Monthly Archives: May 2015

Humor: The Borowitz Report

McCain Urges Military Strikes Against FIFA



The Borowitz Report) – Calling the Obama Administration’s actions against the soccer organization “weak and ineffective,” Senator John McCain on Thursday proposed military action to “dismantle and destroy FIFA once and for all.”

“These are people who only understand one thing: force,” McCain said on the floor of the United States Senate. “We must make FIFA taste the vengeful might and fury of the United States military.”

McCain said that he was “completely unimpressed” by the Department of Justice’s arrests of several top FIFA lieutenants this week, calling the action “the kind of Band-Aid solution that this Administration, sadly, has become famous for.”

“Rounding up a few flunkies in a hotel is meaningless when the leader of FIFA remains at large,” he said. “I will follow Sepp Blatter to the gates of Hell.”

McCain requested a four-billion-dollar aid package for moderate elements within global soccer, and said that the United States should be prepared to put boots on the ground in Switzerland.

Calling the use of force against FIFA “long overdue,” he placed the blame for the group’s alarming growth squarely on the shoulders of the White House. “Barack Obama created FIFA,” he said.

Get news satire from The Borowitz Report delivered to your inbox.

Counterpunch on Two-Tiered Justice


Working People Have No Leverage

Labor’s Enemies Wear Black Robes, Not White Hoods


One doesn’t have to be a professional historian or archivist to appreciate just how virulently skewed the U.S. judicial system has been in its dealings with working people. One doesn’t have to be a legal scholar to acknowledge that moneyed interests have always been provided with their own form of “justice.” All one has to do is pay attention.

From Day One, the federal courts and Supreme Court have taken the side of employers, peddlers, merchants, plantation owners, industrialists, entrepreneurs, bankers, and any other remotely Establishment agent (including law enforcement officials) who more or less stands in opposition to the interests of the working masses. Not to get all “Marxian” here, but it’s true.

That shouldn’t surprise anyone. After all, whom do federal judges typically pal around with? The Country Club set, or men and women who actually toil for a living? Indeed, if it happened to be the latter, it could be the opening of a classic joke: “A welder, bricklayer and federal judge are drinking together in a bar….”

Granted, the High Court has thrown the occasion bone in the direction of the “proletariat,” but that gesture has usually been in the form of extending due process or some other civil libertarian right to the underdog. It’s different when it comes to money and property. In matters involving economic hegemony, workers have historically been pissed on from a great height.

One example of just how “corporate-minded” the judiciary has always been is the application of the landmark Sherman Anti-Trust Act (1890) in the Danbury Hatters Case (1908). While liberals loved passage of the Sherman Act because they finally had something on the books that thwarted monopolies and price-fixing, the manner in which the Supreme Court interpreted the Act was a mind-blower.

Briefly, the facts are these: When a labor union, the United Hatters of North America, tried to organize a hat factory—D.E. Loewe and Company, located in Danbury, Connecticut—the company unceremoniously rebuffed them (officials refused even to meet with the union). Accordingly, the United Hatters called a strike.

And when D.E. Loewe and Company hired scabs to replace the striking workers, the hatters swung into action. With the assistance of the influential AFL (American Federation of Labor), they launched a public relations campaign, urging the company’s retail outlets not to carry Loewe’s merchandise. Apparently, the proposed boycott worked extraordinarily well. Customers balked and orders shrank.

But D.E. Loewe took its case all the way to the Supreme Court. They argued that the AFL’s boycott violated the “restraint of trade” provision laid out in the Sherman Act, and incredibly, the U.S. Supreme Court bought the argument. The Court basically stated that anything that resulted in significantly impeding a commercial venture—including strikes and boycotts—was illegal under the Sherman Act.

Not content to simply win, D.E. Loewe filed a lawsuit against the union, demanding compensation. Citing the Sherman Act, a lower court awarded Loewe triple damages (triple!!), to be paid by members of the United Hatters. Bank accounts were attached and home foreclosures were threatened. Naturally, the union appealed, but the Supreme Court, in 1915, upheld the decision. So much for workers’ rights.

The Danbury Hatters Case was just one of many anti-labor decisions passed down by the courts. There were dozens of others. It wasn’t until 1932, with passage of the Norris-LaGuardia Act (which forbid judges from arbitrarily issuing strike injunctions), that things began looking up, and it wasn’t until 1935, with passage of the Wagner Act, that organized labor finally gained a place at the table.

Still, even with Wagner in effect, organized labor’s status was precarious. In fact, labor’s “glory days” lasted barely 12 years. In 1947, the Taft-Hartley Act altered many of the Wagner Act’s provisions, including making “right to work” states legal and making secondary boycotts illegal.

By passing Taft-Hartley, the U.S. Congress demonstrated that it was equally as hostile to labor as the courts were.

Unfortunately, boycotts (even the legal, modestly ambitious ones) don’t usually work today because we’ve become too fragmented and diluted (in union jargon: “corpuscular”) as a nation. It’s hard to mobilize and harder yet to maintain discipline.

But even if we did become unified, even if by some crazy happenstance working people (the bottom 80-percent), in a splashy show of solidarity, were able to put a dent in the nation’s commerce, it would be illegal. President Obama would invoke Taft-Hartley and make everybody go back to work.

Working people have no leverage. They aren’t allowed to engage in meaningful strikes, they aren’t allowed to engage in meaningful boycotts, and they aren’t even allowed to keep their jobs during a walkout. Doesn’t that give a whole new meaning to the term “stacked deck”?

David Macaray is a playwright and author. His newest book, “Nightshift: 270 Factory Stories,” will be published in June. He can be reached at

“There is no democracy.”



“I would like to try to sell something to you. Valhalla, Mr. Beale… You have meddled with the primal forces of nature… The Arabs have taken billions of dollars out of this country and now they must put it back. It is ebb and flow, tidal gravity… You are an old man who thinks in terms of nations and peoples. There are no nations. There are no peoples. There are no Russians. There are no Arabs. There is no West. There is only one holistic system of systems. One vast and immense, interwoven, interacting, multivariate, multinational dominion of dollars: petrodollars, electrodollars, multidollars, reichmarks, reims, rubles, pounds, and shekels. It is the international system of currency that determines the totality of life on this planet today… You get up on your 21-inch and howl about America and democracy. There is no America. There is no democracy. There is only IBM and IT&T and AT&T and Dupont, Dow, Union Carbide, and Exxon… What do you think the Russians talk about in their councils of state? Karl Marx? They get out their linear programming charts, statistical decision theories, mini-max solutions and compute the price-cost probabilities of their transactions and investments, just like we do…

“The world is a business, Mr. Beale. It has been since man crawled out of the slime. And our children will live to see, Mr. Beale, that perfect world in which there is no war or famine, oppression or brutality. In which all men will work to serve a common profit, in which all men will own a share of stock. All necessities provided. Ann anxieties tranquilized. All boredom answered.”

