What is this "the market" you speak of, if not a series of government grants and privileges?
Without the Treasury honoring the Federal Reserve's obligations, there is no "the market."
You want competing currencies? Get a time machine and go west. We tried it. It sucked. Every other day another bank went bust, and took a whole bunch of worthless currency and overhyped bullion promises with it. Turns out private sector currency manipulation makes Keynesian governments look like boyscouts.
So we tried to print all our own public currency at the Federal level, and that didn't work so well either. Well.. a big part of the problem was that we ended up in the middle of a crazy civil war, so maybe we should also remember that two governments operating with purely public and purely fiat currencies were able to raise the largest industrial-era armies the world had ever seen. Just imagine if they had skipped the war and gone straight to building railroads?
But alas, the public currency died at the demands of the British financiers who made loans to our shattered republic in the aftermath of destruction. They insisted we abandon our current corporate regulations to adopt their concepts of limited liability and government sponsored cartels that evolved directly from the hereditary privileges of those aristocrats chartered to do the crown's royal business. Upon securing favorable loan and regulatory terms with the U.S. Congress, they funneled huge sums of cash to Rockefeller, Morgan, and other would-be "barons" who could successfully corner and monopolize essential industries.
The restoration of the financial nobility's control over America was set to be codified in 1913, but there was just one fatal flaw in the Federal Reserve System: It was too effective.
By 1929, consolidation of the nation's wealth and inequality had reached such a peak that it made 1850's slave plantations look like a bunch of egalitarian hippy communes.
But a strong economy can't exist unless a lot of people have discretionary income: When you consolidate all of the country's capital, no one has anything left to spend. Sure, you can build an incredible palace here or there, but the rest of the economy collapses and you end up with pissed off peasants at Blair Mountain or something.
So we came up with one more solution in the 1940s. It was incredible. It put every other innovation to shame.
We kept the effectiveness and price stability of the Federal Reserve System, but we stripped it of the rich-right wing WASP conspiracy to "get as fucking rich as possible and fuck everyone else" by recovering a large part of the profits of those who were most able to manipulate it for their own benefit.
We took that money and we built transportation networks and schools that were the envy of the world! And you know what happened next? Those kids growing up in those schools grew up to know a lot of stuff about how to build stuff and make even more money! The economy boomed! We went to the goddamn *moon*!
Since then? Well, a lot of the banks attached to those old names, Chase-Rockefeller, JP Morgan, Goldman Sachs... well, they own everything again. The economy's shit. The peasants are getting pissed off, and they'll probably only continue blaming the Muslims for so long...
Best case: Everyone defaults.
Then, when the banks fail (again) we DON'T bail them out.
Reform Federal Reserve so that money creation is done through public, member owned, and not-for-profit banks: eliminate private banking representation on the board. If we're going to subsidize banking as if it were a public good, we should operate it as a public utility.
Institute simple yet gradually progressive tax system to pay for remaining public obligations. Eliminate deductions/exemptions/incentives/payroll taxes.
There ya go. All debt-related problem are solved!
Worst Case: Get ready for 30 years of austerity and a violent awakening that gives way to the unraveling of empire and an even more violent crisis that shakes the very foundations of our government & corporate economy.
What do you want the next 70 years to look like?
Increasingly, it is "the market" that shapes our social destiny and financial choices, but what is a market and more specifically, what is our market?
An ever present concept
The freest market is the one that exists conceptually in relation to every voluntary human transaction or exchange. When the neighbor kid offers to mow your yard for $30 or $40 and you agree - you've created a market for exchanging cash and services. By publishing this website, I've provided an info-tainment product offered at no fee to you. In the broader online market, the price for content is typically set around "free."
So whether the exchange is one on one or part of a larger clearing house like the internet is for information, all voluntary trades can be classified as market activities. In theory, the aggregate of these voluntary choices is "The Free Market," but in reality many exchanges and economic choices are not entirely consensual or free to fail.
The Market in Practice
In more common terms, "The Market" is a series of political and private institutions designed to rapidly make economic choices on an international scale.
While Wall Street is the center of activity, it is actually the Treasury and the Federal Reserve that operate as the origin point for this market. As money is created, it flows from the public institutions into private banks that in turn lend the money out for a profit. As the bailouts have demonstrated, these loans will be allowed to fail - although there are plenty of other ways for money to enter society at large, none of them would be quite so profitable for the entrenched interests who already have enough wealth and influence to insure that they get what they want.
Typically, the majority of a bank's loans are issued to state and local governments, large corporations, or for residential mortgages. From there, smaller businesses can acquire currency by providing products & services to those entities, and labor can acquire currency by working directly for someone else who is in the loop. In short, this is how money trickles down from the rich and occasionally makes it in to the hands of the working poor.
