Why the NFL Draft Drives Economists Crazy

For a league that does many things well, the first round of the NFL draft is a mess.

The league gives its worst teams first crack at incoming college talent in the name of parity, but instead of giving bad teams a leg up, it often forces them to draft players they don't really need at prices they can't afford. Many top picks hold out of training camp before they sign, only to end up with enormous contracts that have little to do with their true value to a football team.

What's more, as this page reported Wednesday, NFL teams have a 50% chance of blowing a first-round pick entirely—the sort of costly gaffe that can set a franchise back for years.

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"It's a double-edged sword," said Phil Savage, a former Cleveland Browns general manager who also worked for the Baltimore Ravens. "Certainly, the higher you pick, the better chance you have of getting an elite player," he said, but the list of top picks is "littered with players who are not in the NFL anymore."
This isn't entirely the league's fault. The draft was once an innovative solution for distributing college talent to pro teams, but that was 75 years ago. The economics of pro football have gradually made it less effective, and as the college game becomes increasingly different from the NFL, players have become even more difficult to scout.

What's surprising is that the NFL, a league with a long history of making sweeping rules changes, hasn't much changed its draft format since the draft was first held in 1936. Since then, an entire academic-research area known as "market design," a spinoff of the Nobel Prize-winning concept of game theory, has grown exponentially to serve just this purpose—helping markets operate more efficiently by creating better rules and procedures to govern them.

Thanks to market design, medical-school students are matched with hospitals through a complicated computer algorithm. Governments use "communal auctions" to distribute things like cellular bandwidth to telecommunications companies. Even the New York City public schools have used market economics to ensure parity in its school-choice system.

Mona Signer, an avid NFL fan who happens to be executive director of the medical-school National Resident Matching Program, said the football draft could easily be replaced. "I could certainly see a way to run a matching program for any kind of pro-sports draft," she said.

As it's laid out now, teams start out with one pick in each of the draft's seven rounds. Each player is paid more or less according to his draft slot, his position and a rookie pool that limits the amounts teams can spend on draft picks. Based on the multiyear guaranteed portion of first-round draft picks' contracts from the past three years—including the $41.7 million that last year's top pick, quarterback Matthew Stafford, got from the Detroit Lions—this year's likely first pick, Oklahoma quarterback Sam Bradford, can expect to make $47 million guaranteed during his first multiyear contract.

In a draft system, there's no way of knowing what a player is actually worth on the open market. In 1998, the Indianapolis Colts used the first pick to draft Peyton Manning, who has gone on to become an excellent NFL quarterback. A year later, the Cleveland Browns used their top pick on Tim Couch, who was considered light years behind Mr. Manning in talent. But Mr. Couch still got a nearly identical salary of $48 million and a signing bonus of about $12 million. Mr. Couch played only 62 games before retiring (in style).

To make matters worse, it's harder to evaluate talent in college football, with its spread offenses that encourage quarterbacks to run as much as they throw. This makes it easier to draft the sort of first-round bust that can set a team back for years. A 2007 study by economists Cade Massey of Yale and Richard Thaler of the University of Chicago suggested that the first pick of the NFL draft is the least valuable of the first round.
There's no shortage of potential draft fixes: Players and their agents would like a more free-market system, similar to European soccer, in which transfer fees in the hundreds of millions are handed out like drink coupons. "Why don't we just abolish the draft and have everyone become a free agent just like any other workaday world?" asks football agent Steven Feldman.

An NFL spokesman declined to comment about the draft's structure. The league's commissioner, Roger Goodell, recently wrote that he thinks the problems many teams have in signing their first-round picks could be solved by limiting rookie salaries. While most NFL executives like the idea, the player's union doesn't—it likes high rookie salaries because they help to drive up salaries in general.

Looming over all this is the league's labor negotiations, which are at an impasse. As the standoff threatens to drastically change the league's bedrock economic principles—like revenue sharing, free agency and a cap on team salaries—the moment could be right to rethink the draft, too. "This could be something to look into that could quite possibly help in those negotiations," said Derrick Mayes, a former wide receiver who won a Super Bowl with the Green Bay Packers.

Three researchers at Harvard Business School—who studied under Alvin Roth, a Harvard professor and a pioneer in market-design theory—have proposed an alternative to the NFL draft.

Under their plan, all 32 teams would be given seven picks. They would have to abide by a spending cap that would go higher to lower—with the worst team (based on its record the previous season) having the most money to spend. When the bidding opened, the most sought-after players would draw multiple bids. Teams could then raise their bid as high as they'd like for a player they coveted.

Theoretically, a team could get any player it wanted—so long as it was prepared to pinch pennies on everyone else. Meanwhile, a team that didn't want to break the bank on any particular player could pick up lots of useful parts by spreading its money around evenly. Teams could also thrive by focusing on the bidding and looking for bargains.

"I think that it would significantly help teams get the right guys," said Lucas Coffman, one of the study's authors. If nothing else, Mr. Coffman said, the auction format might be more exciting than the draft, which allows for long gaps between picks.

In any case, there's some evidence the draft could be the next fix for a league that fixes everything. One NFL executive said patience is running thin. "There's a huge trail littered with guys who got the big dollars but were a bust," this person said.

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What's Right? Waleed Aly on Conservatism. With Shaun Carney

Where did the Right go wrong? With the departure of George W. Bush and John Howard, conservative parties in the US and Australia entered a period of turmoil. How might conservatism renew itself? Discussing his illuminating Quarterly Essay with Age journalist Shaun Carney, Waleed Aly discusses what a better conservatism might look like. He draws on the work of conservative thinkers, past and present, to outline the weakness of the 'Left versus Right' paradigm and to examine the current state of conservatism. Contending that conservative parties have backed themselves into a corner by embracing free-market extremism, he predicts that the key issues of the day, such as climate change and the financial crisis, mean a reactionary brand of politics is unlikely to work.
Part 1:

Flash Video (.flv): 69 MB

MP3 Audio (.mp3): 14 MB

MPEG Video (.m4v): 307 MB

Part 2:

Flash Video (.flv): 62 MB

MP3 Audio (.mp3): 12 MB

MPEG Video (.m4v): 271 MB

Presented by The Wheeler Centre, March 2010
Source:
The Wheeler Centre
Black Inc.

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Melbourne Storm stripped of 2007 & 2009 NRL premierships for salary cap breaches

The National Rugby League has today stripped the Melbourne Storm of the 2007 and 2009 Telstra Premierships, the Minor Premierships of 2006-8 and of its 2010 competition points after confirming a series of salary cap breaches amounting to at least $1.7million over five years.

The club will lose all competition points earned to date in 2010 and also the right to accumulate points going forward in 2010 (competition tables will record wins and losses but the club will not be awarded competition points on the basis of any wins). These measures are effective as of today.

The club has furthermore been fined $500,000 and will be forced to return $1.1million in prize-money with the prize-money being distributed evenly among the other fifteen clubs.

Individual awards by players will continue to be recognised but records will be adjusted to show that the Premiership is not recognised even though the result cannot be overturned. Neither Manly nor Parramatta will assume the Premiership titles in their respective years.

The Storm's Chairman and Chief Executive met with the NRL in Sydney today to confirm the extent of the breaches uncovered by NRL Salary Cap Auditor Ian Schubert and his audit team.

The investigations have revealed the Storm maintained a dual contract system and the club has today confirmed that side letters promising extra payments were stored in a secret file at the home of the Chief Executive.

The accounts were structured in such a way that it would appear the commitments were not apparent to either the Melbourne Storm Board or its owners.

The NRL has uncovered breaches estimated to be in excess of $1.7million over five years, around $400,000 in 2009 and with a projected breach of $700,000 in 2010.

"While the amount itself is cause for concern, the most damning indictment is the systematic attempt by persons within the club to conceal payments from the Salary Cap auditor and, it would now seem certain from the club's Board and from its owners, on an ongoing basis," Mr Gallop said.