—Ned Beatty, chairman of the board in the movie “Network”

Naked Capitalism on the Latest Oil Spill

Gaius Publius: The Constant Cost of Carbon — Another California Oil Spill

Posted on May 24, 2015 by 

By Gaius Publius, a professional writer living on the West Coast of the United States and frequent contributor to DownWithTyranny, digby, Truthout, Americablog, and Naked Capitalism. Follow him on Twitter @Gaius_PubliusTumblr and Facebook. This piece first appeared at Down With Tyranny. GP article archive here.

la-me-santa-barbara-county-beach-oil spill
Oil spill off Santa Barbara coast (Credit: Brian van der Brug / Los Angeles Times)

Thoreau once wrote, “We do not ride on the railroad; it rides upon us.” The full quote is:

We do not ride on the railroad; it rides upon us. Did you ever think what those sleepers are that underlie the railroad? Each one is a man…. The rails are laid on them, and they are covered with sand, and the cars run smoothly over them. They are sound sleepers, I assure you. And every few years a new lot is laid down and run over; so that, if some have the pleasure of riding on a rail, others have the misfortune to be ridden upon.

It’s likewise said that we don’t grow corn; corn grows us, then uses us to spread its genetic material around the country and the world at our expense. At that task, corn is successful beyond its dreams.

In the same way, we don’t burn carbon — oil and gas. By burning the earth, it burns us, and in the process uses us to burn itself, to desequester its long earth-buried atoms and reenter the atmosphere as a gas. Through most of the history of life on earth, CO2 has been far more prevalent in the atmosphere than it has been during the age of humans.


The blue line near the middle shows CO2 concentration during the age of humans, which started about 200,000 years ago. The horizontal dotted line shows 400 ppm, where we are today. The tall red line on the right is where we’re headed by 2100 under “business as usual.” Notice how neatly that matches most of the past (source).

While carbon is burning us, creating this world, it’s also poisoning us, creating this world, a world of ever-increasing spills and explosions, of groundwater arsenic and unlivable shorelines. About those shorelines …

Oil Spill Off Santa Barbara Coast (Again)

As reported by the LA Times and the Santa Barbara Independent, there’s a pretty serious oil spill off the Santa Barbara coast in an area called Refugio State Beach. The source of the spill is a shoreline pipeline whose leak detection mechanism apparently failed to work. The leak poured what was first reported as 21,000 gallons of oil into the ocean …

During the several-hours-long leak, about 21,000 gallons of oil escaped the pipeline, Coast Guard officials estimated. Coast Guard crews stopped the leak by 3 p.m., said Petty Officer Andrea Anderson.

… but those estimates were apparently provided by the pipeline company itself, Plains All American Pipeline, to the Coast Guard (my emphasis throughout):

The accident has been classified by federal responders as a “medium-sized” spill and was traced to an underground pipeline a few hundred yards inland above Highway 101. The 24-inch pipe is owned and operated by Houston-based Plains All American Pipeline, which stopped the leak at approximately 3 p.m. It’s unclear how long the pipe was leaking, what caused it to break, or exactly how much crude escaped. Plains initially reported that 21,000 gallons of oil made its way into the ocean, but that number is expected to riseafter county, Coast Guard, and state Fish and Wildlife personnel tally the true damage.

Nice of the Coast Guard to take the company’s word and make it their own. An update at the Independent offered this correction:

Lt. Jonathan McCormick with the U.S. Coast Guard said an estimated 21,000 gallons of oil spilled into the ocean. That estimate comes from Plains All American Pipeline. An independent assessment has not yet been completed, he said, and it’s unknown how many gallons of crude remain on land and along the shoreline.

The latest news from the AP puts the number of gallons much higher:

BREAKING: Pipeline company: Up to 105,000 gallons of oil might have spilled from California line.

I’m willing to bet that’s not the last word, especially since the source is, again, the pipeline company, with an economic interest in underplaying the problem.

About That Pipeline Company …

The version of the story at the Independent has some background on Plains All American Pipeline:

Founded in 1998, Plains All American Pipeline is in the business of transporting and storing crude oil and natural gas all over the continent. According to the SEC, the company’s net revenue last year was $1.39 billion. Tuesday’s spill was the latest in a number of similar accidents in recent years. The EPA has recorded at least 10 serious incidents in Texas, Louisiana, Oklahoma, and Kansas; between June 2004 and September 2007, more than 273,000 gallons of crude was leaked, and in a 2010 settlement with EPA, the company agreed to spend $41 million to upgrade 10,400 miles of pipeline and pay $3.2 million in civil penalties. In 2011, Plains’ Canadian division was responsible for three major accidents in Alberta.

Last May, a 130-mile Plains pipeline that runs through Los Angeles County ruptured and sent 19,000 gallons of crude through the streets of Atwater Village. The leak lasted around 45 minutes, covered a half-mile area in oil, and caused the evacuation of nearby buildings. According to news reports, Plains was not aware of the spill until residents called the city fire department, which then had to notify the company.

Not a small company. And it apparently swings enough pipe of its own to get special oversight dispensations:

The broken Plains pipeline funnels 45,000-50,000 barrels of produced oil a day between ExxonMobil‘s Las Flores Canyon Processing Facility near Refugio to the Plains-owned Gaviota pumping station. From there, it travels to refineries in Kern County. The 10-mile pipeline was installed in the early 1990s. Notably, it’s the only piece of energy infrastructure on Santa Barbara County land that’s not under the county’s watchWhen pipe was put in, Plains successfully sued to place it under the supervision of the State Fire Marshal’s Office, arguing state management pre-empted local oversight.

I’d be remiss if I didn’t tell you that Plains is “sorry” and “deeply regrets” the incident. So do their stockholders, but I’m guessing on that. The stockholders have yet to speak.

The Political Angle — the California Congressional Delegation

California’s District 24 is represented by Lois Capps, who was quoted in the Independent as saying:

“I am deeply saddened by the images coming from the scene at Refugio,” Rep. Lois Capps said Wednesday morning. “This incident is yet another stark reminder of the serious risks to our environment and economy that come from drilling for oil.”

While Capps may be a friend of the coastline (by backing sure-to-fail bills in the U.S. House), she’s also a corporate-friend member of the New Dem Coalition and refused to take a position on county Measure P, which would have banned fracking in Santa Barbara County and the Channel Islands.

Measure P lost:

Most Santa Barbara County residents didn’t vote on Tuesday, but those who did made one thing clear: They didn’t support Measure P. Shot down by a whopping 62.65 percent of voters, the contentious initiative — which would have banned all new fracking, acidizing, and cyclic steam injection wells in the county’s unincorporated regions — pitted environmentalists sounding the alarm on climate change against the oil industry calling for fair regulations. And the oil industry — with help from operators in Santa Barbara County and beyond — dug into its deep pockets, shelling out approximately $6.6 million to defeat the measure, while Measure P supporters raised just more than $400,000.

