constitutionalley.us

Received the following from my registered nurse cousin Nancy in response to the “Obama’s not the problem, Romney’s not the solution” posting:

As far as the economy (is concerned), all these attempts at regulation are in response to people making selfish, manipulative, immoral decisions. I’ve worked in healthcare which is highly regulated, and I have seen the regulations pile on and on over the years. I’ve also seen how easily people circumvent them, in the spirit if not the letter. I don’t think there’s any external substitute for people who have learned integrity from childhood.

I’ve been thinking of the economy as much like a human body: very complex with many interactions and systems to maintain homeostasis when one thing changes. Like the economy, there can be a lot of compensation over a long time before the ability to compensate runs out and there is some form of collapse. I’ve seen a person gradually put on hundreds of pounds of fluid before going in to acute heart failure and then wonder how that could happen so suddenly. I’ve also seen people get unusually thirsty and drink sugared pop for months til they were “suddenly” in a coma from a blood sugar of 1200.

OK. You have the collapse, and you do all the things that have worked in the past: drugs, IV’s, education. You get the patient stabilized (Low interest rates, stimulus, recapitalizing banks, etc.) Now, unless you can fix the underlying problem (reform labor markets, wean the system off being so dependent on credit, allow bankruptcies and foreclosures to proceed expeditiously), you’re left with giving drugs (more stimulus, low interest rates for an extended time), some of which cause side effects that create more problems and require more intervention. If the patient doesn’t take the medicine the right way, or refuses to follow advice about diet, exercise, etc, things gradually get worse and it’s more and more difficult to stabilize the patient. Death ensues.

I see the economy being at the stage of compensation using a lot of interventions that will cause more and more problems if they are maintained long-term, and no willingness to do the things that will improve things in the long run. In other words, I’m as pessimistic as you and have been ever since I first did research to try to understand what was happening in ’07.

The “death ensues” bit is a nice touch. Guess pessimism runs in the family. Even so, there comes a time when resuscitation attempts will probably prove futile.

“Are we there yet, Daddy?”

Ciao,
Dennis

Editors Note: The following is excerpted from my prior posting. This was done at the suggestion of kind compatriots who thought that post too long, and were concerned that some casual readers might not ever get to the “red meat” bit. If you’d care to look at some of the background information that prompted this “suggestion”, see: Obama’s not the problem. Romney’s not the solution.

* * *

Consider the following post at the Claremont Institute by James W. Ceaser on Restoring the Constitution:

If undisciplined government is the problem, in what way can the Constitution help? Taking this question to the oracle at Delphi (link added), the answer might be: in one sense not very much, but in another sense quite a lot. Distinguishing the two is the key to solving the riddle.

The first sense—legalistic constitutionalism—understands the Constitution as a set of rules that can decide policies or cases; these rules are of a sort that can offer definitive answers and that could be employed and enforced by courts. The second sense—political constitutionalism—understands the Constitution as a document that fixes certain ends of government activity, delineates a structure and arrangement of powers, and encourages a certain tone to the operation of the institutions. By this understanding, it falls mostly to political actors making political decisions to protect and promote constitutional goals.

However, whether they are Republicans or Democrats, there is little possibility that Congress and the Executive will suddenly shackle themselves with constitutional restraint. Congress has invariably sought to expand the reach and power of the federal government through one piece of legislation after another. When challenged, the courts have for the most part upheld said legislation. Then the executive branch goes on to expand federal powers even more through the creation and implementation of regulations. When regulation and promulgation are challenged, the courts, again for the most part, grant their imprimatur. The system has been crafted over a long period and is designed to create, promote and preserve the power of the federal government. The players have little or no desire to restrain themselves. For the most part they are enablers of one another. And partisan bickering is often no more than diversion. Much the same could be said for the “bipartisanship” ruse.

This system, as it stands, is unchallengeable by private citizens or groups. Go along or go to jail … even if you didn’t really break any laws. Few have the time, money and stamina to mount a serious challenge against the federal government in court. And even if you do win, the victory may prove Pyrrhic. Just ask Lord Black. And it doesn’t mean that down the road the government won’t go after some other poor bastard for essentially the same thing. What we have here is a tyranny of, by and for a legal system that to a great extent serves no useful purpose other than to perpetuate itself. That’s why with 5 percent of the world’s population we have 50 percent of the world’s attorneys.

If political constitutionalism is to be anything more than a catch phrase, it will have to be because a substantial majority of the states, with the support and on the behalf of state residents, don the Constitutional defender mantle, and as a group challenge the federal government, i.e., Civil War II. It won’t be pretty, but it need not be bloody. That this is the direction whither we’re moving is indicated by such state actions as Arizona’s illegal alien legislation, Florida’s refusal to stop purging its voter rolls of fraudulent registrants, and several states’ proclamation of their intent to not fully implement Obamacare. That’s probably why Attorney General Eric Holder has been so vigorously challenging these assaults on federal prerogative.