State of the Market
The biggest banks not only have the most influence over the Federal Reserve, they also have an infinitely implicit guarantee of profitability. While they are theoretically paid to make large economic choices in a market-like way, the removal of their risk distorts the choices they'll ultimately make. This moral hazard is the status quo and its hard to believe it is an accident or an honest attempt at maximizing efficiency.
When the markets go down as they have over the last few weeks, what is actually happening is that those who are voluntarily invested in the system are walking away and looking for something a little less rigged. Inevitably, when the next emergency bailout or "market support" is announced, the "markets" will appear to do better but only in that they are even less functional as markets.
This is a crisis of legitimacy, and the cure is part of the cycle that devalues our market's market-like functions. A few patches and bandaids is not "reform," rebuilding from the ashes of a failed system will be the only true reform.
Until then, good luck...
Was it the crazy drop in trading last week? Was it all of the talk about defaults in Europe or the actual bail out itself?
Whatever it is, it is driving up the price of gold - every survivalists' favorite commodity and the investment that only really makes sense when you're bearish on absolutely everything else.
At the moment I'm writing this (noon on May 12), gold is trading at about $1,245 per ounce. The last big purchase I remember hearing about was India's 200 ton acquisition back in November at or around $1,050 an ounce.
That was six months ago - and now gold is trading for almost 20% more than it was. No one is saying that India was buying at the top of the bubble any more - in fact they just pulled a huge, quick profit simply because they didn't need to print up a money to stay solvent & investing in the economy. Now every bailout of crisis that strikes a western economy is just going to amplify the value of that investment.
The problem is largely inflation beyond wages - but people don't really feel this until they're already on the edge of bankruptcy or foreclosure. So many costs are fixed - car payments, mortgage payments, student loans, etc... - that consumers aren't really feeling the deflationary effects in autos & real estate in any kind of positive way.
Meanwhile, milk and gas are back near $3 a gallon, most meat is up 20-25% over the last year or so, and insurance rates, local taxes, & communications fees are on the rise. The only parts of the economy experiencing inflation are the ones that aren't fixed for consumers - the parts experiencing deflation are fixed at the old, higher rate.
Wages haven't really gone anywhere, so the result is that people near the edge are going to have to constantly cut back until they simply can't anymore. At that point, default becomes logical as its the only way to really take advantage of the deflation in other sectors that brings the total CPI down.
So the markets are speaking up, and this is what I hear: Walk away from your debts, and/or buy up physical gold because the government is just going to keep printing to make those banks whole for the debt losses.
The SEC has released this crazy theory about a conspiracy at Goldman Sachs to defraud investors.
Although technically, if they have enough evidence to win at trial, it won't really be a conspiracy theory any more.
Isolated or Systemic Fraud?
The big question here is whether we're looking at a one time event or a pattern of behavior. If the SEC only has this one complaint lined up, this might not end up as much of a story at all. The total value of the Abacus transaction is only about $1 billion and Goldman's stake is even smaller. Bloomberg is saying they only made about $15 million in fees for this particular deal, so the charges here are really, really insignificant for a company that made a thousand times that much profit in just last year.
On the other hand, if this turns out to be the kind of deals that Goldman routinely uses to collect fees and bring profits to their favorite hedge funds and investment firms... Well, then we could be looking at a price fixing scheme big enough to make huge profits in the event of a crisis situation. Hell - let's just be honest and admit that it would be a big incentive to create a financial crisis.
On Timing the Announcement
A lot of the analysis surrounding the SEC's complaint relates to the timing of its release. There are definitely a few interesting "coincidences" to be considered when trying to determine what we can really expect out of this:
- No one got "blindsided" - Goldman had knowledge of the charges months ago and they didn't take the opportunity to come out and announce the pending suit on their own terms. They kept quiet about the SEC accusations and got their PR machine working to promote a general brand image.
- The "other" SEC Report - Oh yeah, by the way, the SEC also published its explanation of why it took 12 years to actually bring any charges against a suspected ponzi scheme that is turning out to be one of the biggest direct investment scams of the bubble era. Its probably a good thing for the SEC's own public image that everyone is busy talking and thinking about how they're "cracking down" on Goldman and not about how they're mostly turning a blind eye to all of the other scams going on. If you want to see the whole report and tell us what it says, its down at the bottom of the page. Thanks!