You can buy a lot of votes and lay down a lot of fog with $6.6 million … in a county election no less.

Lois Capps is retiring after this term and Blue America is looking for a replacement who is more in keeping with what the district needs. In the meantime, in a neighboring district, CA-44, Blue America has endorsed progressive candidate Nanette Barragán.

About that race, Howie Klein writes via email:

CA-44 is an open congressional seat because Janice Hahn is running for Supervisor. One of the most corrupt Sacramento politicians, Isadore Hall, is the Establishment fave. He’s the second biggest recipient of money from Big Oil in the legislature and he’s the lobbyists’ favorite lawmaker. His opponent, Nanette Barragán, got into politics fighting Big Oil— and beating them.

You can contribute to the Barragán campaign, along with other Blue America candidates, here (adjust the split in any way you like, including 100% for Barragán).

We End Where We Began

We began this piece with the idea that the trains ride us, the corn gene breeds us and feeds us for its own propagation … and our oil burns us so it can return to the skies.

I’m not sure we can stop the trains — the march of technology — but we can stop the march of carbon into the atmosphere. All we have to do is adopt an Easter Island solution and depose its human agents:

You’re a villager on Easter Island. People are cutting down trees right and left, and many are getting worried. At some point, the number of worried villagers reaches critical mass, and they go as a group to the island chief and say, “Look, we have to stop cutting trees, like now.” The chief, who’s also CEO of a wood products company, checks his bottom line and orders the cutting to continue.

Do the villagers walk away? Or do they depose the chief?

There’s always a choice …

And now is the time to make it. We can end the rule of carbon, and those who suck money from it, the minute we really want to.

Naked Capitalism: Matt Taibbi on Perp Walks


Matt Taibbi on Democracy Now: Banks Admit to Crimes, Pay $5 Billion, And Still No One Goes to Jail

Posted on May 22, 2015 by

Matt Taibbi discussed the latest round of bank settlements on Democracy Now. This time, Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland pleaded guilty to conspiracy to manipulate foreign exchange rates in dollars and Euros. While this settlement was a step forward by virtue of the banks admitted to specific, criminal acts, yet again the institution is fined while the executives go unpunished. And we again have to listen to the intelligence-insulting claims that the top brass were victims of bad actors.

On a related issue, reader Glenn M e-mailed us:

Perhaps I missed it, but I have seen no news stories regarding the final results of Eric Holder’s 90-day ultimatum back in February to finally land indictments against Wall Streeters for the mortgage crisis.
According to my calculations, this “ultimatum” expired May 17.

There haven’t seemed to have been any stories noting the failure of this ultimatum, which was announced with great fanfare.

Here is a link from the day of:
Eric Holder launches 90-day crusade against bank leaders

From the article:

After years of pressure from some lawmakers, civic leaders and Occupy Wall Street protesters, the country’s No. 1 law enforcer said Tuesday he has instructed many of his 93 federal prosecutors to review any residential mortgage fraud case they have brought against a financial institution stemming from the 2008 financial crisis to see if any executive could be held accountable for the company’s actions.

Both civil and criminal cases will be on the table, Holder said.

The prosecutors have been given three months to report their findings to Washington.

And predictably, this bold talk was yet another show for the rubes. Nothing took place and no report was made public. Some Democrats in the Senate, such as Sherrod Brown and Elizabeth Warren, threatened to slow-walk the confirmation of Loretta Lynch unless cases were filed against individuals. But as an insider tersely put it, “Dems voted for Lynch and lost their leverage.”

Naked Capitalism: Krugman Stopped Short


Bill Black: Krugman is Half Right

Posted on May 18, 2015 by

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives

Paul Krugman has a nice column entitled “Fraternity of Failure” dated May 15, 2015.

In Bushworld, in other words, playing a central role in catastrophic policy failure doesn’t disqualify you from future influence. If anything, a record of being disastrously wrong on national security issues seems to be a required credential.

But refusal to learn from experience, combined with a version of political correctness in which you’re only acceptable if you have been wrong about crucial issues, is pervasive in the modern Republican Party.

Krugman moves from foreign policy to economic policy and sees the same fraternity of failure among Republican economists.

Take my usual focus, economic policy. If you look at the list of economists who appear to have significant influence on Republican leaders, including the likely presidential candidates, you find that nearly all of them agreed, back during the “Bush boom,” that there was no housing bubble and the American economic future was bright; that nearly all of them predicted that the Federal Reserve’s efforts to fight the economic crisis that developed when that nonexistent bubble popped would lead to severe inflation; and that nearly all of them predicted that Obamacare, which went fully into effect in 2014, would be a huge job-killer.

Given how badly these predictions turned out — we had the biggest housing bust in history, inflation paranoia has been wrong for six years and counting, and 2014 delivered the best job growth since 1999 — you might think that there would be some room in the G.O.P. for economists who didn’t get everything wrong. But there isn’t. Having been completely wrong about the economy, like having been completely wrong about Iraq, seems to be a required credential.

What’s going on here? My best explanation is that we’re witnessing the effects of extreme tribalism. On the modern right, everything is a political litmus test. Anyone who tried to think through the pros and cons of the Iraq war was, by definition, an enemy of President George W. Bush and probably hated America; anyone who questioned whether the Federal Reserve was really debasing the currency was surely an enemy of capitalism and freedom.

It doesn’t matter that the skeptics have been proved right. Simply raising questions about the orthodoxies of the moment leads to excommunication, from which there is no coming back. So the only “experts” left standing are those who made all the approved mistakes. It’s kind of a fraternity of failure: men and women united by a shared history of getting everything wrong, and refusing to admit it. Will they get the chance to add more chapters to their reign of error?

Krugman’s explanation is compelling, except that it ignores the rival fraternity of failure inhabited by economists and finance “experts” who support the New Democrats and New Labour. Krugman chooses three economic prediction issues to discuss: was there a housing bubble, would the Fed’s liquidity programs in response to the crash cause hyper-inflation, and would Obamacare be a huge job-killer? He faces tight word count limits and one can only discuss a few examples in any column. The three examples he chose are certainly legitimate. But the examples he chose focus on Republican errors, are not the most important economic errors, and are not as clean as he implies in purportedly differentiating between Republican error and Democratic Party economist success.

The Housing Bubble

Economists who tend to support the Democratic Party like Dean Baker were the ones who got the housing bubble correct – and early. But, overwhelmingly, economists who tend to support the Democratic Party either got the bubble wrong, or made minimal efforts to warn about the bubble and call for public sector actions to burst it.