The states would do well to get organized and coordinated. First order of business would be for the state parties, especially the Republicans, to become financially detached from the national party. Without control of their own funds, the state parties cannot act independently of the national. Reincorporating under a different name, for example “Texas Independent Republicans” or a similar moniker may also be necessary. Then, along with the Tea Party, and whoever else is of like mind, get state legislators elected who will vote for the convening of Constitutional Convention II. Without some such bold action I have no faith whatsoever that there will ever be any substantive improvements in the functioning of our government. The Constitution may very well need updating whether or not it’s “living”, but certainly not by the courts or executive orders or the bureaucratic fiats that have, to a large extent, been the case so far. After over 200 years of floating about in briny political and legal seas, the Constitution seems bit barnacle encrusted. Perhaps it’s time to pull it out of the water for a good scraping.

Who knows, we may even end up with a bit of originalism back in our public debate.

Ciao,
Dennis

Update: If you still think that Congress any regard at all left for the separation of powers doctrine, may I suggest that you consider the following post at the National Review‘s “Bench Memos” blog:

The Consumer Financial Protection Bureau and Separation of Powers
By Ammon Simon
July 16, 2012 11:07 A.M.

Here’s Chicago and NYU Prof. Richard Epstein responding after being asked during a Reason interview what it is we should do to address the economic problems of the country:

You show people that all the ingenuity of gimmicks fails … we have more debt, more unemployment, and less happiness in this country now because hope and change turns out to be discord and confusion.  And there’s no way you can stop that. You cannot stop the blunders of one government program by putting another one on top of it … you get more production out of fewer regulations.
(Starts at about 11 min. into the clip)

Who’s the “fewer regulations” candidate? Certainly not Obama. And what indication is there that Romney is a regulation reducer? Perhaps this is one of the issues underlying Peggy Noonan’s contention the there seems to be little “rah, rah” enthusiasm for the upcoming election and probable candidates, despite the fact that the country is in the midst of a crisis of gargantuan proportion. Apparently, the superhero cape is a bit big on either man. A fundamental problem in American politics is that we keep looking for “American Idol” presidents. As a result, much media attention is focused on the persona and past actions of the candidates.  There is little or no focus on the basic structure and functioning of the federal and state bureaucracies and jurisprudence systems that have a much greater and longer lasting impact on the individual. An example of this is found in the following observation made recently by Conrad Black:

The United States has 5 percent of the world’s population, 25 percent of the world’s incarcerated people, and 50 percent of the world’s lawyers. Ninety percent of its criminal cases are determined by accused people forgoing their constitutionally guaranteed right to trial in favor of an agreed sentence. It was accepted by the Supreme Court in the cases decided last week that defendants frequently receive inept advice. It is also frequently the case that the government spuriously seizes the assets of defendants as ill-gotten gains — on the basis of fraudulent affidavits in ex parte actions — so that the defendants can’t engage the counsel of their choice, and then stays those proceedings while the criminal case is decided without the presence of a serious defense counsel.

Joseph Heller would be proud. We now find ourselves living in a jurisprudential Catch-22 our own making. This may be of little interest to you at this point, but if you’re in a business that imports natural materials or foodstuffs, perhaps you should spend a little time considering the following Lacey Act case that came to my attention via the Gibson Guitar fiasco:

(November 2003 Case Study)
The Supreme Court is currently considering whether to take the case of four businesspeople sent to prison for importing lobster tails from Honduras. Their convictions are predicated on supposed violations of the Lacey Act, which makes it a crime to import “fish or wildlife taken … in violation of any foreign law.” Here, the foreign laws are Honduran fishing regulations that have been declared null and void in Honduras, but are somehow still being enforced by American federal courts

[snip]

The prosecution of four businesspeople for normal business activities highlights the dangerous but growing trend to expand criminal liability against normal social and economic conduct. Historically, a criminal conviction required proof of criminal intent (mens rea; a guilty mind) in addition to the wrongful infliction of harm (actus reus; a bad act). Even if the Honduran statutes had not turned out to be uniformly invalid, there was never any evidence that showed the businesspeople acted with criminal intent. Rather the evidence seems to prove that they were simply engaged in catching and selling seafood in a way that any businessperson would consider lawful.

This prosecution also reveals the risks of federalizing criminal law. Observers have long warned against allowing the federal government to encroach on the traditional state function of enacting and enforcing general criminal laws. Here, the federal government, through the Lacey Act, claims to enforce foreign laws against foreign and U.S. citizens. These regulations were not made by the U.S. Congress or by some executive agency, but by a foreign government with unfamiliar procedures. If the government of Honduras had actually believed these regulations to be valid, they were free to bring charges. Instead, the U.S. government prosecuted a case on what turned out to be bad law.

OVERCRIMINALIZED.COM
McNab v. United States
A Lobster Tale: Invalid Foreign Laws Lead to Years in U.S. Prison

I’m sure many an eye glazes over at the mention of legal terms such as mens rea and actus reus. But these Latin phrases are two of the “common law principles” that were developed over centuries of English court decisions, and were certainly part of the foundation underlying the creation of the U.S. Constitution. Any reasonable interpretation of the Constitution is necessarily embedded in common law. It is the ever increasing and blatant disregard of common law principle in American jurisprudence that underlies much of what many people perceive as a trashing of the Constitution by all branches of government. Without the continuing inclusion of these principles in our court decisions, the result of adjudication can be essentially whimsical.