"It was through this system that they were able to attract and retain some of the biggest names in Rugby League.

"In doing so they have let down the game, the players and the fans of the Melbourne Storm.

"Clearly there were some individuals who knew what was going on and perhaps many who did not.

"By nature, that means innocent parties will suffer as a result of this punishment but the persons responsible are those who constructed the scheme and anyone who knowingly signed a false statutory declaration to deceive the game.

"It would be unfair now on the players and fans of every other club in the competition to allow the Storm to enter this year's finals series or to retain the titles they won.

"As a game we will do all we can to restore the faith of each of those parties but there is no alternative now but to deal with the situation that has been so deliberately engineered.

"As was the case with Canterbury after 2002, the only other instance in which we have seen such an elaborate and contrived set of accounts, there is the chance for the club to begin a rebuilding process with the fans and the game by the way it conducts itself in the weeks and months ahead.

"A significant step in that process has been the way the Melbourne Board has reacted to the information the Salary Cap team tabled this week.

"Rather than look to conceal the activities, the Board has cooperated fully and we have been informed that the club's owners, News Limited, have now ordered a full forensic examination of all club accounts.

"It should be pointed out that, as owners of the club, News Limited has only been made aware of the investigation in recent days.

"Ian Schubert and his assistant Jamie L'Oste Brown have been collecting information in relation to this process for some time and their commitment to that process deserves considerable respect.

"Salary cap investigation is among the most difficult and in many ways least rewarding roles in the game but, despite the thoughts of some critics, there is universal acceptance of the importance of the cap and of the contribution it has made to the most successful era in the game's history.

"In truth, this issue is not so much about the Salary Cap but the simple reality of cheating the rules as they stand at any time. Everyone knew the rules, particularly after 2002.

"This investigation has relied on detailed reviews of accounts as well as evidence from informants.

"It is a reminder to everyone who wishes to test the rules that there is every likelihood the truth will emerge in time and that the consequences will be severe at that point

Related Links

• WATCH the press conference
• Read the OFFICIAL RELEASE
• Read the Storm's official statement
• NRL Salary Cap explained
• History of NRL Salary cap breaches

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Australia and India - A banged-up equation?

Dileep Padgaonkar

MELBOURNE: An evening of merrymaking that ended in a nightmarish experience in May last year gave Shravan Kumar his 15 minutes of fame. The young Andhraite, a student in a private college here, had hosted a party at his home in a western suburb of the city to celebrate his birthday. All the 20-odd guests were fellow Indians; all pursued vocational courses in institutions of dubious worth; all led a hand-to-mouth existence; all worked well beyond the stipulated 20 hours a week; all settled for wages much lower than the official wage; all lived four-to-six in a room; and all were fired by a single ambition: to acquire permanent resident (PR) status within two years of their arrival in Australia.

Liquor, much like loud music and laughter, flowed freely at the party. On such occasions, it is not unusual for uninvited guests to join in the revelry. When two young, white gatecrashers rang the doorbell, the Indians welcomed them with open arms. But soon the booze began to take its toll. Hot words were exchanged when the whites made passes at Indian girls. They were shown the door.

Minutes later the boys turned up again. Unknown to the Indians, one of them carried a screwdriver in the pocket of his trousers. They were allowed to come inside in the hope that they would behave themselves. But no sooner had they stepped in that the boy with the screwdriver plunged its sharp edge into Shravan Kumar's skull. This is when all hell broke loose.

Even as Shravan Kumar struggled for his life in the hospital, a small group of left-wing radicals, both Indian and Australian, staged a demonstration outside the Victoria state Parliament House. They shouted angry slogans, pelted a few stones and bricks, broke some windows. From the sidelines, half a dozen or so members of the Australian Socialist Party, a fringe group, made provocative speeches. Among the rabble-rousers, according to a witness, was an Indian, Gautam Gupta, a failed businessman and a jobless cardiologist who over the years had fancied himself as an avatar of Mahatma Gandhi and Nelson Mandela. (Efforts to reach Gupta bore no fruit.) By sunset, the police had dispersed the demonstrators. Along the way however they, and especially the firebrand Gupta, attracted a huge amount of attention in the national media. And that coverage in turn got the Indian media all worked up.

On certain TV news channels in particular, charges of racism flew thick and fast. Fuelling their rage was the initial claim of the Australian authorities that race did not figure at all in the attacks. No one this writer spoke to, including office-bearers of the Federation of Indian Associations of Victoria, denied that racial prejudice had to be taken into account
to understand the factors that led to the tragic sequence of events. At the same time they emphasized that such prejudice was limited to a small group of young ruffians. To focus solely on race, as the Indian media had done, detracted attention from the more important factors that caused the crisis in the first place.

The most significant factor by far was the decision taken by the previous John Howard government to open up the vocational education sector to private groups and link it with migration. This was the government's logic: invite young people to study in the country in order to boost earnings from education; persuade them to develop vocational skills needed to grease the wheels of the economy; give them permission to do part-time work even while they took their courses; above all, dangle before them the carrot of PR status two years after their arrival, provided they acquired a certain number of points in their studies.

The policy was disastrous on many counts. Individuals with no experience in the educational field, including a shop assistant from Kerala, were allowed to open colleges. The government did not bother to find out how they functioned. There were no controls — on the kind of courses offered, fees charged, the number of students admitted. For instance, permission had been given to enrol, say, 250 students. Double the number were enrolled. In no time, more than 170 private colleges mushroomed in Victoria. As many as 40% of them were controlled by individuals from the sub-continent. More often than not, their backers were former Australian politicians. They constituted a powerful lobby that no government could go against.

Between 2006 and 2009, the annual number of Indian students admitted to private colleges was more than three times the 2005 figure. This was the handiwork of Indian agents — nearly 1,700 at the last count — whose job was to lure prospective applicants with tall promises. In return for an investment
of Rs 12-15 lakh, the student was assured 'help' to procure a visa (including a certificate certifying good knowledge of English), admission to a 'posh' college, a well-paid job on arrival, good accommodation, a great lifestyle and, not least, PR status after two years. Most of the agents' 'victims' came from three states — Andhra Pradesh, Gujarat and, above all, Punjab. The agent's commission ran-ged between 15-20% of the overall expenditure.

Aiding, if not quite abetting, the agent was Australia's lax visa regime. The visa-seeker had to furnish proof that he had enough money in the bank to pay for the travel, tuition fees and lodging and boarding costs for two years. With the agent's help, a loan would be obtained from a bank by the applicant or his family, the money deposited in an account for three months and the bank statement attached to the visa application form. As soon as the visa was granted — without a counter-check or an interview — the loan was returned to the bank and the student was left high and dry.

This is where his travails began. There was no one to receive him at the airport. He had to make his own arrangements for accommodation. The 'posh' college was often a small, decrepit structure. Courses were few and far between. They were of course conducted in English, a language the student barely knew. To sustain himself, he worked long hours at all sorts of odd jobs and accepted wages well below the official rate, which placed him at odds with local job-seekers.

The illegal wage was paid in cash, which the student carried on his person. That made him a target for attack, especially when he took the last train home located in a remote suburb. In case he was assaulted, he never turned to the police for help because that would mean exposing the illegality of his working hours and wages. With no family support system, no contact with Indian associations or the Indian consulate, no friends in any other community, he had no choice but to seek the company of similarly placed fellow Indians. In the few hours he had for rest and leisure he would drink himself silly, sometimes take to drugs and gambling, enjoy loud music and, not least, chase girls. None of this obviously endeared him to the host population.

For Indian girls, the experience has proved to be far more harrowing. According to Krishna Arora, a community leader, Punjabi girls have been the worst victims of this search for an El Dorado. An educated girl is married off to a rich farmer's son. In return, the father-in-law agrees to fund her travel, tuition and stay in Australia. Her husband, who is entitled to get a spouse visa, goes along with her. Once they land, the husband links up with other women, treats his wife shabbily and as soon as both get their PR, he files for divorce, obtains it and goes his own way leaving the young woman to fend for herself.

