• Part 1 – Premises
• Part 2 – Race to the Bottom
• Part 3 – The Beginnings of a “Demand”
• Part 4 – A Work in Progress or Mission Accomplished?
• Part 5 – 150,000 New Reasons To #occupywallstreet
• Part 6 – Who Has Our Backs?

Speaking for Myself . . .

I begin this post on 1 December 2011, the day Suffolk Superior Court Judge Frances McIntyre held a hearing to hear cause why a temporary restraining order restricting the City of Boston from evicting the camp at Dewey Square be lifted. As well as as attempt to get inside Judge McIntyre’s head, it’s also a reflection on the issues at hand. Right off the bat, my attempt to get inside Judge McIntyre’s head is, I realize, a fool’s errand. I’m not a lawyer. I am just a sporting amateur who happens to care deeply about the issues surrounding and involved with the existence of the camp at Dewey Square. I happen to feel that there is no other voice in all of American politics who speaks for me and my issues. As a life long labor democrat and then an active ex-blogger at the Big Orange Satan for years, I am convinced that it is no longer the fatally compromised Democratic party.

As a City of Boston lawyer correctly pointed out, freedom of speech is not absolute. Nor should it be. Libel, slander and other speech with consequences come immediately to mind, for instance. However none of those applies to Occupy Boston.

As I see it, the framework lies in the conflict between two valid societal needs: the right of people to constitutionally protected speech, and at the outset there can be no doubt that Occupy Boston’s protest falls under exactly what the First Amendment was designed to protect, versus the City of Boston’s right, and duty, to maintain the public spaces for the benefit of all. Both of which are things we should all support. Even Occupy Boston. (After all, Boston’s green spaces are one of the finer aspects of what I feel is still one of the world’s great cities. That tragically misplaced monstrosity of a cable-stay bridge notwithstanding.) I don’t necessarily feel that the exact space that the tents actually sit on falls under the description of a destination for those wishing to enjoy the Greenway, but rather that the space the camp inhabits is a transit area between the subway station and much nicer green spaces of the Greenway beyond. More of the framework in this discussion are actions the city has undertaken from the outset to limit both the growth of structure in the camp and the spread of tent city itself. Listed as “contraband” are items such as winter tents and insulating materials destined to make the Occupy Boston camp habitable throughout the winter, and on at least two occasions that I know of, miscellaneous items have either been prevented from entering the camp or summarily removed. As for the cost? perhaps Boston taxpayers should question the $3.5 million taxpayer subsidy granted to JPMorgan/Chase instead of the reported $600-$750 thousand in police overtime. All of which goes to illustrate that, as far as city hall is concerned, the Occupy Boston camp appears to be the enemy! (More on that later.)

“This is one of my favorite things about OWS. It’s not just a protest, it is a MASSIVE brainstorming session. It is bringing people together who used to not talk, never wanted to or had a reason to, and we are figuring this crooked game out, and maybe we will also figure out what to do about it. This is how problems will get solved.”

Source

I have no idea how Judge McIntyre will come down on this. Certainly, the camp could be a safer, healthier, more structured environment, and several campers I’ve spoken with would certainly be happier without disruptive individuals (some of whom have very serious problems). Had the City of Boston not imposed some fairly stringent restrictions early on, it would certainly be a safer, healthier site today. We would also prefer not to get bogged in matters distracting everyone from the issues which caused us to support the Occupy Movement in the first place. Talk has already begun on Occupy 2.0 as a result of Bloomberg’s atrocious acts against Occupy Wall Street. I don’t know how many physical occupiers (I am not one) have winter camping experience (as I do), but the question of whether the camp should continue through the winter or not has come up already. (My spotty understanding is that there are no plans to until we can see ahead to another viable avenue of protest, in case you’re wondering. However be cautioned that I’m not in a position to possess definitive knowledge either.)

Sarah Palin Speaks!

This post is the result of a thought put into my head by @southsouth, who evidently heard a member of the Miami Police Department ordering FTAA protesters to get back to “your free speech zone.” (Miles from anywhere near it was meant to be heard.) So I played out a quick thought-experiment in which free speech was alive and well, but as an institution, it was restricted to safe, non-intrusive zones where nobody who wasn’t interested could easily avoid exposure. Free-speech made convenient, if you will. I didn’t get far with this experiment because it immediately becomes apparent that American society would be far worse off if this were the case.

I myself have been tuning Sarah Palin out for years now. I don’t hear her. I am not interested in playing “gotcha” with her verbal stumbles nor fact-checking her claims nor exposing what she has written on the palm of her hand. Life is just too short, and she has the right, in America, to make as big a fool of herself (and she’s got talent) as she wishes. I will defend her right to speak out until the day I pass, for guaranteeing her right to free speech helps me defend my own, and I am certain Occupy Boston recognizes this. I don’t hear her. I don’t read (i.e.: “hear”) Glenn Greenwald either, even though I’m probably much in agreement with him in general. There are lots of people I have no interest in hearing. That’s my right as well. This also applies to Occupy Boston and to the entire Occupy Movement in over 100 cities nationwide. None of us have ever had, outside of our courts, a constitutionally protected right to be heard.

Which is exactly why this movement at this time is vital.

Because the camps, the marches, the signs, the drum circles, the bagpipes, the inconvenience caused by peaceful marchers to motorists trying to get home (there’s no guaranteed right to punctuality, as anyone who drives route 128 at rush hour can attest to, either), the chants, etc. are, I posit here, the direct result of decades of neglect. Thirty years of the voices of both ordinary and our most informed people being consistently ignored. Decades in which many people with valuable information that voters needed to know about went largely unnoticed. I could get into a whole diatribe here on how the news-for-profit industry fails to meet the needs of the body politic here, but that’s for another time. However, media consolidation is most definitely on the Occupy Movement’s radar. Be warned.

These days, Twitter’s my thing. Not only do I find it informative (I try to follow people who tend to care about my ponies), but I find that it scoops major news outlets, both internet and broadcast, by at least thirty minutes on a regular basis, and in those minutes I tend to get a story which is more fleshed out than what’s finally offered by those news outlets, mingy about column inches and seconds of airtime. Often, the tweet-stream puts more of a human face on events as well. That’s just the way it is. So, after being a huge skeptic, I’ve come to appreciate Twitter very much. I mention this because in my observation, important pieces of information and defining nuance more often than not go missing from major news outlets.

I also mention this because several times now, I have tweeted up the notion that my vote, and the votes of every other ordinary American no longer matter, and here’s why I bring this up. How much can our votes matter when a reported $3.51 billion (2010) is spent on lobbying in the US? What does that all this money buy? Access. The capacity to be heard where it really matters. That link takes you to a Sunlight Foundation site where the meeting logs of those involved in drawing up the real provisions implementing Dodd-Frank meet with those “most” interested. As if they are the only, or even major, stakeholders. Take a minute and check out the list of lobbyists, bankers and officials (important petitioners are signaled to the committees by the fact they get a representative of the Federal Reserve Bank of New York—FRBNY—to escort them to the meeting). So a Volker Rule gets passed, which somehow allows banks to engage in prop trading as long as it’s overseas. (Anyone who knows about the ICE and booking havens (pdf) knows how big a loophole this really is.) So the ISDA gets to lobby the SEC not to mandate that the amount of risk banks have taken on in the form of derivatives and swaps be reported in 10Q and 10K reports to shareholders, who are left in the dark about exactly these banks do business. More broadly speaking, the structural issues of TBTF banks and unregulated OTC markets still lie there waiting for the next boom and bust cycle, and the next taxpayer bailouts as well.

So all these problems, and potential problems, go unmentioned and unsolved. And to all those reporters in all those videos I’ve seen asking a protester, “why do you occupy?” I have but one answer: “Because, for thirty years, you haven’t been doing your jobs.” Are we supposed to somehow trust that the right thing will be done? Are we supposed to suspend disbelief (again) and ignore that recent history which amply demonstrates that the time for trust needs to end and be replaced by informed consent?

Protest is not only necessary, under these conditions, it is vital. I ask the reader to consider whether the issue of income inequality ever would have entered the discussion in which the US deficit and the “cure” of austerity also takes place without the impetus that the Occupy Wall Street gave it. Even those critics of the camps whom I’ve pointed this out to grant this.

I’ve said all along that the Occupy Movement will gladly trade the tents for the kind of regular media access which neoliberal commentators like Rick Santelli, Larry Kudlow and Erin Burnett enjoy. In a heartbeat. I’ll even donate my winter bag to Santelli and he can sleep out there this coming winter. Because the Occupy faces stiff opposition from the likes of WSJ, CNBC, the Bloomberg Channel, BusinessWeek, et al, who merely report on the Occupy Movement phenomenon (mostly the dramatic evictions), and not on the issues that brought the protesters out in the first place.

Save once. The CBO report on wealth inequality captured the attention of serious bloggers and commentators, thus giving the movement a legitimate, though as yet undefined, position in American politics. Hopefully, only the first victory.

To those of like mind to Mayor Tom Menino, I have this to say. Occupy Boston has never sought to be the enemy of the City, the Police or the citizens of Boston. The history of cooperation emanating from Occupy Boston to the Greenway Conservancy and to the City of Boston is fairly well known. Moreover, the camp at Dewey Square is but the latest expression of dissent, of intellectual ferment and of excellence in thought and debate for which Boston, more than any other city in America, including San Francisco, has been justly famous for. The “Athens of America.” Mr. Mayor, you’re missing a promotional opportunity here.

I read the first part of the brief, I can easily guess the material in the affadavits following, for the Herald and Fox 25 have been more than eager to make Occupy Boston the story instead of the issues for which the protesters camp. As for the protests belonging in Washington, rather than Boston, I say that the protest belongs wherever an angry American happens to be, and that it’s time for you to make your professed sympathy to the issues raised by the protesters real. Does faulty wiring really matter more than the shape of our national debate? Does the lack of easy egress in case of fire so insurmountable a problem that an important (Boston’s is now the oldest remaining camp, remember) expression of dissent needs to be crushed? Aren’t those solvable details?

As for the perceived “right” of protesters to just take over any public space they want willy-nilly, let me just offer the notion that if things are bad enough in the US that every park and public space is filled with enough people that it chokes the City of Boston to a standstill, then at that point, it has very likely become obvious to all that we’ve bigger fish to fry than public access to public spaces and the free flow of traffic.

As for the demand or two which Mayor Menino demands the Occupy Movement decide on, well, I’m fairly cognizant of the current literature in political economy and I know for a fact that nobody in the world has that answer. Hardly anybody, even in the Occupy Movement, advocates a centrally-planned economy no matter what the more idiotic critics like to claim. Washington Consensus? Beijing Consensus? European Technocracy? Nobody on earth knows, but the Occupy Movement is the only political force in America right now honestly and trying to figure it out. The only political force in this country peacefully demanding the dialog.

Because we need it so badly in our economic life, our political life and in our legal system.

So when the Mayor demands a demand or two, I answer that honest solutions deserve more than the soundbite he’s looking for. If he can see only the foreclosure problem, the decline of the middle class in Boston and the problem of unemployment, then Occupy is already far beyond his comprehension. Because many of us already realize that these are only the symptoms of those problems which lie beneath and deserve more than just another patch job to save the jobs of our current crop of elected officials. His concerns are probably excessively narrow, considering the environmental concerns many occupiers insist on as well as the problems of race in Boston, and throughout America. And more.