This trend of undermining or disregarding common law principle seems to have started in 1895 with the Supreme Court decision in the Sparf vs. U.S. case wherein the court determined that a federal judge was not required to inform jurors of their power of nullification. Since then, jury nullification, described by Madison as the last line of defense against a tyrannical government and a basic reason why trial by a jury of one’s peers was included in the Constitution, has essentially been eliminated from the jury trial system as anathema, though in theory it still exists. However, since 90 percent of criminal cases never go to trial, I suppose the suppression of nullification doesn’t really matter that much – unless you’re the accused, of course.

Nullification is not the power of a jury to determine what the law is. Rather, it is the power of a jury to decide, in a specific criminal case without setting precedent, that a law is unjust or being unjustly applied. A person being acquitted by reason of nullification does not change or invalidate written law, but it could very well dampen prosecutorial fervor. Today, few jurors would seem to have the gumption to defy a directed verdict which is precisely how nullification came into being as the result of a trial in mid-1600’s England:

The jury was an essential safeguard of liberty long before the American Revolution. British courts guaranteed the independence of criminal trial juries in 1670, in a case concerning four jurors who had acquitted William Penn for illegally preaching about his Quaker beliefs. Those jurors were imprisoned for their “not guilty” verdict because they had ignored the trial judge’s instructions to vote for Penn’s conviction. An English appellate court released the jurors from prison, establishing the principle that juries cannot be punished for bringing in the “wrong” verdict. The freedom of American jurors to vote according to conscience can be traced to that landmark precedent.

The CATO Institute
December 19, 1998
Trial by Jury
by Clay S. Conrad

Jury nullification is but one of many common law principles that in today’s America are often disregarded in the pursuit of “justice” by both state and federal courts. But the inner machinations of the legal system aren’t the only reason for the misapplication and misinterpretation of the Constitution. As important is the ongoing submission of legislators to the will of courts:

If undisciplined government is the problem, in what way can the Constitution help? Taking this question to the oracle at Delphi (link added), the answer might be: in one sense not very much, but in another sense quite a lot. Distinguishing the two is the key to solving the riddle.

The first sense—legalistic constitutionalism—understands the Constitution as a set of rules that can decide policies or cases; these rules are of a sort that can offer definitive answers and that could be employed and enforced by courts. The second sense—political constitutionalism—understands the Constitution as a document that fixes certain ends of government activity, delineates a structure and arrangement of powers, and encourages a certain tone to the operation of the institutions. By this understanding, it falls mostly to political actors making political decisions to protect and promote constitutional goals.

Both senses of constitutionalism are important, and they can often work together in defense of the Constitution. But when it comes to addressing undisciplined government, legalistic constitutionalism by itself is inadequate and often even counterproductive. Political constitutionalism must assume the principal role in any campaign for a constitutional revival. Here, however, the nation faces what may be its greatest challenge: as a concept or idea, political constitutionalism has all but slipped from our grasp. The dominant understanding today is shaped by the legalistic view, which has become the nation’s “epistemological” default option. Until the meaning of political constitutionalism can be recovered, calls for a return to the Constitution will be to little avail.

The Claremont Institute
Restoring the Constitution
By James W. Ceaser
May 22, 2012

However, this seems to beg the question. Whether they are Republicans or Democrats, there is little possibility that Congress and the Executive will suddenly shackle themselves with constitutional restraint. Congress has invariably sought to expand the reach and power of the federal government through one piece of legislation after another. When challenged, the courts have for the most part upheld said legislation. Then the executive branch goes on to expand federal powers even more through the creation and implementation of regulations. When regulation and promulgation are challenged, the courts, for the most part, again grant their imprimatur. The system has been crafted over a long period and is designed to create, promote and preserve the power of the federal government. The players have little or no desire to restrain themselves. For the most part they are enablers of one another. And partisan bickering is often no more than diversion. Much the same could be said for the “bipartisanship” ruse.

This system, as it stands, is unchallengeable by private citizens or groups. Go along or go to jail … even if you didn’t really break any laws. Few have the time, money and stamina to mount a serious challenge against the federal government in court. And even if you do win, the victory may prove Pyrrhic. Just ask Lord Black. And it doesn’t mean that down the road the government won’t go after some other poor bastard for essentially the same thing. What we have here is a tyranny of, by and for a legal system that to a great extent serves no useful purpose other than to perpetuate itself. That’s why we have 50 percent of the world’s attorneys.

If political constitutionalism is to be anything more than a catch phrase, it will have to be because a substantial majority of the states, with the support and on the behalf of state residents, don the Constitutional defender mantle, and as a group challenge the federal government, i.e., Civil War II. It won’t be pretty, but it need not be bloody. That this is direction whither we’re moving is indicated by such state actions as Arizona’s illegal alien legislation, Florida’s refusal to stop purging its voter rolls of fraudulent registrants, and several states’ proclamation of their intent to not fully implement Obamacare. That’s probably why Attorney General Eric Holder has been so vigorously challenging these assaults on federal prerogative.