Last year, of the 18 cases of domestic violence reported to the Melbourne police, as many as 13 were student-related. Victims of such violence do receive some financial assistance from the government. But the money is grossly insufficient. As a consequence, more and more such women take to prostitution. Indian women make up a sizeable percentage of the escort service business in cities across Australia.

Indian community associations are making a valiant effort to come to the rescue of students duped into coming to the country. They are lobbying the government to strengthen security for Indians and to come down hard on the perpetrators of violence. The Indian consulate, too, is straining every nerve to assist them. But it is woefully understaffed. All the same, the leaders — including high-profile ones like Vasan Srinivasan, who very nearly got elected to the Victoria parliament; Vernon da Gama, a hugely sought-after solicitor and Ravi Bhatia, the suave and highly admired CEO of a telecom company — are unanimous in their belief that the issue at stake in the spate of attacks on Indians is not so much racism as a question of maintaining order and enforcing the law.

They repeat that the Indian media's charges of racism quite correctly rile the Australians. This, in turn, tarnishes the entire Indian diaspora, most of whose members are successful professionals and adds strains and stresses to the India-Australia bilateral relationship. I asked the community leaders why Indians were targeted and not students from other countries. One reason, I was told, is that most of the other students come from good social backgrounds. They have a working knowledge of English and have the necessary funds to pay for their education.

Indeed, most of them study in universities, not in private colleges. Their numbers are small. As against this, the sheer size of the Indian student body, its general rowdiness, pecuniary situation and inability or unwillingness to live according to local norms gives it a higher visibility and makes it a target of suspicion, prejudice and sometimes violence.

Australia, one Indian executive told me, can be a tough place to live if you don't know English, don't know how to use a Western-style toilet, don't know elementary rules of courtesy, if you don't follow traffic rules and are perceived to be a lout. That, he said, was the case with most Indian students. And a bulk of them come from Punjab — indeed, straight from a Punjabi village to a cosmopolitan metropolis like Melbourne or Sydney. In no position to handle the culture shock, they just go out of control.

The attacks on Indians have, however, had a negative impact on Australia's booming education business. Figures published by the Federal Education Department just days ago show an overall decline of foreign students seeking admission to the country's colleges and universities. The decline is sharpest among Indian students. Numbers plummeted 40% in Victoria, from 6,303 to 3,761 for the first two months of the year. Especially affected are private vocational colleges. Experts believe that the numbers are likely to drop further in the months ahead.

The Australian authorities have finally begun to take meaningful steps to arrest the trend. Regulations for private colleges have been toughened; 21 rogue institutions have been identified. Rules have been changed to grant licenses to educational entrepreneurs. They are now obliged to re-register to meet the standards prescribed in the National Education Code. Some 1,500 educational providers have to undergo stringent tests. And courses like hair-dressing have been scrapped.

Visa regulations, too, have been revised. Now money needed for travel, tuition and boarding and lodging has to be deposited in a bank for six months instead of three. The Australian High Commission has been asked directly to consult chartered accountants and banks to verify the bonafides of the visa applicants. Living expenses have been raised from AU$1,000 to AU$1,500 a month. English proficiency tests have been made more rigorous. Most important of all, rules to grant permanent resident status have been overhauled to make it that much more difficult to immigrate.

Indian community leaders now hope that the Indian authorities will also crack down on unscrupulous agents and make sure that students wanting to study in Australia are given an accurate picture of the conditions that await them on arrival. Similarly, they would like on-the-spot reporting by Indian journalists of the problems confronting Indian students. This, they say, is urgent because under the revised rules, visas of a substantial number of students are not likely to be extended once they expire. This could well lead to more protests and perhaps to an outbreak of violence just in case a desperate student, unwilling to return to an uncertain future back home and fearful of losing face, attempts to commit suicide.

Meanwhile, Shravan Kumar has staged a remarkable recovery. The Australian government paid his hospital bills as he had no health insurance. It also funded the visit and stay of his father, brother and uncle. Undeterred by charges of racism and fears for his security, the young Andhraite applied for permanent resident status. He obtained it days ago. He is not quite sure if he will return to India once he finishes his courses. But chances are that he will choose to remain in Australia to get on with his life, hoping that by and by he will put behind him the birthday bash that turned into a ghoulish nightmare one balmy day in May last year.

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Foresight and Fait Accompli: Two Timelines for the Global Financial Collapse

1995
Steve Keen concludes his JPKE paper “Finance and economic breakdown: modelling Minsky’s ’financial instability hypothesis’” as follows:

There are, however, severe doubts as to whether the kind of government that has been constructed over the last thirty years is a sufficiently powerful or balanced stabilizer to capitalist investment behaviour.

From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind that Keynes described so well, the excessive reliance on the (stable) recent past as a guide to the future.  The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm. [emphasis added]

2000

 Wynne Godley in a paper with L. Randall Wray argued that the current stability in the US economy was unsustainable, because it was driven by the growth of households’ debt, which in turn was fuelled by real estate capital gains.  Using an accounting framework of the US economy developed by Godley, they predicted that when debt growth slowed down – as it inevitably would within years -, growth would stop.

2001

 Kurt Richebächer in September 2001 wrote:

the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled the stock market bubble.

 2002 


  
Dean Baker in August published “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?” in which he said:

While the short-term effects of a housing bubble appear very beneficial—just as was the case with the stock bubble and the dollar bubble—the long-term effects from its eventual deflation can be extremely harmful, both to the economy as a whole, and to tens of millions of families that will see much of their equity disappear unexpectedly. The economy will lose an important source of demand as housing construction plummets and the wealth effect goes into reverse. This will slow an economy already reeling from the effects of the collapse of the stock bubble of 1999, … Unfortunately, most of the nation’s political and economic leadership remained oblivious to the dangers of the stock market and dollar bubbles until they began to deflate. This failure created the basis for the economic uncertainty the country currently faces … [which] will be aggravated further by the deflation of the housing bubble. This process will prove even more painful if the housing bubble is allowed to expand still further before collapsing.

2003

 Jakob Brøchner Madsen (month unknown) wrote:

I am very pessimistic. We are heading into something in the world which is worse than what we experienced in 1982. It will be the worst recession since the Second World War”.

 Ann Pettifor in August published in Open Democracy “The Coming First World Debt Crisis”.  The article, which focused on “a giant credit bubble”, began:

The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided . . . only by serious efforts to bring regulation and balance to the international economy.

 Ann Pettifor in September published her edited collection Real World Economic Outlook: The Legacy of Globalization: Debt and Deflation, which examined the growth and new dominance of the financial sector. Contributors included Dean Baker, Herman Daly, Wynne Godley, Michael Hudson and Joseph Stiglitz.
Pettifor’s introduction said:

Removing controls over the finance sector paved the way for its rise to dominance, which in turn has led to a transformation of the global economy and increased instability.

 [One of] the consequences for the global economy [is an] enormous increase (or ‘bubble’) in the stock of financial assets in relation to the real economy, as measured by GDP or the stock of physical, human, and technological capital.

 There will be a collapse in the credit system in the rich world, led by the United States

 Once default rates approach 1 per cent of the value of the debt across the whole lending spectrum, the profitability of banks is called into question. If default rates reach 2 per cent, the probability of a financial crisis rises appreciably.

 Also in September, Pettifor restated her arguments for a forthcoming global financial collapse in a cover article for The New Statesman magazine.

 Dean Baker published in the Los Angles Times on December 3 “Who to Blame When the Next Bubble Bursts. This was the first of dozens of columns that Baker wrote on the bubble. (most can found at http://www.cepr.net/index.php?option=com_issues&task=view_issue&issue=11&Itemid=22)

2004

 Dean Baker’s column “Building on the Bubble” in May appeared in six US newspapers. He wrote:

The fact that people are borrowing against their homes at a rapid rate (more than $750 billion in 2003) is more evidence of an unsustainable bubble. The ratio of mortgage debt to home equity is at record highs.