The reason the vast majority of economists, regardless of political affiliation, got the bubble wrong has next to nothing to do with partisan “tribalism.” The reason they got it wrong is because orthodox economists of all political persuasions believed in economic myths that had been falsified by white-collar criminologists 75 years ago. For a bubble to occur, market prices for that good (and a vast array of financial derivatives for which that good constitutes the “underlying) must systematically move in the wrong direction away from the “efficient” price – for many years and (in the case of housing) by over $1 trillion cumulatively. Orthodox economists, believed in the efficient market hypothesis and knew such bubbles were impossible.

The most logical explanation for such a bubble is a rational explanation – widespread “accounting control fraud” by lenders and loan purchasers. Orthodox economists make a standard assumption of rational behavior, including by criminals. But orthodox economists have a primitive tribal taboo against the “f” word – fraud. When it comes to bubbles, therefore, orthodox economists overwhelmingly simply assume mass irrationality. They would rather drop their most cherished assumptions about economic behavior than admit the reality that there are elite white-collar criminals and that their crimes can become epidemic when the incentive structures are so perverse that they produce a criminogenic environment. .

This problem of dogma is compounded by the problem that the orthodox responses to a bubble are clumsy, slow, and awful in terms of their “collateral damage” to the Nation, particularly those most in need. Basically, the orthodox response is to throw the economy in a recession – hoping to kill off the bubble and reduce the severity of the eventual recession it would have caused when it collapsed on its own. Worse, the orthodox policy recommendation to avoid future bubbles is permanent monetary austerity and higher interest rates to deter bubbles – producing rolling recessions and weak growth. Indeed, orthodox economists are so dubious of their ability to correctly identify a bubble and so cognizant of the grave harms and risks posed by trying to use orthodox responses to bubbles that their standard recommendation is to do nothing even if they suspect that a bubble is developing.

The vastly better response to a bubble like the housing bubble is unknown to orthodox economists and is never taught to students. The answer is to (1) put the fraudulent lenders and loan purchasers out of business by vigorous supervision, enforcement, and prosecution and (2) to limit their growth by effective regulation and bans on loan products most conducive to fraud. The regulators and prosecutors must break the “Gresham’s” dynamic that can make fraud epidemic.

We did this as regulators in 1984-1986 and deliberately burst the developing real estate bubbles in the Southwest before they could cause any national, much less international, economic crisis. It was certainly not pain free and we were aided by passage of the 1986 tax reform act that ended some of the most perverse real estate tax incentives, but it worked brilliantly and represents even today the most successful policy intervention against a bubble. The same strategy would have prevented the Great Recession, but the anti-regulators refused to follow our lead.

Inflation and Monetary Stimulus

This was an odd formulation by Krugman because it ignored fiscal stimulus which is where economists that tend to support the Democratic Party had their greatest success relative to economists that almost invariably support the Republican Party. Krugman’s point on the “hyper-inflation” crazy-hawks is correct, but it would have been even more forceful had Krugman brought in fiscal policy.

Obamacare as a Faux Job Killer

This too could have been explained in a manner that would have added support to Krugman’s thesis. The key to recall, that Krugman knows but did not mention here, is that Obamacare is a direct steal from a far-right-wing “think” tank that overwhelmingly supports Republicans. Further, Republican economists frequently supported the plan and Mitt Romney famously was the first to implement the plan when he was Governor of Massachusetts. Now, however, one would risk being torn apart at a Republican gathering by announcing support for the ultra-right-wing health insurance plan. Krugman, years ago, explained many of the defects of Romneycare/Obamacare. Of late he has also explained that while Romney/Obamacare is a poorly designed plan because of the dogmas of its right-wing drafters, it is also much better than “no care.” “No-care” was the prior system.

Republican economists act like virtually all Republicans in constantly inventing myths and horror stories about Romney/Obamacare. At this juncture, the problem is plainly one of ethics. The Republican economists are so eager to curry favor with Republican politicians that they lie as a matter of routine when they try to picture a hard-right-wing health insurance program as a near-Communist conspiracy.

But What If We Looked at Democratic Economists on the Most Critical Issues?

The single most important economic issue of the last three decades has been the three “de’s” – deregulation, desupervision, and de facto decriminalization. On that issue, which has driven our three most recent financial scandals, economists who are prominent New Democrat supporters have been disastrous. Yes, the Republican economists are often even worse. On the most important economic issue the dominant economists of both parties have simply formed rival fraternities with the same membership requirement – a track record of failure.

The Garn-St Germain Act that prompted the federal v. state regulatory race to the bottom that generated the savings and loan (S&L) debacle was drafted by a Republican economist (Dick Pratt), but it enjoyed broad bipartisan support and faced no opposition from economists associated with the Democratic Party. Not a single outside academic economist associated with the Democratic Party supported our struggle to reregulate, resupervise, and prosecute the industry and the elite frauds driving the S&L debacle. Democrats and Republicans formed a bipartisan effort to defeat our efforts against the fraud epidemic. Speaker Wright led the opposition in the House and four of the five Senators who did Charles Keating’s bidding in his jihad against our efforts to reregulate the industry were Democrats.

Of the two Democratic economists President Reagan sought to appoint to leadership positions running our regulatory agency, one (George Benston) was Keating’s man and a ferocious proponent of the three “de’s.” The other (Larry White) was always instinctually a fraud-denier and an opponent of regulation. To White’s credit, he overcame these instincts in a number of important decisions, but he was never able to overcome his dogmas sufficiently to become a leader against the fraud epidemics raging in the industry.

There are many problems with the three “de’s,” but the paramount problem is that they can create criminogenic environments that produce epidemics of “control fraud” that cause catastrophic damage. But orthodox economists of parties share the primitive tribal taboo against the “f” word. Orthodox economists of both parties share the same absurd standard assumptions that (implicitly) exclude fraud (it is impossible if there is perfect information and people act rationally).

Orthodox economists of both parties are proudly mono-disciplinary. They virtually never read any of the sophisticated modern research on white-collar criminology even though James Galbraith has explained (in his article prompted by a Krugman column) that our predictive success far exceeds economists’ predictive strength. Similarly, George Akerlof and Paul Romer explained in their 1993 article on “looting” that the S&L regulators got the fraud epidemic right from the beginning while the economists missed it.

Orthodox economists of both parties use almost exclusively econometric and modelling techniques that must produce systematic, massive error in the presence of epidemics of accounting control fraud. The mathematics on this is indisputable and these economists are proud to a point well-beyond arrogance about their purported quantitative expertise. Why then do they continue to use almost exclusively a failed methodology that they know must produce systematic, massive error in the presence of fraud? They also know that under their standard assumption about human behavior the bankers’ quants should design the models to systematically, and dramatically overvalue assets (by ignoring fraud) in order to maximize the quants’ (and their senior officers’) compensation.