The states would do well to get organized and coordinated. First order of business would be for the state parties, especially the Republicans, to become financially detached from the national party. Without control of their own funds, the state parties cannot act independently of the national. Reincorporating under a different name, for example “Texas Independent Republicans” or a similar moniker may also be necessary. Then, along with the Tea Party, or whoever else is of like mind, get state legislators elected who will vote for the convening of Constitutional Convention II. Without some such bold action I have no faith whatsoever that there will ever be any substantive improvements in the functioning of our government. The Constitution may very well need updating whether or not it’s “living”, but certainly not by the courts or executive orders or bureaucratic fiats that have, to a large extent, been the case so far. After over 200 years of floating about in briny political and legal seas, the Constitution seems bit encrusted with barnacles. Perhaps it’s time to pull it out of the water for a good scraping.

Who knows, we may even end up with a bit of originalism back in our public debate.

Ciao,
Dennis

The following is an upgraded version of an email sent to my B-school buddy Harry. . .

I suppose you’ll be dismayed at the length of my response to your “question” of a week or so back, but if you bear with me I do believe I can make a good case for my contention that the recent 2008 financial crisis and the concomitant economic malaise were neither unanticipated nor unintentional. My opinion of the issue is based on widely- and not-so-widely-reported events and the activities of key players. When put together, I find it rather improbable that the whole mess just “happened.” I’ll start with one after-the-fact statement made by Mr. Lloyd Blankfein, Goldman Sachs CEO, while testifying before Congress on Goldman’s role in the crisis:

New York Times
Bankers Without a Clue
By PAUL KRUGMAN
Published: January 14, 2010

Still, Mr. Dimon’s cluelessness paled beside that of Goldman Sachs’s Lloyd Blankfein, who compared the financial crisis to a hurricane nobody could have predicted. Phil Angelides, the commission’s chairman, was not amused: The financial crisis, he declared, wasn’t an act of God; it resulted from “acts of men and women.”

But Goldman and others certainly knew it would be BIG. Here are a few specific references on that subject:

NewsMax
Economist: Housing Bubble ‘Biggest in History’
MoneyNews
Monday, June 27, 2005

The current worldwide boom in residential real estate prices is “the biggest bubble in history,” according to a disturbing new report in the Economist magazine.

Never before have home prices risen so fast, for so long, in so many countries including the United States, reveals a front-page story in the world’s most respected financial periodical.

“Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000,” The Economist reports. “What if the housing boom now turns to bust?

Business Week
Goldman Sachs Economist on the Bubble
Posted by: Peter Coy on September 23, 2005

Just got off the phone with Jan Hatzius, a Goldman Sachs economist who has written extensively on the housing market. He gave me permission to post a research note that he wrote today about the same academic study that I questioned in a post yesterday.

Hatzius says he’s not sure I’m correct that the authors of the study assumed their conclusion. His criticisms are different. The biggest one is that the authors ended their analysis too soon—last year—missing the further inflation of housing prices since then. Here’s what he wrote:

Bubble Trouble? Probably Yes. . .

FOX News
Housing Bubble: Fact or Fiction?
Written By Paul B. Farrell
Published March 14, 2006
MarketWatch

Back during the ’70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I’ve worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University.

But oddly, like the rest of America, most of the time I don’t think about the housing bubble that’s about to pop. We ignore the coming storm.

But when it gets up close and personal — like my family’s home — well, suddenly I’m shocked out of my denial.

The shocker? I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us — from San Francisco to San Diego — is predicted to decline 50% in the next five years. Ouch!

That dire prediction was made by former Goldman Sachs investment banker John Talbott in his new book, “Sell Now! The End of the Housing Bubble.”

A Goldman-Paulson Primer

Paulson was the first CEO (1998-2006) of Goldman Sachs when it was recapitalized as a stock company rather than a partnership.  That meant that they now got to bet with other people’s money rather than just their own. As Goldman CEO, Paulson made 70 trips to China.  Guess which side of the Pacific his bread is buttered on?

American Economic Alert
The “Goldman Sachs Effect” Transfers the Strategic Advantage to China
William R. Hawkins
Thursday, September 28, 2006

Yet, last May, while Paulson was still Goldman Sachs CEO, the firm invested $2.6 billion in the Industrial & Commercial Bank of China, the country’s largest bank.  It is the largest single investment Goldman Sachs has ever made.  According to a Sept. 28 report in the Wall Street Journal, “when ICBC, as the bank is known, lists its shares on the Hong Kong and Shanghai stock markets next month, the value of Goldman’s stake could double based on current demand for the offering.” So much for “fragile” Chinese banks!