This is especially scary because equity values may be inflated by as much as 30 percent due to the bubble,

 Michael Hudson in June presented at an academic conference the paper “Saving, Asset-Price Inflation, and Debt-Induced Deflation”. He noted that the ‘large debt overhead – and the savings that form the balance-sheet counterpart to it” is the ‘anomaly of today’s [US] economy’.  He warned against the ‘self expanding growth of savings’ and the unsustainable ‘growth of net worth through capital gains’ induced by US monetary and tax policies.  He said that the:

natural limit to the process was reached in 2004 when the Federal Reserve reduced its discount rate to 1 percent. Once rates hit this nadir, further growth in debt threatens to be reflected in draining and amortization payments away from spending on goods and services, slowing the economy accordingly.

 Dean Baker sponsored through the CEPR a $1,000 essay contest to solicit the most-convincing argument that the housing market was not in a bubble.  The contest was twice written up in the New York Times.
Jakob Brøchner Madsen (month unknown) wrote:

 There is something completely wrong. We are seeing large bubbles and if they bust, there is no backup. House prices and shares are completely out of proportion. And it will go wrong.

2005

 Dean Baker and Paul Krugman in March predicted in a paper written with J. Bradford DeLong that asset prices in the US were bound to fall in the medium term.

 Robert Shiller in May in the Introduction to the second edition of his book Irrational Exuberance warned that home prices were looking “very anomalous” and that:

further rises in the [stock and housing] markets could lead, eventually, to even more significant declines… A long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession. This extreme outcome … is not inevitable, but it is a much more serious risk than is widely acknowledged.

 Paul Krugman on 27 May wrote in his NYT column:

If housing prices actually started falling, we’d be looking at [an economy pushed] right back into recession. That’s why it’s so ominous to see signs that America’s housing market … is approaching the final, feverish stages of a speculative bubble.

 Nouriel Roubini in summer 2005 predicted that real home prices were likely to fall at least 30% over the next 3 years.

 Steve Keen in December, drawing heavily on his 1995 theoretical paper “Finance and economic breakdown: modelling Minsky’s ‘financial instability hypothesis’” and convinced that a financial crisis was approaching, decided to go very public with his analysis. He registered the webpage www.debtdeflation.com dedicated to analyzing the “global debt bubble”.  His site soon attracted a large international audience.  At the same time he began appearing on Australian radio and television with his message of approaching financial collapse.

 Jakob Brøchner Madsen (month unknown) wrote:

 I feel lost. Money growth is increasing, oil and commodity prices have doubled in the last 10 years. Therefore inflation and interest rates should increase, but nothing happens. All the models we use to predict inflation have broken down, it is chaos.

2006

George Soros in January on CNBC television said:

There’s (a) problem that I think is brewing, and that is the end of the housing boom in the United States and the ability of households to spend more than they earn because the value of their house is rising.

So I expect that by ‘07 there will be a significant decline in U.S. consumer spending and I don’t see what will take its place because it’s so important as a motor of the world economy.

 And to an audience in Singapore Soros said:

the soft landing (for the US economy) will turn into a hard landing. That’s why I expect the recession to occur in 2007 not 2006.

 Michael Hudson in April published ‘The Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse’, in Harper’s Magazine. In it he wrote:

almost everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst… America holds record mortgage debt in a declining housing market… For those who bought at the top and who now face decades of payments on houses that soon will be worth less than they paid for them, serious trouble is brewing. …. Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse.

 Wynne Godley in May in a paper with Gennaro Zezza, “Debt and Lending: A Cri de Coeur”:

demonstrated again the US economy’s dependence on debt growth and argued that only the small slowdown in the rate at which US household debt levels were rising, resulting form the house price decline, would immediately lead to a “sustained growth recession … somewhere before 2010

 Kurt Richebächer in July wrote in his newsletter:

The one thing that still separates the U.S. economy from economic and financial disaster is rising house prices that apparently justify ever more credit and debt”…
 … a recession and bear market in asset prices are inevitable for the U.S. economy. … This will not be a garden-variety recession, in which monetary easing unleashes pent-up demand, as it used to do in past business cycles”.
 … the great trouble for the future is that the credit bubble has its other side in exponential debt growth
 The U.S. liquidity deluge of the last few years has had one single source: borrowing against rising assets backed by the Fed’s monetary looseness… all hinging on further rises in asset prices. But they are going to plunge.

Michael Hudson published his paper “Saving, Asset-Price Inflation, and Debt-Induced Deflation”.
 Joseph E. Stiglitz et al. in August 2006 published Stability with growth: macroeconomics, liberalization and development which includes a chapter on “capital market failures” that looks “at how capital market liberalization can exacerbate the problems posed by coordination failures and broader macroeconomic failures” [p. 189]

 Robert Shiller on August 30, writing with K. Case in the Wall Street Journal, said:

there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected.

 Nouriel Roubini  on August 23, 2006 wrote:

By itself this [house price] slump is enough to trigger a US recession.

On August 30 he wrote:

The recent increased financial problems of … sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg – and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession. You can then have millions of households with falling wealth, reduced real incomes and lost jobs…

Like Baker and Keen, Roubini now put out repeated public warnings of the systemic implications of the housing bubble.

Kurt Richebächer in September 2006 wrote:

There is no question that the U.S. housing bubble is finished. All remaining questions pertain solely to speed, depth and duration of the economy’s downturn.

 Ann Pettifor in October published her book The Coming First World Debt Crisis, an extension of the analysis she had presented in 2003 and which detailed legislation needed to avert the coming collapse.  She summarized her book’s analysis in articles for The Guardian and Open Democracy.
October - The boom in US house prices begins to reverse its course.  Defaults on home mortgages approach record levels.

 Joseph E. Stiglitz on October 30 on the Alex Jones radio show discussed the warning signs of plummeting real estate prices in the U.S. and the possibility of a global economic downturn. He said:

If it’s well managed it will only be a slow-down, if it’s not well-managed it could be a recession,
and
….I think we can avoid an implosion if we manage this carefully but it’s going to be very risky

 Steve Keen in November began publishing on www.debtdeflation.com his monthly DebtWatch Reports (33 in total). These were substantial papers (upwards of 20 pages on average) that applied his previously developed analytical framework to large amounts of empirical data. Initially these papers analyzed the GFC that he was predicting and then its realization. His first report was titled “The Recession We Can’t Avoid?”.
  
Dean Baker in November, published the paper “Recession Looms for the U.S. Economy in 2007” (http://ideas.repec.org/p/epo/papers/2006-29.html)  in which he forecasts that weakness in the housing market was likely to push the economy into a recession in 2007, predicting -0.7 % GDP growth over 2007, Baker wrote:

The wealth effect created by the housing bubble fuelled an extraordinary surge in consumption over the last five years, as savings actually turned negative. …This home equity fuelled consumption will be sharply curtailed in the near future…. The result will be a downturn in consumption spending, which together with plunging housing investment, will likely push the economy into recession….Over the course of the year, the economy will shed 1.2 million jobs.”

 Nouriel Roubini in a Nov 17 blog said:

[t]he housing recession is now becoming a construction recession; and the construction recession is now turning into a clear auto and manufacturing recession; and the manufacturing recession will soon turn into a retail recession as squeezed households – facing falling home prices and rising mortgage servicing costs – sharply contract their rate of consumption.

 Steve Keen’s December report, titled “The runaway train of debt”, concludes:

Clearly households can’t go on like this. At some point, whether voluntarily or by duress, households have to stabilise, and preferably substantially reduce, their level of debt. They can only do this by either significantly reducing spending, or by liquidating assets. Long before this process actually causes the debt burden to fall, the economy will be in a debt-induced recession.

