The Attacks on the Banks

I have written about the banks and how important they are to the economy. I have written about the efforts of the U.S. government to control and destroy them. I am reminded of the progression of events in Atlas Shrugged in which the government consistently (unconsciously, i.e., not as a result of cognitive purpose) attacked business sectors as they became vital for the country’s survival. I would not give our government as much credit as Ayn Rand did in the novel. But it is the case that banking and finance is the one industry that every sector relies upon to make business and trade function. Banking is a necessity.

Two recent articles have underscored the rocky road that our economy faces. Earlier this month, Reuters published “Column: The crackdown on bank misbehavior masks a troubling reality” which summed up the actions against our major banks over the last few years:

… In the annual letter he writes to shareholders, Robert Wilmers, the chairman and CEO of M&T Bank, has started keeping track of the fines, sanctions and legal awards levied against the "Big Six" bank holding companies. In 2011, those penalties were $13.9 billion. In 2012, they more than doubled to $29.3 billion. Wilmers writes that the past two years represent the majority of the cumulative $52 billion in charges, from 236 separate actions in eight countries, over the past 11 years. Wilmers also cites a study done by M&T, according to which the top six banks have been cited 1,150 times by the Wall Street Journal and the New York Times in articles about their improper activities. Perhaps not surprisingly, the biggest bank, JPMorgan, accounts for a sizable chunk of all this. According to a report by Josh Rosner, a managing director at independent research consultancy Graham Fisher & Co, JPMorgan has paid $8.5 billion in fines between 2009 and 2012, or about 12 percent of its net income over that period.

Then today the U.S. Justice Department announced a forthcoming new set of suits, “Justice Department planning new action against financial firms.” We have national government, states, even cities, and aggrieved individuals attacking and attacking the banking industry. There is more than one reason that this is happening, including plain ignorance. But most important is that private banks are major tools of capitalism. They are obvious symbols of the accumulation of wealth and productiveness. They are being attacked not because of their recent errors and failures, but because of what they represent. Their mistakes and leaders who are actually government lackeys are only a justification for the frenzy of destruction and feeding.

I am not personally aware of anyone defending the banks, except for John Allison. Yet, banking is more vital for our economy than the energy industry, because all industries depend upon credit and capital for their operation. If banking becomes critically wounded, the credit for international movements of oil, for example, or even the movement of oil within our own country becomes difficult. It is not possible on a cash or barter basis. Of course, that comment is only referring to what most of us see as the oil business. The search for oil, the research on oil recovery methods, and all that makes up an oil company depend upon a flow of credit and capital, which at root comes from banking.

Banking has to be defended.

From what I can see, it may be hard for bankers to defend themselves. The indicators include John Allison’s comment in his book that if he were still a banker he couldn’t write his book. Then there are the regulations and laws that require banks to not to reveal various regulatory rulings. And, as there is in the recent Apple anti-trust case, the requirement that the victim of government regulation declare that he was guilty of impure thoughts (anyone for the inquisition?). A banker who stands up and declares that the regulators are immoral idiots won’t be a banker for long. No, as opposed to the conflict between the energy companies and the climate fanatics, defense of banking will have to at least begin on the outside.

So, one of the short-term issues we have to take on, if we want this economy to hold up long enough for us to have at least some success on culture change, is the freedom of finance and banking.

Other recent articles about the U.S. government’s comprehensive attack on finance and banking:



U.S. Bank Legal Bills Exceed $100 Billion

http://www.bloomberg.com/news/2013-08-28/u-s-bank-legal-bills-exceed-100-billion.html



