in the late 1980s, also from China.

I would therefore argue that even if Paul Volcker hadn't pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the USA.

Then, markets had already been signaling the unsustainability of Fed induced inflation which had been underpinned by real market events as oversupply and globalization. Thus, Paul Volcker’s actions may have just reinforced an ongoing development.

In short, lady luck may have played a big role in Mr. Volcker’s alleged feat.

Next, looking at the world in a static frame misleads.

Conditions today are vastly dissimilar from the conditions then, as I recently wrote,

Circumstances during Mr. Volker’s time have immensely been different than today. There has been a vast deepening of financialization of the US economy where the share of US Financial industry to the GDP has soared. In short, the financial industry is more economically (thus politically) important today than in the Volcker days. Seen in a different prism, the central bank-banking cartel during the Volcker era has not been as embedded as today.

Yet how did this came about?

According to Federal Reserve of Dallas Harvey Rosenblum

Banks have grown larger in recent years because of artificial advantages, particularly the widespread belief that government will rescue the creditors of the biggest financial institutions. Human weakness will cause occasional market disruptions. Big banks backed by government turn these manageable episodes into catastrophes

Put differently, public policies or regulations spawn a feedback mechanism between regulators and the regulated through human interactions.

Laws and regulations don’t just alter the incentives of the market participants, they foster changes in the relationship between political authorities and the regulated industry.

More laws tend to increase or deepen the personal connections and communications between authorities and the regulated. This magnifies opportunities to leverage personal relationships where market participants seek concessions or compromises from their regulatory overseers, which leads to political favors, corruption, influence in shaping policies and the ‘captured’ regulators. And such relationships bring about the insider-outsider politics as evidenced by revolving door syndrome.

As human beings we live in a social world. The idea where “virtue” and knowledge are enough to shield political authorities from the influences of the regulated and or the political masters of public officials and or from personal ties, represents a world of ivory towers, and simply is fiction.

The true reason behind the illusions of technocracy as stated by Murray N. Rothbard, (bold emphasis added)

There are two essential roles for these assorted and proliferating technocrats and intellectuals: to weave apologies for the statist regime, and to help staff the interventionist bureaucracy and to plan the system.

The keys to any social or political movement are money, numbers, and ideas. The opinion-moulding classes, the technocrats and intellectuals supply the ideas, the propaganda, and the personnel to staff the new statist dispensation. The critical funding is supplied by figures in the power elite: various members of the wealthy or big business (usually corporate) classes. The very name "Rockefeller Republican" reflects this basic reality.

While big-business leaders and firms can be highly productive servants of consumers in a free-market economy, they are also, all too often, seekers after subsidies, contracts, privileges, or cartels furnished by big government. Often, too, business lobbyists and leaders are the sparkplugs for the statist, interventionist system.

What big businessmen get out of this unholy coalition on behalf of the super-state are subsidies and privileges from big government. What do intellectuals and opinion-moulders get out of it? An increasing number of cushy jobs in the bureaucracy, or in the government-subsidized sector, staffing the welfare-regulatory state, and apologizing for its policies, as well as propagandizing for them among the public. To put it bluntly, intellectuals, theorists, pundits, media elites, etc. get to live a life which they could not attain on the free market, but which they can gain at taxpayer expense--along with the social prestige that goes with the munificent grants and salaries.

This is not to deny that the intellectuals, therapists, media folk, et al., may be "sincere" ideologues and believers in the glorious coming age of egalitarian collectivism. Many of them are driven by the ancient Christian heresy, updated to secularist and New Age versions, of themselves as a cadre of Saints imposing upon the country and the world a communistic Kingdom of God on Earth.

Bottom line: Technocrats are no different than everyone else. They are human beings. They may have specialized knowledge covering certain areas of life, but they don’t have general expertise over the complex world of interacting human beings and of nature.

Technocrats have not been bestowed with omniscience enough to know and dictate on how we should live our lives. Instead, technocrats use their special ‘knowledge’ to advance their personal interests, by short circuiting market forces through politics, and who become tools for politicians or vested interest groups.

And that's why they are technocrats, they are afraid to put their knowledge to real tests by taking risks at the marketplace and rather hide behind the skirt of politics.

Thus, the idea of political efficacies from the philosopher king paradigm through modern day technocratic governance is a myth.