- Options Friday - April options contracts expired Saturday, so anyone who was bearish on Goldman in the options market could have made some serious cash. While most of these common derivatives generally expire without being exercised, a huge sudden price move triggered huge volume in the options market. With 300,000 contracts leveraging up to 30 million shares at a $5 or $20 profit each, way more money was earned on the options market than the actual value of Goldman's participation in the fraud they're alleged to have committed. Based the major sell off and next month's options activity, traders are expecting Goldman to continue falling over the near future.
And it might not be up to just the SEC to prove a case for systemic fraud. In fact, they might already have help from German authorities who are in the process of bringing their own legal actions against the investment firm. A German bank was among the buyers of the intentionally doomed mortgage securities, so one of the most influential governments in the European Union has a reason to take this scam personally. If there is more dirt to be found on Goldman, I'm sure they'd like to help expose it.
Of course we also already knew that Goldman had a hand in the Greece's deceptive debt accounting and the Federal Reserve claims to be taking care of that investigation, but how long will it be before Greece or France or the U.K. sets up their own investigations in the interest of keeping the EU financially stable? I can't give you a date, but EU Monetary Affairs Commissioner Olli Rehn promises it will be "profound and thorough." Of course, the United Kingdom is the home turf of big banking, so you know when London is talking about sanctions there must be something seriously rotten going on. Then again, maybe Gordon Brown is just trying to win some election points with tough talk.
The craziest theory
With May options investors seeming to expect declines that far exceed the value of the SEC's entire case, it seems like the craziest conspiracy of all might now be coming to light. Not only did Goldman Sachs intentionally misrepresent the securities they sold, but this is starting to be perceived as a standard course of action rather than any kind of isolated incident. With prior executives and directors staffing some of the most influential political positions around the world, they were widely presumed to be immune from this kind of scrutiny and seen as safe a bet as any aggressive growth stock could be.
Instead, whether this was intended as a public relations move or a slap on the wrist, it could have serious implications for Goldman's ability to acquire clients in the future - or even operate inside certain legal jurisdictions.
As promised, here is the SEC's "other report" from Friday. No one's really talking about it so I haven't bothered to read it. I'm sure though, that its a great reminder of why the SEC can't (or won't) actually take on a powerful company on its own until they're absolutely certain they can win a case.
Anyone watching the employment reports for the signs of a recovery may have found a bit of happy news this week. It was reported that only 10,000 jobs were lost in November, and this actually sounds like a pretty good number when its compared to the hundreds of thousands of lost jobs that had become the norm.
Despite this "recovery," the unemployment rate remains right at 10% (although the fact that any total decline in jobs results in an improved unemployment rate is suspect in itself.)
Inside the details of this latest jobs report are some true gems to help us truly understand what is going on with the labor markets in America:
In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.
Not only are we employing fewer people to build and make stuff, we're also losing jobs in technology and information services. The latest trend toward outsourcing is high-tech - and online jobs are increasingly headed to Asia.
Month over month, the absolute number continues decline, and the depth of our current economic troubles becomes clear:
So the only employment "gains" in November are temporary jobs for Christmas - this means ringing cash registers at minimum wage or sitting in a fake beard and asking someone's kids what they want for Christmas. At least the department store Santa won't have to tell the little ones that they probably won't be getting what they want this year...
Meanwhile, the health industry also continues to grow - a necessary cost but one that is having a disproportionate drain on America's spending capacity. Where most nations contain health costs to under 10% of GDP, we have almost doubled those averages and we're headed toward a situation where 1 in 5 dollars spent in our economy is for some kind of medicine or medical attention. Of course that's great news for anyone in med school, but its bad news for employers or anyone who is paying for insurance out of their own pockets.
On a forum I visit, someone posted a graph of global trade in nominal terms and claimed it was irrefutable evidence that Obama has really turned the economy around.
The graph was provided without context, but a smart and skeptical poster tracked down the source data on global trade.
So anyway, I spent the last little while building up some line graphs out of the currency-adjusted trade volumes coming in and out of the United States from August 2005 to October 2009.
We are indeed, "off the bottom" in that our international economic activity is higher than its lowest post-bubble point. However, there is definitely no indication of a trend toward recovery and I'm pretty certain the momentum is pointing toward further declines and new lows.
Of all the conspiracy theories that may come up in American political discourse, there is one that requires nothing that is supernatural, or even particularly out of the oridinary. The players may only be vaguely familiar: Rockefellers, Rothschilds, Morgans, Warburgs - and the Federal Reserve (whose part tonight will be played by Ben Bernanke, a PhD economist with education from Harvard and M.I.T.)
The scope is nothing short of a total underground or shadow government that directs hundreds of billions of dollars a year. But the cost of funding the operation would only be a few pennies on the dollar (quite literally).