Banks shiver as UBS swallows $885 million U.S. fine

http://www.reuters.com/article/businessNews/idUSBRE96O1FH20130726



Under siege, JPMorgan to quit physical commodities

http://www.reuters.com/article/topNews/idUSBRE96P10M20130727



JPMorgan to pay $410 million in power market manipulation probe

http://www.reuters.com/article/businessNews/idUSBRE96T0NA20130730



JP Morgan under investigation in Monte Paschi probe: document

http://www.reuters.com/article/topNews/idUSBRE96U0MP20130731



FERC seeks BP response to natgas market manipulation

http://www.reuters.com/article/businessNews/idUSBRE9740JU20130805



Regulators willing to risk repo damage

http://www.reuters.com/article/marketsNews/idUSL2N0GH0JP20130816



JPMorgan hit by U.S. bribery probe into Chinese hiring: report

http://www.reuters.com/article/businessNews/idUSBRE97H00P20130818



Bank of America fails to end U.S. govt's mortgage fraud lawsuit

http://www.reuters.com/article/bondsNews/idUSL2N0GS0ZV20130827

What I think is profoundly unjust about this is that the government wanted the banks to take over the ruins of other banks and mortgage companies. Now they out to destroy the bank that took on the history and risk at the government’s behest. This is immoral.

Reality Disconnect, Again

So many news headlines these days take my breath away because they are just so intent on pushing liberal/progressive views. Today offered one of the worst: “Last Bernanke Years Shows No Sign of Buyer’s Remorse” online at Bloomberg. The article is congratulating Bernanke for navigating the last six years without seeing high rates of consumer price increases. I know that many people disagree with the government’s claim that prices have not been climbing more rapidly, but for the issue in the article, it doesn’t matter. What matters is the underlying, widely accepted view of the article. That view holds that it is okay to focus very narrowly on an isolated, micro point, and assert that it means something. Using Dr. Leonard Peikoff’s DIM nomenclature, this is at best D1, possibly D2.

A knee-jerk, but nevertheless appropriate, response to this article would be to observe that there is less upward price pressure during a recession/depression. As Bernanke has responsibility for the recession, which he shares with some other esteemed governmental and legislative fools, it is morally outrageous to give him credit for the accidental consequence that consumer prices aren’t raising fast enough for people to be angry. Supposedly, Bernanke meant for prices to remain stable. But that is not true. Bernanke has been trying for a 2.5% rate of increase, and he hasn’t been able to get there, regardless of the amount of made-up money he has pushed toward the economy. Bernanke is being given credit for something he didn’t want and really thinks is bad.

Furthermore, focusing on the period of the last few years fails to observe that the consequences of his policies are going to be disasters for many more years into the future. This is another sign of the D mentality: the future isn’t real to them. What happens tomorrow is always a complete surprise. When you discard causality, the future has no relation to the present. This is especially true of government actions. They say that their new law or control will eliminate some perceived error in economic activity. They never check to see if the law or regulation had any effect on that problem, never. They do apparently assume that merely making the law is a sufficient “cause” for the problem to go away. But they do not actually realize that their action might cause some other, unwanted effect, in spite of the current wave of the hand at “unintended consequences.” The possibility is not part of their view of the world because they don’t understand cause and effect.

Bernanke is such an eloquent example. He was surprised by every turn of the economy from the day he took office until today. He has denied that his actions have had any negative consequence. He just won’t believe it (see my blog on his speech about the cause of the housing price boom). He has one response for any kind of economic situation: put more, lots more, money into the economy. More money is always good. And if wonderful things don’t happen, it is because really bad things were happening, which were staved off by the money he did put in. “Just think,” he might say, “how bad things would have been if I hadn’t acted.” Thus he proclaimed himself hero of the universe when he pushed a trillion of so into the economy during the beginning of the recession. Never mind that he has had to do the same thing repeatedly since. In his view that is because capitalism had let us down drastically in 2007.

This is another aspect of the D1 (he is a D1 because he does have a theory, an integration, which he thinks is founded in science). The theory is true, and thus must be applied, regardless of the actual results. He is not capable of reevaluating the theory.

All of this underscores the vital nature of philosophy in our battle to change the culture. We can’t argue or collaborate with a D. There is no common ground, actually no ground at all for him. We have to just replace him. In general, the same is true with the M. In the sense of using their theory, the M holds his ideas in much the same way as the D: the theory cannot be touched by reason or consequences.

We have to address ourselves to those people who aren’t contorted into either anti-reason methodology. That means the young and those individuals who somehow survived today’s schooling with some of their brains intact. It isn’t easy.