Agency Problem: Goldman Sachs Edition

Asymmetric incentives usually leads to conflicts of interests in relationships (seen in both the private and the public sectors), which typically is known as the principal-agent or the agency problem

On how this applies in the evaluation of sources of information I recently wrote,

This brings us to the most sensitive part of information sourcing: the principal-agent or the agency problem

Economic agents or market participants have divergent incentives, and these different incentives may result to conflicting interests.

To show you a good example, let us examine the business relationship between the broker and the client-investor.

The broker derives their income from commissions while the investor’s earning depends on capital appreciation or from trading profits or from dividends. The economic interests of these two agents are distinct.

How do they conflict?

The broker who generates their income from commissions will likely publish literatures that would encourage the investor to churn their accounts or to trade frequently. In short, the literature will be designed to shorten the investor’s time orientation.

Yet unknown to the investor, the shortening of one’s time orientation translates to higher transaction costs (by churning or frequent trading). This essentially reduces the investor’s return prospects and on the other hand increases his risk premium.

How? By diverting the investor’s focus towards frequency (of small gains) rather than the magnitude. Thus, a short term horizon tilts the risk-reward scale towards greater risk.

Writing at the New York Times, a recently resigned Goldman Sachs employee scathingly accuses his former employer of the said infraction.

Writes Greg Smith,

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for…

Goldman Sach’s agency problem, from Mr. Smith’s account (bold emphasis mine)

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail…

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

I would add that the cultural transformation of the company may have largely been brought about by the amplification in the political role played by Goldman Sachs in shaping US politics.

A company that earns through political rent seeking or has been protected by regulators will largely become indifferent to its consumers. Since they have become substantially less subjected to market discipline, their priorities will run in the direction of influencing policymaking in line with their interests or gaming the system.

Bottom line: interventionism magnifies the agency problems.

Transparency Issues on the US Federal Reserve

Former IMF chief Economist Simon Johnson takes the US Federal Reserve to task for their lack of transparency,

The Wall Street Journal reported on Tuesday that during the 1980s the Fed’s board held 20 to 30 public meetings a year, but these dwindled during the Greenspan years to fewer than five a year in the 2000s and “only two public meetings since July 2010.” At the same time, “the Fed has taken on a much larger regulatory role than at any time in history” — including “47 separate votes on financial regulations” since July 2010, The Journal said.

This high level of secrecy is a concern. It is particularly alarming when combined with the disproportionate access afforded to industry participants in the arguments about what constitutes sensible financial reform.

Just on the Volcker Rule — the provision in Dodd-Frank to limit proprietary trading and other high-risk activities by megabanks — Fed board members and staff members apparently met with JPMorgan Chase 16 times, Bank of America 10 times, Goldman Sachs nine times, Barclays seven times and Morgan Stanley seven times (as depicted in a chart that accompanies the Wall Street Journal article).

How many meetings does a single company need on one specific issue? How many would you get?

For example, Americans for Financial Reform, an organization that describes itself as “fighting for a banking and financial system based on accountability, fairness and security,” met with senior Federal Reserve officials only three times on the Volcker Rule. (Disclosure: I have appeared at public events organized by Americans for Financial Reform, but they have never paid me any money. I agree with many of its policy positions, but I have not been involved in any of their meetings with regulators.)

Americans for Financial Reform works hard for its cause, and it produced a strong letter on the Volcker Rule — as did others, including Better Markets and Anat Admati’s group based at Stanford University.

Based on what is in the public domain on the Fed’s Web site, my assessment is that people opposed to sensible financial reform — including but not limited to the Volcker Rule — have had much more access to top Federal Reserve officials than people who support such reforms. More generally, it looks to me as though, even by the most generous (to the Fed) account, meetings with opponents of reform outnumber meetings with supporters of reform about 10 to 1.

According to those records, for example, the Admati group has not yet managed to obtain a single meeting with top Fed officials on any issue, despite the fact that the group’s members are top experts whose input is welcomed at other leading central banks. To my definite knowledge, they have tried hard to engage with people throughout the Federal Reserve System; some regional Feds are receptive, but the board has not been – either at the governor or staff level…

I do not understand the Fed’s attitude and policies — if it is serious about pushing for financial reform. No doubt they are all busy people, but how is it possible they have time to meet with JPMorgan Chase 16 times (just on the Volcker Rule) and no time to meet Anat Admati – not even for a single substantive exchange of views?