 Paul Krugman on 4 December in the NYT wrote

Right now, statistical models based on the historical correlation between interest rates and recessions give roughly even odds that we’re about to experience a formal recession.

 2007 

(The GFC becomes a fait accompli)
 Steve Keen continues through the year with Debtwatch Report.
February - The decline in US house prices accelerates. HSBC issues its first profit warning in its 142-year history, citing bad debts in its US subprime unit.
April – New Century, the US’s largest subprime lender, goes bankrupt.

Wynne Godley in April foresaw output growth “slowing down almost to zero sometime between now and 2008 and then recovering toward 3 percent or thereabouts in 2009–10”; but warned that “unemployment [will] start to rise significantly and does not come down again.”
July – Investment bank Bear Stearns reveals it has made huge losses in two of its hedge funds.
August – Banks around the world begin to disclose that they too have large holdings in mortgage-backed securities.
September – British bank Northern Rock requests emergency funds, prompting a run on the bank.

Steve Keen on 14 September published, with the Centre for Policy Development, a 79 page report “Deeper in Debt”, analyzing the causes of the financial breakdown in the US and the possibility of it spreading to Australia.
October – Citigroup reports subprime related losses of $40bn.

George Soros in early November in a lecture at New York University said that after decades of overspending the U.S. economy is “on the verge of a very serious economic correction”
  
Wynne Godley and others in November 2007 predicted “a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment”.

2008
  
George Soros in January at Davos said:

The current crisis is not only the bust that follows the housing boom,… It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.

March - Bear Stearns collapses and, days later, is sold to JP Morgan Chase for just $2 a share.
September 14 – Mortgage lenders Fannie Mae and Freddie Mac are rescued in one of the largest bailouts in US history.
September 15 - Lehman brothers files for bankruptcy, prompting panic as investors had assumed the US government would prevent a bank of Lehman’s size – it was the US fourth largest investment bank – from going under.
As Merril Lynch approaches insolvency, it is bought by Bank of America for $50bn.
September 16 - Credit rating agencies downgrade status of AIG, America’s largest insurer. The US Federal Reserve loans the AIG $85bn and takes an 80 per cent stake.
September 19 – Henry Paulson, then US treasury secretary, unveils plan to use taxpayers’ money to stabilise firms and buy up toxic assets.
September. 29: Dow suffers largest ever one-day drop.
September to October – In the space of a month, banks around the world, notably HBOS, Royal Bank of Scotland, Washington Mutual, Fortis, Hypo Real Estate and Landsbanki, collapse.
October. 6: Dow drops below 10,000 for the first time since 2004.
October. 9: Dow falls below 9,000.
November. 19: Dow drops below 8,000 for first time since 2003.
November 25 - US Fed announces further $800bn stimulus.
November 28 – The IMF approved a $2.1bn loan for Iceland.

2009

 January. 29: US jobless claims hit all-time high.
March - Stock markets hit record lows, wiping out gains made since 1997. The Dow drops below 7,000.
  
^* In compiling the Foresight Timeline, much use has been made of  Dirk Bezemer’s outstanding paper ‘“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models’. Bibliographic details may be found therein.

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DebtWatch No. 44: House Prices Are Not Normal

House Prices Are Not Normal

“I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged into property. It isn’t going to be that easy.” (RBA Governor Glenn Stevens, Sunrise Program March 29 2010)

I applaud Glenn Stevens for making the above statement on national television. It was both courageous, and a succinct and accurate statement of the delusion that has come to dominate economic thinking in Australia. He effectively acknowledged that Australia has succumbed to a Ponzi Scheme: the belief that the entire country can make a living from unearned income. This something that, until recently, most public and private commentators have been strenuously denying. The great pity is that this realisation was so long in coming, while the farce is that one wing of Australia’s government has now declared its intention to bring down a Ponzi Scheme that the other wing is trying to maintain.
The data that led Stevens to this realisation is pretty obvious: the most recent quarter saw the largest increase in house prices since the ABS began keeping records in 1986.

The role of the Federal Government in causing this bubble–and earlier ones–via the First Home Owners Grant is also obvious. While previous manipulations of the market by the Grant turned a tepid rate of increase into a bubble, this time the Grant turned the fastest rate of fall in house prices into its greatest rate of increase. The current volatility of house prices is telling: eight of the ten biggest movements–in both directions–have occurred in the last two years.

With the RBA likely to increase rates specifically to prick this bubble, the volatility will doubtless continue. But even without the RBA’s expected–and I have to say justified–anti-bubble interest rate intervention, the real estate market is, as Stevens argued, far from a stable route to riches.

House Prices are Not Normal

One of the great fallacies of conventional “neoclassical” economics that encouraged behaviour that caused the GFC was the proposition that asset prices are “Normal”–in the sense that their volatility fits the pattern described by the “Normal Distribution”.
The superficial beauty of the Normal Distribution is that the behaviour of a variable can be reduced to just two numbers–its mean and standard deviation. But its real, deep beauty is that if a variable follows a Normal Distribution, then extreme events are vanishingly rare. if a variable moves normally, then:

• Movements of 5 standard deviations or more above or below the mean are so rare as to be effectively non-existent; and
• Their rarity means that they play no significant role in shaping the system: its behaviour is completely described by the events that fall within the +/- 5 standard deviations range.

As stock market speculators learnt to their great cost during the GFC, that is so not the case for share prices–since “impossible” or “Black Swan” movements in prices have been the order of the day since 2007.
For example, the average daily movement on the Dow Jones since 1914 is 0.028%, while the standard deviation is 1.13%. If stock market price movements were “Normal”, there would have been just one daily decline of more than 4.5 percent since 1914. In fact, there were 100 such falls, out of a total of 24,593 daily movements in the Index–fully 100 times as many falls as a Normal distribution would predict.
Nor could those falls be ignored in the long run: they caused a collective 612.5 percent fall in the Index, when the sum of all the percentage movements since 1914 is 688 percent.
Anyone who relies upon the Normal Distribution when investing in the stock market is ultimately on a hiding to nothing to lose his shirt, because the Normal Distribution seriously underestimates the odds and the importance of extreme volatility in share prices. A far better guide to how share prices actually behave is the “Power Law”, as well as Didier Sornette’s research based on an analogy to earthquakes.

So how do house prices stack up? Though we have a far shorter time series for house prices than for shares, one thing is for certain: house prices are not Normal. The mean quarterly change in the ABS series for nominal house prices since 1986 is 1.24%, and the standard deviation is 1.786%. If house prices were Normal, the distribution of quarterly changes would look like the red line in the next chart; the actual pattern is shown by the blue bars.

The vast majority of quarterly movements are below the mean, with the largest number–27 out of the 93 quarters–registering just above zero change (an average of 0.267% increase for the quarter). The high overall average of 1.24% growth per quarter in nominal house prices is driven by the smaller number of quarters (26 out of the 93) with increases above the average.
The data is skewed in time as well as magnitude. A truly Normal distribution would have no time pattern to the data, with a large movement just as likely to be followed by a small one. The actual distribution has long periods of low increases with clusters of large changes–and these have increasingly involved large falls as time has gone on. The next chart compares the actual pattern of price movements (in red) to a simulated random pattern (the black crosses).

There are several movements–especially the -3.4% and +7% recorded since the GFC began–which are outside the standard range for a Normal Distribution. They are not so far outside that we can categorically say that a Power Law accurately describes house price movements, as we can with share prices. But the odds are that these two leveraged asset classes share the same fundamental dynamics.

The FHOG of Real Estate

It should also come as no surprise that the First Home Owners Grant scheme significantly distorts the housing market. From the statistics, there is no doubt that the true beneficiaries of the scheme are vendors, real estate agents, and lenders–not first home buyers.
There are several ways to slice and dice the data on this point: there are years when there was no Grant, and years when there was a grant in some form or another; periods prior to the introduction of a Grant, or a change in its magnitude, and periods after the change; and periods when the Grant was doubled. The following charts show these dissections.