Krugman is better on this subject than many economists. He famously got the California energy crisis correct by be willing to believe that Enron and its co-conspirators had formed a cartel to restrict supply. Cartels are another area in which economists supporting both parties were long insane. They claimed, contrary to all known experience (and Adam Smith’s famous warning) that cartels were, at worst, so ephemeral, with a half-life similar to Ununoctium, that they were not worth worrying about. Criminologists never made this mistake, but why would an economist read the criminology literature to learn about crimes like fraud and cartels?

It was the Rubinites in the U.S. and New Labour in the UK using orthodox economics as their weapon that constituted the Schwerpunkt of the assault against effective regulation under President Bill Clinton and Vice President Al Gore and Prime Ministers Tony Blair and Gordon Brown. Clinton’s destruction of Glass-Steagall and squashing Brooksley Born’s effort to protect us from fraud in financial derivatives through passage of the Commodity Futures Modernization Act of 2000 that gets the most attention, but the desupervision of the financial industry and the embrace of the regulatory race to the bottom were far more destructive. It was under Clinton and Gore’s assault that the underwriting rule we used in 1991 to drive liar’s loans out of the S&L industry was replaced with a guideline deliberately crafted to be unenforceable and useless. It was Clinton and Gore who began and primarily “accomplished” cutting the FDIC staff by more than three-quarters and the OTS staff of S&L regulators by more than half. I have just completed a series of articles detailing how Blair and Brown championed the City of London “winning” the regulatory race to the bottom by destroying the last vestiges of financial regulation, supervision, enforcement, and prosecutions in the UK.

Similarly, it was the Rubinites in the U.S. and the Blairites in the UK who spread the economic nonsense that a government with a sovereign currency (like the U.S. and the UK) was just like a consumer household. Under this myth, government deficits were immoral and harmful while budget surpluses demonstrated superior morality and were desirable. Blair and Brown turned the City into the financial cesspool of the world by championing the regulatory race to the bottom (which the City “won”), produced massive epidemics of control fraud that caused a financial crisis and threw the UK into the Great Recession, and then “bled the patient” through self-destructive and economically illiterate austerity while Labour’s economists generally remained silent about how insane these policies were or even provided support.

It was President Obama, having seen the catastrophe set in motion by the Rubinites (yes, greatly exacerbated by President Bush and his “wrecking crew”), who decided to place the Rubinites in power in his administration and to supplement them with Republican failures like Ben Bernanke and Timothy Geithner (who dropped his party affiliation to set up such promotions).

Here is how I explained Obama’s and Bush’s deliberate embrace of officials with a track record of failure it on April 3, 2009 in my first interview by Bill Moyers.

WILLIAM K. BLACK: These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator.

BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this

TIMOTHY GEITHNER: I’ve never been a regulator, for better or worse. And I think you’re right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

BILL MOYERS: Overwhelmed by regulation! It wasn’t the absence of regulation that was the problem, it was despite the presence of regulation you’ve got huge risks that build up.

WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.


WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he’s completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that’s just plain wrong.

The point I was explaining was that prominent politicians frequently feel they can gain politically by taking policy positions that are destructive but popular. These politicians want to be able to trot out their economist in such circumstances and have him (more rarely, her) say something that is economic nonsense that the economist fabricates to make the politician’s terrible policy argument sound like it accords with economic history. Ethical economists, therefore, tend to be disfavored by prominent politicians. One of the inherent consequences of presenting nonsense economic positions is that the economist’s predictions will fail – repeatedly. An economist who is willing to repeat a fabricated economic claim that he knows to be false to support his politician’s latest insane policy proposal will have a record of failure that prominent politicians will love. This economist is willing to lie, repeatedly, for me when I need him to lie.

My proposal to Bill Moyers was that we try the opposite strategy. Fire the persistent failures and the cheats and hire people with a track record for integrity and getting things right.

WILLIAM K. BLACK: Now, going forward, get rid of the people that have caused the problems. That’s a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers that caused the problems? That’s facially nuts. That’s our current system.

So stop that current system. We’re hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what’s failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they’ve had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

Black and Krugman on Choosing Failures and the Resultant “Reign of Error”

In addition to identifying the same dynamic of deliberately choosing failures that I explained in 2009 that Krugman has now named fittingly the “Fraternity of Failure,” I notice that his same May 15, 2015 column used a phrase I had just used two days earlier in an article in my series of columns on New Labour.

Note to Blair: it would be a truly excellent thing for the world if financial regulators were to “always err on the side of caution” and to have only “one-way pressures” “to guard the public interest” rather than to aid and abet the City banksters’ “reign of error” and fraud. The fact that Blair felt that (mythical) UK financial regulators devoted “to guard[ing] the public interest” were a disaster tells you all you need to know about how deeply he was in the banksters’ pocket even before they made him “filthy rich” (in the immortal words of Blair’s Red Tory strategist, Peter Mandelson).

Krugman’s column aptly uses the same “reign of error” phrase in an analogous context.

It doesn’t matter that the skeptics have been proved right. Simply raising questions about the orthodoxies of the moment leads to excommunication, from which there is no coming back. So the only “experts” left standing are those who made all the approved mistakes. It’s kind of a fraternity of failure: men and women united by a shared history of getting everything wrong, and refusing to admit it. Will they get the chance to add more chapters to their reign of error?

(A tip as a criminologist: contrary to all the cop shows on TV where the boss pronounces “there is no such thing as a coincidence,” coincidences such as these are common. Anyone who understands statistics understands why.)

Naked Capitalism on Perpetual War


William J. Astore: The American Military Uncontained, Chaos Spread, Casualties Inflicted, Missions Unaccomplished

Posted on May 15, 2015 by

Yves here. This post is an important, sobering description of how US military overreach became institutionalized.

By William J. Astore, a retired lieutenant colonel (USAF) who edits the blogThe Contrary Perspective. Originally published at TomDispatch<

It’s 1990. I’m a young captain in the U.S. Air Force.  I’ve just witnessed the fall of the Berlin Wall, something I never thought I’d see, short of a third world war.  Right now I’m witnessing the slow death of the Soviet Union, without the accompanying nuclear Armageddon so many feared.  Still, I’m slightly nervous as my military gears up for an unexpected new campaign, Operation Desert Shield/Storm, to expel Iraqi autocrat Saddam Hussein’s military from Kuwait.  It’s a confusing moment.  After all, the Soviet Union was forever (until it wasn’t) and Saddam had been a stalwart U.S. friend, his country a bulwark against the Iran of the Ayatollahs.  (For anyone who doubts that history, just check out the now-infamous 1983 photo of Donald Rumsfeld, then special envoy for President Reagan, all smiles and shaking hands with Saddam in Baghdad.)  Still, whatever my anxieties, the Soviet Union collapsed without a whimper and the campaign against Saddam’s battle-tested forces proved to be a “cakewalk,” with ground combat over in a mere 100 hours.