People’s actions are driven by incentives or purpose behavior. So are the actions of those running government bureaucracies. The fundamental difference is that the incentives of bureaucrats are prompted for by political exigencies against market participants who are guided by profits and losses.

Researcher Jane Shaw expounds on the public choice theory

Their incentives explain why many regulatory agencies appear to be "captured" by special interests. (The "capture" theory was introduced by the late George Stigler, a Nobel Laureate who did not work mainly in the public choice field.) Capture occurs because bureaucrats do not have a profit goal to guide their behavior. Instead, they usually are in government because they have a goal or mission. They rely on Congress for their budgets, and often the people who will benefit from their mission can influence Congress to provide more funds. Thus interest groups—who may be as diverse as lobbyists for regulated industries or leaders of environmental groups—become important to them. Such interrelationships can lead to bureaucrats being captured by interest groups.

The political relationship between the regulator and the regulated always impels for a feedback mechanism, such as lobbying, as the regulated will always find ways to circumvent or to relax on the rules which restricts or inhibits their actions. And the typical outgrowth to such relationship has always been the lack of transparency, revolving door relationships (Wikipedia: movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies), logrolling and corruption. Such "conflict of interests" relationships frequently make regulatory agencies “captured” by special interest groups.

And what is the ultimate cause for this?

To quote Milton Friedman in Capitalism and Freedom

Any system which gives so much power and so much discretion to a few men that mistakes – excusable or not – can have such far-reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an "independent" central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an "independent" bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers.

In short, the kernel of the transparency issues surrounding the US Federal Reserve has been about the negative ramifications from the centralization of power. Conflicts of interests and regulatory capture signifies as issues which won’t go away for as long political power (in relation to money, but applies elsewhere) remain concentrated to a few men. The more the power assumed by central bankers, the greater the risks of political indiscretions and secrecy.

Thus, the transparency issue can be resolved by the abolishment of central banks.

This means, yes, End the Fed.

Chart of the Day: More Crony Capitalism

More diagrams showing revolving door crony capitalism in the US (hat tip: Bob Wenzel) Part 1 here.

Update:

I'd like to add (or forgot to say earlier) that I hope to see the revolving door relationship between the US Federal Reserve and Wall Street. The previous chart exhibited relationship between the US Federal government and Goldman Sachs.

Also, I hope that Filipinos will get the idea and try to establish the same revolving door crony relationship with today's big firms and the incumbent (or past) government.

Finally, all these goes to show how governments have been "captured" by special interests groups and how public choice theory have been very relevant in today's political environment.

Chart of the Day: Crony Capitalism

This fantastic Venn diagram from Professor Mario Rizzo shows of the conflict of interests, particularly the US government's revolving door relationship with the too big too fail, Goldman Sachs.

This also serves as a good example of regulatory capture or when a “regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating” (Wikipedia.org).

Former Central Banker Papademos Is Greece New Prime Minister

Over at Europe, Central Bank—Wall Street—Welfare state interests are becoming entrenched politically.

First we have Mario Draghi, an alumnus of Goldman Sachs as the president of the European Central Bank (ECB).

Now we have an ex-ECB vice president as Greece’s PM.

From the Bloomberg

Lucas Papademos, named today to be interim prime minister of Greece, steered the country into the euro region as central bank governor more than a decade ago. Now the former European Central Bank vice president will have to secure the country’s euro membership for a second time.

Papademos, who has never held elected office, helped foster economic growth rates that surpassed Germany’s and France’s in his eight years at Greece’s central bank before moving to the ECB in 2002. Most recently a visiting professor at Harvard University in Cambridge, Massachusetts, and an adviser to departing Prime Minister George Papandreou, Papademos takes over a country weeks from being unable to meet its debt obligations…

Appointed Greek central bank chief in 1994, Papademos presided over an economy lagging behind its European counterparts. Growth had averaged 1.3 percent in the previous decade, almost half the average of the other 11 countries preparing to join the euro.

Papademos, who described his monetary strategy as “eclectic” in a 2001 interview with Institutional Investor magazine, stabilized the drachma and inflation in his early years at the Greek central bank.

In March 1998, Greece devalued the drachma by 14 percent against a basket of European currencies to join the EU’s exchange-rate mechanism. Papademos then kept the bank’s main rate above 10 percent for the next two years to curb consumer prices following the devaluation. By 2000, inflation, which had been 14.2 percent in 1993, slowed to 3.2 percent.