Or the Mayor should just come clean and declare his philosophical opposition and be done with it. Either way, America doesn’t need another triangulating politician, but rather at least one honest civic leader to set an example for others.

UPDATE:

As I publish this and hop onto Twitter to announce it, I read this:

@andrewb_boston
Andrew James Barrows

PROTESTER HIT BY COP CAR. POLICE TRYING TO REMOVE SINK FROM CAMP. COPS SHOWING UP! RT! #ows #occupy #occupyboston livestream.com/occupyboston

Link

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@Fitzy205
Ryan Fitzmartin

Video of #OccupyBoston Protesters surrounding the police van that is carting the #OccupySink away. #solidarity twitpic.com/7mx0of

Link

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@Fitzy205
Ryan Fitzmartin

I was assaulted by a #BPD officer tonight while trying to take video of a protestor being hit by an officer at #OccupyBoston tonight.

Link

I guess Mayor Tom Menino has just announced which side he’s on. Pity. It didn’t have to be that way.

(a) No governmental authority, or agent of a governmental
authority, or person acting on behalf of a governmental authority,
shall engage in a pattern or practice of conduct by law enforcement
officers that deprives any person of rights, privileges, or
immunities secured or protected by the Constitution or laws of the
United States or by the Constitution or laws of California.
(b) The Attorney General may bring a civil action in the name of
the people to obtain appropriate equitable and declaratory relief to
eliminate the pattern or practice of conduct specified in subdivision
(a), whenever the Attorney General has reasonable cause to believe
that a violation of subdivision (a) has occurred.

How much faith have we in California’s Attorney General?

A note on the source: I don’t trust the source on this, though it should be pretty straightforward whether this is accurate or not. Seems fairly close to what I could tell of one #OccupyLA protester was reading to the LAPD & LA Sheriff officers.

A definitive guide to the California Civic Code didn’t come up in Google.

• Part 1 – Premises
• Part 2 – Race to the Bottom
• Part 3 – The Beginnings of a “Demand”
• Part 4 – A Work in Progress or Mission Accomplished?
• Part 5 – 150,000 New Reasons To #occupywallstreet

“President Obama is the only candidate for president who shares our vision of America as a land of opportunity for everyone. We need a leader willing to fight for the needs of the 99 percent, and stand with hard working families to say that the world’s wealthiest corporations must pay their fair share”

      —SEIU President Mary Kay Henry’s endorsement release

Speaking For Myself . . .

My heart sank as I read this, because there’s ample evidence that the Obama administration, rather than push the political envelope in Washington, which this administration has never done, has abandoned working Americans to the tender mercies of Wall Street. As we have seen so far, the Washington machine has busily at work drilling holes in Dodd-Frank’s regulatory provisions:

• Volcker: Obama Plans Maintain ‘Too Big To Fail’ in which the obvious point that large, private financial institutions in the US will continue to enjoy the implicit support of Washington, and through Washington, of taxpayers. While I understand the decisions of 2008, in which Hank Paulson, the Bush administration and Congress felt a total meltdown was imminent and could be avoided, we really need to ask ourselves at what price, and has it really gotten our of hand?
• Meanwhile, As Zuccotti Park is Cleared, Congress Moves to Gut Financial Reform. Four new bills are introduced which effectively gut important parts of Dodd-Frank:
  • HR 1838 which
    

    Amends the Dodd-Frank Wall Street Reform and Consumer Protection Act to repeal the prohibition against federal government assistance to (bailouts of) registered swap dealers, security-based swap dealers, major swap participants, or major security-based swap participants with respect to any swap, security-based swap, or other activity.

    Let’s just call this the “Taxpayers are still on the hook for Wall Street Speculators Bill”

   

  • HR 2586, which restricts what the CFTC can regulate so severely the Dodd-Frank provision on derivatives trading is effectively useless:
    

    Swap Execution Facility Clarification Act – Amends the Commodity Exchange Act and the Securities Exchange Act of 1934 to prohibit both the Commodity Futures Exchange Commission (CFTC) and the Securities and Exchange Commission (SEC), in interpreting or defining a “security-based swap execution facility,” from requiring one to: (1) have a minimum number of participants receive a bid or offer or respond to any trading system or platform functionality, (2) display or delay bids or offers for any period of time, (3) limit the means of interstate commerce used by market participants to enter into and execute swap transactions on the trading system or platform; or (4) require bids or offers on one trading system or platform operated by the swap execution facility to interact with bids or offers on another trading system or platform operated by the swap execution facility.

    We’ve already seen what restrictions on regulators can accomplish: a U3 unemployment rate stuck at over 9%, and a U6 unemployment rate approaching 30%. So what’s the thinking here?

   

  • Do pensions enjoy any protection from Wall Street predators? Not so much. The Retirement Income Protection Act of 2011 (please note the unmitigated gall to call this proposal pension “protection”) exposes pension plans to wider risk. It forces pension funds to engage in swaps which may, or may notbenefit the fund. Clearly, there are ways to hedge your investments, most notably through wide diversification—which works almost all the time. What this bill proposes results in pension plan costs going up (swaps don’t come for free) and Wall Street gets increased revenues through the fees associated with processing these swaps.This bill is a form of congressional pork favoring Wall Street, and nothing else.

   

  • HR 2308, the SEC Regulatory Accountability Act, places significant new hurdles to SEC regulators:
    

    SEC Regulatory Accountability Act – Amends the Securities Exchange Act of 1934 to require the Securities and Exchange Commission (SEC), before promulgating a regulation or issuing any order, to: (1) identify the nature and significance of the problem that the proposed regulation is designed to address in order to assess whether any new regulation is warranted; (2) use the Office of the Chief Economist to assess the costs and benefits of the intended regulation and and adopt it only on a determination that its benefits justify the costs; and (3) ensure that any regulation is accessible, consistent, written in plain language, and easy to understand. Directs the SEC to review its regulations and orders periodically to determine their efficacy and whether to modify or repeal them.

    Already there are significant procedures in place before any regulatory body can implement new regulatory rules, as specified by the Administrative Procedure Act. Part of the process is spelled out in §553. Rule making, which, among other things, specifies that interested people can provide their input. The Dodd-Frank proposal prohibiting certain financial institutions from playing the market on their own behalf, the proposed Volker Rule implementation is now under public review for instance.

So, who shows up at these meetings? Meetings which will significantly affect what possibilities and choices every member of the 99% can avail themselves of in the future? Well, Courtesy of the Sunlight Foundation, we can take a peek. Just recently, we see:

• BlackRock, Fidelity Investments, Goldman Sachs Asset Management meeting with the CFTC
• Mortgage Bankers Association
• Federal Reserve Board, Wells Fargo
• Barclays Capital, FRBNY (Federal Reserve Bank of New York)
• FRBNY, JP Morgan
• Verizon, Covington & Burling, Equinix, others
• Etc., etc,. etc. . . .

There is the oddball advocacy group showing up to offer testimony, but these I list here are by far the typical examples of whom the people drawing up the regulatory provisions of Dodd-Frank are. I included the fifth one for a reason. As it happens, Covington & Burling is the bank lobbyist law firm where none other than Obama’s Attorney General, Eric Holder, enjoyed a partnership for eight years. Not to put too great a spin on this, but ask yourself how Holder’s performance has been, and then ask yourself just what kind thinking makes such a person as he a suitable choice to be America’s top law enforcement official?

Someone who has the interests of the 99% foremost? You think?

For me, Congress’ defining moment came and went as the Senate killed the Brown-Kaufman Amendment, which would have imposed a hard limit on TBTF banks as a percentage of GDP. The blame for its failure can be laid at both parties, as more than two dozen democrats voted to kill what MIT economist and ex-director of the IMF Simon Johnson characterized as “our best near-term chance to reduce the size of Wall Street megabanks that are too big to fail and that threaten our economy” by a vote of 61-33.

So who gets the blame? Well here you go (Democrats in boldface):

As for other public officials, it seems that even liberal mayors can’t be counted on. Of course, most urban areas in the US have Democratic mayors, the GOP’s appeal is significantly rural, but as we see, few mayors of major cities are more prepared to work with protesters than with those who have a visceral hatred of protesters on the left and are perfectly happy with the abuse of power pepper-spraying an 84 year-old woman represents.

So when I read Mary Kay Henry’s statement of endorsement of Obama in 2012, my stomach churned. Had she said that Obama was working people’s best hope vis-a-vis the alternative, that would’ve been one thing. However, trying to sell the idea that he shares working Americans’ aspirations and concerns is more than history bears out. While the Examiner story allegedly coming out of the Justice Department (anonymously, mind you) that the raids on #Occupy sites are facilitated with help from DHS is being disputed, it has legs because at some levels, it’s probably closer to the truth than the fantasy that our federal security apparat is totally without a hand in all this, and I think ordinary people know this and accept it as the truth. The simple fact that the President happens to be in China and Australia when all this goes down in itself speaks volumes. So I think we can count on there being coordination, if not direction. We just don’t know the details yet. We do know some details about which wealthy and Wall Street special interest groups are writing the laws Congress should have written, and as time passes, we will witness just how badly the 99% are being sold out by both Wall Street and Washington acting in concert.

In short, almost nobody has our backs. Not more than a bare handful of officials in Washington like Bernie Sanders, not the White House, certainly not Congress nor our local officials.

We have nobody but each other.

Peace, Strength and Honor.

In an earlier post, I expressed my feeling that the story of wealth inequality playing out across America was merely the tip of the iceberg. It is, in fact, little more than a soundbite. In various and subtle ways, the structural weaknesses and injustices (negative externalities) generated by free financial markets impose costs many of which remain off balance sheets but are, nonetheless, imposed on all either through market prices or through taxes. Simply leveling the playing field through measures like the financial transaction tax and Tobin tax, which I think are vital, does nothing to address other underlying problems which unregulated finance has inflicted upon us all. Today’s absentee landlords are known as shareholders, and include a huge proportion of working Americans, who know very little of where their money is being invested and nothing at all about who is managing their money or how they are managing it.

Fortunately for me, we have yet another example of Wall Street mismanagement: 150,000 is the number of investors, some of whom will have to wait for years before they see their money, directly affected by the MF Global collapse. I know these people, or people very much like them, and in the larger sense, almost all of us are these people. If you have a 401k or an IRA. If you have or are thinking of investing in financial markets, you are one of these people. You are those who largely accept the tenets of capitalism (I do, but with caveats): that if you work hard enough, you get a little lucky, and you get to reap the rewards of your efforts. If you are one of those who believes in the integrity and good faith of those you entrust to handle your money, do your accounting, and those who run the firms you invest in, you are one of those people. I believe markets are the most efficient means to determine value/price, though not always-witness the housing bubble. There is a very good case for wondering if this has been warped as well – take a good, cold hard look at securities markets today and ask yourself the degree to which greater fool theory determines value, because really, who is a value investor anymore? What else does technical analysis actually describe? Underlying value? Please. We treat the hard-work-yields-success paradigm as if it were a cause-and-effect dynamic, but the truth is, more than a little luck is needed. And to those who wish to throw the maxim that people make their own luck (through diligence and intelligence) at me, I’d have to say that luck plays a far greater part than you might think. One can fail through lack of effort at a crucial point or the flaw intellect has failed to detect, but neither hard work nor smarts will guarantee success either, because strength has limit, knowledge is not perfect and the state of the marketplace itself is dynamic. The markets at all levels, like life, really are a gamble.