Goldman was the primary moving force behind the creation of the December 2000 Republican sponsored “Commodity Futures Modernization Act.”  This legislation was signed into law by Clinton and created “weapons of mass financial destruction” by turning debt markets into a global craps table that was exempted from any and all federal and state gaming and “bucket shop” laws (with some minor exceptions).  Here are the last two sections of the 262 pages of legislation:

PAGE 261

 1 SEC. 407. EXCLUSION OF COVERED SWAP AGREEMENTS.
 2         No provision of the Commodity Exchange Act (other
 3 than section 5b of such Act with respect to the clearing
 4 of covered swap agreements) shall apply to, and the Com-
 5 modity Futures Trading Commission shall not exercise
 6 regulatory authority with respect to, a covered swap agree-
 7 ment offered, entered into, or provided by a bank.
 8 SEC. 408. CONTRACT ENFORCEMENT.
 9         (a) HYBRID INSTRUMENTS.– No hybrid instrument
10 shall be void, voidable, or unenforceable, and no party to
11 a hybrid instrument shall be entitled to rescind, or recover
12 any payment made with respect to, a hybrid instrument
13 under any provision of Federal or State law, based solely
14 on the failure of the hybrid instrument to satisfy the pre-
15 dominance test set forth in section 405(b) of this Act or
16 to comply with the terms or conditions of an exemption
17 or exclusion from any provision of the Commodity Ex-
18 change Act or any regulation of the Commodity Futures
19 Trading Commission.
20         (b) COVERED SWAP AGREEMENTS. — No covered
21 swap agreement shall be void, voidable, or unenforceable,
22 and no party to a covered swap agreement shall be entitled
23 to rescind, or recover any payment made with respect to,
24 a covered swap agreement under any provision of Federal
25 or State law, based solely on the failure of the covered
26 swap agreement to comply with the terms or conditions

 PAGE 262

 1 of an exemption or exclusion from any provision of the
 2 Commodity Exchange Act or any regulation of the Com-
 3 modity Futures Trading Commission.
 4         (c) PREEMPTION. — This title shall supersede and pre-
 5 empt the application of any State or local law that pro-
 6 hibits or regulates gaming or the operation of bucket
 7 shops (other than antifraud provisions of general applica-
 8 bility) in the case of —
 9         (1) a hybrid instrument that is predominantly
10 a banking product; or
11         (2) a covered swap agreement.

(Have to pass the bill to know what’s in it, right?)

This makes it rather difficult to describe derivatives trading as anything other than gambling.  Otherwise, why the specific exemptions from nearly all regulation? “…other than antifraud provisions of general applicability” of course.

In September of 2005 a Goldman Sachs economist wrote a response contradicting a rather sanguine view of the “Housing Bubble” (see above) that was expressed in a WSJ article by two academic economists.  His view was “Thus, housing valuations are stretched, and are becoming more stretched the longer the current boom continues.”

In 2005 Federal Bankruptcy law was amended so as to put the holders of derivatives (Credit Default Swaps, etc.) at the head of the feeding frenzy when a company goes belly up.  They get theirs before anyone else because the new law exempted derivative settlement funds from the usual bankruptcy freeze.

Goldman Sachs was already divesting itself of real estate bets in late 2006 after having been given that in-house heads-up the year before.

The Goldman Exception
Goldman Sachs Chief Executive Lloyd Blankfein this year will almost certainly earn more than the $54.3 million he made in 2006, the New York Times reports. And “if he gets a 20% raise — in line with the growth of Goldman’s compensation pool– he will take home at least $65 million. Some expect his pay, which is directly tied to the firm’s performance, to climb as high as $75 million,” the Times says. The reason his career is going in the opposite direction of Chuck Prince’s or Stan O’Neal’s is that Goldman, unlike almost all its peers on Wall Street, decided late last year to cut its exposure against “mortgage risk” and even take out expensive insurance against the risk that remained (probably the AIG swaps), the Times adds.

— WSJ, Morning Brief, November 19, 2007 — 7:25 a.m. EST

Treasury and the Fed let Lehman Bros. tank in September of ’08 but saved AIG.  Why?  Well, AIG was counterparty to CDS bets made by Goldman.  Using TARP money that was being shoveled into the teetering insurance giant, AIG assumed ownership of the securitized debt owned by Goldman by paying off the credit default swaps at face value.  This was done despite the fact that the debt had not actually become worthless. As a result, Goldman didn’t end up owing the government additional tarp dollars but AIG did.

So, by the end of 2007, nearly a year prior to the meltdown of the financial markets, Goldman pretty much had their ducks lined up, ready and waiting for the bubble to pop. And since the middle of 2006, they also had their former CEO Hank Paulson seated in the cat bird seat as the Treasury Secretary.  As soon as he arrived at Treasury he went to work preparing for the crisis on the horizon:

March 30, 2009
The Financial Crisis: An Inside View
PHILLIP SWAGEL
Assistant Secretary for Economic Policy from December 2006
to the end of the Bush administration on January 20, 2009.

(Starting near the bottom of Page 3. . .) 

On the Verge of Crisis
Secretary Paulson on his arrival in summer 2006 told Treasury staff that it was time to prepare for a financial system challenge. As he put it, credit market conditions had been so easy for so long that many market participants were not prepared for a financial shock with systemic implications. His frame of reference was the market dislocations that had taken place in 1998 with the Russia and LTCM crises.