Papademos’s legacy as central bank governor was blown apart by the debt crisis that’s ricocheting through world markets. As Papandreou’s government, elected two years ago, revealed that the country’s budget deficit was more than double the previous administration’s effort, investors dumped the country’s bonds, forcing the country to seek a European Union-led bailout.

The interests of politically endowed banking cartel are evidently being protected through revolving door politics.

Obviously the same story, but only different personalities involved.

ECB’s Mario Draghi’s Baptism of Fire: Surprise Interest Rate Cut

You’ve just got to love how predictable welfare state politics operate.

Yesterday I pointed out that the global Banking cartel has intensified lobbying for the European Central Bank (ECB) to conduct more asset purchases or Quantitative Easing (QE)

Goldman Sachs alumni now ECB President Mario Draghi in his first meeting gave them an indirect platter—interest rate cuts using the Greece political drama as well as a potential Greece exit as an excuse!

From Bloomberg, (bold emphasis added)

The European Central Bank unexpectedly cut interest rates at President Mario Draghi’s first meeting in charge after the prospect of a Greek exit from the euro region sent bond yields soaring in Italy and Spain.

ECB officials lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point reduction. The euro fell almost a cent to $1.3729 and the yield on Italian 10-year bonds retreated to 6.14 percent after surging to a euro-era high this week.

“The ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of the year and beyond,” Draghi said at a press conference in Frankfurt today.

European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases.

Global financial markets just love it when they are being pampered…

Artificially manipulated low interest rates (premised on the “euthanasia of the rentier”) and quantitative easing (premised on “parting with liquidity”) translates to inflationism as opium to the political and banking-financial elites. Of course there is a third one: socialization of investment (bailouts).

How these elites love Keynesian policies of redistributing or diverting resources from the poor to the rich. (Wall Street Occupy people, where are you?)

US and European equity markets immensely applaud on ECB Draghi’s surprise cut.

Well I may be getting quite ahead of myself, ECB’s Draghi’s baptism of fire looks like a precursor to what the global banking elite has been asking for. Take it one step at a time.

Occupy Wall Street: President Obama’s Stealth Re-election Strategy?

There has been a brewing grassroots discontent at Wall Street, and they are partly right, Wall Street has been party to America’s social woes.

But the political solution to this has been divided; on the one hand, one camp blame Wall Street as inextricably tied to the US government and the US Federal Reserve. The other believes in the socialist resolution.

As Anthony Gregory writes,

Although there is no single ideology uniting the movement, it does seem to have a general philosophical thrust, and not a very good one at that. OccupyWallStreet.org has a list of demands, and while the website does not represent all of the protesters, one could safely bet that it lines up with the views of most of them: A "living-wage" guarantee for workers and the unemployed, universal healthcare, free college for everyone, a ban on fossil fuels, a trillion dollars in new infrastructure, another trillion in "ecological restoration," racial and gender "rights," election reform, universal debt forgiveness, a ban on credit reporting agencies, and more power for the unions. Out of over a dozen demands there is only one I agree with — open borders — and, ironically, many on Wall Street probably favor that as well.

All in all, this wish list is a terrible recipe for moving far down the road toward socialism. On the way to achieving these goals, totalitarian controls on the population would be necessary. Some of these demands are merely horrible ideas that would injure the economy severely — such as the huge expansion of public infrastructure. But others are so fancifully utopian — such as a living wage guaranteed to all, especially when combined with free immigration — that their attempted implementation would confront the many disasters and horrors we have seen in every nation that has seriously attempted socialism. Such policies would vastly expand the government, including its manifestations in the corporate state and police power that these protesters find so unsavory. All of the corruption and brutality they think they oppose are symptoms of the same essential political ideology they favor.

It must NOT be forgotten that Wall Street’s political and economic privileges emanates from the role it plays in the current political economy of the US.

Fundamentally, Wall Street functions as the major conduit in the financing of the US government.

As explained by Professor Philipp Bagus,

For governments, the mechanism works out pretty well. They usually spend more than they receive in taxes, i.e., they run a deficit. No one likes taxes. Yet, most voters like to receive gifts from their governments. The solution for politicians is simple. They promise gifts to voters and finance them by deficits rather than with taxes. To pay for the deficit, governments issue paper tickets called government bonds such as US Treasuries.

