America Exported Poisoned Financial Products


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As TWN readers know, I have been on a lot of international travel lately — to Beijing, Mumbain, Tokyo, Berlin, London, Brussels, and Tel Aviv. In all of these places, I met angry and frustrated finance ministry bureaucrats, central bankers, retail bankers, investment bankers, and other fund managers.
All of them had a single message that rang a bit like the US accusing China of shipping out poisoned pet food and lead-paint covered toys. They said American regulators failed. “You exported poisoned financial products.”
Most Americans have no idea how low American prestige had fallen in the world before the financial crisis — but for the mother ship of modern day capitalism to fail so badly in managing the social contract between economic stakeholders and the finance industry is yet another enormous blow to America’s ability to compel other nations to do as we do, or as we want.

William Pfaff has a piece in this spirit out today. From “Adam Smith Betrayed“:

Adam Smith was the author of the theory of the invisible hand that guides unregulated markets to produce the optimum result, but he took for granted that the hand was clean. Today’s securities markets cannot be described as expressing the unsullied result of a mass of rational individual decisions on the best interests of corporate and public society. Smith’s model has broken down.
The Nobel Prize in Economics has been won by analyses of how flawed or idiosyncratic the “rationality” of consumers, sales organizations, entrepreneurs, CEOs, and corporate boards really is.
Even so theoretically reliable sources of business rationality as avarice and personal self-advancement can assume counterproductive forms. The private rationality of a business executive, or government official, may dictate a quick trip to Washington to rendezvous with a call-girl in whom he already has an $80,000 investment, rather than attend a meeting on the uses of a new investment instrument he finds impossible to understand. The lack of optimum economic rationality in market decisions is well known, the insiders’ joke.
The head of the Deutsche Bank AG, Josef Ackermann, well known as a true believer in the autonomy and efficiency of markets, came back from a trip to New York last week to tell a gathering at the Swiss consulate in Frankfurt, “I no longer believe in the self-correcting nature of markets. It pains me to say something like this.”

Paul Krugman has much to add in his own diagnosis of our times — suggesting that the bank runs that followed the 1929 market crash are what really destroyed the American economy — a successive set of waves of mistrust in the financial system.
In an economic forecast event for the University of Chicago Graduate School of Business that I spoke at along with CSIS Senior Associate Edward Luttwak, venture capitalist and former Richard Nixon advisor Fred Malek, and ACON Investments Founder Bernard Aronson — Luttwak said grimly that there is no regulatory path out of today’s financial mess that would have long term impact.
Luttwak said that instead of reactive regulation what would make a difference is the image of bankers and regulators jumping off of tall buildings.
We live in fascinating times.
— Steve Clemons


14 comments on “America Exported Poisoned Financial Products

  1. Anders says:

    It’s no wonder America is in so much doo doo when frankly stupid opinions like this one from Luttwak are treated respectfully.
    Your comments make more sense than the article,Mr.Obama needs to pick the ball up and run with it to the White House.


  2. credit card processing says:

    I am not surprised at all to see that the Americans are doing illegal stuff like this one. I always had the feeling that everything from what they are selling and exporting isn’t really the way it looked like. And this is the very first proof.


  3. ufans says:

    completely agree. Nobody complained when times were good. Now the stupid money gets burned, like Bear Stearns (sclerotic management says Bove from Punk Ziegel). Problem is that with the stupid money failing, smarter money may get dragged down as well.
    @Steve Clemons
    I like your article. My comment, only a simplistic view of Adam Smith’s invisible hand is dead. If you take Hegel’s dialectic (german philospher from the 18 hundreds), which is a more sophisticated version of the invisible hand (this does not take away from Adam Smith), it is working fine. Why, things go sour (the usual boom and bust) but we (the market, the fed, mr berneke) are learning and handling it much better than we did last time, 1929, in my opinion. We will not know for a while, if bernekes unconventinal methods are right. But I believe they will eventually turn out to be. And there is a lot of praise for bernanke from the right people.
    Invisible hand is nothing depersonalized. We little humans have to struggle, strive and learn to improve. Paradise is in heaven, not here on earth.