Method Important in Cultural Change

It is slowly sinking into my mind that the first order of business in any activity is a consideration of method. Method is in fact a continuing consideration and the major factor in seeing growth and maturity.

I am reminded of this in listening to the recent OCON presentation given by Don Watkins, “Changing the Debate: How to Move from an Entitlement State to a Free Market,” which you should listen to. I have noticed that a few people have criticized attempts at influencing the culture as being in effective. The critics had nothing more to offer about how to do that, as if the other people were failing, perhaps the critics hadn’t figured it out either. We must keep in mind that this is something we have to figure out how to do. Again, just like everything else in human activity, learning how to communicate and influence is a matter for induction, possibly trial and error. You don’t improve your ability in anything sitting in a room thinking without evidence. You can come up with ideas, but you then have to try them out and evaluate the results, several times.

It is true that winning our battle will require many repetitions of good ideas, done from many different perspectives, by many people. It is also true that those people will have to be ones who are doing it for selfish reasons, not out of duty. I think that we have many good, selfish reasons to do it. Becoming motivated shouldn’t be hard.

What Don has to say is excellent and has several important ideas. It is a good place to start. Other inspirations include the very effective activities by The Center for Industrial Progress, created and guided by Alex Epstein. I am sure there are others. (Suggestions?) We each need to learn what we can, practice, do it, think, analyze, and add to our knowledge.

It is too soon for much to happen, but the insights in Dr. Leonard Peikoff’s book, The DIM Hypothesis will also affect how our message will be delivered (as I have suggested earlier in this blog).

So if you are engaged in this battle, keep your eyes open and listen to what your fellow fighters are doing. Think about your approach. And closely consider the feedback and any other indications of the response your actions produce. Use your rational facilities. Apply method.

What To Do: For Yourself and Family

I hope that as a result of AR’s writing, listening to Yaron Brook, and happening across my comments a question will cross your mind, “What should I do?” There are actually two levels to this question, the personal and the public. By “public” I mean what is normally considered activism. But you rarely see people talk about what to do personally.

Part of my answer to the question of what to do for yourself is: Live your life. Work for happiness. Enjoy yourself. While a rational man never ignores the fact that he lives a life across decades, he is only alive in the present. Don’t forget to enjoy the values you can today, especially those you have achieved.

Then there is the consideration of what to do regarding forthcoming crises. One thing to consider is what will happen to the assets that you have, e.g., your home, your investments, etc. Are any loans subject to being called? How stable are the interest rates? How safe is your income? How liquid are your assets? And so on. Don’t put your head in the sand!

For more extreme situations, in a way there is less you can do.

You hear of people buying guns and canned food. Any of that might be of use in a situation that is brief, but afterwards, even if you are set for a couple years, what do you do then. What you would need is a long-term solution, which ultimately means being in a safe community.

One then tends to think of Galt’s Gulch. I do. Remember that it was a private estate and people came by invitation only. It was defended. The rest of the country, by contrast, collapsed.

The idea of Galt’s Gulch was that people who understood Galt’s message wanted to be together to the extent possible for enjoyment and safety.

Today, a few Objectivists get together on occasion, briefly. Many say they want to, but don’t. Few do business with each other. In a way, there is no community. I am aware of no efforts to seriously consider a way for us to survive a crises (it should be relatively secret). On our current road, we will suffer to the same extent as the rest of the population, even though we understand what is happening and know that it will end in disaster!

That doesn’t seem like the rational thing to do.

Perspective and Time-Frames

When I have read other claims of coming doom in the past I have always rejected them. They seemed to me to regard the economy much like a mechanical clock, with certain elements of the economy as having overwhelming power. Those claims that our economy was going to collapse within a certain time-frame never came true. Some of these claims were made by rank amateurs, but some weren’t. A certain historian has recently argued again for a coming collapse, and I have the same regard for him. The great economist Henry Hazlitt wrote in 1983 (The Inflation Crisis, and How to Resolve it) that the U.S. economy would drive itself into hyperinflation, but again, didn’t happen.

It is obviously possible to foresee limited crises in the near future as Ludwig von Mises did in the 1920s and famously Peter Schiff did preceding the recent financial crisis. But here I am talking about even a larger failure than the mortgage-backed securities mess.