We assume that the managers act with integrity (but we don’t know), and that the regulators are on the case making sure that forms are followed (which is hardly ever true).

So I admire the small business entrepreneurs, whether they make it or not. They makes the attempt knowing that they don’t know everything they need to know, and hope that flexibility, determination and thought will suffice to make up the shortfall; and they hope that the vagaries of pure chance and hazard pass them by.

About a year ago, a customer came up to me with a few books on how to start your own business. Her teen-aged daughter stood next to her. Dressed as a professional, she looked bright enough, and I took a deep breath then asked her if she was thinking of starting her own business. She said she was. I glanced over at her daughter, then looked her straight in the eye and told her that if she decided to go ahead with this, she should have the backing of her family beforehand, because she wasn’t going to be available for them for several years, and that was the case if all went well. She smiled and thanked me.

I saw her again a few weeks ago. I didn’t recognize her, but she knew me. She told me I was right. She said that her business was doing great and she had even been offered a publishing deal in the event she wanted to write a book. (If not a secondary profit generator, it is at least fabulous marketing opportunity.) She told me that she thought that she could control the business, rather than the reverse, but that plainly, business demands had trumped all other concerns.

Running a business is more absorbing, more demanding, than having a family. I know. I’ve been through the startup adventure five times.

For the record, about 66% of all startups fail within 36 months. Yet another reason to admire their grit, and the truth is that their hard work is rewarded with failure rather than success by a whopping margin.

Can You Tell Me Of One Corporate Merger Which Ever Worked Out Really Well?

As for investors, people who “make their money work for them,” it’s largely the same – luck plays a far greater role than we publicly admit. Trusting your money to financial services companies, especially operating in loosely or completely unregulated markets, is much more of a gamble than is generally realized. While you may look around and see others who have cashed in (during the housing boom, especially in California we are told, this became cocktail party chat – how well somebody there had done in real estate.) and you think, “why not me?” If you are especially sensitive (and savvy), you might sense that the forces of the free market at that particular moment were favorable enough you had a good chance for success, but you’re also aware that you must watch very carefully for these ill-defined and incompletely comprehended market forces to change course very quickly.

But at the outset, you don’t really know. So while gazing at the specter of “success” you really have to pull yourself back down to earth and examine the risk. Or risks. Some of these are what sunk MF Global.

So what are we talking about when we say “risk?” Well, Erik Banks, Morton Glantz and Paul Siegel define five types of risk¹ all of which MF Global investors agreed to undertake, whether they knew it or not:

1. Credit risk – an event that causes the debtor to slow, interrupt or stop paying on the note. Certainly for investors, this was known and accepted.
2. Market risk – losses sometimes occur due to nothing but changes in the market. Some derivatives are more exposed to market driven forces than others. If your instrument depends on credit spreads, interest rates, foreign exchange rates or the yield curve, you’ve accepted risks that are truely unknowable in advance, and absolutely beyond your control. You better be looking for one hell of an ROI up front. Especially these days.
3. Liquidity risk – little else matters if your investment is in an instrument nobody will ever buy and you can’t convert your gains or pare your loses. Essentially, this is exactly what happened when Goldman Sachs pulled the plug on the housing bubble and the entire market for CDO’s collapsed. Even those composed of fairly reliable corporate bonds became illiquid after this macro economic event, and investors like the City of Narvik who held these were stuck with their them, relying on much smaller, slower revenue flows and quickly had to cut municipal services as a result.
4. Legal risk – this arises from lack of following the legal and regulatory up to and including a Bernie Madoff (or Bankers Trust) type fraud. The foreclosure scandals we see unfolding on about a weekly basis these days are largely failures of this type – a failure to maintain an adequate paper trail, which lenders like BoA and their stable of loan servicers seem to be making up for through fraud. MF Global may also be guilty of some regulatory breaches, such as using client’s funds for proprietary bets, though the verdict isn’t in on this at present.
5. Operational risk – Lost paperwork, a break down in interior reporting, management and control systems, etc. In the foreclosure mess, this is a huge source of risk, loss and injustice. The example of MF Global applies here (in the best case scenario), in being unable to account for millions of dollars – it seemingly lost track of investors’ money, and those investors may never see that money ever again. Or at least any more than two thirds of it.

Such problems, especially operational problems which I will focus on here, are far more widespread than you might realize, but if you’ve ever been the victim of a lost payment, had trouble getting confirmation that your ESOP shares are recorded (a three year fight my mother had to wage after my father passed), or received corporate statements and ballots even though you never bought into the ESOP (having never bought into an ESOP plan at one employer, I got both of them for years – even after I’d changed jobs) or continued receiving these even after disposing of your block of shares (again, my mother kept receiving these for four years after cashing out), you’ve discovered an operational flaw, and they are hardly ever isolated instances.

MF Global, which seemed to misplace some $600 million of its customers’ money (since reported to be resting over at JPMorgan/Chase) may be a victim of an operational risk they unwittingly undertook. That the managers couldn’t readily account for this money during a due diligence indicates (best case scenario, remember) insufficient in house systems set up to keep track of in house funds. At the very least.

Such problems are endemic throughout our economy. By themselves, most of them are fairly minor, but taken together the picture alters dramatcally. The foreclosure mess we’re witnessing today, we are witnessing today illustrates an enormous systemic fault throughout our banking system for example. The ESOP instances I mention above are all indicators of other such serious weaknesses in the retirement savings systems managed (or mis-managed) by some major Wall Street broker/traders. Apart from market swings, how safe are your retirement savings if your investment broker can’t readily find your records?

Mega finance is only as strong as its weakest control mechanism.

Don’t Mess With the Law of Diminishing Returns. Ever.

Size matters. Simon Johnson once cited research that found after banks grow to about $30 billion, they’ve maxed out the possible efficiencies available to the business model. I cannot vouch for the figure, but I believe the premise that anything more than this, and the work needed to maintain the systems to keep the business running begins to outweigh the profitability of any new business brought in (not only through sales, but through M/A activity as well, don’t forget). The reason I have no trouble believing this is because I’ve seen this dynamic in action myself several times. Two of the membrane switch businesses I help build seemed to max out profitability at around $6 million in gross annual sales. More business than that and quite quickly, the processes which took you to that point become unwieldy. More work, staffing, resources and investment are needed to maintain these systems, and fulfilling orders started to become more and more difficult. Another membrane switch company I was part of eventually went under largely because of this and this was a highly successful, well respected industry leader. The largest order ever placed for custom membrane switches came to us, and we weren’t even looking for it. We were that good, and known for being so, that they were willing to accept just about any reasonable proposal fitting their parameters. The company, predictably, went through another, huge, round of growth and though people there were diligent, experienced and driven, the inefficiencies overcame the business model. In two years, the company was in serious trouble, and it ceased operations entirely about two years after that.

Thank you Professor Johnson. At least I know that my observations are now supported by independent findings.

The point of all this being, the larger and more successful the company you’re looking to invest or do business with, the possibility of operational risk events becomes more and more certain. BoA’s CEO Brian Moynihan cannot possibly control the events at every branch and facility, nor can he possibly absorb the data needed to even grasp what’s really going on in them. Much less the integrity and practices of out-sourced loan servicers.

The implications of operational inefficiencies arising through size are several:

For one, the small government advocates of the right have a valid point. For instance, it is estimated that as much as $60 billion annually is lost through Medicare fraud. A huge problem. My counter argument is that the private sector is no better, and in an unregulated environment, is certainly going to be a good deal worse (one company alone just lost track of $600 million and by any measure, that ain’t chump change), for government can be held accountable while the private sector hardly ever is.

The extra costs all of us are paying to maintain enormous entities like TBTF banks and highly diverse mega-corporation like GE is unknown, but I would suspect something in the range of hundreds of billions of dollars, just within the industry itself, which does not count the public sector costs. Taken together, 7-8% of GDP might be a conservative estimate of the cost of private sector inefficienies. (I wish there was reliable data on this, and if anyone knows of a study or report from academia, Treasury, the CBO, or the GAO, feel free to point me in the right direction.)

All of which is why my #Occupy demand is to break up the big banks. A return to Glass-Steagall may not be enough, for I’d like to see a cleaner break. Commercial (FDIC insured) banking, investment banking, insurance and the various in-house hedge funds and broker/traders must be separated. This should be a national economic priority, as certainly we as taxpayers have every right to limit the risks (both in size and in kind) we agree to undertake in insuring commercial bank depositors, as we’re the ones footing the bill. Furthermore, restrictions on the size of these institutions, much like what was proposed by Brown-Kaufman Amendment (no banking institution of any kind be allowed to grow larger than x% of US GDP) must be brought back to the table and passed. Investment banks should be required to report every transaction booked in unregulated havens like the Cayman Islands, where ICE is supposedly located, and booking laws should be passed (if a transaction is executed in New York, then it is booked in New York and not in an unregulated tax haven like the Cayman Islands).

It makes policy sense. It makes political sense. As stakeholders in our own banking system, we have every right to make some demands for our own protection, because, again, as “owners” of the entity insuring American deposit accounts, we should absolutely demand it. And it should make business sense as well.

Informed consent, or no consent at all.

Post script: One other kind of risk goes unmentioned by the three authors of the Credit derivatives book I cited above, is a risk that doesn’t show up on the balance sheet. It was really reputational risk that sunk MF Global in the end. It finally lost the trust of the marketplace. All of Wall Street is on trial and this is so richly deserved.

Notes:

¹Banks, Erik; Glantz, Morton; Siegel, Paul, Credit Derivatives, McGraw-Hill, New York, 2007.

So I don’t think buzz over #Occupy Wall Street and wealth inequality goes far enough, but that’s for another post. It is, nonetheless, a good place to start.

I have, on quite a few occasions, told tweeps that the #Occupy movement would trade the tents and sleeping bags in a heartbeat for CNBC, WSJ, Bloomberg’s cable channel and BusinessWeek, CNN Money, Barrons, and all the news slots devoted to the daily market news. A huge media behemoth devoted to, as the ads during the 70′s when individual investing began to take hold used to say, “making your money work for you.”  (As opposed to actually going out and earning a wage and surviving on that alone. In America, more than anything else, it matters where your income comes from.) All of which was concerned with “Your Money,” the insane antics of Washington and the European debt crisis, or whatever market moving news of the day turned out to be, along with business friendly commentary from the likes of Larry (“Lawrence of America”) Kudlow, who had at one point two prime time slots on CNBC. #Occupy has tents, and the intention of staying until . . . something happens.

Because that’s what we’re up against. Maybe not an especially corrupt media, but a profit-driven media whose major outlets are all publicly traded corporations themselves, staffed with people unwilling to question the neoliberal paradigm. Questioning the central tenets of your employer is not a good career move. And for good reason. Just ask Ashleigh Banfield, Phil Donahue, Keith Olbermann and Cenk Ugyur. Before the #Occupy movement, the odd story about some CBO report finding that income inequality has grown in the US would have been lucky to make it to the back pages of any newspaper, and would be bumped from any television news program in favor of any story on Michael Jackson, a Kardashian drama or hero-saves-kitten-stuck-in-a-tree segment.