An huge portion of the Treasuries are bought by the banking system, not only because the US government is conceived as a solvent debtor, thanks to its capacity to use violence to appropriate resources, but also because the Fed buys Treasuries in its open-market operations. The Fed, thereby, monetizes the deficit in a way that does not hurt politicians.

In other words, the incumbent architecture of the welfare state applies Financial Repression by channeling the savings of the private sector to the US government via the banking system which has been backed, coordinated and supervised by the US Federal Reserve.

I would like to add that capital adequacy laws have likewise been designed to designate US sovereign liabilities as ‘risk free’ which ‘incentivizes’ banks to hold government securities as its main assets.

Not only that, major Too Big to Fail Banks of Wall Street are the chief conductors of the US Fed’s monetary policy, which goes to show the depth of their intertwined relationships. A list of Primary dealers here.

And further proof that Wall Street benefits from the welfare state is the example of JP Morgan’s role as processor of food stamp benefits.

From the Economic Collapse Blog

JP Morgan is the largest processor of food stamp benefits in the United States. JP Morgan has contracted to provide food stamp debit cards in 26 U.S. states and the District of Columbia. JP Morgan is paid for each case that it handles, so that means that the more Americans that go on food stamps, the more profits JP Morgan makes. Yes, you read that correctly. When the number of Americans on food stamps goes up, JP Morgan makes more money.

And it is no doubt that such cozy relationship represents a classic text book example of regulatory capture —when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating (Wikipedia.org)

And an ostensible symptom of this has been the revolving door relationships—the movement of personnel between roles as legislators and regulators and the industries affected by the legislation and regulation and on within lobbying companies (Wikipedia.org)—between Wall Street and the US government.

The Business Insider shows 29 famous revolving door cases where Wall Street personalities went on to work for the government and vice versa, and the list includes Hank Paulson, Robert Rubin, Lawrence Summers, Martin Feldstein and many more

Bottom line: While it would seem right to put the load of the blame to the financiers of the government, solutions that further socializes Wall Street would only serve to perpetuate the current malaise or even worsen them.

And given the penchant of the emerging grassroot’s movement for bigger government, it would seem that such actions could signify as a stealth political strategy to promote President Obama’s re-elections. After all, Wall Street as scapegoat has been used before and at the end of the day had been settled amicably.

Looks and smells like the same old trick.

Quote of the Day on Rent Seeking and Regulatory Capture

You think that the predicament of crony capitalism through the unholy stealth relationship between government agencies and big corporations, which results to revolving doors, corruption, regulatory capture and rent-seeking are about ethics or virtues?

It’s not.

Professor Steve Horwitz explains, (bold emphasis mine)

The problem is not regulatory or ethical, but institutional. If you want to change the pattern of outcomes, change the rules. The only possible way to end the corporate control over the state is to reduce the state's sphere of influence down to as little as possible and ideally nothing. As long as there's the dead animal of the state (really: the citizenry) to feed on, the vultures of the private sector will keep showing up to get their share.

Revolving Door Syndrome: European Central Bank’s New Head was Goldman Sach’s Honcho

It has been a revolving door affair between the banking industry, particularly the ‘Too Big to Fail’ cabal, and the government/central bankers.

This goes for the recent appointment of the new president of the European Central Bank

From BBC.co.uk

Mario Draghi takes the helm of the European Central Bank (ECB) at the most difficult period in its 13-year history.

With a number of eurozone economies straining under the weight of massive government debt levels, some observers have even suggested the very future of the euro is at stake.

Much will depend on the 63-year old Italian central banker.

"Super Mario", as he is known, is well respected and widely recognised as the best person to head the ECB.

He certainly has impeccable credentials. A graduate of the University of Rome, he holds a PhD in economics from the Massachusetts Institute of Technology and served as professor of economics at the University of Florence between 1981 to 1991.

But Mr Draghi is no dry academic. He went on to become managing director and vice-chairman of Goldman Sachs International, giving him a vital insight into how financial markets work in practice.

He has also worked as an executive director of the World Bank, director general of the Italian Treasury and, perhaps most importantly in the eyes of investors, head of the Financial Stability Board.

Ever noticed why the interests of privileged bankers and governments/central banks have been intertwined?