Karl Denninger, "Greenspan's Delusions Deepen"

"Greenspan's Delusions Deepen"

by Karl Denninger

"In an article published in "Businessweek" Caroline Baum (of Bloomberg) eviscerates Alan Greenspan, or as I have called him repeatedly, "Greedscam": "He gave political support to the Bush tax cut in 2001 because -- get this -- unless the government reduced taxes, there would be no more Treasuries for the Fed to buy to conduct monetary policy! He refused to raise margin requirements in the late 1990s to defuse the technology stock bubble, arguing publicly it would have no effect. (Privately, he acknowledged it would curtail the bubble but might nail the economy in the process.) He advocated a “risk-management” approach to monetary policy and failed to exercise even a modicum of risk- management during two asset bubbles on his watch."

One place I do take issue with Caroline is that she asserts that monetary policy was the essence of the bubble. I disagree. The essence of the bubble was and is fraud, along with various deceptions that do not rise to the legal definition of fraudulent activity. It always has been and this time was - and is - not different.

Greenspan has been excoriated (rightly so) by myself and others for urging people to use Adjustable Rate Mortgages when rates were at or near historical lows. Urging someone to take out an adjustable rate loan when rates can only go up from where they are is spectacularly (and indeed intentionally) bad advice - but unless you profit from it, it's not fraud. But "loosening lending standards" is not the same thing as ripping people off wholesale. One of the roles of regulation is to put up a wall - a bright line - beyond which one cannot exploit the inherent power of asymmetrical information. The law provides for this through the fraud statutes, but a statute is worthless without enforcement.

Fraud, when executed "properly" (from the perspective of the person doing the defrauding) essentially always leads to effective execution of embezzlement. And embezzlement is the mother and father of all economic crimes, because it, standing alone, appears for a time to increase the value of both the person embezzled and the person doing the embezzling. That is, it appears that the totality of wealth has increased in society - until the embezzlement is discovered. But fraud is the essence of what happened during the 2000s - not mere mistakes or bad advice (whether tendered knowingly or not.) Witness the events in Jefferson County Alabama, which Matt Taibbi has written on (and which I've written about multiple times going back to May 7th of 2008) - raw acts of bribery (now factually known as a consequence of guilty pleas) and other corruption that turned a $250 million job into a $3 billion dollar boondoggle - that is, the taxpayer was bilked out of an amount twelve times the actual cost of the required infrastructure improvements. Who got the money? The banks, by and large. And who paid? The citizens of Jefferson County Alabama (that's the county that contains the city of Birmingham, for the geographically challenged.) Note carefully that while several politicians have in fact pled (or been judged) guilty of criminal acts related to this sleazy artifice, not one banker has been indicted, nor has the beneficiary of the scheme - JP Morgan.

Why not? Probably for the same reason that Pfizer was able to get away with committing the same felony twice. See, JP Morgan is the firm that handles the Federal Government's food stamp program - by creating debit accounts so that there is no "stigma" associated with public assistance. They issue what look like generic debit cards and of course collect a fee when they're used, as well as a maintenance charge. But Federal Law contains myriad strictures against firms and individuals that are involved in felonies doing business with the government. Medicare, for example, would have been forced to stop buying drugs from Pfizer - and that might have sunk the company.

JP Morgan would have a hell of a time justifying the retention of their lucrative food stamp business were they to be charged and convicted of criminal fraud in the Jefferson County case. These elements of criminality don't stop with municipal swaps and bribery, although these same sort of swap deals are literally everywhere in state and local governments. New Jersey is paying for swaps on a bond issue it was forced to pull, and due to the incredibly "prescient" way the deal was structured by the banks (and/or willful ignorance of the state's agents in contracting for them) that contract's validity was not linked to the underlying issue that was withdrawn. In other words, the state is paying on a contract that has no economic value whatsoever to the state. What was the "consideration" New Jersey received for being involved in this contract? Beyond being party to a gambling contract on interest rates - nothing!

The entirety of this bubble, like all bubbles, comes back to fraud in one form or another, executed as embezzlement. That is, the promise of a free lunch that causes both sides of the transaction to record what appear to be gains instead of the usual circumstance where goods or services change hands in exchange for money, being at best an exchange of equal value.

This manifested in "mortgages" that were never intended by the banks to be anything other than churning vehicles (that is, "here, have this loan - now come back in 2 years when the rate resets so we can hit you with more FEES!"), in swaps that were of no economic value to the people who bought them (but of plenty of value to those doing the selling!) and claimed "credit protection" that was purchased not as an actual hedge but rather as a means of gaming capital requirements, with the purchaser well aware that the seller had no money (AIG anyone?)

The ugly is that the consequence of this fraud hasn't been dealt with. We have now legalized fraud through changes to the FASB regulations, allowing banks to hold "assets" that under any reasonable read have diminished dramatically in value at or near 100 cents on the dollar. That is, we have recognized the essence of the scam - the embezzlement that caused both homeowners and the banks to be "enriched" by these transactions - and hidden the consequence of the embezzlement in a black box labeled "do not recognize this loss - so says TurboTax Timmy and President Obama!"

None of this was an accident folks, and the sad reality is that until and unless we deal with the underlying reality that led to this mess, dragging the scammers out in the open and prosecuting them, forcing the bad instruments to be written down to their true economic value (zero in many cases) we will suffer another crash, and this next one, like all of them in series, will be worse than the last."

- http://market-ticker.denninger.net/