News for profit hardly ever tells us what we need to know, and that’s a huge problem for a large, diverse and complex democracy. Again, news-for-profit along with granting corporations Fourteenth Amendment rights are topics for other posts.

However, everybody’s talking now, and that at least, is the #Occupy Movement’s great achievement thus far. Whereas prior to #Occupy, business news pretty much confined itself to what concerned the markets (unemployment, Euro debt, the odd piece of tax legislation, etc.) the wires and airwaves now hum with debate over wealth inequality in the US. I had thought to include a quick precis of each article, but as you see, the headlines speak for themselves:

In Support of the #Occupy movement:

Oligarchy, American Style Paul Krugman, New York Times
Bloomberg refuted Paul Krugman, New York Times
Inequality Trends In One Picture Paul Krugman, New York Times
Merchants of Doubt Paul Krugman, New York Times
Fix income inequality, fix the economy Robert Reich
More on the Myth of Income Equality Ryan Chittum, Columbia Journalism Review
America wakes to the din of inequity Financial Times Editorial Board
Occupy this: Six culprits for economic injustice and inequality in America Alec MacGillis Washington Post
Income Gap Becomes Politicians’ Latest Battleground Mara Liasson, NPR
Defending the Indefensible: David Brooks on Income Inequality Richard Brodsky, Huffington Post
America’s Primal Scream Nicholas D. Kristof, New York Times
Are They Really That Good? James Kwak, The Baseline Scenario
The Bush Tax Cuts and the 99 Percent James Kwak, The Baseline Scenario
Can Tax Cuts Pay for Themselves? Simon Johnson, New York Times
The Hill Poll: Fears about inequality in income grow Bernie Becker, The Hill
Memo to “one-percenters”: Look out your limos John Cassidy, CNN/Fortune
Bernanke to Occupy Wall Street: ‘I get it’ Money & Company blog, Los Angeles Times
Graph of the day: Not exactly trickling down Michael Diedrich, Twin Cities Daily Planet
Why the U.S. is No Longer the Land of Opportunity Stephen Gandel, Time
What Ever Happened To Upward Mobility? Rana Foroohar, Time
Washington’s rich, but the 1% are elsewhere Democracy In America blog, The Economist
A rising population is not the problem – growing inequality is Andrew Simms, The Guardian
Income gap slips into GOP talk Mark Cogan & Jake Sherman, Politico
The Ideological Fantasies of Inequality Deniers Jonathan Chait, New York Magazine

It is not all Paul Krugman you’ll notice. Some pro-business outlets like The Economist, and CNN/Fortune Magazine have allowed at least some supporting mentions of the #Occupy movement. All but one link is from a major American national or international news outlet.

In Opposition:

Economic inequality is the wrong issue Michael Gerson, Washington Post
The Wrong Inequality David Brooks, New York Times
Real Grievances Fuel Occupy Wall Street Protests: Albert R. Hunt Albert R. Hunt, Bloomberg
Kinsley: Iron-Clad Demands for Occupy Wall Street Michael Kinsley, Bloomberg
Occupy Wall Street Gets a Reaction Dan Beicke, Bloomberg
CBO Report Shows Rich Got Richer, As Did Most Americans: View Editorial Board of Bloomberg BusinessWeek
The Luck of the 1% Alex Planes, the Motley Fool
Attention, Protestors: You’re Probably Part of the 1% Morgan Housel, The Motley Fool
For liberals, income inequality is the new global warming James PethoKoukis, The Enterprise Blog, American Enterprise Institute

Everyone in the #Occupy movement has their individual motives for participating and supporting the occupiers, and it is the same with those who oppose it. Some try and blame Obama, others characterize it as an underhanded attack by the Democratic Party (nothing could be further from the truth), a George Soros conspiracy, ACORN’s last gasp, a Marxist insurgency and some express the quite valid argument that government is not the solution. There is a lot of projecting of individual perceptions and exorcising of personal demons: here, here, here, here, here and here. Just a sample. The most only serious arguments in opposition present other statistical portraits showing that indeed, income grew for all quintiles. A fair argument, though I don’t know how much of the middle class feels that they’re better off than they were a decade or two ago.

So who is left talking about the European debt crisis? CNBC pretty much cornered the market on that. Well, the banks are demanding money, but then, that’s pretty much all they’ve done for thirty years.

A note on the links: This is really just a tiny, tiny fraction of the buzz that the #Occupy movement has generated. I’ve tried to restrict my choices to mainstream national and international media, though the Twin Cities Daily Planet link is included just to illustrate that the #Occupy movement is playing in Heartland America as well. The opposition links were far fewer in number and the better material is mainly restricted to WSJ, Bloomberg BusinessWeek and AEI, all fairly predictable outlets supporting the economic liberties argument (regardless of the social cost, those pesky negative externalities again). In the one and only #occupyboston GA I attended, it was stated that we intended to “start a dialog.”

As far as starting the debate, I’d have to say, “Mission accomplished.” But so much more than employment and wealth inequality needs to be addressed.

Reputation risk has come back to haunt an unregulated Wall Street, and with a history including Bankers Trust, MF Global, Enron, Goldman Sachs, and UBS (twice! A tax evasion scandal as well as a separate trading scandal), one wonders why anyone would consider trusting their hard earned money to anyone on Wall Street.

Oh. Wall Street managed to bribe convince Washington into granting a tax deferral on retirement contributions invested through Wall Street banks and investment houses. Find the charts yourself. By any measure, PE ratio, volume traded, index price, etc, financial markets began to take off only after taxes and regulation were relaxed, as well as a steady stream of America’s wages began flowing directly into Wall Street trading houses. The other side of the coin, and a perfect illustration of inflation, that practically nobody else has noticed.

It’s not that I never intended to reach this point, because all this has been simmering within for years. The timing, however, is prompted by an short exchange on Twitter with @cspenn in response to his post on #occupyboston, noting (yet again) that the movement seems to lack focus:

• @cspenn: #the5: 3 takeaways I learned yesterday visiting #OccupyBoston: bit.ly/uN7RdP

• Me: @cspenn A closer look at all the items in your list tells me there’s more focus than you give the people you spoke with credit for. . . Many of those items are manifestations of crony-capitalism, for instance. Or just plain corruption . . . Note the comparative lack of cultural issues brought up, for instance. In this context, another effect of cronyism.

• @cspenn: @papicek I totally agree there are commonalities, but saying “end corporate greed and corrupt politics” isn’t quite a solution or focus.

• Me: @cspenn For my part, the solution is already out there: level the playing field through taxation & enforcement . . . Some effort needs to be given on the topic of legal doubt, which tax cheats depend on.

• @cspenn: @papicek That presumes the governing authority behind taxation/enforcement is not corrupt, however.

• Me: @cspenn See what happens? You introduced another topic which dissolves focus! It’s moot, however . . . Because once the taxes are in place, the desired effect is in process.

• @cspenn: @papicek the better question is: what is the linchpin, the shatterpoint, that holds much of the corrupt system in place? Break THAT.

• Me: @cspenn A systems view. You’re looking for a leverage point. But the problems permeate our society, from the Absentee landlordism of NYSE . . . to a quite demonstrable racial inequality in America. A single leverage point won’t suffice.

Poor guy. I hit him with a barrage of tweets (this recreation is pulled together to simulate the exchange as I saw it, and contains minor edits), replying to his in a somewhat random fashion. He must have thought I was as lacking in focus as he feels #Occupy Wall Street appears to him. Because his points are pertinent and well taken, I decided that now is an good time to pull together the earlier posts in this series and synthesize a program going forward.

A program, not a demand, please note.

One mustn’t take the description of the effects of wealth inequality and political corruption in America for the final demands of the #Occupy movement, but more as expressions of an underlying pathology in neoliberal capitalism. Certainly, each of us who support the #Occupy movement is motivated by considerations due to our own area of expertise, knowledge and personal experience, so the movement appears slightly differently to each of us. This is completely normal. Just take a look at the GOP and the Democrats, and tell me there’s a sharp, pointed demand which every member subscribes to. If anything, the movement is an expression of the call for a third party many of us on the left have been talking about for a few years now. A political party doesn’t put forth a demand, it proposed a program, a platform. This is probably closer to what the #occupy movement is in reality. Certainly, as I wrote in Part One of this series:

“The Tea Party on the right (the original Tea Party, not the Tea Party Express and other organizations running under the Tea Party moniker, all of which are sponsored by wealthy individuals intent on undoing existing – and poorly enforced – government regulation and lowering their tax liability) shares the feeling that Washington does not represent their views or interests, but blame the government. The Occupy protesters feel that Washington doesn’t represent their views and interests, but feel that democracy has been undermined by the wealth generated by that free market and often enough, by fraud, corruption and maintaining the ignorance of the electorate and the US consumer base.”

Let me say at the outset that I’m wholly unqualified to propose such a platform. To be qualified, I would need millions of dollars, a huge staff of researchers and time to make concrete proposals, for the issues are complex and personally, I’d like to run the numbers before settling on a program. But I would like here to outline the direction America should take and areas needed to be addressed.

90% of all Americans, that’s 270 million people, get to divy up 19% of America’s wealth.

Call it a leveling the playing field. The wealth inequality in America has negative effects in our economic life, our political life, and in our courts. Economically, radical free market supporters have succeeded in effecting an upward distribution of wealth. This is not due to individuals’ bad choices, the inherent inequalities in aptitude and ability of human beings or accidents of history. The policies which I describe in Part Two of this series made such a radical redistribution of wealth inevitable. Only those poised to invest would benefit, and as we have seen, this amounts to about 12% of America’s population. Working people, whose discretionary income has been shrinking steadily in the last thirty years, were never in a position to reap the benefits. In other worlds, those who had the wherewithal to “let their money work for them” (the rich) were going to benefit far more than anyone else. Recent history has shown this to be true. For the rest of us, our wages have increasingly been devoted to funding three things: housing, insurance and education to the exclusion of all else, including investment.

CONNIE: “You know what they say about money and politics.”

SAM “No.”

CONNIE “It’s like water on pavement”

SAM “Why is like water on pavement?”

CONNIE (caught short) “That’s a good… “

BRUNO “It finds every crack and crevice.”

Politically, wealth inequality exacerbates the inequality of American society. Wealth removed from the Koch brothers would not affect the Koch brothers’ free speech, it would just remove the megaphone wealth enjoys. It would be reduced somewhat. Not to my level, because the Koch’s are wealthy, i.e.: demonstrably “right thinking,” “sound.” Would Charles Koch’s right to free speech diminished by being restricted to twitter and/or a blog like this one anymore than mine is? If I am supposed to be satisfied with this, why not Koch? Certainly, Citizens United needs to be repealed and/or overturned—an early “demand” addressed by the #BostonGA. Politically, wealth inequality also finds expression in the plethora of 527(c) groups airing ads at election time, as well as in the politically motivated think tanks like the American Enterprise Institute (devoted to only half of what it means to be American—free market radicalism) and the Cato Institute. Not only do they publish their “research” (whose results are pre-ordained, or else it is never published), they are a handy stopping over place where out of work conservative politicians and their staffers to burnish their resumes and/or enhance their career prospects in later election cycles. Wealth has found a variety of ways to take care of itself and ensure its privileged place in American politics. I’ve just touched on some of them here.

