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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Wednesday, January 12, 2011

Economics and Goldman Sachs

by JoyceR

I have read and thought a lot about Warren Mosler's, “The 7 Deadly Innocent Frauds of Economic Policy.”

I am a fairly well educated person with average intelligence and I would like to comment on that essay. It was indeed easy to understand and I am grateful for that.

I believe that economic theory is merely a construct of “man” (not woman) and that there are alternative views of economics (all purporting to be an answer to something or other) but these concerns are not necessarily mutally exclusive. Man makes the theory; man makes the rules that govern the theory; and man changes the rules as he sees fit. Economics is not scientifically based in the way that the theory of evolution is. If it were (scientifically based) it would take into account the economic value of a woman who stays home and looks after her children. In fact, a good economy would pay that woman a living wage.

I do not think it matters if the average person like me thinks that if the deficit is huge that future generations will have to pay more taxes or that my check to pay my health care taxes is actually torn up by the government when they receive it. In fact, I get a great deal of satisfaction thinking that I am paying my health care expenses through the earnings from my own labor and by paying my taxes. I am also, incidentally, helping society as a whole as my tax dollars will assist those less well off to receive health care too. It is my commitment as a citizen of my country.

It may be true that “government deficits equal increased monetary savings” but the question is Who gets those savings—the banks who have trillions of dollars obtained by borrowing from the Fed which now sit in their accounts (p. 42)? Right now most of the market that is thriving is the financial market. Manufacturing has moved to cheaper labor overseas.

I was disappointed to realize that there was an ideological agenda evident at the end of the article. Low or no taxes came through loud and clear and the economic theory espoused by Mosler supports that belief. The support of the military came through loud and clear also! What paranoia when the US has hundreds of bases all over the world; it fights wars whenever it wants to; it has a record of warfare unsurpassed by any other country in the world. But that really has little to do with economic theory and more to do with fear and trembling about what might happen. The most belligerant country in the world is afraid that someone is going to invade it. With less belligerance comes less fear for everyone and more admiration from the rest of the world. Few people envy the culture of the US as it is now, in my humble opinion.

Economists are terrible predictors of future events--about 50/50 on any topic (i.e., chance is as good an indicator).

What I noticed about this discussion of economic theory, and which is probably true of all theories of economics, is the absence of the one thing that all economics is based on, the things that fill that department store with all its goods and services and which are essential for all life, as a matter of fact, and that is the earth and the natural world that lives upon it. That part is taken for granted--that the earth and nature will always be here, but I think it should be taken into consideration in economic theory, especially now that climate is changing so rapidly and the depletion of resources is surely to be the future. Eonomics should be concentrating on sustainability of nature and not how “consumers” will be able to buy all the goods and services in the department store. In fact, there could be just as many jobs created by husbanding the natural environment as by reducing taxes.

That is what I think. I arrived at this place on the web when I became interested in Goldman Sachs's ability to corner the money market by creating derivatives from sub-prime mortgages, selling them to investors, having the securites become junk, shorting the sub-primes, and making money on both the upside and downside of market making. There is something fraudulent about that kind of money-making and it requires a good deal of scrutiny by everyone. The economy of the US in the last 30 years has been one of de-regulation for the benefit of the richest which in turn creates more poverty for the poorest. Mosler's piece promotes less regulation (p.29). It is obvious to me that self-regulation has not worked!

There is something wrong with any economic theory that supports such inequality and allows such disparity. Economists make the rules so maybe they should include benefits to all of society in those rules. It is not the innocent frauds we should be tackling but the guilty frauds committed by the financial system in the past few years and I include Goldman Sachs in that description.

End of sermon.


Anonymous said...

Its not the's the ethics or lack of...

Its the cronyism...the different rules for different parties...its this...

WARNING: Bogus Accounting Identical To 2007!

I shouldn't be surprised, but I am. The banks are doing exactly the same thing that blew them up in 2007 and 2008, and it will end the same way.

What am I talking about?

Booking non-existent income that will NEVER be realized.

The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators.

They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months.

All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.

Anonymous said...

What economic theory hails bail outs to the politically connected class?

Bailouts Postponed, but Can't Prevent "Greatest Depression"
Celente argues his dire predictions would have come to fruition if it had not been for an unprecedented set of bailouts that continue today. Most shocking to Celente was the disclosure, in late 2010, that the Federal Reserve lent hundreds of billions to foreign banks to bail them out during the height of the crisis in 2008 and 2009. "Absent those kind of schemes, if capitalism take it's course, at some remote level it used to be, we see the crash," he says. (Mark's note - there is very little capitalism happening outside of small business domestically - we have corporate socialism in the States, but mostly focused on big business. Where the lobbyists are the money goes. The savers and average folk will be sacrificed to keep the status quo for as long as possible - hence we can forget about 'capitalism washing out the weak players' unless you are the part of society that does not have a lobbying firm working for you.)

