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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

Monday, July 2, 2012

The "Self-regulated, Self-rewarding, Bubble-seeking, Fraud-loving Juggernaut"* That is Goldman Sachs

This blog has been a search for the truth about Goldman Sachs's contributions to The Great Recession and the financial crisis of 2008.  Eventually, it became necessary to look at economic theory and how economics itself seemed to contribute to the environment in which the crisis took place.  Here are the latest efforts by Goldman Sachs guys in Europe to bring bank bailouts directly from taxpayers to the insolvent banks in Europe.  "If private creditors run the economy there isn't enough power to produce [left] for the sovereign--for the public purpose."

There are a number of economists who are re-thinking economic theory; for example, how money really works in the economy of democratic countries.  Apparently, neo-classical economics does not deal with the role of money in the economy which is a rather startling idea.

Below is a brief history of the development of MMT (Modern Monetary Theory) and how MMT helps to explain the present financial crisis.  It identifies accounting control fraud as practiced by Goldman Sachs and other banks and it describes how the private control of money reduces the sovereign power of the State.

MMT:  A Doubly Retrospective Analysis*
By L. Randall Wray - New Economic Perspectives (Keynote:  Coffee Conference, University of Newcastle, Australia 2011)
 . . . .
Here’s the rub. Bank money is privately created when a bank buys an asset—which could be your mortgage IOU backed by your home, or a firm’s IOU backed by commercial real estate, or a local government’s IOU backed by prospective tax revenues.

But it can also be one of those complex sliced and diced and securitized toxic waste assets you’ve been reading about since 2008. A clever and ethically challenged banker (is there another kind?) will buy completely fictitious “assets” and pay himself huge bonuses for nonexistent profits while making uncollectible “loans” to all of his deadbeat relatives.

The bank money he creates while running the bank into the ground is as good as the government money the Treasury creates serving the public interest. And he will happily pay outrageous prices for assets, or lend to his family, friends and fellow frauds so that they can pay outrageous prices, fueling asset price inflation.

This generates nice virtuous cycles in the form of bubbles that attract more money until the inevitable bust.

The amazing thing is that the free marketeers want to “free” the private financial institutions but advocate reigning-in government on the argument that excessive issue of money by government is inflationary.

Yet we have effectively given banks the power to issue government money (in the form of government insured deposits), and if we do not constrain what they purchase they will fuel speculative bubbles. By removing government regulation and supervision, we invite private banks to use the public monetary system to pursue private interests.

Again, we know how that story ends, and it ain’t pretty. Unfortunately, we now have a government of Goldman, by Goldman, and for Goldman that is trying to resurrect the financial system as it existed in 2006—a self-regulated, self-rewarding, bubble-seeking, fraud-loving juggernaut.

To come nearer to a conclusion: the primary purpose of the monetary monopoly is to mobilize resources for the public purpose.

There is no reason why private, for-profit institutions cannot play a role in this endeavor. But there is also no reason to believe that self-regulated private undertakers will pursue the public purpose.

Indeed, we probably can go farther and assert that both theory and experience tell us precisely the opposite: the best strategy for a profit-seeking firm with market power never coincides with the best policy from the public interest perspective.

And in the case of money, it is even worse because private financial institutions compete with one another in a manner that is financially destabilizing: by increasing leverage, lowering underwriting standards, increasing risk, and driving asset price bubbles.

Unlike my JG example, private spending and lending will be strongly pro-cyclical. All of that is in addition to the usual arguments about the characteristics of public goods that make it difficult for the profit-seeker to capture external benefits.

For this reason, we need to analyze money and banking from the perspective of regulating a monopoly—and not just any monopoly but rather the monopoly of the most important institution of our economy.

Government has an unlimited supply of its own money—but there have to be available productive resources.

In modern economies that is not the usual constraint, however. Government’s sovereign power is constrained in two main ways: arbitrary self-imposed budgetary constraints, and exchange rate constraints.

Many countries happily impose both types—including Euroland. The handcuffs of budget limits were not enough—so they imposed the ball and chain of the Euro. We can observe the fall-out right now.
A sovereign government that issues its own currency faces no inherent financial constraints. It cannot produce a financial imbalance. It can buy any resources that are for sale in terms of its own currency by using keystrokes.

That does not mean it should try to buy all the resources—it can certainly produce inflation and it can leave too little resources to fulfill the private purpose.

Government needs to use its sovereign power to move just the right amount of resources to serve the public purpose while leaving enough for the private purpose. That balance is mostly political. It is hard to find. I admit all that.

But trying to use an arbitrary budget limit or supposed “balance” between tax receipts and monetary spending (over some time period determined by the movement of celestial objects) is the worst possible way I can conceive of trying to find the right balance between the public and private purposes. What it usually does in reality is to leave the resources unused—wasted—rather than to leave them for the private purpose.

Much better is to explicitly decide: what do we want government to do? What do we want our private sector to do? Do we have a sufficient supply of resources domestically plus what we can obtain externally to achieve both? If we don’t how can we expand capacity as needed?

I’m not necessarily arguing for a planned economy as usually defined. But of course, all economies are planned, of necessity. The question is by whom and for whom. Currently, the by and for is Goldman. 

Please read the remainder of this essay here


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