Periods without a FHOG had significantly lower growth in house prices, and significantly lower volatility in prices. The average quarterly price change without a FHOG was a mere 0.44%–one third of the average for the entire series. The volatility was also substantially lower, with all movements being between -1 and +2.5%.
Periods with a FHOG had both substantially higher average price rises (2% p.a. vs 1.25% for the entire set) and substantially greater volatility (ranging from -3.4% to + 7%).
A closer look at the impact of the FHOG shows that its role is that of a storm trooper for the housing market. The next chart looks at the movements in house prices in the 2 years after an introduction or change to the Scheme, and in particular at what happens to prices in the 2 years after the payment was doubled (in 2001 under Howard and 2008 under Rudd). The “Pre-FHOG” is all other quarters apart from these 2 year segments.
All but one of the large increases in house prices (4% or more in a quarter) occurred after the FHOG was doubled, while the average quarterly change in prices was over 2.9 percent. If the FHOG is the real estate sector’s storm trooper, then doubling the FHOG is its Panzer division.

The next table summarises the statistical properties of house price changes, including “Kurtosis”–a measure of how peaked the distribution is compared to the Normal Distribution–and “Skew”–a measure of how biased the distribution is towards above or below mean movements. Periods without a FHOG have a peaked distribution (Kurtosis greater than zero) and few price changes below this peak with many above (Skew greater than zero); periods with a FHOG have a flattened distribution (Kurtosis below zero, meaning that price movements are more widely dispersed), and a negative skew (meaning that there are more price movements below the mean than above).

The role of the FHOG in causing house prices to rise faster than consumer prices is even more apparent if we consider the annual CPI-deflated series–but what is then also obvious is its decreasing effectiveness over time. When rolling annual price changes are considered–a more realistic time frame for changes in house prices, since this is a slow moving asset market–the biggest price inflation bang for the FHOG buck was back in 1988, when the rate of increase hit almost 30%. Howard’s doubling could only score a 16.5% maximum rate of growth of real house prices; Rudd’s has thus far peaked at 11.25%–though this omits the impact of the most recent 7% increase in nominal house prices (since CPI numbers are only available till December 2010).


The real house price data emphasises the message that the real beneficiaries of this government intervention are not first home buyers, but vendors, real estate agents, and banks–in increasing order of benefit.



The vendors benefit from a higher price; the agents benefit from higher turnover and fees; while the banks benefit from the increased mortgage debt that first home buyers–and then the vendors they sell to–take on in order to buy into a government-supported Ponzi Scheme. The banks and mortgage lenders in general have been the biggest beneficiaries as mortgage debt has risen from under 20% of GDP in 1990 to over 85% at the end of 2009.
The revival of this Ponzi Scheme played a key role in Australia’s sidestep of the GFC. As is obvious in the next chart, the mortgage debt to GDP ratio began to fall prior to the First Home Vendors Boost, but then accelerated once the Boost was available.



The Australian economy has thus returned to debt-driven growth, with the household sector carrying the full burden for the private sector. I remain sceptical this period of debt-driven growth will last as long as in previous bubbles when our private debt to GDP ratio was half what it is today.

Table One

Table Two

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Goldman Sachs: Master of the Universe - Stephen Lendman

The status applies to all Wall Street giants, none, however, the equal of Goldman, the Grand Master. Like the fabled comic book Superman hero, it's:

-- faster than its competitors, thanks to its proprietary software ability to front run markets (illegal, but no matter);

-- more powerful than the government it controls; and

-- able to leap past competitors, given its special status.

Founded in 1869, GS calls itself "a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide."

Since going public in 1999, the same year Glass-Steagall ended letting banks, insurers and securities companies combine, GS became a giant hedge fund trading against the advice given clients with the full faith and blessing of Washington - the same thing other Street giants did and profited handsomely.

In his April 17 article headlined, "Goldman Sachs Vampire Squid Gets Handcuffed," L. Randall Wray noted SEC laxity for years, "managing to sleep through every bubble and bust in recent memory," and saying Goldman acts above the law "since it took over Washington during the Clinton years." Their criminal behavior is nothing new. It's their established business model, the reason it's been immersed in nearly all financial scandals since the 19th century.

Wray notes that John Kenneth Galbraith's famous 1954 book, "The Great Crash," had a chapter titled "In Goldman We Trust" on its contribution to the Great Depression through risky investment trusts (an early mutual fund cum Ponzi scheme) sold to unwary buyers.

Goldman and other "whip(ped) up a speculative fever in shares, reaping (highly leveraged) capital gains with other people's money." They were fraudulent pyramid schemes, a "Charles Ponzi-Bernie Madoff scam." Then and today, they collapsed, the way they always do when insiders pull the plug at the same time, cashing out to let their customers take the pain.

At the end of his Goldman chapter, Galbraith recounted this years after the crash encounter before a Senate committee:

"Senator Couzens. Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corporation (to sell junk trusts to unwary buyers)?

Mr. Sachs. Yes, sir.

Senator Couzens. And it sold its stock to the public?

Mr. Sachs. A portion of it. The firm invested originally in 10 per cent of the entire issue for the sum of $10,000,000.

Senator Couzens. And the other 90 per cent was sold to the public?

Mr. Sachs. Yes, sir.

Senator Couzens. At what price?

Mr. Sachs. At 104. That is the old stock....the stock was split two for one.

Senator Couzens. And what is the price of the stock now?

Mr. Sachs. Approximately 1 and 3/4.

Buyers then and now lost their shirt, not knowing that betting against Goldman is a sure way to get fleeced. Yet even sophisticated lambs volunteer to be slaughtered, thinking they're as smart, will get out in time, then learning otherwise and discovering Goldman cheats all its clients, even nation states like Greece by hiding its debt and shorting it. Around a dozen US states as well, including California, the same way. Wall Street's culture encourages this and rewards it greatly, the price for getting caught usually fines too small to matter.

Will this time be different? No matter the cost to others, like Enron and Savings and Loan crooks, don't ever bet against Goldman, especially given the SEC's shoddy crime fighting record, picking off small fry but barely slowing big ones, and hardly up to a serious tangle with the Grand Master, regardless of the extent of its sleaze.

So what to make of April 16's breaking news, headlined by New York Times writers Louise Story and Gretchen Morgenson saying the "SEC Accuses Goldman of Fraud in Housing Deal."

The SEC filed civil, not criminal, suit named Fabrice Tourre, "the fabulous Fab," (GS's 31-year old VP involved in creating junk investments), charging fraud. GS, in turn, called the accusations "completely unfounded in law and fact (and would) vigorously contest them and defend the firm and its reputation" - indeed so with all the legal talent billions in ready assets can buy, and no shortage of top tort attorneys willing to line up and take it.

Watch for more suits to follow, but is Goldman sacked? Don't bet on it in what for sure will be long drawn out proceedings, including appeals that will drag on for years.

Case in point, among others - the notorious Exxon Valdez incident after the March 24, 1989 spill, ravaging Alaska's Prince William Sound and Lower Cook Inlet, ruining the livelihoods of area fishermen and residents. Lawsuits followed:

-- In September 1994, $287 million in compensatory damages and $5 billion in punitive ones were awarded;

-- In December 2002, the Ninth US Circuit Court of Appeals reduced the latter to $4 billion.

-- In December 2006, after more appeals, the same court cut another $1.5 billion; and

-- In June 2008, the US Supreme Court reduced punitive damages to $500 million - the equivalent of about 1.5 days profit from ExxonMobil's first quarter 2008 operations. No company executive went to jail for perhaps the worst environmental crime in history. It was whitewashed for 10 cents on the dollar after nearly 20 years of litigation.