  4. rapier says:

    The economic cycles we talk about are mere hundreds of years old, at most, but for the sake of argument let’s pretend they are ageless. There a small cycles and large cycles. Cycles within cycles and the question now is the current crisis of the longer term variety.
    During the 90’s economic surge the savings of households in the lower 7 deciles increased, even as Americas total savings rate declined. Savings they were told through word and action was for suckers. In post Bush tax cut era the top two deciles ‘invested’ trillions of dollars in hedge funds which typically leveraged those ‘investments’ 10 to 1. Savings are for suckers,. especially when the interest paid on savings is specifically meant to punish them. When people are told to go out and spend to help the economy, Best to leverage a home 100% with a mortgage.


  5. JasonC says:

    People here need to calm down. The political hyperbole is easily as big a fraud as any of the finance.
    We have always had financial cycles and we always will. That is not a function of who is in office, and it can no more be “fixed” by regulation, let alone the death of financiers, than Canute can order back the sea.
    And the cast of characters in on the racket in blameworthy ways is wide indeed. Half the outrage is coming from guilty parties.
    The famed “Average Joe” isn’t saving anything, that is why the US has a savings shoftfall of 7% of GDP. The supposedly burned foreign investors like the resulting trade deficit just fine. Europeans with their noses in the air like the stronger Euro, and bought plenty of paper without any diligence at all. The poor unlucky householders were paying insane prices they couldn’t afford playing heads I win, tails the bank loses, and were the first to actually default and stiff their supposedly so ravenous lenders. Politicians demanded easy credit for deadbeats who voted for them. And the regulators goosed the whole thing with rates left too low for too long.
    The truth is there are precious few “innocent” parties in any of it. But when it doubt, a fine capitalist fat cat cartoon can be constructed for a few minutes of hate, to excuse everyone else.
    It is nonsense. There have always been financial cycles and there always will be, because men are falliable. All of them.


  6. Dirk says:

    The “reactive legislation” would be re-imposition of the Glass Steagall Act. From its repeal in 1999 it took only eight short years to lead to a world financial crisis.
    Maybe Phil Gramm led the GOP calling for the repeal but Robert Rubin (Treasury Scty) convinced the administration to agree to sign the repeal.
    It’s interesting to note that the current Fed Fund rate and the Discount rate are below the annual inflation rate implying that financial markets are being primed with “free” money.


  7. rapier says:

    While private, and in the EU some formerly private now state owned banks, loaded up on bad debt all dressed up with lipstick and AAA ratings by the US financial industry foreign central banks have purchased around $850 billion of FNM and FRE mortgage backed securities over the last 3 years. Just last week they bought $16 billion in agency securities. That is and was a powerful signal for the banks to do the same.
    The Chinese in particular who bought half of that are hardly ones to lecture. Just wait until the populace finds out that the central bank has lost perhaps 40% of the principal on$400 billion and another 15% and probably a lot more in the currency translation. Lost for nobody really knows what reason except probably an attempt to prop up the US so that their export dominated economic model could continue.
    Non oil imports to the US have fallen from $40 bil to $22 YOY for Feb. So now it’s up to the oil states to prop us up. At least with them we offer something in return, protection. Uncle Sam is now running a protection racket there so has little incentive to see oil prices fall.


  8. David says:

    A close friend of 40+ years, a Swiss investment banker with Credit Suisse who lives in Zurich, but travels to the US both for personal visits and because he has American clients he visits from time to time, asked me recently why the US is the source of such financial trouble. I quipped that it is because idiots are in charge (it is a quip that I am becoming more and more inclined to think is not hyperbolic).
    This is a person with very deep fondness for America. He did his banking internship in New York in the mid-60s, and was one of my roommates when I was working at the World’s Fair before starting graduate school at the College of New Jersey. As an American, he would have been a Rockefeller Republican. He and his family are all hoping Obama is the next president, because he is deeply troubled by how the United States has fallen so low in the eyes of the rest of the world because of the Bush administration. His wife will not come here until Bush is no longer president, and we are not talking about radical people – we are talking about very even-keeled Swiss. Americans really don’t know what a pariah we have become under Bush/Cheney, even for centrist Europeans.