So, why am I willing to now put myself out on this limb after I have shown such good sense before? Two reasons: The first is our current situation.

Remember the tech-stock bust of 2002? Do you realize that the next bust was about five years later, beginning in 2007? Remember that 2004 through 2006 were decent years. If the bottom was in 2008, then we are now five years in and there is not actually a recovery. We have rehired very few of the people who lost their job in the crash, and most of them are not in jobs with the same level of productivity. Businesses are profitable still because of cost cutting, and are doing little new investment. We are stagnating.

We aren’t stagnating because of government spending but because of the continued, increasing attack on business and banking through rapidly expanding regulation. After about a century of increasing and improving regulation which limited our growth but didn’t seem to have a visible result, the government is finally beginning to make an obvious mark on our economy.

Reason two: the numbers regarding our future problems are too large. They are large enough to be killing. And, as I explained in my last post, large enough that our economy cannot possibly meet the requirement, with or without the entitlements, with or without a reduction in spending.

One additional reason, which I do not see mentioned anywhere, is that our economy is very dependent upon its technology. No country of our size or complexity has ever faced major problems. The most advanced economy that has faced extreme issues is Greece, and it was not particularly industrialized, and is not at all dependent upon technology. Today, it has massive unemployment and is now considered a “developing” country. It is a good thing that it has a relative small population. Greece still lives much closer to the land than most countries in Europe.

We don’t.

From today’s vantage point, I consider it possible that in a couple years all of Dodd-Frank and the other new regulations will finally be in place and business will find a way to survive. We could see a period of small, but moderately stable growth. There will be lots of possible threats to our economy, mostly from outside. Some examples include: Another terrorist attack. The Chinese personality split, i.e., communist/capitalist, could come apart. (That connection is so explicitly M1 in so many ways.) Japan’s attempt to “ease” their way out of stagnation, after a couple decades of various kinds of “easing” failed, could surely lead to a worse case. The economy in Europe will fracture again. Islam could completely take over much of the oil supply. The list is nearly endless.

But even if we are able to accommodate the regulations, at some point things will come apart from our increasing debt load and the growing demands of the entitlement programs and/or our aging population.

We could go through a couple more financial crisis as we saw in the last decade. I predict that each one will be more severe, and depending upon how vindictive the politicians are, move difficult from which to recover. And each time capitalism, businesses, and bankers will be blamed. That scenario would be more like a death spiral.

All of that that means that we have even more reason to work now to reverse the entire process. As Yaron Brook has said, not being involved, not being active is no longer a rational option. Don’t act now and you will necessarily live to see the big mess. Certainly your children will.

Will that collapse correspond with the rise of an M2 religious dictatorship I don’t know. We will certainly be ripe for it.

Don't Count on Savings

The failing of the economy to allow for savings sufficient for taking care of oneself in later years is not clear to most people, including many economists. It is not clear to many financial advisors. That is because saving and investment is rarely set up with goals and definitions: Specifically what do I want the money to do? What period of time? What level of spending? What degree of loss of purchasing power to plan for? How will the asset be invested during the period it is used?

Instead people save what they feel they can and try to put it where they hope they can get the best return. Few study sufficiently for the task. Few use professionals properly. Few actually like doing the work investing and follow the news. This last is an important point. For example, as a financial advisor for twenty years, I realized that I was not a stock picker. I wasn’t interested. It was not an area that I wanted to spend my time. I found professionals who did find it interesting and were successful. I used the division of labor for my and my clients’ benefit. The whole “do it yourself” approach is wrong headed. Professionals often use the amateur investor as a counter-trend indicator: when the small investor begins buying it is time to sell.

What you can see in just the equity market is that since the end of the tech boom in something like 2002 the stock market has not kept pace with the loss of purchasing power. It is not that it has just not had good returns. What returns it has had in relation to what a dollar can buy, the equity market in the U.S. has lost value.

The market that has actually risen, is the bloated Federal bond market. Guess what happens when the Fed stops buying and attempts to get rid of some of its astonishing horde of bonds. It won’t be pretty. The stock market will tend to dive as well.