From summer 2006, Treasury staff had worked to identify potential financial market challenges and possible policy approaches, both near term and over the horizon. The longer-range policy discussions eventually turned into the March 2008 Treasury Blueprint for Financial Markets Regulatory Reform that provided a high-level approach to financial markets reform. Consideration of near-term situations included sudden crises such as terror attacks, natural disasters, or massive power blackouts; market-driven events such as the failure of a major financial institution, a large sovereign government default, or huge losses at hedge funds; or slower-moving macroeconomic developments such as energy price shocks, a prolonged economic downturn that sparked wholesale corporate bankruptcies, or a large and disorderly movement in the exchange value of the dollar that led to financial market difficulties. None of these were seen as imminent in mid-to-late 2006, and particularly not with the magnitude that would eventually occur in terms of the impact on output and employment.

Rather than trying to prepare plans for particular scenarios, the focus at Treasury was on risk mitigation beforehand and on preparing broad responses in the event that a crisis developed, while recognizing that the details would vary with the situation. To help ensure smooth teamwork in the event of a problem, Secretary Paulson reinvigorated the President’s Working Group on Financial Markets (PWG) that had been formed after the October 1987 stock market crash. The PWG brought together senior officials from the Treasury, Fed, SEC, and CFTC to discuss financial and economic developments and potential problems. Regular meetings took place of the heads of the agencies, with frequent and routine interaction at the staff level. Secretary Paulson also talked regularly about the need for financial institutions to prepare for an end to abnormally loose financial conditions.

So it turns out that Goldman and honchos Paulson and Blankfein had been preparing for a “shock” to the system for quite some time and, even if the magnitude turned out to be a bit of a surprise, they well knew what was on its way. The question then becomes, did no one else in the Bush Administration or the loyal Democratic opposition have any idea as to what was about to transpire? If they did, why wasn’t something done sooner so as to reduce the impact on the economy and financial system? 2008 was an election year, obviously, and we always have to have an October — in this case September — surprise. Bear Stearns was saved in February. That was too early for a meltdown. But September was close enough to the election. When Lehman Bros. offered itself up for sacrifice the trigger was pulled and the rest is history. I’m not willing to believe that Goldman had little notion of what was transpiring at the other investment banks. And if they did know, it seems unlikely the actions of Paulson and Blankfein were merely reactionary.

Don’t get me wrong. Goldman was not the cause of all this. They may have behaved unethically but I don’t believe illegally. After all, they wrote the laws so why break them? Derivatives, including credit default swaps, are traded over-the-counter. No exchange. So who has what bets placed with whom is known only to the counterparties themselves. Very convenient when one wishes to conceal which way one is betting.

The major factors behind all this nonsense were not the creation of Goldman. Our trade and fiscal policies were the responsibility of the Administration while monetary that of the Federal Reserve. Legislation such as the Community Reinvestment Act pushed for increased home ownership as did the pressure put upon banks to loosen home loan requirements for minorities. Fannie Mae and Freddie Mac were being operated fraudulently. And then there was the issue of “Liar Loans” as Steve G. (another B-school sectionmate) expounded upon. These led to rampant speculation in the housing market by people who had no business doing so. Everyone wanted to get in on the act. How bad did  it get? This will give you some idea:

The End
by Michael Lewis
From the December 2008 issue of Portfolio

The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong. . .

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’?” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”

It really was a giant game of liars poker invented and promoted by our government to serve its own deceptive purpose of creating — and sustaining for however long a period it could — a smoke and mirrors prosperity. Goldman helped construct the plan and managed it, but didn’t own it. They just did the job as best they could for their own benefit and that of the Chinese and U.S. Governments as well as the Saudis and others. Goldman, in the persons of Paulson & Blankfein, controlled the timing because its hand was on the wheel. If you’re not in that position, you’re just going along for the ride — whether it’s off the cliff or otherwise.

Or so it must seem to the taxpayer.

Ciao,
Dennis

From Courthouse News:

Wednesday, June 06, 2012
Police Overkill

BALTIMORE (CN) – When an architect crashed his car while suffering a diabetic reaction on the way home from Bible study class, state and county police pepper sprayed him in the face and clubbed and Tasered him to death, his wife claims in court.

Linda Johnson sued the Maryland State Police, Baltimore County Police, their top commanders and six officers who allegedly beat and Tasered to death Carl D. Johnson on May 27, 2010.

[snip]

The widow claims Johnson was Tasered at least three times, while he was lying on his back, helpless, surrounded by police. He became “motionless and speechless” and was pronounced dead within an hour of cardiac arrest.

He was the 10th person to die since 2004 after being subjected to police electroshock in Maryland, the Baltimore Sun reported in a story about Johnson’s death.

Linda Johnson seeks more than $10 million in punitive damages for wrongful death, loss of consortium, false imprisonment, false arrest, battery, gross negligence and other charges. She is represented by Mark Millstein and David Silbiger, both of Baltimore.

Hat Tip to Remus on that. . .and the one at the end.