I won’t go into US prison demographics, or the near impossibility of an individual’s capacity to seek judicial redress against a determined wealthy or corporate opponent. Both are well known and accepted. Consider the following though:

UBS Clients

• Oct. 5, 2011 – Peter Schober, of Boston, Mass., was sentenced to one month in prison and six months of supervised release, of which two months will be served in home confinement. Schober was also ordered to pay $77,870 in restitution and a $777,986 civil penalty. In November 2010, Schober pleaded guilty to willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) concealing over $1 million from the IRS.
• Aug. 5, 2011 — Michael Reiss, a doctor, professor and medical researcher, pleaded guilty to willfully failing to file Reports of Foreign Bank and Financial Accounts (FBAR) with the IRS. As part of his plea agreement, Reiss has agreed to pay back taxes of at least $400,000 and to pay a civil penalty of over $1.2 million.
• Aug. 3, 2011 — Robert E. Greeley, of San Francisco, pleaded guilty to charges of filing a false federal income tax return. Greeley concealed more than $13 million in two bank accounts he held with UBS AG.
• July 14, 2011 – Anton Ginzburg pleaded guilty to failing to file a Report of Foreign Bank and Financial Accounts (FBAR). Ginzburg agreed to pay a civil penalty of over $1.5 million.
• June 27, 2011 — Kenneth Heller, of New York, N.Y., pleaded guilty to income tax evasion. Heller admitted to hiding more than $26.4 million in a bank account at UBS AG and he has agreed to pay a civil penalty of over $9.8 million.
• June 20, 2011 — Sean and Nadia Roberts, of Tehachapi, Calif., pleaded guilty to filing a false tax return related to an undisclosed Swiss bank account at UBS AG.
• May 24, 2011 — Harry Abrahamsen, of Oradell, N.J., was sentenced to three years probation, including 12 months of home confinement with electronic monitoring, and ordered to pay $600,000 in restitution to the Internal Revenue Service (IRS). In addition, Abrahamsen agreed to pay a civil penalty in excess of $300,000. In April 2010, Abrahamsen pleaded guilty to failure to file a (FBAR) report and admitted that he concealed over $1 million in Swiss bank accounts.
• May 23, 2011 — Lucille Abrahamsen Jackson, of Hilldale, N.J., was sentenced to one year probation. In addition, Jackson agreed to pay a civil penalty in excess of $379,000. Jackson pleaded guilty in November 2010 to filing a false tax return and failing to file a Report of Foreign Bank or Financial Account (FBAR). She admitted to concealing over $750,000 in a UBS account by transferring ownership of the account to a nominee Panamanian corporation.
• April 21, 2011 — Ernest Vogliano, of Manhattan, N.Y., was sentenced to two years probation and ordered to pay a $940,000 civil penalty. He pleaded guilty on Dec. 22, 2010, to filing false tax returns and conspiring to defraud the Internal Revenue Service by hiding $4.9 million in an offshore bank account with UBS, AG.
• March 14, 2011 — Jeffrey Chatfield, of San Diego, Calif., was sentenced to three years’ probation and ordered to pay more than $96,000 to resolve his civil liability with the IRS for failing to file the required Reports of Foreign Bank and Financial Reports (FBARs). Chatfield pleaded guilty on Nov. 18, 2010, to filing a false tax return in which he failed to report a UBS account containing $900,000. Between 2000 and 2008, Chatfield transferred the $900,000 through several offshore accounts of nominee entities.
• March 11, 2011 — Richard Werdiger, of Purchase, N.Y., pleaded guilty to conspiring to defraud the IRS by hiding more than $7.1 million in a bank account at UBS AG. As part of his plea agreement, Werdiger will pay a civil penalty of over $3.5 million from his failure to file Report of Foreign Bank or Financial Account (FBAR) forms.
• March 8, 2011 — Edward Gurary, of Orange Village, Ohio, pleaded guilty to filing false income tax returns for the years 2004 through 2008. Gurary owned and controlled a financial account at UBS AG which was in the name of a Bahamian entity and failed to report interest income earned on his tax returns.
• March 4, 2011 — Arthur Joel Eisenberg, of Seattle, Wash., was sentenced to serve three years’ probation and to pay a $2.1 million penalty for failing to file a Report of Foreign Bank or Financial Account (FBAR) form. Eisenberg pleaded guilty in December 2010 to willfully filing a false tax return which failed to report over $3.1 million in various UBS bank accounts.
• Dec. 7, 2010 — Samuel Phineas Upham, of New York, N.Y., was indicted conspiring with a family member to hide over $11 million in an offshore UBS bank account. He also assisted in establishing a sham foundation in Liechtenstein to further conceal money from the IRS.
• Nov. 19, 2010 — Bernard Goldstein, of Carlsbad, Calif., was indicted for conspiracy to defraud the IRS, filing false tax returns, and failing to file Report of Foreign Bank or Financial Accounts (FBARs). Goldstein is alleged to have transferred over $2 million in a UBS account to a sham Panamanian corporation in an effort to conceal the account from the IRS.
• Nov. 10, 2010 — Sybil Nancy Upham, of Manhattan, N.Y., pleaded guilty to conspiring to defraud the IRS and subscribing to false federal income tax returns. As part of her plea agreement, Upham has agreed to pay over $5.5 million in penalties for failure to file FBARs. On April 15, 2010, Upham was indicted with five other individuals for hiding millions of dollars in secret Swiss bank accounts.
• Oct. 4, 2010 — Gregory Rudolph, of Brookline, Mass., pleaded guilty to failing to comply with foreign bank account reporting requirements. UBS bankers assisted Rudolph with creating a shell company registered in the British Virgin Islands and a shell corporation registered in Hong Kong in hiding in excess of $1 million. In October 2010, Rudolph was indicted with Peter Schober.
• Sept. 21, 2010 — Jules Robbins, of New York, N.Y., who owned and operated watch distribution companies, was sentenced to one year probation and ordered to pay a civil FBAR penalty of $20.8 million. Robbins set up a sham Hong Kong corporation which was listed as the holder of an UBS account in an effort to conceal his income from the IRS. This account and Robbins’ other offshore accounts collectively contained almost $42 million in unreported income.
• Sept. 17, 2010 — Federico Hernandez, of New York, N.Y., was sentenced to 12 months in prison, six months home confinement, and ordered to pay a civil FBAR penalty of $4.4 million. Hernandez used sham companies set up in the British Virgin Islands and Panama to conceal his ownership of UBS accounts totaling $8.8 million.
• July 1, 2010 — Leonid Zaltsberg, of Milltown, N.J., pleaded guilty to filing a false tax return for 2003 and failing to file a Report of Foreign Bank or Financial Accounts (FBAR). In his plea agreement, Zatlsberg admitted failing to disclose the existence of a Swiss bank account on his tax returns for the years 2000 through 2006 and concealing over $2 million in his Swiss account. On Dec. 20, 2010, Zaltsberg was sentenced to four years of probation, including one year of home confinement. In addition, he was ordered to pay civil penalties for failing to file an FBAR and a $3,000 fine.
• April 15, 2010 — In Manhattan, N.Y., seven UBS clients were indicted for collectively hiding over $100 million in secret Swiss bank accounts. Two of these individuals, Jules Robbins and Federico Hernandez, pleaded guilty and agreed to pay civil penalties of $20.8 million and $4.4 million, respectively. The remaining indicted clients were Kenneth Heller, Sybil Nancy Upham, Richard Werdiger, Ernest Vogliano and Shmuel Sternfeld.
• April 13, 2010 — Paul Zabczuk, of The Woodlands, Texas, pleaded guilty to filing a false tax return wherein he failed to report his interest in or signature authority over financial accounts at UBS AG. Zabczuk was sentenced on July 27, 2010, to three years of supervised release with one year served in home detention and 150 hours community service. In addition, Zabczuk was ordered to file accurate tax returns and pay all taxes, interest and penalties due and owing to the IRS.
• Feb. 4, 2010 — Jack Barouh of Golden Beach, Fla., pleaded guilty to filing a false tax return. Barouh admitted to filing a false tax return for 2007 in which he failed to report a foreign bank account. He was sentenced to 10 months in prison and ordered to pay all taxes, interest and penalties due and owing.
• Oct. 5, 2009 — Roberto Cittadini of Bellevue, Wash., pleaded guilty to filing a false tax return and admitted to concealing nearly $2 million in Swiss bank accounts. Cittadini, a retired sales manager for Boeing, failed to file a Report Foreign Bank and Financial Accounts for 2001 through 2003. Cittadini was sentenced on Jan. 8, 2010, to six months home detention and one year supervised release and was ordered to pay a $10,000 fee and $17,985 in restitution.
• Sept. 25, 2009 — Juergen Homann of Saddle River, N. J., pleaded guilty to failure to file a Report of Foreign Bank or Financial Accounts and accepted responsibility for concealing more than $5 million in Swiss bank accounts. Homann was sentenced on Jan. 6, 2010, to five years probation and was ordered to pay a $60,000 fine.
• Aug. 14, 2009 — John McCarthy of Malibu, Calif., pleaded guilty to failing to inform the government of a Swiss bank account as part of a scheme to move at least $1 million from the United States into Swiss bank accounts with the goal of avoiding the payment of federal income taxes. McCarthy was sentenced on March 22, 2010, to three years of supervised release with six months served in home detention and 300 hours community service. In addition, he was ordered to pay a $25,000 fine and to file tax returns for 2003 through 2008 and pay all taxes due and owing.
• July 28, 2009 — Jeffrey P. Chernick of Stanfordville, N.Y., pleaded guilty to charges of filing a false tax return. Chernick, who owns a corporation which represents toy manufacturers in China and Hong Kong, accepted responsibility for concealing more than $8 million in Swiss bank accounts. Chernick was sentenced on Oct. 30, 2009, to three months in prison and one year of supervised release with six months served in home detention.
• June 25, 2009 — UBS client Steven Michael Rubinstein of Boca Raton, Fla., pleaded guilty to filing a false tax return for tax year 2004. On April 1, 2009, Rubinstein was charged with filing a false tax return that intentionally failed to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account. Rubinstein was sentenced on Oct. 28, 2009, to three years probation, of which 12 months will be served in home detention.
• April 14, 2009 — Robert Moran of Lighthouse Point, Fla., pleaded guilty to a criminal information charging him with filing a false income tax return. Moran accepted responsibility for concealing more than $3 million in assets in a secret bank account at UBS in Switzerland. Moran was sentenced on Nov. 6, 2009, to two months in prison and one year of supervised release with five months in home confinement.