Think of it as the trifecta moment: Vietnam syndrome vanquished forever, Saddam’s army destroyed, and the U.S. left standing as the planet’s “sole superpower.”

Post-Desert Storm, the military of which I was a part stood triumphant on a planet that was visibly ours and ours alone.  Washington had won the Cold War.  It had won everything, in fact.  End of story.  Saddam admittedly was still in power in Baghdad, but he had been soundly spanked.  Not a single peer enemy loomed on the horizon.  It seemed as if, in the words of former U.N. ambassador and uber-conservative Jeane Kirkpatrick, the U.S. could return to being a normal country in normal times.

What Kirkpatrick meant was that, with the triumph of freedom movements in Central and Eastern Europe and the rollback of communism, the U.S. military could return to its historical roots, demobilizing after its victory in the Cold War even as a “new world order” was emerging.  But it didn’t happen.  Not by a long shot.  Despite all the happy talk back then about a “new world order,” the U.S. military never gave a serious thought to becoming a “normal” military for normal times.  Instead, for our leaders, both military and civilian, the thought process took quite a different turn.  You might sum up their thinking this way, retrospectively: Why should we demobilize or even downsize significantly or rein in our global ambitions at a moment when we can finally give them full expression?  Why would we want a “peace dividend” when we could leverage our military assets and become a global power the likes of which the world has never seen, one that would put the Romans and the British in the historical shade?  Conservative columnist Charles Krauthammer caught the spirit of the moment in February 2001 when he wrote, “America is no mere international citizen. It is the dominant power in the world, more dominant than any since Rome. Accordingly, America is in a position to reshape norms, alter expectations, and create new realities. How? By unapologetic and implacable demonstrations of will.”

What I didn’t realize back then was: America’s famed “containment policy” vis-à-vis the Soviet Union didn’t just contain that superpower — it contained us, too.  With the Soviet Union gone, the U.S. military was freed from containment.  There was nowhere it couldn’t go and nothing it couldn’t do — or so the top officials of the Bush administration came into power thinking, even before 9/11.  Consider our legacy military bases from the Cold War era that already spanned the globe in an historically unprecedented way.  Built largely to contain the Soviets, they could be repurposed as launching pads for interventions of every sort.  Consider all those weapon systems meant to deter Soviet aggression.  They could be used to project power on a planet seemingly without rivals.

Now was the time to go for broke.  Now was the time to go “all in,” to borrow the title of Paula Broadwell’s fawning biography of her mentor and lover, General David Petraeus.  Under the circumstances, peace dividends were for wimps.  In 1993, Madeleine Albright, secretary of state under Bill Clinton, caught the coming post-Cold War mood of twenty-first-century America perfectly when she challenged Joint Chiefs Chairman Colin Powell angrily over what she considered a too-cautious U.S. approach to the former Yugoslavia. “What’s the point of having this superb military that you’re always talking about,” she asked, “if we can’t use it?”

Yet even as civilian leaders hankered to flex America’s military muscle in unpromising places like Bosnia and Somalia in the 1990s, and Afghanistan, Iraq, Libya, Pakistan, and Yemen in this century, the military itself has remained remarkably mired in Cold War thinking.  If I could transport the 1990 version of me to 2015, here’s one thing that would stun him a quarter-century after the collapse of the Soviet Union: the force structure of the U.S. military has changed remarkably little.  Its nuclear triad of land-based ICBMs, submarine-launched SLBMs, and nuclear-capable bombers remains thoroughly intact.  Indeed, it’s being updated and enhanced at mind-boggling expense (perhaps as high as a trillion dollars over the next three decades).  The U.S. Navy?  Still built around large, super-expensive, and vulnerable aircraft carrier task forces.  The U.S. Air Force?  Still pursuing new, ultra-high-tech strategic bombers and new, wildly expensive fighters and attack aircraft — first the F-22, now the F-35, both supremely disappointing.  The U.S. Army?  Still configured to fight large-scale, conventional battles, a surplus of M-1 Abrams tanks sitting in mothballs just in case they’re needed to plug the Fulda Gap in Germany against a raging Red Army.  Except it’s 2015, not 1990, and no mass of Soviet T-72 tanks remains poised to surge through that gap.

Much of our military today remains structured to meet and defeat a Soviet threat that long ago ceased to exist.  (Occasional sparring matches with Vladimir Putin’s Russia in and around Ukraine do not add up to the heated “rumbles in the jungle” we fought with the Soviet leaders of yesteryear.)  And it’s not just a matter of weaponry.  Our military hierarchy remains wildly and unsustainably top-heavy, with a Cold War-style cupboard of generals and admirals, as if we were still stockpiling brass in case of another world war and a further expansion of what is already uncontestably the largest military on the planet.  If you had asked me in 1990 what the U.S. military would look like in 2015, the one thing I wouldn’t have guessed was that, in its force structure, it would look basically the same.

This persistence of such Cold War structures and the thinking that goes with them is a vivid illustration of military inertia, the plodding last-war conservatism that is a common enough phenomenon in military history.  It’s also a reminder that the military-industrial-congressional-complex that President Dwight Eisenhower first warned us about in 1961 remains in expansion mode more than half a century later, with its taste for business as usual (meaning, among other things, wildly expensive weapons systems).  Above all, though, it’s an illustration of something far more disturbing: the failure of democratic America to seize the possibility of a less militarized world.

Today, it’s hard to recapture the heady optimism of 1990, the idea that this country, as after any war, might at least begin to take steps to demobilize, however modestly, to become a more peaceable land.  That’s why 1990 should be considered the high-water mark of the U.S. military.  At that moment, we were poised on the brink of a new normalcy — and then it all began to go wrong.  To understand how, it’s important to see not just what remained the same, but also what began to change and just how we ended up with today’s mutant military.

Paramilitaries Without, Militaries Within, Civilian Torturers, and Assassins Withal

Put me back again in my slimmer, uniformed 1990 body and catapult me for a second time to 2015.  What do I see in this military moment that surprises me?  Unmanned aerial vehicles, or drones, for sure.  Networked computers everywhere and the reality of a military preparing for “cyberwar.”  Incessant talk of terrorism as America’s chief threat.  A revival, however haltingly, of counterinsurgency operations, or COIN, a phenomenon abandoned in Vietnam with a stake through its heart (or so I thought then).  Uncontrolled and largely unaccountable mass surveillance of civilian society that in the Cold War era would have been a hallmark of the “Evil Empire.”