Lest you think this story is naught but bullshit, recall the Maryland mayor who’s house was raided in a set-up drug bust and both the mayor’s dogs were shot to death:

SWAT Gone Wild in Maryland
A botched raid on a small-town Maryland mayor exposes widespread abuse by the state’s SWAT teams.
Radley Balko | July 13, 2009

Late last month, Berwyn Heights, Maryland Mayor Cheye Calvo took the unusual step of filing a civil rights lawsuit against the police department of his own county. The suit stems from a 2008 SWAT team raid on Calvo’s house that resulted in the shooting deaths of his two black Labrador retrievers. In pushing back against the abuse he suffered at the hands of the Prince George’s County police department, the mayor is helping expose a more widespread pattern of law enforcement carelessness and callousness throughout the state of Maryland.

Also interesting is the move up by one of the officers associated with that raid, as reported here by the Washington Post:

Baker taps Magaw for police chief; names six others to top posts
By Miranda S. Spivack and Matt Zapotosky
Published: May 13, 2011

Prince George’s County Executive Rushern L. Baker III on Friday nominated Acting Police Chief Mark Magaw and six others to head key departments in his fledgling administration, turning to several county government veterans to fill top positions.

[snip]

Magaw is not without baggage. He was commander of the police department’s narcotics enforcement division when a sheriff’s office SWAT team, serving a county police warrant, broke down the door of Berwyn Heights Mayor Cheye Calvo’s home in 2008 and shot and killed his two dogs.

Must be how one advances in Prince George’s County law enforcement. Perhaps that’s the reason for such little improvement over the past three years in the professionalism of  Maryland’s “finest.” Has the situation in Atlanta fared better?

Recall the tragedy of an elderly woman’s death at the hand of an Atlanta police swat team during a botched drug raid in November of 2006 :

Kathryn Johnston: A Year Later
92-year-old woman’s death has done little to curb the use of paramilitary police tactics around the country.
Radley Balko | November 23, 2007

It was one year ago this week that narcotics officers in Atlanta, Georgia broke into the home of 92-year-old Kathryn Johnston.

They had earlier arrested a man with a long rap sheet on drug charges. That man told the police officers that they’d find a large stash of cocaine in Johnston’s home. When police forced their way into Johnston’s home, she met them holding a rusty old revolver, fearing she was about to be robbed. The police opened fire, and killed her.

Shortly after the shooting, the police alleged that they had paid an informant to buy drugs from Ms. Johnston’s home. They said she fired at them first, and wounded two officers. And they alleged they found marijuana in her home.

We now know that these were all lies. In fact, everything about the Kathryn Johnston murder was corrupt. The initial arrest of the ex-con came via trumped-up charges. The police then invented an informant for the search warrant, and lied about overseeing a drug buy from Johnston’s home.

Ms. Johnston didn’t actually wound any of the officers. They were wounded by fragments of ricochet from their own storm of bullets. And there was no marijuana. Once they realized their mistake, the officers handcuffed Ms. Johnston and left her to bleed and die on the floor of her own home while they planted marijuana in her basement.

We now know that it was routine for Atlanta’s narcotics officers to lie on drug warrants. We know that judges in the city rather systematically approved those warrants with no scrutiny at all (the judge in the Johnston case literally rubber-stamped the warrant), abrogating their oaths as guardians of the Fourth Amendment.

As a result, the good Citizens of Atlanta demanded the establishment of a civilian police oversight board. How’s that been working out? Well. . .

The Atlanta Journal-Constitution
Metro Atlanta / State News
5:00 a.m. Sunday, May 27, 2012
Atlanta Citizen Review Board under scrutiny
Police resistance, internal politics put effectiveness in doubt
By Rhonda Cook

Outrage over a botched raid built on lies from informants followed by cover-ups by cops who killed a frightened, innocent 92-year-old Kathryn Johnston in her home — and then planted drugs in the house — led to the birth the Atlanta Citizen Review Board.

The board was given investigators, subpoena power and a mandate to provide a credible, independent and “safe and welcoming place” to bring complaints and accusations of misconduct and abuse by public safety officials.

More than five years later, the oversight board’s existence is threatened by resistance from the police force, an apparent lack of interest from city government, internal board politics and a damaged public image.

[snip]

“It had the capability of having effectiveness but the city of Atlanta is a huge political machine and I don’t think it was ever strong enough to be effective,” said Joy Morrissey, who had been on the board since its inception until May 10, when her replacement was announced. “I don’t know if anyone is going to allow it to be effective.”

[snip]

Only one member of the board has a law enforcement background. Some critics of police oversight said laypeople do not understand or appreciate that officers deal with difficult, untrustworthy, dangerous people every day and it’s common for some to claim brutality or false arrest to deflect from the charges against them.

But various neighborhood safety groups say APD cannot police itself and that is evidenced in just a few cases that came after officers shot and killed Johnston. Even as top police officials insisted officers acted appropriately in the cases below, the ACRB was saying otherwise and the city’s lawyers were settling lawsuits — $2.6 million in the past year.

not very well, apparently.