Legal Actions to Date

• Aug. 4, 2011 — Gian Gisler, a former UBS AG banker, was charged with conspiring to hide more than $215 million offshore at various Swiss banks. Gisler had more than 38 U.S. taxpayer clients and allegedly opened and/or managed more than 60 hidden accounts on their behalf.
• Aug. 2, 2011 — Martin Lack, a former UBS AG banker who is currently an independent asset manager, was charged with conspiracy to defraud the United States. Lack assisted U.S. customers to open and maintain secret bank accounts at a Swiss cantonal bank headquartered in Basel, Switzerland.
• July 21, 2011 — Beda Singenberger, a Swiss financial advisor, was indicted for conspiring with U.S. taxpayers and others to hide more than $184 million in offshore Swiss bank accounts.
• Dec. 22, 2010 — Renzo Gadola, a citizen and resident of Switzerland, pleaded guilty to assisting an American client in concealing an offshore bank account from the United States government. From 1995 through August 2008, Gadola was employed as a private banker by UBS AG.
• Aug. 21, 2009 — Former UBS banker Bradley Birkenfeld was sentenced to 40 months in prison. Birkenfeld worked as a private banker for UBS AG and assisted an American billionaire real estate developer evade paying $7.2 million in taxes.
• Aug. 20, 2009 — Hansruedi Schumacher and Matthias Rickenbach were indicted for conspiring to assist wealthy American clients conceal their assets by establishing sham offshore entities. Schumacher was an executive manager at Neue Zuercher Bank (NZB), a private Swiss bank. Rickenbach was a Swiss attorney who advised U.S. clients.
• Aug. 19, 2009 — The Justice Department and the IRS today announced that an agreement has been reached with the Swiss government regarding the John Doe summons filed against UBS on June 30, 2008.
• Feb. 18, 2009 — UBS AG, Switzerland’s largest bank, entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service (IRS).
• Nov. 12, 2008 — Raoul Weil, a senior executive of a large Swiss bank, was charged with conspiring with other executives, managers, private bankers and clients of the banking firm to defraud the United States.
• June 30, 2008 — The Justice Department filed papers seeking an order from a federal court in Miami, Fla., authorizing the Internal Revenue Service (IRS) to use a John Doe summons to request information from Zurich, Switzerland-based UBS AG about U.S. taxpayers who may be using Swiss bank accounts to evade federal income taxes.
• May 13, 2008 — Banker Mario Staggl was indicted for conspiring with banker Bradley Birkenfeld to assist an American billionaire real estate developer evade paying $7.2 million in taxes by assisting in concealing $200 million of assets in Switzerland and Liechtenstein.
• Dec. 12, 2007 — Igor Olenicoff, president and owner of Olen Properties Corporation, pleaded guilty to filing a false tax return for tax year 2002 related to foreign bank accounts he failed to disclose to the IRS. As part of his plea agreement, Olenicoff paid $52 million to the IRS for six years of back taxes, penalties and interest. Olenicoff was sentenced in April 2008, in Santa Ana, Calif., to two years probation and 120 hours of community service.

Source: IRS.gov, last accessed 31 October 2011.

Though I could pivot here to a larger discussion of tax avoidance/evasion, for now I’ll restrict myself to noting the sentencing, where they’ve been handed down. Note the fines (some quite substantial, I admit), as well as the tendency to impose probation and house arrest over prison. All else being equal, these are arguably just sentences for nonviolent offenders. However equality is a condition which is absent here—they are also sentences handed down to people who own the means to effectively buy their way out of a harsher sentence, and always, a very comfortable margin of wealth remains untouched. Another perk of wealth in America.

So where do we go from here? As I said earlier, I am only offering suggestions here for further discussion. I am not addressing the larger question of property rights nor freedom of contract. The founders settled the question on property rights when they granted Congress the power to levy taxes and freedom of contract, like freedom of speech, has never, ever been absolute. We were granted permission to order our society within the framework of the constitution by the founders, and that’s all #Occupy advocates. To that end, I propose that #Occupy consider the following:

1. A national redistribution of wealth conducted by the federal and state governments through taxation and domestic reinvestment in infrastructure, education, safety net programs, and research and development. For at least five years, perhaps ten, this should be conducted fairly aggressively, then relaxed somewhat (this is one of those moments when I’d have to see the numbers first in order to go forward with this). Opponents to this will say that it will stifle domestic investment, but I would counter that at present, there isn’t enough private sector investment in the US anyways. They might also say that it is taxes which make the US uncompetitive, but I would counter that tax competition worldwide has been driven by corporate profiteering and management looting, and that lowering the US corporate tax rate would only drive other nations to do the same. Corporations would, in fact, demand tax concessions there as well. They already do. Unable to innovate or boost production, corporations have resorted to rent seeking behavior, of which tax relief is only one manifestation.
    
2. A return to some form of capital controls, the least of which involve granular transparency in capital flows across borders. This would help determine when transfer pricing abuse takes place, as well as make it much harder for criminal transfers of wealth. The OECD count of tax haven countries (pdf) put the number at 41. These countries should be dealt with harshly, perhaps to the extent that trade, telcom and commercial air services be cut off or severely curtailed. Furthermore, laws should be enacted to state that the country in which the decision to agree to a financial or business transaction takes place or is structured falls under the tax code of that country. This should end the practice of booking a transaction in the tax-free Cayman Islands, when in fact that decision was taken on Wall Street or in Chicago. It should also involve lax regulation in incorporation havens like the British Virgin Islands, where activity goes completely unmonitored. If we can propose legislation to punish China for currency manipulation, surely we can enact measures against countries facilitating this and other kinds of criminal behavior.
    
3. A series of measures and disincentives to prohibit algorithm trading in equities (estimates put as much as 60% of all stock trades as algo trades). Make every trader enter a “Captcha” for every trade in order to force the stock markets to be real markets and reflect real purchase and sell decisions of individuals, for a computer at Goldman Sachs trading a block of shares to another computer at JP Morgan Chase serves only to keep security prices at inflated levels. The current S&P PE Ratio (I just checked) stands at 21.16, which means that someone buying into Vanguard’s Vanguard 500 Index Fund Investor Shares would need to wait over two decades for earnings to justify what an investor paid for those shares today—with the risk of 20 years attentuated and all else being equal. This is hardly rational investing and only points out that the stock market has been running solely on Greater Fool Theory. Think George Hull’s dictum, “there’s a sucker born every minute,” and you’ve got the idea. I look at the stock market and call it “aggregate stupidity.”
    

   Which is subsidized by the federal income tax deferral for retirement account contributions, please note.
    

4. Campaign finance reform. It gets thorny, but the cacophony of a national debate taking place in an open square should be the ideal aspired to. Perhaps every household should be required to have broadband internet access installed just to facilitate the process. Perhaps the telcom companies, which were given tax breaks just for this, should be compelled to come through and actually deliver on their part of the bargain to get this done. Or else, can we have our money back? One thing is absolutely essential: the false equivalence that money equals speech needs to be denounced. Decisively.
    
5. Recognition that some, but not all, aspects of society need to be treated as utilities. These should be cooperative investments paid for by all. We already do so with the Department of Defense to the extent that the US pays as much for our armed services as the rest of the world combined, so it is not such a stretch of imagination to think we can do so in other areas as well. Education, legal representation, a sustainable energy infrastructure, transportation and healthcare should all be considered in this light.
    
6. A progressive tax code. Those who reap the most benefit should reward the system which made it possible.
    
7. Break up the too-big-to-fail banks. According to Simon Johnson, efficiencies in banking top out at about $30 billion. I’ve no trouble believing this as I’ve seen businesses top out myself. Anything more than their seemingly “natural” maximum size (for a custom membrane switch manufacturer offering complete in-house fabrication, this seems to lie somewhere between five and six million in gross sales), and the ability to manage the business degrades fairly quickly.
    
8. Break up financial services companies. The government should not be insuring deposits in institutions whose real profit center is in risky investment banking. Yet we do. Neither should any bank be allowed to accept the risks inherent in being an insurer as well. The market should have spoken up on this long ago, for each of these industries requires a separate skill set and expertise not necessarily available elsewhere. Or does the market only care about packaging? And finding the next greater fool? Are investors’ interests really aligned with the businesses they have an (another convenient legal fiction) ownership stake in? 

I could go on, but as I say, this is beyond my resources to propose more completely and more concretely. And there are other voices. I have not touched on areas, one being racial inequality, for other good reasons, I’m white and will not presume. I might suggest that as measures are enacted to reduce inequality, the boats of non-white Americans should rise as well, but we shouldn’t hope for this. We should rather make it real. Restraining markets from plaguing society with boom and bust cycles is another goal Everything I’ve proposed here though is the only direction we can take to preserve both a free, open and fair market (ours is one whose reputational risk has only begun to come back to haunt Wall Street) and our democracy.

We could take on more and more the look and feel of China’s authoritarianism, but just ask yourself if you believe Americans would take this in stride.

Dr. Jeffrey Sachs evidently sees the situation in the same way. You ask why we occupy? Here you go: Obama, the G20, and the 99 Percent.

UPDATE: A little more information on one of the convicted tax dodgers listed above. The Bloomberg story I just came across fleshes the episode out with more detail:

Prosecutors said Reiss used the services of Beda Singenberger, a Swiss financial adviser who was charged last month with conspiring with more than 60 U.S. taxpayers to hide more than $184 million in offshore accounts.

The Floranova account held assets valued at about $2.6 million as of March 2008, prosecutors said. In November 2008, Reiss transferred the Floranova assets into another undeclared account, prosecutors said.
::
UBS in 2009 paid $780 million to avoid prosecution on charges that it helped Americans evade taxes and turned over data on 250 secret accounts. It later handed over information on 4,450 more accounts.
::
The U.S. dropped its criminal case against UBS in October.

“Our soundness standards should be no more or no less stringent than those the market place would impose. If banks were unregulated, they would take on any amount of risk they wished, and the market would price their capital and debt accordingly. Ideally, banks should also face regulatory responses to their portfolio risks that simulate market signals. And these signals should be just as tough, but no tougher than market signals in an unregulated world. Perfection would occur if bankers had a genuinely difficult choice deciding if they really wanted their institutions to remain insured or become unregulated.”
— Alan Greenspan Banking in the Global Marketplace

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“The Class [A] through Class [C] Notes will be governed by, and construed in accordance with, the law of the State of New York. The Class [D] Notes will be governed by, and construed in accordance with, the laws of the Cayman Islands.”
— Goldman Sachs, ABACUS 2007 AC1, Indicative Terms, Page 20.

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@papicek you say borrowed, I say stole… The govt is way too big. It’s a beast that we should starve. Riddled with cancer.”
— @BrocktonDave

Speaking For Myself . . .

Frankly, I’m having a hard time finding a sane critic of Occupy Wall Street or any of the branch affiliates, such as my own beloved Occupy Boston. Some critics I’ve spoken with have sounded intelligent and curious, but upon closer examination, many share the obsession that Occupy (and Obama, democrats in general and even America) are commies and Marxists. I mention it because this keeps cropping up, though I don’t know why. Faux News? Perhaps. Probably. I couldn’t care less. If people are stupid enough to believe this claptrap, there’s no hope for them. My belief is that these people are driven exclusively by an overwhelming hatred of the left and nothing else, and that in policy matters, if all they have to bring to the table is name calling and lies, they have absolutely nothing to offer.