SEC Charges

On April 16, the SEC:

"charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the US housing market was beginning to falter."

Allegations are:

"that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund (Paulson & Co.) played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO" - junk assets its president, John Paulson, made $4 billion on in 2007 by correctly betting on the housing collapse he and GS helped initiate.

"The SEC's complaint charges Goldman Sachs and Touree with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties."

Fabrice Touree was "principally responsible" for the fraud and sent an email before they were sold saying:

"the whole building is about to collapse anytime now," calling himself the "Only potential survivor, the fabulous Fab....standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those 'monstruosities!!!' "

According to the SEC, he wasn't alone as senior GS executives signed off on them. Likely, but unnamed, they include CEO Lloyd Blankfein - profiled on November 8, 2009 in the London Sunday Times saying "I'm doing 'God's work,' " the height of audacity matching the firm's history of criminality and getting away with it.

In their April 17, 2010 article headlined, "Goldman Sachs Charged With Fraud," Wall Street Journal writers Gregory Zukerman, Susanne Craig and Serena NG called GS Wall Street's most profitable firm, "emerg(ing) as a symbol of excess, (having) paid out about $16 billion in compensation to employees in 2009," the firm's most profitable ever year.

In her April 18 article headlined, "Top Goldman Leaders Said to Have Overseen Mortgage Unit," Louise Story said:

"....according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. These people spoke on the condition that they not be named so as not to jeopardize business relationships or to anger executives at Goldman....

According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation's economy."

A top level decision was made - short the market at the same time advising clients to buy. Around 99% of the mortgage securities sold went sour. In her April 18 articled headlined "Savage Truth: Goldman Tarnished America," financial writer Terry Savage put it this way:

It was "as if the dealer in a card game had purposely handed all the players the low cards, while dealing himself all the aces and picture cards from the bottom of the deck. Those (in the game) were bound to get fleeced."

One of Goldman's board members, Rajat Gupta, is also being investigated about whether he shared inside information with Galleon Group hedge fund founder Raj Rajaratnam, he then used to initiate trades from June - October 2008. Thus far, no charges have been filed. Gupta said he did nothing wrong, and Rajaratnam had no comment, despite last October being charged with insider trading to which he pled not guilty. For years, Goldman executed Galleon trades. The relationship is close, and Gupta and Rajartnam were former business partners.

The Goldman suit involves an investment vehicle called Abacus 2007-AC1, one of two dozen or more like it for the firm and select clients to bet against the housing market.

The scheme was to sell toxic asset-backed securities (ABSs) to unwary customers (including foreign banks, pension funds, insurance companies and others), then apparently use credit default swaps (CDSs) to profit when they defaulted, or in other words the equivalent of buying life insurance on an undisclosed terminally ill patient. More still, given Paulson & Co.'s role in helping to structure and select assets, then buying CDSs to short them, betting they'll decline. Paulson thus far faces no charges. Goldman's so far are civil. If criminal ones are filed, prosecutors will have to prove intent, perhaps coming given enough evidence to proceed.

On April 19, Wall Street Journal writers Carrick Mollenkamp, Serena NG, Gregory Zukerman, and Scott Patterson headlined, "SEC Investigating Other Soured Deals," saying:

Besides Goldman, the SEC "is investigating whether other mortgage deals arranged by some of Wall Street's biggest firms may have crossed the line into misleading investors."

Definition of Fraud

Black's Law Dictionary, 5th edition, 1979 defines fraud as follows:

"All mutifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated."

The legal-dictionary.thefreedictionary.com/fraud calls it:

"A false representation of a matter of fact - whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed - that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury."

Criminal and civil frauds differ in the level of proof required - the former needs a "preponderance of evidence;" the latter must prove intent and be "beyond a reasonable doubt."

Times writers Story and Morgenson call the SEC action "a sign (it may be) revitalized." Don't "bet" on it given the agency's deplorable history of being a facilitator, not a regulator, now run Mary Schapiro, a high level industry insider, revolving door into her position before returning to another top spot.

Before being appointed, she was CEO of the Financial Industry Regulatory Authority (FINRA), served as president of NASD Regulation (National Association of Securities Dealers, then was NASD's chairman and CEO. Earlier she was an SEC commissioner, and in 2008, George Bush appointed her to the newly established President's Advisory Council on Financial Literacy, focusing on economic empowerment issues. She was also chairperson of the IOSCO SRO Consultative Committee under Bush, another body supposedly "promot(ing) high standards of regulation in order to maintain just, efficient and sound markets," the same ones manipulated to collapse, while the SEC and other watchdogs stayed silent and watched.

Will SEC go the limit on Goldman, add criminal to civil charges, lodge them against board members and other top officials, then take on other guilty firms? Goldman is the most prominent, but there's plenty of culpability to go around among the major banks and their complicit hedge fund and other trading partners.

According to Karl Denninger:

"The real problem is with these so-called 'complex securities' that are in fact nothing more than a gambling contract designed and constructed in such a fashion as to make proper due diligence impossible. Some of these synthetics had literally 100,000 pages of referenced documentation related to them - how can anyone reasonably expect to read and understand that sort of paperwork?"

Even worse, they're "abusive (because) someone believes that the reference security or securities in question will decline...."

In other words, they're structured to fail - clear evidence of criminal intent by companies and complicit employees, but will SEC officials charge it? Will the Justice Department pursue RICO violations involving the largest financial fraud in history with plenty of guilt to go around? Don't bet on it!

The Power of Goldman

On October 17, 2008, New York Times writers Julie Creswell and Ben White's article headlined, "The Guys from 'Government Sachs,' " showing how embedded they are in Washington - so much so that competitors call them "Government Sachs."

Long regarded as Wall Street savviest firm, "The power and influence that Goldman wields at the nexus of politics and finance is no accident." It has a history and culture of "encouraging its partners to take leadership roles in public service," for the obvious benefit to the firm.

Among insiders, it's widely acknowledged that "no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere." According to some, it's a conflict of interest, since the decisions they make directly benefit the firm.

Former Treasury Secretary Henry Paulson was appointed because of Joshua B. Bolten, former GS alum and GW Bush chief of staff. "And if there is one thing Goldman has, it is an imposing army of top-of-their-class, up-before-dawn uber-achievers."

Other Paulson Treasury stalwarts included:

-- Neel Kashkari - originally ran a $700 billion fund buying toxic assets before becoming Interim Assistant Treasury Secretary for Financial Stability under Paulson, his "right-hand man," according to The Times, playing a major role in selling Bear Stearns to JP Morgan;

-- Dan Jester, former GS strategic officer involved in 2008 Treasury initiatives, especially the Fannie and Freddie takeovers and bailing out his former employer;

-- Steve Shafran, formerly a GS Asian executive involved in Treasury's guarantee of money market funds among other activities;

-- Kendrick Wilson III, "a seasoned adviser to chief executives of the nation's biggest banks;" unpaid, he worked on apprising them of possible Treasury plans to get their reaction;

-- Edward Forst, a former Paulson adviser on setting up the bailout fund, then returned to his position as Harvard executive vice president; and

-- Robert K. Steel, Goldman's former vice chairman, hired to shore up Fannie and Freddie.

Other prominent alumni include:

-- Robert Rubin, former co-chairman and Treasury Secretary;

-- John Corzine, former CEO and chairman, US senator and New Jersey governor;

-- Robert Zoellick, former managing director, Deputy Secretary of State and US Trade Representative, and current World Bank president;

-- Jeffrey Reuben III, former European managing partner and Under Secretary of State;

-- Mark Patterson, former Goldman lobbyist and current Treasury chief of staff;

-- Ed Liddy, former GS board member and Paulson-appointed AIG CEO;

-- Gene Sperling, former Goldman consultant and Deputy Treasury Secretary under Robert Rubin;

-- Robert Hormats, former vice chairman GS International and Under Secretary of State;

-- Stephen Friedman, former Bush National Economic Council director, New York Fed board chairman, and Goldman chairman, now a Goldman board member;

-- George Herbert Walker IV, former Goldman managing director, current mutual fund manager, and Bush family member;

-- John Thain, former GS mortgage desk chief, CEO of the New York Stock Exchange, and Merrill Lynch chairman and CEO;

-- and numerous other prominent GS alums with ties to Washington, the New York Fed, and other institutions of power, including currently under Treasury Secretary Geithner.