More than anything, however, what would truly have shocked the 1990 version of me is the almost unimaginable way the military has “privatized” in the twenty-first century.  The presence of paramilitary forces (mercenary companies like DynCorp and the former Blackwater, now joined with Triple Canopy in the Constellis Group) and private corporations like KBR doing typical military tasks like cooking and cleaning (what happened to privates doing KP?), delivering the mail, and mounting guard duty on military bases abroad; an American intelligence system that’s filled to the brim with tens of thousands of private contractors; a new Department of Defense called the Department of Homeland Security (“homeland” being a word I would once have associated, to be blunt, with Nazi Germany) that has also embraced paramilitaries and privatizers of every sort; the rapid rise of a special operations community, by the tens of thousands, that has come to constitute a vast, privileged, highly secretive military caste within the larger armed forces; and, most shocking of all, the public embrace of torture and assassination by America’s civilian leaders — the very kinds of tactics and techniques I associated in 1990 with the evils of communism.

Walking about in such a world in 2015, the 1990-me would truly find himself a stranger in a strange land.  This time-traveling Bill Astore’s befuddlement could, I suspect, be summed up in an impolite sentiment expressed in three letters: WTF?

Think about it.  In 2015, so many of America’s “trigger-pullers” overseas are no longer, strictly speaking, professional military.  They’re mercenaries, guns for hire, or CIA drone pilots (some on loan from the Air Force), or warrior corporations and intelligence contractors looking to get in on a piece of the action in a war on terror where progress is defined — official denials to the contrary — by body count, by the number of “enemy combatants” killed in drone or other strikes.

Indeed, the very persistence of traditional Cold War structures and postures within the “big” military has helped hide the full-scale emergence of a new and dangerous mutant version of our armed forces.  A bewildering mish-mash of special ops, civilian contractors (both armed and unarmed), and CIA and other intelligence operatives, all plunged into a penumbra of secrecy, all largely hidden from view (even as they’re openly celebrated in various Hollywood action movies), this mutant military is forever clamoring for a greater piece of the action.

While the old-fashioned, uniformed military guards its Cold War turf, preserved like some set of monstrous museum exhibits, the mutant military strives with great success to expand its power across the globe.  Since 9/11, it’s the mutant military that has gotten the lion’s share of the action and much of the adulation — here’s looking at you, SEAL Team 6 — along with its ultimate enabler, the civilian commander-in-chief, now acting in essence as America’s assassin-in-chief.

Think of it this way: a quarter-century after the end of the Cold War, the U.S. military is completely uncontained.  Washington’s foreign policies are strikingly military-first ones, and nothing seems to be out of bounds.  Its two major parts, the Cold War-era “big” military, still very much alive and kicking, and the new-era military of special ops, contractors, and paramilitaries seek to dominate everything.   Nuclear, conventional, unconventional, land, sea, air, space, cyber, you name it: all realms must be mastered.

Except it can’t master the one realm that matters most: itself.  And it can’t find the one thing that such an uncontained military was supposed to guarantee: victory (not in a single place anywhere on Earth).

Loaded with loot and praised to the rafters, America’s uncontained military has no discipline and no direction.  It never has to make truly tough choices, like getting rid of ICBMs or shedding its obscenely bloated top ranks of officers or cancelling redundant weapon systems like the F-35.  It just aims to do it all, just about everywhere.  As Nick Turse reported recently, U.S. special ops touched down in 150 countries between 2011 and 2014.  And the results of all this activity have been remarkably repetitive and should by now be tragically predictable: lots of chaos spread, lots of casualties inflicted, and in every case, mission unaccomplished.

The Future Isn’t What It Used to Be

Say what you will of the Cold War, at least it had an end.  The overriding danger of the current American military moment is that it may lack one.

Once upon a time, the U.S. military was more or less tied to continental defense and limited by strong rivals in its hegemonic designs.  No longer.  Today, it has uncontained ambitions across the globe and even as it continually stumbles in achieving them, whether in Iraq, Afghanistan, Yemen, or elsewhere, its growth is assured, as our leaders trip over one another in continuing to shower it with staggering sums of money and unconditional love.

No military should ever be trusted and no military should ever be left uncontained.  Our nation’s founders knew this lesson.  Five-star general Dwight D. Eisenhower took pains in his farewell address in 1961 to remind us of it again.  How did we as a people come to forget it?  WTF, America?

What I do know is this: Take an uncontained, mutating military, sprinkle it with unconditional love and plenty of dough, and you have a recipe for disaster.  So excuse me for being more than a little nervous about what we’ll all find when America flips the calendar by another quarter-century to the year 2040.

Jim Hightower: Save the Post Office from the Honchos


Stop Postal Executives from Destroying our Postal Service

Monday, May 11, 2015   |   Posted by Jim Hightower

When a big-name retailer finds its sales in a slow downward spiral, the geniuses in the executive suite often try to keep their profits up by cheapening their product and delivering less to customers.

To see how well this strategy works, look no further than the declining sales at Walmart and McDonald’s. When the geniuses in charge of these behemoths applied the cut-back strategy, their slow decline turned into a perilous nose-dive. You’d think their experience would keep other executives from making the same mistake, but here comes an even bigger – and much more important – retail behemoth saying, “We have to cut to survive.”

That’s the pronouncement last year by the honcho of the US Postal Service, which has been eliminating employees, closing facilities, and reducing services for years. Each new round of reductions drives away more customers, which causes clueless executives to prescribe more cuts. In a January decree, USPS virtually eliminated overnight delivery of first-class mail, and it’s now planning to close or consolidate 82 regional mail processing plants. This means fewer workers handling the nation’s growing load of mail, creating further delays in delivery. The answer to this, say the slap happy executives, is – guess what? – to cut even more “service” out of postal service. They want to close hundreds of our local post offices and eliminate Saturday mail delivery (which is one of USPS’ major competitive advantages).

This is Jim Hightower saying… Fed up with the deliberate degradation of this vital public service, postal workers themselves are putting forth a vision and innovative plan not merely for USPS to survive, but thrive. With more than 70 other national groups, they’ve forged “A Grand Alliance to Save Our Public Postal Service.” To be part of its actions, go to:

“APWU Asks Union Members to Build Support for Postal Bills,” American Postal Workers Union, February 19, 2015,


Humor: The Borowitz Report

Scientists: Earth Endangered by New Strain of Fact-Resistant Humans



MINNEAPOLIS (The Borowitz Report) – Scientists have discovered a powerful new strain of fact-resistant humans who are threatening the ability of Earth to sustain life, a sobering new study reports.

The research, conducted by the University of Minnesota, identifies a virulent strain of humans who are virtually immune to any form of verifiable knowledge, leaving scientists at a loss as to how to combat them.

“These humans appear to have all the faculties necessary to receive and process information,” Davis Logsdon, one of the scientists who contributed to the study, said. “And yet, somehow, they have developed defenses that, for all intents and purposes, have rendered those faculties totally inactive.”