One of the claims I’ve often heard are variants of “government is the problem,” “government is no solution to the problem,” etc. Seemingly, these people are content to see government whither away to practically nothing except a kick-ass military. Obviously, they haven’t thought that one through yet. Well, in one respect the #Occupy movement would agree: campaign finance reform and rolling back the Fourteenth Amendment rights granted non-citizen entities like corporations is central to the #Occupy movement. We may not agree how to accomplish this, but in the main, removing the amplifying effects money brings to our national debate is central and one of the very first aims that the #Occupy movement addressed. In one other respect both the supporters of the #Occupy movement and it’s critics agree: we do not particularly like being made to feel as though we’ve become serfs (in the sense Hayek means). The critics see government as the enslaving entity while #Occupy sees corporate hegemony in the same light.

Empirical evidence can be found on both sides of this argument, but it is a moot question because the two institutions use one another to further their aims—profits for corporations with the attendant astronomical levels of looting on the corporate hand and party unity with good prospects for re-election (along with the opportunity to do some looting for purely personal gain on the other). Hand in glove: those of us who look see the glove (our elected officials) for the most part, and not the corporate hand within animating it.

Both unite to make one fist though.

What this post is about is the recent history of government regulation of banking. Strange that it begins in the same year (1978) when the first of an unending tale of union concessions began, but I suggest no link, other than the fact that equity in American society came under attack on both fronts. I draw on a very handy timeline of banking deregulation (pdf), written by Matthew Sherman and published by the Center for Economic Policy Research. Through my own research, I knew the pieces of legislation, but Sherman includes the important changes in regulatory policy as well as an important Supreme Court decision which I hadn’t known about. Kudos and thanks to Mister Sherman for his work here and to the CEPR for making it available.

From 1978 to 2000, Sherman lists six major pieces of deregulation which came out of Congress, but his history begins with Marquette vs. First of Omaha. This case overturned state usury laws, and a bank chartered in Minnesota was allowed to impose an interest rate in Nebraska which had been prohibited by Nebraskan law as usurious. What followed was “a competitive wave of deregulation”¹ as states began dropping their usury laws to allow banks to charge whatever interest rates on loans the market would bear. By 1981, Jeff Gerth was reporting about Maryland Governor Pierre S. du Pont’s efforts to entice banks to his state by virtually eliminating taxes on them and offering them a safe regulatory haven. What follows used to be news. Not any longer. Nowadays, it is recognized that the real decisions are made in secret, packaged in secret and rushed through Congress or State legislatures:

“An examination of the Delaware legislation and the process by which it was enacted, including interviews with dozens of bank officials, state officials, legislators and consumer advocates, disclosed the following:

- The legislation was drafted in private over a period of six months by lawyers for two large New York banks, the Chase Manhattan Bank and J.P. Morgan & Company, without any written analysis by any Delaware official involved.

- Other parties who might have raised questions about the bill, including other state officials, the press and the public, were intentionally kept in the dark, according to bankers and state officials.

- Many legislators say they did not read the 61-page bill before agreeing to sponsor it and did not understand the complicated measure before voting on it.

- Some legislators and consumer attorneys say the handling and timing of the only hearing for the bill – it lasted three hours – was unfair, preventing many legislators from attending and inhibiting rebuttal from the bill’s opponents. The bill’s supporters say the deliberations were the most extensive they had seen in Delaware in the last four years.”²

The benefits of increased competition did not come to pass, however. What did happen was that very shortly after, credit card interest rates soared as high as 18% as banks cashed in on their new-found freedom to charge whatever they wanted (partly driven by Alan Greenspan as he raised the prime rate as high as 20% in order to curb the “stagflation” resulting from the Arab oil boycott) and as interest rates trended upward, so did consumers filing for bankruptcy:

Source: FDIC, The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate, March 1998.

The “free market” was coming to a theater near you, and far from being beneficial, it was beginning to look like a disaster. Two years later, the Depository Institutions Deregulation and Monetary Control Act, an initiative of the Carter administration, was passed, which allowed banks to merge. It also removed the interest rate ceiling on deposit accounts, theoretically offering consumers greater flexibility in choosing the bank offering the highest rate of return on savings. Sadly, only the interest rates on highly restrictive accounts like 6-month and 1-year certificates of deposit went upward. Briefly. If you needed a working account where you could get at your money, your return began dropping from about 5% on a passbook savings account to near zero, where it is today.

Two years after the Depository Institutions Deregulation and Monetary Control Act Congress was at it again, and the Garn-St. Germain Depository Institutions Act was passed, which effectively removed all restrictions on Savings and Loans, who could now lend to commercial borrowers (less security on more risk than home loans), and allowed money market accounts to compete across state lines and deliberately undercut existing state regulatory powers.

Yes, undercutting states’ rights here was a Reagan initiative. On signing the bill, Reagan proclaimed, “All in all, I think we hit the jackpot.”³ Not quite. What resulted from the influx of new profitability was the upsurge in sweetheart loans, speculative lending and leveraging which lead to the S&L Crisis. Of course, while S&L’s doubled and in some cases tripled in size, banking regulators we cut, underpaid, and inexperienced, and the results were inevitable. Millions of insured depositors were placed at greater risk of being wiped out entirely and eventually Washington had to fund failing S&L’s and step in to save ordinary American’s deposits. If Reagan’s goal was to shrink the size of government, he almost succeeded. The Federal Savings and Loan Insurance Corporation, for whom Congress appropriated first $15 Billion in 1986, then $10.75 Billion in 1987, was insolvent by 1989 and dissolved. All in all, the cost to taxpayers (by the 1990′s) of deregulation topped $100 Billion.⁴ Poor Ronald. One regulatory agency was replaced by another, the newly created Office of Thrift Supervision (under the Treasury Department), brought into being by George H. W. Bush and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which, predictably, removed the regulations restricting bank holding companies from acquiring Savings and Loan institutions,and the big boys of Wall Street were on the verge of sweeping up all the chips. Which they have not been slow to take advantage of: in the years 1994 to 2003, 3,517 banks have merged or been swallowed up in the US.⁵

The trends here are several: on the banking side, there was greater freedom to expand into new markets and let the market determine costs and prices. On the borrowers’ and depositors’ side, costs went up, returns plummeted, and any business caught with loan obligations at a higher interest rate through an accident of the market was caught at a competitive disadvantage unless it could refinance (not always the case), and small businessmen had something new to worry about. The second trend was in bank consolidation. Part the reason that bank holding companies were allowed to buy up S&L’s was because it had become clear by the time the FSLIC was about to go belly up that the problem was bigger than even Washington could handle. It needed private bankers to step in and help resolve S&L insolvencies. The trend here is in concentrating the risk into fewer and fewer banks, and in a fairly short period, the banking landscape in America had changed enough that “systemic risk” became the Sword of Damocles we all dine under today.

No part of deregulation had yet to perform as promised, yet the neoliberals weren’t done yet. After a brief hiatus post-S&L Crisis, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed with broad bipartisan support. Suddenly, major regional banks such as Washington Mutual and even the colossus that is Bank of America became possible. Riegle-Neal had repealed the remaining restrictions on interstate banking, and states had become powerless to regulate within their borders. What began as regulatory competition among states eventually took state legislatures completely out of the picture. At the state level, free market deregulators had won convincingly. Risk was spread out, but it was also amplified, and the total lack of prudent lending rampant in California, Texas and Florida later came back to bite Massachusetts, Ohio and Michigan.

As I said, the neoliberals weren’t finished. This time, it wasn’t Congress who dropped the ball, but the free market fanatic, Alan Greenspan, who, in 1996 reinterpreted the Glass-Steagall Act to allow commercial banks, those holding insured (by the taxpayer) deposits, to earn up to 25% of their revenues through the far riskier practice of investment banking. This was an irresponsible exposure of both depositors and taxpayers to elevated levels of risk. Greenspan’s gesture was completed in 1999, when Congress passed the Financial Services Modernization Act, otherwise known as Gramm-Leach-Bliley. This repealed the remaining safeguards in Glass-Steagall and allowed banks to become “Financial Services” companies, offering (taxpayer insured) commercial banking services, investment banking services, and even insurance. Congress thus ratified the 1998 Citigroup merger with Travelers (insurance and investment banking) which had taken place the year before. At no time since the Great Depression had the US allowed risk to permeate every sector of the economy until Graham-Leach, and if nobody saw what was coming, it was simply because they didn’t bother to look.

It was only a matter of time.

Meanwhile, bank innovation began to take off. Interest rate swaps, credit default swaps, securitization of debt instruments and the CDO market was taking off, and at the behest of Alan Greenspan and Lawrence Summers, Congress passed the Commodity Futures Modernization Act of 1994, solely to prevent the Commodity Futures Trading Commission from regulating the fast growing market of credit derivatives trading. The banks’ freedom to dump risk made credit easy. Borrowing skyrocketed. Housing (and other asset prices) prices went through the roof. It was all a vicious circle of inflation: too much credit (what came to be called “Greenspan dollars”) chasing too small a market.

Still, in spite of the fact that we were edging closer to the abyss, Washington freed things up just a little more. This time, it was the SEC, who in 2004 allowed investment banks to voluntarily regulate themselves under the Consolidated Entities Program. which allowed “global investment bank conglomerates that lack a supervisor under law to voluntarily submit to regulation.” The result that a risky world became even riskier as investment banks were allowed to gamble on smaller reserves and increase their leverage. The very next year, the housing market peaked and investment banks like Goldman Sachs began to think of ways of getting out—while making a killing.

Bear Stearns and Lehman Brothers. Washington Mutual and Merrill Lynch. In the years 2000 to 2004, 25 bank failures are recorded by the FDIC. In the period from 2005 to the present, that number rises to 409. The cost to the taxpayer to safeguard depositors and resolve outstanding issues is unknown. Some lending facilities, like the Primary Dealer Facilities remain secret.

Secrecy is, of course, at the root of the problem. Banks, no more than other companies, maintain proprietary accounting information—crucial details only insiders know about. By 2002, accounting scandals had become so commonplace that Forbes Magazine published a list of the biggest offenders: Enron, Adelphia, Merck, Qwest, Tyco, etc. Energy sector companies based in Texas are well represented here: CMS Energy, Duke Energy, Dynergy, El Paso, Halliburton and Reliant Energy. Some of the big names in Telcoms as well: Adelphia, AOL/Time Warner, Qwest, WorldCom and Global Crossing. The telcoms in particular were some of the darlings of Wall Street, which, for all the disclosures mandated by law and regulation, is indicative of the disconnect between securities “experts” on Wall Street and reality, due to the secrecy of boardrooms, accounting departments and those auditors tasked with reporting to the SEC, and more importantly, shareholders and the markets.

Of course, I’m not suggesting we can legislate integrity. May as well try and hold back the tide.