Institutional Risk Analytics managing partner Christopher Whalen called Goldman's ties to the New York Fed "grotesque, (giving) the appearance of conflict of interest....everywhere" - under Paulson, unconstrained as Treasury Secretary to stack the agency with his cronies and run it like a GS subsidiary.

A Brief History of Goldman Sachs, Courtesy of the Wall Street Journal

-- founded by Marcus Goldman in 1869;

-- in 1906, became a major player in the IPO (initial public offering) business;

-- in 1929, Goldman involved in the market crash, suffers big losses like others on the Street;

-- in 1930, Sidney Weinberg (aka "Mr. Wall Street") becomes CEO;

-- in 1956, GS is Ford's lead underwriter;

-- in 1969, Gus Levy succeeds Weinberg;

-- in 1976, John Weinberg (Sidney's son) succeeds Levy;

-- in 1981, Goldman acquires J. Arons & Co., a commodities trading firm;

-- in 1990, Robert Rubin and Stephen Friedman succeed J. Weinberg, expanding the company globally;

-- in 1999, CEO and chairman Jon Corzine resigns as co-head, leaving Henry Paulson in charge;

-- in 2006, Paulson becomes Treasury Secretary; Blankfein succeeds him;

-- in 2008, Goldman becomes a bank holding company to have easier access to liquidity and funding;

-- in 2009, Goldman has its most profitable ever year;

What's Next

Goldman stands civilly charged. Will criminal ones follow? One executive only was named. The firm's loyalty to clients has before been questioned. It calls the accusations "unfounded" and claims no responsibility for the credit crisis. So far, its public image alone is tarnished as the symbol of popular outrage, but its profits are the highest ever.

Will key top executives be hung out to dry? Will those from other top firms follow? If past is prologue, look for modest fines to be levied, appealed and lowered; perhaps a few prosecutions below the top; pleas to be copped for light (later reduced) sentences; and so-called "financial reform" to become law, the kind this writer addressed in an article titled, "Bogus Washington-Proposed Financial Reform," amounting to "show," but little "dough" to assuage public anger.

It will leave business as usual unchecked, so ordinary people will remain "sitting ducks to be scammed again with the full faith and blessing of Washington" - where everything changes but stays the same, and each party is as corrupt as the other.

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If The U.S. Economy Goes Into The Toilet Will It Result In A Complete And Total Collapse Of Society?

If the United States experiences a horrifying economic collapse (and it most definitely will), will that cause a complete and total collapse of society?  Will we experience crime, violence, riots and social unrest on a scale that is unprecedented in U.S. history?  Before you dismiss such notions as utter foolishness dreamed up by a few bloggers with too much time on their hands, perhaps you should consider what one of the biggest credit rating organizations in the world is saying.  According to a report on sovereign debt by Moody's, the world's five biggest AAA-rated countries (including the United States) are all at risk of soaring debt costs and will have to implement austerity plans that threaten "social cohesion".  In case you are wondering what happens when "social cohesion" starts to break down due to economic factors, just check out the recent examples in Iceland and Greece.  If even Moody's is warning that there is a realistic possibility that "social cohesion" in the United States may break down due to economic factors, perhaps we should all start listening.


Or if you will not listen to Moody's, then perhaps you will listen to the man who has been called the top trends researcher in the entire world.  Gerald Celente is the CEO of Trends Research Institute, and he is convinced that we are heading into what he calls "The Greatest Depression".  The picture that he paints of the future of America is extremely alarming and extremely sobering.  It would be easy to dismiss his forecasts as just the ramblings of another useless "talking head", but unfortunately Celente has been dead-on accurate time after time after time in the past.  Considering his exemplary track record, what Celente says is coming next for America is incredibly frightening....


At this point you may be tempted to think that America has been through extremely tough economic times before (The Great Depression for example) and came through them okay.

So what is so different now?

Well, the truth is that the character of the American people is dramatically different.  At the time of the Great Depression, the American people were tough, self-sufficient people who knew how to live off the land.  Today, most Americans are weak, spoiled little children who will throw a temper tantrum whenever anyone tries to take their toys away.  The character of the American people has been decaying for decades, and there is no way that the current crop of Americans has any chance of weathering a horrible economic depression the way Americans back in the 1930s did.

Already we are seeing early signs of what the rest of America could soon be like.  The city of Detroit is a rotting, crime-ridden war zone that has a "real" unemployment rate of somewhere around 40 to 50 percent.  The state of California has become a cesspool of gang violence, rampant unemployment, rising foreclosures, unchecked drug dealing, and depressing economic decline.  Even in New York City we are seeing early signs of what is ahead.  Residents are quite alarmed about the dramatic rise in violent crime that is happening throughout the city.  Many New Yorkers were convinced that the days of "The Rotten Apple" were behind them, but economic problems are going to cause an increase in crime in just about any city.

But it just isn't crime that is on the rise.  Millions of normal, law-abiding Americans are angry.  This anger is coming out in various ways - including the Tea Party protests that are sweeping the nation.  The majority of the American people are frankly disgusted with the government, and the approval ratings for both major parties continue to hover around record lows.  As things continue to get worse for the U.S. economy, the anger of the American people is going to continue to rise. 

All of this is causing many in the U.S. government to view "troublemakers" inside the United States as one of the greatest threats to national security.  In fact, according to FBI Director Robert Mueller, "homegrown terrorists" represent as big a threat as al-Qaeda.

As big a threat as al-Qaeda?

For a top U.S. government official to come right out and make a statement like that is absolutely mind blowing.

Not only that, but now former U.S. President Bill Clinton is comparing Tea Party members to Timothy McVeigh.

Considering the fact that Timothy McVeigh received the death penalty, that is a very frightening parallel for Clinton to draw.

Does Clinton actually believe that Tea Party protesters should receive the same treatment as McVeigh?
Even more alarming is new legislation being pushed in the U.S. Senate.  A new bill introduced by Senators John McCain and Joe Lieberman would allow the U.S. military to round up large numbers of Americans and detain them indefinitely without a trial if they "pose a threat" or if they have "potential intelligence value" or for any other reason the President of the United States "considers appropriate".

The reality is that as "necessary" as bills like that may seem to many as we edge ever closer to the breakdown of society, the reality is that the United States is quickly becoming just like so many of the other horrific totalitarian regimes that we have seen rise throughout the 20th and 21st centuries.

In fact a time may soon be coming when authorities in the U.S. may soon be able to legally utter this bone chilling phrase: "Your Papers Please!"  Lawmakers in Washington D.C. working to create a new immigration "reform" bill have decided on a way to prevent employers from hiring illegal immigrants: a national biometric identification card that all American workers would be required to obtain.

Can you imagine being forced to carry around a national identification card?

Or worse?

A startup company developing "chipless RFID ink" has already tested its product on cattle and laboratory rats.

Could one day we all be required to sport an "RFID tatoo" to prove our identity to authorities?
Let's hope not.

But many of us never thought that the day would come when we would see things such as the Patriot Act, "no fly" lists, the NSA's warrantless wiretapping program, DNA databases, Guantanamo Bay or full-body scanners at airports that reveal the graphic details of our naked bodies either.

America is quickly changing.  The next Great Depression is coming, and society is not going to be able to handle it.  How the U.S. government (and governments around the world) handle the coming social problems is going to be very interesting to watch.  Let's hope that all of this does not degenerate into the absolute societal nightmare that many are projecting that it could be.


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