Other conspiracies have come and gone, but the distrust of central banks has been with us for hundreds of years - and the actual verifiable history is murky at best. The individuals involved are known to posses incalculable wealth, and they entertain themselves with controversial social causes & international political activity - but they value their privacy and make their conclusions away from scrutiny. The totality of the plot is so pervasive, so totalitarian, that it encompasses a massive international network. If you've been reading a while, you may have heard me brush on a few of these topics.
The Promises of a Central Bank
The fundamental promise of a central bank like the Federal Reserve is economic stability. The theory is that manipulating the value of the currency allows financial booms to go higher, and crashes to be more mild. If growth becomes speculative and unsustainable, the central bank can make the price of money go up and force some deleveraging of risky investments - again, promising to make the crashes more mild.
In reality? The results are mixed. No doubt, America has experienced rapid growth since the institution of the central bank. Then again, we did pretty darn good before the Fed, too. Does it bring stability? Again, this is mixed. It must be noted that the Fed was established prior to the Great Depression, but it must also be noted that we have experienced many periods of rapid economic growth.
A Revolutionary History
The period leading up to the American revolution was characterized by increasingly authoritarian legislation from England. Acts passed in 1764 had a particularly harsh effect on the previously robust colonial economy. The Sugar Act was in effect a tax cut on easily smuggled molasses, and a new tax on commodities that England more directly controlled trade over. The navy would be used in increased capacity to enforce trade laws and collect duties.
Perhaps even more significant than the militarization and expansion of taxes was the Currency Act passed later in the year 1764.
"The colonies suffered a constant shortage of currency with which to conduct trade. There were no gold or silver mines and currency could only be obtained through trade as regulated by Great Britain. Many of the colonies felt no alternative to printing their own paper money in the form of Bills of Credit." 
The result was a true free market of currency - each bank competed, exchange rates fluctuated wildly, and merchants were hesitant to accept these notes as payment. Of course, they didn't have 24-hour digital Forex markets, but I'll hold off opinions on the viability of unregulated currency for another time.
England's response was to seize control of the colonial money supply - forbidding banks, cities, and colony governments from printing their own. This law, passed so soon after the Sugar Act, started to really bring revolutionary tension inside the colonies to a higher level. American bankers had learned early on that debasing a currency through inflation is a helpful way to pay off perpetual trade deficits - but Britain proved that the buyer of the currency would only take the deal for so long...
Establishing and Abolishing Central Banks
Following the (first) American Revolution, the "First Bank of the United States" was chartered to pay off collective war debts, and effectively distribute the cost of the revolution proportionately throughout all of the states. Although the bank had vocal and harsh skeptics, it only controlled about 20% of the nation's money supply. Compared to today's central bank, it was nothing.
Thomas Jefferson argued vocally against the institution of the bank, mostly citing constitutional concerns and the limitations of government found in the 10th amendment. There was one additional quote that hints at the deeper structural flaw of a central bank in a supposedely free capitalist economy:
"the existing banks will, without a doubt, enter into arrangements for lending their agency, and the more favorable, as there will be a competition among them for it; whereas the bill delivers us up bound to the national bank, who are free to refuse all arrangement, but on their own terms, and the public not free, on such refusal, to employ any other bank" 
Basically, the existing banks will fight over gaining favor with the central bank - rather than improving their performance relative to a free market. The profit margins associated with collusion would obviously outweigh the potential profits gained from legitimate business.
The Second Bank of the United States was passed five years after the first bank's charter expired. An early enemy of central banking, President James Madison, was looking for a way to stabilize the currency in 1816. This bank was also quite temporary - it would only stay in operation until 1833 when President Andrew Jackson would end federal deposits at the institution. The charter expired in 1836 and the private corporation was bankrupt and liquidated by 1841.
1863 & 1864:: National Bank Act(s)
While the South had been the major opponent of central banking systems, the end of the Civil War allowed for (and also made necessary) the system of national banks that would dominate the next fifty years.
The Office of the Comptroller of the Currency (OCC) says that this post-war period of a unified national currency and system of national banks "worked well."  Taxes on state banks were imposed to encourage people to use the national banks - but liquidity problems persisted as the money supply did not match the economic cycles.
Overall, the American economy continued to grow faster than Europe, but the period did not bring economic stability by any stretch of the imagination. Several panics and runs on the bank - and it became a fact of life under this system of competing nationalized banks. In 1873, 1893, 1901, and 1907 significant panics caused a series of bank failures. The new system wasn't stable at all, in fact, many suspected it was wraught with fraud and manipulation.