On New Jersey school grounds you’ll now be safe from attack by irate BB gun toters:

June 7, 2012
CheaperThanDirt.com
BB Gun Possession Could Come with Prison Sentence

Little Timmy Moore, you are hereby convicted to 10 years in prison and a $150,000 fine for the possession of a Daisy Red Ryder BB gun. That is what some people could hear from a New Jersey judge if a new piece of legislation passes at 2:00 p.m. June 7, 2012. With the passing of A1216, possession of all BB guns and air guns on school property would carry 7-10 year prison sentences with no possibility of leniency. Parents picking up their children at school after hunting or going to the range would also be at risk.

Daisy Red Ryder BB Gun

The legislation aims to increase the penalty for possession of a firearm on school grounds, or any educational institution from a third to second degree crime. Typically, second-degree crimes carry a prison sentence of 7-10 years and up to a $150,000 fine, with very limited sentencing discretion from the judge. In New Jersey, law enforcement considers BB guns and air rifles legally firearms. Many consider them toys in other parts of the country.

But then, New Jersey isn’t Maryland or Atlanta so there’s no need to concern yourself with inappropriate police actions, is there?

“Land of the Free”? IMHO politics is a distraction from more serious problems. That’s probably why establishment politicians and pundits always keep it on the front burner.

As Mark Stevens says, “It’s war!”

Ciao,
Dennis

This is from the June 4th edition of the AFPC‘s China Reform Monitor:

May 22:

A yearlong U.S. Senate Armed Services Committee probe has found that vast numbers of counterfeit Chinese-made electronic parts are being used in U.S. military equipment. More than 70 percent of an estimated one million suspect counterfeit parts used in the Navy’s SH-60B helicopters, P-8A Poseidon planes, C-130Js, and C-27Js cargo planes, among others, were traced back to China, the BBC reports. Committee staff that attempted to travel to China for the investigation were not granted visas. “Rather than acknowledging the problem and moving aggressively to shut down counterfeiters the Chinese government has tried to avoid scrutiny,” according to the report. The committee also criticized China for failing to shut down counterfeit manufacturers claiming “counterfeit electronic parts are sold openly in public markets in China.” In response, the official China Daily called the accusation an “attempt to distract the U.S. public from the real problems that are plaguing the country” and noted that the U.S. has maintained a military embargo on China for 23 years and called on Washington “to find out who purchased the parts and how they passed muster.”

You “buy” that? Apparently our military procurement system does. But don’t blame Obama. This has been going on for some time now. After all, back in April of 2009, Dr. Joel F. Brenner, then National Counterintelligence Executive (NCIX), stated in an address that:

We’re also seeing counterfeit routers and chips, and some of those chips have made their way into US military fighter aircraft.

At least the Senate is up to the task of getting out a report on the subject of counterfeits from China getting into our military supply chain. Can’t wait for their next heads-up. Maybe by then we’ll learn why there’s been such a problem with the F-22’s oxygen generating system. Ya think?

Don’t hold your breath.

Ciao,
Dennis

I would like to thank Mr. Stevens of “No, I won’t stop advertising on the Rush Limbaugh show” fame for providing some reassurance that I’m not really living on my own planet. No, Dennis, you’re not crazy. It really is that bad.

If anyone has Romney’s email, please forward this to him.

From the American Spectator and well worth the 26 minutes:

Mark Stevens Sits Down With Ginni Thomas
By Jeffrey Lord on 5.31.12 @ 10:36AM

Ciao,
Dennis

Update: Here’s Jeffrey Lord’s American Spectator telling of the Mark Stevens tale:

Special Report
Mark Stevens: A Profile in Courage
By Jeffrey Lord on 4.5.12 @ 6:08AM

Threatened for sticking with Rush, defiant advertiser declares “Battle for America.”

Those who died defending America did so with purpose. We cannot honor them if we honor not their purpose. That is our “Test of Fire.”  The following video was not created for that reason, but it does inspire a level of dedication and possess a clarity of moral purpose I cannot recall seeing elsewhere. Whether or not you’re religious, this political message intended for Catholics is also the Memorial Day message: Family, Life and Freedom — values that stand the test of fire and for which our honored dead gave their last full measure.

Hat Tip: Chuck F. — Fellow USAF veteran and friend

Whether or not you’re a budget hawk, you may be interested in knowing how much of our national fiscal dilemma is the responsibility of the Bush Administration versus the Obama Boys. The answer may surprise you because the average annual increase in spending is almost identical for both administrations, as you can see in the following table:

(left-click on the table for a larger, more readable view)

FY 2000 is included for comparison purposes, and then there is the question of whether or not the Obama Boys should be held responsible for FY 2009 spending. After all, Obama took office in January of ’09 and FY 2009 started October 1, 2008. The increase from ’08 to ’09 is a little over a half-trillion which, if blamed on Bush, would increase his average and lower Obama’s. The choice is yours.

Ciao,
Dennis

Check Six!

Here are the raw employment/unemployment numbers for April, not seasonally digested, mind you:

Otherwise, no comment. You can find plenty of that elsewhere with very little effort. Just like the weather, everyone talks about employment, but nobody does anything about it.

Ciao,
Dennis