RobertM said...

"I do not think it matters if the average person like me thinks that if the deficit is huge"

...but it does. Because the public is misinformed about the economy works and thinks the government must balance its books like a household, they accept the lie that "we" (meaning the middle class and exempting the rich) have to cut the protections for the poor and soon-to-be-poor middle class, that we should accept a lower standard of living because the TBTF banks screwed the economy with their gambling debts, deregulation and corruption.

We most certainly do not have to do that. In fact, it's the very opposite of what we need to do. Please see the comments I made in the last thread today about HOW the money is spent and WHO should get taxed.

I do NOT agree with all of his proposals, including the insane amount of money going to the military. Many others that understand modern money agree. The reason I brought up the whole subject was to show how the economy really works, not to suggest that Mosler's solutions are the correct ones (although some are). I prefer the solutions such as Steve Keen's or HR6550 as proposed by the AMI.

RobertM said...

BTW, that pdf is not the original one I had read and this one appears to be from his new book. I don't know all of Mosler's politics but I don't think he is calling for more deregulation. He thinks that government could run with less (but proper) regulation and I agree. We had it right before when Glass-Steagall was in place and taxes on the rich were high. The deregulation that has allowed the oligarchs to take control of the country is a very bad thing. Could it be done with less (and stricter) regulations? Yes. By ending the unfair advantages Bill Black has pointed out many times.

I think we're pretty much on the same page, Joyce and we may be debating for nothing.

RobertM said...

I haven't had a chance to read all the way through the new pdf so I did a search on some keywords.

First, my read of what he was saying is that we need a ‘right sized’ defense. I disagree with him that we should be the world's policemen and charge a fee. The US & the IMF has tried to take over the world by way of economics, through un-payable loans and the inevitable austerity measures. That has caused many people to be very unhappy with us and to ignore the fact that there are people in the world who want to harm us would be irresponsible. My argument with Mosler would be about the size of the military.

Two. I haven't found the part where he says he's for deregulation. What I did find is where he says he is FOR regulation.

"Bottom line, the currency itself is a public monopoly, which means the price level is necessarily a function of prices paid
by the government when it spends, and/or collateral demanded when it lends. The last part means that if the Fed simply lent without limit and without demanding collateral we would all borrow like crazy and drive prices to the moon. Hence, bank assets need to be regulated because otherwise, with FDIC-insured deposits, bankers could and probably would borrow like
crazy to pay themselves unlimited salaries at taxpayer expense.
And that’s pretty much what happened in the S & L crisis of the 1980’s, which also helped drive the Reagan boom until it was discovered. Much like the sub prime boom drove the Bush expansion until it was discovered. So it now goes without saying that bank assets and capital ratios need to be regulated."

Anonymous said...

They Just Change the Rules....for themselves

With constant bending of the rules, the only constant was that every bent rule favored the big banks, often uniquely so.

With this special attention given to a favored few, the social mood darkened considerably among U.S. citizens, especially those far removed from the beneficial impacts of the Fed's largesse. Where states are struggling with extremely painful budget deficits measured in the single billions (in most cases), the Fed has been busy printing up and handing out some $75 billion per month to its coziest clients.

While millions of people ran out of extended unemployment benefits and lost houses due to completely fraudulent and illegal banking practices, nothing was ultimately fixed and (seemingly) nobody went to jail or was charged with anything. Small, regional banks without access to unlimited and essentially free capital from the Fed are now forced to compete with big national banks that have been granted an unlimited backstop by the Fed.

This is how too big to fail leads to too small to succeed.

Anonymous said...

Product: Greek deficit-dodging derivatives swap. Manufacturer: Goldman Sachs Group Inc.

Product recall notices are a fact of life for consumer-product makers. Dysfunctional hinges trap tiny fingers; undesirable fluids leak into foodstuffs; and sticky accelerator pedals send cars zooming in mysterious ways, forcing manufacturers into costly withdrawals.

No such strictures apply to the world of banking. No matter how hazardous the mathematical engineering turns out to be, or how destructive the monetary consequences, the finance industry peddles moonshine without fear of sanction or punishment. Here are some recall notices that should be issued.

Joyce said...

RobertM, I agree with you that we are on the same page. Economics, being a man-made construct, can say whatever the interpreters wish it to say as Mosler's essay shows.

The bit about regulation is on p. 29 of the pdf that I read. It says, "We can put the right incentives in place which channel market forces with guidance to better promote the public purpose with far less regulation." My understanding is that less regulation can also mean de-regulation. That was my take.