So those people who are suggesting that people aren’t being personally responsible and saving enough and that is why we can’t get rid of Social Security are not paying attention. Government actions are destroying assets and our ability to save. That is the box we are in.

But it does take a long-term view to realize the size of the box and that it is getting smaller. Current politicians can’t see it because of their self-imposed philosophic blinders. Banking, financial, and business leaders by and large aren’t looking either. We can’t get even a modest public comment about our future and the entitlement programs out of any of them.

We are heading for this blind. Surprise!

“Need” for Social Security Indicates Coming Failure of Economy

Recently Don Watkins said that he was working on a book about Social Security. Without question, the book will be well informed and insightful. It will have information and arguments that will be very useful in the attempt to bring that program to its deserved end.Bureaucrats

One reason why Social Security is a prime candidate for the extensive treatment that Don will give it is the place the entitlement program has in the American attitude toward government’s role in our lives. It seems to embody the idea of government help for the poor and those no longer able to work. It also appeals to the idea that someone who has worked hard all of their lives deserves a little rest in their old age. All of those ideas have completely irrational elements, but I will leave their exposure to Don and other already written material.

However, focusing on Social Security should not leave out the much bigger threat of Medicare. Medicare alone will bankrupt us, while by itself, Social Security would probably just doom us to perpetual poverty. I would expect that Don will include Medicare in his book to some extent.

But I have a problem with focusing on government spending as a primary. While it is necessary to expose the evil of the underlying state-enforced altruism and that the spending will destroy us at some point in next decades, it is not the major reason for our economic problems. Even if we were to convince sufficient numbers of American somehow to ramp down the programs and kill them, we would still be in a very bad way, economically.

But the enormous numbers that Social Security and Medicare will rack up in required spending reveal much more than is normally considered. It isn’t just that the government can’t possibly tax or borrow the numbers required to support and care medically for the Baby Boomers. There is no other source for that care, even if medical costs were to stop growing. This economy cannot possibly support a generation that lives for decades without being productive. Our economy just does not have that capability. I am not sure that any economy could or should support a generation in that manner, but the U.S. economy, as it exists, will not.

Consider that by any measure the Baby Boomer generation, perhaps the wealthiest in the history of man, has a very small amount of savings compared to the cost of living without producing for a decade or more.

Consider that a great amount of our savings has been wiped out by the most recent financial crash, the constant, decades long reduction of purchasing power (2% a year for decades is a disaster for retirement savings), the failure of any but very aggressive, time- consuming investment strategies (which tend to ignore the underlying reality of the division of labor), the fact that savings in banks, cds, or money market funds do not grow at all after loss of purchasing power and taxes are figured in, etc.

Consider that there are no jobs for many who wants to work, and generally not for the retired. Indeed, the unemployment indicator that the government publishes monthly has gone down because it stops counting people who give up. Employment, from the perspective of a growing, high-tech, industrialized economy, has probably fallen since 2008.

It isn’t that the government can’t afford to support the Baby Boom generation in retirement, no one can, as the economy currently exists.

Further, even if you were able to convince sufficient Americans that Social Security and Medicare are wrong, they will resist ending them because they will realize that there is no replacement.

We have to have a replacement to be successful to overcome the problem of our aging population.

What is that replacement? Of course!

It is capitalism: freedom.

Which means the end of regulation. Capitalism means freeing up of the producer, the creator to be productive and profitable. Capitalism means productive work for anyone willing to do it. In capitalism, the primary shortage is people.

It means the recognition of individual rights: that man has to be able to act on his own judgment without requiring permission.

A free economy can solve our problem.

This is the economic side of the implication the DIM Hypothesis. Only the I mode supports an advanced, industrialized, high-tech economy. Any other mode will result in poverty and a much smaller population. There is a fundamental, reality-driven conflict between an economy with any freedom and a culture dominated by D or M. The result will be destructive, and the eventual crash will be very difficult. I don’t know if the crash we are facing will be soon or not, or will play out in a brief period or not. I suppose that the political situation will have some impact. But it will be nasty.