Bankers Admit Faults in Congress

The public spectacle continues. Bankers appeared in Congress yesterday.

‘Yes…we sold a lot of toxic, explosive stuff to our clients,’ they said.

‘Yes, we used our own money to bet against them…’ admitted Goldman’s top man.

‘Yes, we blew up the whole world economy. We’re sorry.’

Associated Press reports:

“The bankers – whose companies collectively received more than $100 billion in taxpayer assistance to weather the crisis – offered no regrets for executive pay that is now likely to increase as a result of their survival…

“Lloyd Blankfein, the chief executive of Goldman Sachs, took the brunt of the questions, especially on his firm’s practice of selling mortgage-backed securities and then betting against them.

“‘I’m just going to be blunt with you,’ Angelides told him. ‘It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.’

“Blankfein replied: ‘I do think the behavior is improper. We regret the consequence that people have lost money in it.’ Later, though, he defended the firm’s actions as ‘exercises in risk management.'”

This is not the first time we’ve seen this show. We’re not old enough to remember the Pecora hearings of the 1930s. But they shared the same story line: captains of industry and finance make blunders; they cause Great Depression; politicians save the day.

Back in the ’30s, the guys hauled before Congress generally refused blame. They were just doing their jobs. By and large, they were right.

This bunch today is more media savvy. They realize that their power and money come at a price. The feds have to pretend to punish them; they have to pretend contrition.

And the rest of us can only enjoy the show. After all, it’s the greatest show on earth. We love every minute of it. But it’s only entertaining when you understand the real plot.

What’s the plot?

Well, you already know it. After the bubble blew up, the feds swung into action to repair it. But you can’t really fix a bubble…at best you can only create a new bubble.

The real economy is still deflating. Just look at the jobs situation. Far from slowing or stabilizing, 2009 was the worst year yet for job losses – ’07…’08 …and ’09…each year has produced greater losses. Even James Grant, who predicted a “barn burning recovery” now admits that his forecast has gone up in flames. He was “either early or wrong,” he says.

And just look at the real estate market. “Home prices are softening again,” says David Rosenberg. As for commercial real estate, here’s Kenneth Laub, who’s been in the business for 50 years, as reported by Bloomberg:

“He says the current downturn will overshadow all of the others…

“‘It won’t be a typical part of a cycle where we’re down for two or three years and things recover,’ says Laub, 70, whose New York firm, Kenneth D. Laub & Co., says it has handled more than $40 billion of real estate transactions since its inception in 1969. ‘It will be longer than we’ve gone through before.’

“As in past slumps, the weak US economy is curbing demand for commercial space, increasing vacancies and causing rents and property values to fall. The key difference today is the explosion in debt financing and related derivatives that fueled a run-up in commercial real estate prices in the 2000s, Laub says. That’s left property owners struggling to make mortgage payments. The overhang of debt will delay any recovery, he says.

“‘It’s not a supply-demand thing; it’s an overleveraged condition,’ Laub says.

“Laub expects a wave of restructurings by troubled commercial borrowers as hundreds of billions of dollars of loans come due annually during the next few years. Commercial real estate may still be recovering a decade from now, he says. ‘What you’re going to see is a tremendously long workout period unprecedented in commercial real estate in this country,’ Laub says. ‘That’s where we’re going, and it’s just beginning.'”

Bad property market. Weak employment market. That’s the background. And it will probably last for years – until the extraordinary debt in the private sector has been worked down to more comfortable levels.

Against this natural process of de-leveraging and depression struggle the feds – our heroes…making the situation worse! More below on that too…

Instead of blaming themselves for their silly theories…for causing the bubble with artificially low interest rates…and then failing completely to understand what they had done…they blame Wall Street.

Sure, the bankers, more knave than fool, took advantage of the situation. But they didn’t cause it.

Still, they’re very sorry they almost brought modern civilization to an end…but, hey, business is business…

Oh the roar of the greasepaint…the smell of the crowd! What a circus!


Obama says the feds ‘saved’ 2 million jobs. But the cost of each job saved was as much as $65 million, according to our not-very-precise accounting.

Was it worth it?

Yesterday, we went on at some length as to why government jobs weren’t the same as private sector jobs. Since they’re never put to the test of the market, you never know whether they are worth having, let alone saving. Do they add to the sum of human wealth and happiness…or do they subtract from it? No one knows for sure.

But here’s the strange and remarkable thing; modern economists actually would prefer jobs that are NOT worth doing.

In the twisted mind of a mainstream economist the problem in a depression is that people don’t spend money. Since they don’t spend, demand goes down. The secret to avoiding a depression, they believe, is to replace private demand with government demand.

Easy, peasy…right?

The government just spends more money. And since it doesn’t have any more money to spend (practically every government on earth was already running a deficit), it borrows the necessary funds. Thus does demand go up. And thus do the feds create the next bubble – in public debt.

But what if government-funded stimulus projects actually produced goods and services that people wanted? Ah…that would be a problem. Because in a depression, there is too much supply and not enough demand. Prices fall, encouraging people to delay spending…further depressing demand…and causing an even worse depression. So, the last thing the feds want is more supply. They want more demand but LESS supply. That means that the ideal government project is one that doesn’t produce anything worth having. Such as military spending. Or digging holes and filling them up again. Or, departments and agencies that employ people who don’t do anything.

It sounds to us as though practically any government program would fill the bill!


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Although it is true that government jobs don’t produce things which expand the real economy (we don’t need more over supply anyway), it is not true “that the ideal government project is one that doesn’t produce anything worth having.” How about fixing roads which are full of potholes, or replacing bridges which are ready to collapse, or building a state of the art electrical grid which is much more efficient. The USA has a badly decaying infrastructure. Good roads, as well as bridges which don’t fall down, and a much better electrical grid down are very much “worth having.”


Looks like good-bye to the world’s middle classes to me. How very convenient for them!

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