More worryingly, Logsdon said, “As facts have multiplied, their defenses against those facts have only grown more powerful.”

While scientists have no clear understanding of the mechanisms that prevent the fact-resistant humans from absorbing data, they theorize that the strain may have developed the ability to intercept and discard information en route from the auditory nerve to the brain. “The normal functions of human consciousness have been completely nullified,” Logsdon said.

While reaffirming the gloomy assessments of the study, Logsdon held out hope that the threat of fact-resistant humans could be mitigated in the future. “Our research is very preliminary, but it’s possible that they will become more receptive to facts once they are in an environment without food, water, or oxygen,” he said.

Get news satire from The Borowitz Report delivered to your inbox.

Naked Capitalism on Our Shaky Banking System


Mr. Market Says Dodd-Frank Isn’t Working

Posted on May 11, 2015 by

Yves here. While I am not convinced that breaking up big banks solves the “too big to fail” problem. Hedge fund LTCM nearly brought down the financial system in 1998. The comparatively small and simple by modern standards #4 bank in 1984, Continental Illinois, took seven years to resolve. Nevertheless, it would be a big step in the right direction. One of the advantages isn’t just reducing the size of firms but increasing their diversity. Andrew Haldane of the Bank of England warned that one of the big sources of instability in our modern financial system is a monoculture, in which the biggest firms are pursuing virtually identical strategies and using similar risk models (not just VaR, but FICO in their retail businesses) and trading approaches. Similarly, having more specialized players also means more contested regulatory demands as players with different customers and products jockey for regulatory advantage.

By Alexander Arapoglou, a professor of finance at the University of North Carolina’s Kenan-Flagler Business School, who been a derivatives trader and head of risk management worldwide for various global financial institutions, and Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader

The objective of the 2010 Dodd-Frank legislation and other post-financial crisis regulatory reforms was to make the too big to fail banks so safe that they could not fail. Has this goal been achieved? The rating agencies answer no. If these agencies were convinced that the plethora of new rules– including increased capital requirements– had led big banks to achieve unquestioned credit standing, their bonds would be rated AAA.

Instead, bond ratings for the top 5 US financial institutions now hover around single A. These ratings scream to anyone who’s listening that the too big to fail institutions may indeed, fail. Mr. Market agrees: debt issued by too big to fail banks currently trades at prices consistent with their credit ratings.

Reforms undertaken since the demise of Bear Stearns and Lehman Brothers have failed on several fronts. The too big too fail banks are not fail-safe. They are more brittle and unable to act as shock absorbers than they were before. Holders of their shares are not deploying capital efficiently and small business is starved of financing. Where did regulatory policy take a wrong turn?

The missteps began during the financial crisis, when regulators were faced with two choices. The first would have turned back the clock on deregulation and re-erected walls between securities sales and trading, asset management, and commercial and retail banking. After such restructuring, smaller, more specialized financial firms would pose little risk to the rest of the economy if any failed.

The alternative approach– the one that was followed– was to accept that there were institutions that were too big to fail. Making these giant institutions safer became the regulatory priority. New rules were enacted and more aggressive and intrusive regulatory scrutiny mandated so, it was hoped, to prevent financial institutions from shooting themselves in the foot.

As a result, bank examiners have moved into the offices of many financial firms full time. They attend board meetings and drive business priorities by asking questions. Decisions are scrutinized lest they encourage untoward risk taking. The list of good intentioned ideas goes on and on. But to what end?
This matters because since 2008, too big to fail institutions have become much larger, posing an even greater risk to the economy than they did before. Bigger banks continue to increase their market share, the number of community banks has declined by 40%, and since June 2010, 500 of these have failed outright.

As banks have got bigger, many market participants— including at least one bank CEO– have conceded that these behemoths have become too big to manage. Goldman Sachs has reported that even JP Morgan Chase, one of the most profitable big banks, would be worth more broken into parts than kept whole– as is true with many conglomerates. The profitability of smaller, more narrowly-focused financial institutions usually exceeds that of institutions that follow a universal banking model, partly due to requirements that systemically important institutions maintain extra capital and overhead.

So how are we left? Dodd-Frank has sidestepped dealing with the central problem – a concentration of systemic risk that hangs over the real economy. Bank shareholders are worse off. Excessive capital requirements have burdened the economy without any offsetting increase in safety. The benefits to the broader economy of greater competition and better distribution have been forfeited without any offsetting gain. The corporate bond market has lost liquidity, adding costs and risk to the overall system for financing jobs, pensions, university endowments and insurance. And the decline of community banks has fallen hardest on small businesses, America’s biggest employer.

If regulators continue to to stumble down the wrong regulatory road, their next step might be to limit competition further, raising prices to guarantee bank profitability. This approach would certainly be safe, yet it would be costly, not only in terms of the cost of bank services, but it would also stymie new business formation.

There is an alternative: not to turn the clock back blindly, but to examine first what it was that made the Depression-era Glass-Steagall financial structure so robust. The regulators of that time quite rightly focused on preventing conflicts of interest and financial contagion. Their solution was to prevent the otherwise inevitable consolidation and oligopoly that follows when single firms are allowed to offer universal banking services by instead splitting up the largest financial firms and confining them to separate lines of business. More modern experts on regulation, such as Senator Elizabeth Warren, just last week again endorsed the general Glass-Steagall approach.

That framework wasn’t perfect; while it separated the domestic securities business from domestic banking, large banks continued to have securities operations in London and Tokyo. Yet while such regulations were firmly in place, the broader economy was insulated from boom-bust financial cycles generated by bank failures.

A modern version would be more far reaching. The most important banking function is the clearing function. If the financial system crashes, paychecks and payments for industrial and other supplies are “lost” and the entire economy would grind to a halt. Thus, as a first step, clearing and custody functions should be separated from everything else. They must be protected and restructured so as to best survive any future systemic shock.

But reform must go further. Trading of derivatives, securities and foreign exchange involves significantly more risk than the rest of banking. These operations should also be segregated — and more completely than in the watered-down Volcker rule that the Federal Reserve has more or less indefinitely deferred. Likewise, asset management activities should be conducted in distinct companies to avoid self-dealing. Brokerage functions should be spun off to avoid conflicts. Here, Eliot Spitzer well understood more than a dozen years ago that allowing one firm to undertake investment banking and sell securities sparked practices that inflated the firm’s bottom line at the expense of its brokerage customers. Many current regulators still have failed to absorb this lesson. Mergers and acquisitions activity should be made apart from lending decisions.

Breaking up the biggest banks would eliminate the too big to fail problem. Yet that wouldn’t be the only gain. If Goldman is right, this approach would benefit bank shareholders as well. A better plan where everyone benefits…. What’s not to like?