What I was trying to indicate is that another economist can talk about man-made rules that are directly opposite to those discussed in the essay. And to many those theories will make sense. The proof is in the eating of the pudding--how are those theories put into practice? It is the practice over the past 30 years of little or no regulation and/or deregulation that has led to the financial meltdown. I know we agree on that.

Also using taxes to "balance" the economy can be interpreted in as many different ways as there are political beliefs. Right now, it seems that giving tax breaks to the rich is the present belief to balance the economy (based on the bill that passed to extend Bush's tax cuts).

Theory is just theory whether it is on the left or the right. But the practice seems to be affected by the money from lobbyists and campaign contributions, money which distorts the theory or the practice no matter what that may be.

Joyce said...

Anonymous above, about the article called "They'll Just Change the Rules," I read the article and the NYSE and CFTC are both organizations that are mentioned as either bending the rules or ignoring them.

The President of the NYSE, Duncan L. Niederauer, is a Goldman Sachs guy so, of course, he would do things to benefit the big guy over the little guy.

"Duncan L. Niederauer is Chief Executive Officer and a Director of NYSE Euronext. He is a member of the company’s Management Committee. Prior to his current position, Mr. Niederauer was President and co-Chief Operating Officer of NYSE Euronext with responsibility for U.S. cash equities. Before joining NYSE Euronext in April 2007, Mr. Niederauer was Managing Director and co-Head of the Equities Division Execution Services franchise at Goldman, Sachs & Co. His career at GS spanned 22 years. Mr. Niederauer has served on the board of Archipelago Holdings, LLC and Colgate University, and now serves on the board of Operation Hope. His current memberships include the G100, the British-American Business Council International Advisory Committee, the Partnership for New York City, the Committee Encouraging Corporate Philanthropy, the Shanghai International Financial Advisory Committee, the Museum of American Finance, and Fundacao Dom Cabral in Brazil. He earned an MBA from Emory University and a BA from Colgate University. He and his wife have three children and reside in New Jersey."

Joyce said...

Also on the same topic of "They'll Just Change the Rules," we are familiar with Gary Gensler, another Goldman Sachs guy who doesn't like regulation and is the Chairman of CFTC.

"Gary Gensler was sworn in as the Chairman of the Commodity Futures Trading Commission on May 26, 2009. Chairman Gensler previously served at the U.S. Department of the Treasury as Under Secretary of Domestic Finance (1999-2001) and as Assistant Secretary of Financial Markets (1997-1999). He subsequently served as a Senior Advisor to the Chairman of the U.S. Senate Banking Committee, Senator Paul Sarbanes, on the Sarbanes-Oxley Act, reforming corporate responsibility, accounting and securities laws.

As Under Secretary of the Treasury, Chairman Gensler was the principal advisor to Treasury Secretary Robert Rubin and later to Secretary Lawrence Summers on all aspects of domestic finance. The office was responsible for formulating policy and legislation in the areas of U.S. financial markets, public debt management, the banking system, financial services, fiscal affairs, federal lending, Government Sponsored Enterprises, and community development. In recognition of this service, he was awarded Treasury’s highest honor, the Alexander Hamilton Award.

Prior to joining Treasury, Chairman Gensler worked for 18 years at Goldman Sachs, where he was selected as a partner; in his last role he was Co-head of Finance."

So why would anyone be surprised that these organizations bend, break, ignore or change the rules when the men who run them are Goldman Sachs guys. GS really does rule the financial system. How much more proof does the government need?

Anonymous said...

Blame the Victims and Enrich the Perpetrators

Despite evidence of widespread interconnected mortgage lending, securitization, and foreclosure wrong-doing, there are no meaningful felony indictments. Arianna Huffington's suggests a solution and a long and difficult road ahead:

The most effective way of fixing the multitude of problems facing America is through the democratic process, but the democratic process itself is badly broken. That is why the first step toward stopping our relentless transformation into Third World America has to be breaking the choke hold that special interest money has on our politicians.

Third World America P. 172

rge said...

Rather than speculating on the possible implications of Mosler's condensed summary may mean, when extrapolated to diverse contexts .... why not take a positive approach and just contact him?

To paraphrase Robert Frosty$, when your train of thought meets a man seeming to offer infinite branch points, you have many options. If you take the course of optimistic discourse & inquiry, that choice may make all the difference.

Joyce said...

Good suggestion rge270. I was really getting a bit off topic discussing economics as my focus here is collecting information on Goldman Sachs that might help explain what has happened and is happening to the financial system. (I should have stuck with that Economics course that I dropped in University!)

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