1907-1913: Triumph of the Robber Barons
"The most notable robber barons were J.P. Morgan (banking), John D. Rockefeller (oil), and Andrew Carnegie (steel)" 
Panic of 1907
The Federal Reserve Bank of Minneapolis is not shy about attributing the causes of the Panic of 1907 to financial manipulation from the existing banking establishment. "If Knickerbocker Trust would falter, then Congress and the public would lose faith in all trust companies and banks would stand to gain, the bankers reasoned." 
In timing with natural economic cycles, major banks including J.P. Morgan and Chase launched an all-out assault on Heinze's Knickerbocker Trust. Financial institutions on the inside started silently selling off assets in the competitor, and headlines about a few bad loans started making top spots in the newspapers. The run on Knickerbocker turned into a general panic - and the Federal Government would come to the rescue of its privately owned "National Banks."
During the Panic of 1907,
"Depositors 'run' on the Knickerbocker Bank. J.P. Morgan and James Stillman of First National City Bank (Citibank) act as a "central bank," providing liquidity ... [to stop the bank run]
President Theodore Roosevelt provides J.P. Morgan with $25 million in government funds ... to control the panic. Morgan, acting as a one-man central bank, decides which firms will fail and which firms will survive." 
How did JP Morgan get so powerful that the government would provide them with funding to increase their power? This question will come up again in 2008.
As Congressman Arsène Pujo would discover in his Congressional investigation of the "robber barons" or "money trusts," the key to expanding wealth beyond typical monopolies is the practice of interlocking directorates. Railroad and oil monopolists could still expand their power and wealth by creating series of banks, and sponsoring directors at the institutions. Alliances across the insiders would be cemented with cross-institution investment. Tycoon A would found banks 1, 2, and 3 - Tycoon B would found 4, 5, and 6 - and each bank would be heavily invested in the various banks and monopolies they represented.
The result is a sort of conglomeration of monopolies - a place where each industry's dominant corporation merges into a larger entity, a goal short of nothing but monopolization of everything.
But such a entity could not be expected to exist or thrive in a purely efficient (competitive) market. It is important then to remember that the private national banks of this "Robber baron" period were effectively subsidized by a tax on their state-based competition. This is of course in addition to the interest gained from public deposits, and the fees that the government paid for the printing of currency.
No, from the onset, the National Bank System was little more than a federally subsidized profit opportunity.
The resulting outrage and scandal would result in a chorus of calls all demanding the same thing: More government action, a stronger central bank. What few but the bankers understood is that the government action and stronger central bank subsidies allowed the creation the things the people feared the most: corruption, monopoly, and central planning of mundane activity and commerce.
1913 The Federal Reserve
Government interventionists got their wish in 1913 with the Federal Reserve (and income tax amendment). Just in time, too, because the nation needed a new source of unlimited cash to finance both sides of WW1 and eventually our own entry to the war. After the war, with both sides owing us debt through the federal reserve backed banks, the center of finance moved from London to New York.
But did the Federal Reserve reign in the money trusts and interlocking directorates? Not by a long shot. If anything, the Federal Reserve granted new powers to the National Banks by permitting overseas branches and new types of banking services. The greatest gift to the bankers, was a virtually unlimited supply of loans when they experience liquidity problems. 
From the early 1920s to 1929, the monetary supply expanded at a rapid pace and the nation experienced wild economic growth. Curiously, however, the number of banks started to decline for the first time in American history. 
Toward the end of the period, speculation and loose money had propelled asset and equity prices to unreal levels. The stock market crashed, and as the banks struggled with liquidity problems, the Federal Reserve actually cut the money supply. Without a doubt, this is the greatest financial panic and economic collapse in American history - and it never could have happened on this scale without the Fed's intervention. The number of banks crashed and a few of the old robber barons' banks managed to swoop in and grab up thousands of competitors for pennies on the dollar.
 The Currency Act, 1764 - http://www.ushistory.org/declaration/related/currencyact.htm
 Jefferson's Opinion on the Constitutionality of a National Bank, 1791 - http://www.yale.edu/lawweb/avalon/amerdoc/bank-tj.htm
 National Bank Notes: A Uniform Curency (1865-1914) - http://www.occ.treas.gov/exhibits/histor4.htm
 F. Augustus Heinze of Montana and the Panic of 1907 - http://minneapolisfed.org/pubs/region/89-08/REG898C.cfm
 FDIC Learning Bank: 1900-1919 - http://www.fdic.gov/about/learn/learning/when/19-1919.html
 Depression-era bank failures: the great contagion or the great shakeout? - http://www.encyclopedia.com/doc/1G1-132680382.html