  9. michael cleveland says:

    Your comments make more sense than the article,Mr.Obama needs to pick the ball up and run with it to the White House.


  10. JohnH says:

    Crocodile tears for the “angry and frustrated finance ministry bureaucrats, central bankers, retail bankers, investment bankers, and other fund managers” that Steve hobnobs with. I hope the tears didn’t spoil their caviar.
    The settlers sold Indians glass beads, and the American government sold foreigners worthless paper script. But in the latter case, the foreigners knew exactly what they were buying, and did it anyway.
    Meanwhile ordinary people are going to get stuck holding the bag, i.e. worthless savings combined with another bailout of the rich and powerful at taxpayer expense. And, yes, it will be taxpayer money, because foreign governments have most likely learned to stop taking dollars. If not, they really are begging to continue to be ripped off.
    Anyway, Krugman has another article about the silence of the candidates.
    He mentions that McCain’s “chief economic adviser is former Senator Phil Gramm, a fervent advocate of financial deregulation. In fact, I’d argue that aside from Alan Greenspan, nobody did as much as Mr. Gramm to make this crisis possible.”
    Also, “it’s clear that the Clinton administration went along too easily with moves to deregulate the financial industry.” What an understatement! Bill Clinton signed the legislation that overrode the lessons learned (Glass Steagall) from the Great Depression. All as a gift to Wall Street for Hillary’s Senate campaign?
    Now the real mystery is why Obama doesn’t pick this ball up and run with it. While it might be easy for McCain to jettison Gramm, Hillary is stuck with Bill. If she “knew then what she knows now” won’t fly, either, for it just reinforces Obama’s argment about her lack of judgement and foresight.


  11. Frank says:

    Can anyone tell me of any regulation that is not reactive? What a fool this Luttwak fellow must be.
    But then, when an idiot like Feith can be allowed to teach foreign policy at Georgetown university, academic nonsense is what we are really exporting to the world.
    Steve, your get togethers with opinion makers is a gathering group tribute to the failure of judicious use of comdoms.


  12. arthurdecco says:

    “Luttwak said that instead of reactive regulation what would make a difference is the image of bankers and regulators jumping off of tall buildings.” Posted by Steve Clemons
    Wartching bankers and regulators frog-marched to prison for 25 years with no chance for parole for their roles in this Ponzi scheme would do it for me. There’s no need to titillate the public with violent demonstrations of cowardice. That’s not a cure for anything. Falling, flailing bodies is a scene from a chest-thumping American movie, not one we need to experience ever again in real life.
    It’s no wonder America is in so much doo doo when frankly stupid opinions like this one from Luttwak are treated respectfully.
    “Reactive regulation”, indeed! My gawd, that’s the dumbest thing I’ve read all week! Is everything that comes out of a right wing idiot’s mouth a sound-bite? Are any of them capable of forming coherent and nuanced sentences with real meaning? A sensible person, listening to him, would have laughed in his face and kicked him down the stairs for his complicity in the destruction of America’s reputation. We certainly shouldn’t be disseminating his nonsense.
    POA nailed it again. As usual. The vast majority of Americans, and indeed, the vast majority of the rest of the world’s citizens, are the ones suffering for the blinkered, ideologically-flawed propagandists’ control over the flow of our information and their stranglehold on the ears and eyes of our elected representatives.
    Who cares what bullshitters like Luttwak think except for the rest of the circle-jerkers that help him stain America with their collective lies and delusions?


  13. temoc94 says:

    I like Edward Luttwack’s work, but is he an expert on finance? If not, what qualifies him to comment on this situation?


  14. PissedOffAmerican says:

    Steve, they’re only “fascinating” if you don’t have any kids inheriting the rotten fruit of this criminal malfeasance. For those of us watching the dreams of our forefather’s denied to our children, these times are not “fascinating”, they’re tragic.
    Sometimes Steve, I think the sheer tittilation you experience being so close to power has robbed you of your sense of reality. We are real people out here, Steve. Today, after taxes and fuel, I will bring home less than 40% of my paycheck. That is after a lifetime of devotion to my trade, and at a time when my skill level is at its highest. “Fascinating” is hardly the word I would use when pondering the predicament of the working Joe.


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