By the time the housing market in the US reached the stratosphere, a new class of lender had sprung up, small mortgage loan companies which did not take deposits, were not banks at all, and were therefore completely unregulated. The most notorious of which was a wannabe filmmaker, Daniel Sadek of Quick Loan Funding:

“Quick Loan Funding was financing two hundred million dollars a month in mortgages. This guy Daniel Sadek had a third grade education; he’d never gotten an MBA. He was running a company that at its peak had 700 employees and was getting financing through Bear Stearns, through Citigroup, through Wells Fargo, who all gave him lines of credit and securitized his loans so he could lend. You. Money.”⁶

“If we had a prime borrower on the line, we hung up on them,”‘ Buksoontorn says. “We were geared toward subprime because they were easier to close. We were giving them money no other bank would dare to give them.”⁷

Cowboy capitalism. The excesses of the free market we’ve all witnessed are known, and it is way past time that the lunatic right, fueled by sensationalist reporting from FoxNews was ignored. A sound banking system has been central to any economy since the Renaissance and the invention of double-entry accounting in the thirteenth century. Letting the market sort it all out has not made matters any better, but on the contrary, has a history of hidden costs (ie: market inefficiencies) which others not involved in these abusive practices must shoulder, or go under themselves. This is not a matter of Marxist ideology, as my twitter foes contend, but of social equity. The banking landscape created by Washington, at the behest of bankers, still exists today. Systemic risk is no less now, for all the provisions of Dodd-Frank, than it was in 2007.

What, one wonders, are the goings-on in Washington these days as the regulatory provisions mandated by Dodd-Frank are being written right now, with Wall Street lobbyists right in the thick of things. Who, one wonders, will do the regulating? An ex-Wall Street banker? What are the odds?

Notes:

¹Sherman, Matthew; A Short History of Financial Deregulation in the United States, CEPR, 2009. (pdf)
²Gerth, Jeff; New York Banks Urged Delaware To Lure Bankers, New York Times, 17 March 1981.
³Reagan, Ronald; Remarks on Signing the Garn-St Germain Depository Institutions Act of 1982, 15 October 1982.
⁴CHRONOLOGY-S&L crisis of the 1980s.
⁵Pilloff, Steven J.; Bank Merger Activity in the United States, 1994–2003, Staff Study of the Federal Reserve Board of Governors, May 2004. (pdf)
⁶Faber, David; House of Cards, CNBC Original Documentary, 2009. I must take a moment here to praise David Faber and the team who put this story together. They succeeded brilliantly in telling a very complex story with balance and humanity, and it is well worth the time.
⁷Ivry, Bob; `Deal With Devil’ Funded Carrera Crash Before Bust (Update3), Bloomberg, 18 December 2007.

“I’m down here to figure out what I think.”
— Governor Deval Patrick at #occupyboston, 15 October 2011

The events of the last six weeks have been exhilarating to follow on the ground and on Twitter. At last the grassroots have found a voice, and in targeting Wall Street, their aim is true.

What follows might be read by some as an attack on free markets, open markets and the freedom of contract, and to some extent this is true, yet this is not entirely so. Early on, the question, “why do you occupy?” was asked and for me, the short answer is: I know too much not to sympathize and support the Occupy movement. So what follows is essentially some of that longer answer, which only touches on the myriad reasons to demand real change in American society. What follows is a mixture of personal and reported experience with a macro view of what this means to everyone.

“The logic of commerce and capital has overpowered the inertia of politics and launched an epoch of great social transformation. Settled facts of material life are being revised for rich and poor nations alike. Social understandings that were formed by the hard political struggles of the twentieth century are put in doubt. Old verities about the rank ordering of nations are revised and a new map of the world is gradually being drawn. Thesee great changes sweep over the affairs of mere governments and destabilize the established political orders in both advanced and primitive societies.”

— William Grieder, “One World, Ready or Not: The Manic Logic of Global Capitalism”

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“We argue that the corporate profits tax is a relatively important policy through its negative effects on innovation and physical capital accumulation that may well undo the benefits of federal support for R&D.”

— Andrew Atkeson, Ariel T. Burstein, Aggregate Implications of Innovation Policy, NBER Working Papers

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“Would you rather live in a society? Or in just an economy?

— Unknown

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“God wants you to be a millionaire!”

— Motivational speaker at a Mary Kay sales rally.

Essentially, our national debate is on whether or not America is a society defined by its democratic features or by its free market. Throughout our entire history, beginning with Adams and Jefferson’s bitter rivalry, the tension between these two poles has defined our political life. It does so today. As I walk my sister’s dog in the rain this morning, I’m minded of the protesters 15 miles away living in tents in a public space to highlight their belief (which I share) that our democracy has been undermined by free market forces. The Tea Party on the right (the original Tea Party, not the Tea Party Express and other organizations running under the Tea Party moniker, all of which are sponsored by wealthy individuals intent on undoing existing – and poorly enforced – government regulation and lowering their tax liability) shares the feeling that Washington does not represent their views or interests, but blame the government. The Occupy protesters feel that Washington doesn’t represent their views and interests, but feel that democracy has been undermined by the wealth generated by that free market and often enough, by fraud, corruption and maintaining the ignorance of the electorate and the US consumer base. In ways large and small, our free market society regards our demos only as a commodity whose labor is demanded and possessing a small (and dwindling) resource of wealth to mine. The logic of business demands it, and the dynamics of business competition exacerbates the imbalance.

On our part, we receive in return, if we can afford it (which is not always the case), food, shelter, clothing, health care, an education – the necessities of life – and discretionary goods like the laptop I use to write this and the webserver I use to host this on—a second hand P2 which I’ve managed to scrounge parts for in order to maintain and upgrade.

13 October 2011: Today’s Example

It was announced that three separate free trade agreements, with Colombia, South Korea and Panama, have been passed by both houses of Congress and await the President’s signature. These are widely touted as being job creators and savers (without spelling out how this is supposed to happen), but a closer look reveals that US manufacturing has just taken another hit, as duties on heavy machinery made in South Korea have just been lifted. It also remains to be seen what headway US automakers will make in the South Korean market in return, but anyone with an ounce of common sense has very real questions whether Detroit has yet shed it’s notion that what works for them in the US will inevitably work for them overseas. It never has before. Meanwhile, the UAW will experience yet more pressure from management, citing the need to remain competititve in the global economy. So, the race to the bottom continues, with both US political parties complicit. After decades of failure of these free trade agreements, after a fairly linear decline in the quality of life of working people in the United States, and after plenty of warnings from union, yet all is in vain, as we learn when hearing that the AFL-CIO’s chief, Richard Trumka, in his meeting with President Obama, came away empty handed, even though being a labor advocate or organizer is tantamount to committing suicide in Colombia is, to me, a fairly convincing argument against.

Who wins? Conservative US farmers get to ship their grain to South Korea, duty-free. Were I a farmer in South Korea right now, I would be very concerned. Look at what happened to Mexico.

Perhaps automakers who can now consider relocating plants to South Korea and shift away from local suppliers to purchase components overseas.

Bankers in charge of moving payments back and forth. For a fee.

Whether US consumers will win is another question entirely, and let’s ask ourselves, while on this trajectory, who in America will be able to afford a car?

The history of NAFTA is clear. The history of US trade with Caribbean and Central American nations is very well documented. None of these free trade deals has performed as promised, while all of them have created significant economic and social dislocation.

So we are left with a society which is highly out of balance socially, economically, legally and politically. The #Occupy movement or its equivalent was inevitable, but we are now presented with the problem of going forward. In these situations, I find that defining the problem often suggests the solution, which is why I feel that taking the time to write this is important. To me, anyways, and hopefully to others who read this.

Expect a lot of history in what follows. As I tweeted to one person today, I’m no Reinhold Niebuhr, but I find the gap between who we say we are and what our actions say we are quite striking. We should begin by recognizing some facts: Income inequality in the US has been steadily growing in the US. From the Bureau of the Census we have a rather stark picture of just how bad this has become:

Taken together, these illustrate that ordinary working people are working longer hours in order to maintain their incomes. Nobody argues this. Of course, it’s hard to argue with the best data available. But there it is for all to see, and we need to acknowledge the basic facts shown here defining American society as the 21st century opens. But many cling to the rubric, which I often see repeated in the #occupyboston twitter stream and heard shouted by passersby at the Dewey Square protesters, that they should “get a job.” Well, good luck with that, as the following chart illustrates:

It’s not my goal here to speculate about what’s going on inside the heads of those who oppose the Occupy Movement, but clearly, they are ignoring some basic, well known truths about our current situation. Which brings us to the problems as I see them, or to put it another way: “Why I Occupy.”

The Tax Situation

‎”There is nobody in this country who got rich on his own. Nobody. You built a factory out there — good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that maurauding bands would come and seize everything at your factory… Now look. You built a factory and it turned into something terrific or a great idea — God bless! Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay it forward for the next kid who comes along.”
- Elizabeth Warren

In the US, individuals carry the far greater share of the federal tax burden. Indeed, corporate tax liability has slowly decreased in the last 76 years:

Source: OMB historical tables.

Though it remains true that the greater share of federal income taxes are paid by wealthy individuals, this is more than offset by the fact that the payroll tax, used to fund Social Security and Medicare disproportionately falls on the poor and middle class, and always has. The individual contributions charted above is the aggregate of individual income tax plus the payroll tax. As we can clearly see, corporations do not fund the federal government in anything like an equal basis with individuals.

In fact, as we look closer, the picture gets even worse. Carl Levin and Byron Dorgan commissioned a pair of reports from the General Accountability Office in 2004 and 2008 regarding corporate taxation. Though the official corporate tax rate is 35%, which is indeed fairly high compared to other nations, the first report found that as much of 60% of all corporations paid no income tax at all:

Source: GAO Report: 1996 to 2000

This is amazing: 61.3% of all US controlled corporations reported no tax liability at all. Evidently, business operations managed to absorb all profits. It is as if these companies are just barely managing to stay afloat. The second study took a broader look:

Source: GAO Report: 1998 to 2005

Again, we see an similar pattern. Are sizable numbers of corporations in the US were remarkably failing to make any money at all? Recall that these were not lean years, marked by recession, but years of economic growth. Or so it was reported. Also reported was the Wall Street darling of corporations, General Electric, managed somehow to take in billions of dollars in profits, yet managed to pay no income taxes in 2010. It is, in fact, the second year in a row GE has not owed any federal income taxes. The reasons for this are complex, but include among them the fact that General Electric operates in many countries and uses this to “manage” both it’s tax liability and its reported earnings very carefully. None of which is news to anyone, but was a topic of a great deal of controversy, and still is. GE, in fact, restated its tax liability statement to indicate that a “small” tax liability was actually due. After the story broke, please note.

I’m using a broad brush here, but some facts need to be agreed upon or further discussion is a waste of time. Are there other facts? Indeed there are. In 2006, for the first time, the top 5% of taxpayers managed to pay more income tax than the bottom 95%:

This excludes the payroll tax of course. In 2009, federal income taxes made up 44% of all tax revenues. Payroll taxes made up 42%, however. For the past three years, all income above $106,800 is exempt from any payroll tax liability at all, and when it is claimed that this is a regressive tax, this is why. Social Security and Medicare have always been supported entirely by working people and their employers(!) alone.

Everyone knows this already – America’s Primal Scream:

“Inequality also leads to early deaths and more divorces — a reminder that we’re talking not about data sets here, but about human beings.”

Like I say, today is about setting some ground rules and looking at broader measures of how corporations participate in American society. From here on, I’ll delve into greater detail on several negative externalities of Business In America.

Part Two, The Race to the Bottom

The operative paragraph everyone quotes from appears near the bottom and I’ve extracted it here. The entire speech, however, is well worth the time and appears afterwards in its entirety.

Be inspired.

“This struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress. In the light of these ideas, Negroes will be hunted at the North, and held and flogged at the South so long as they submit to those devilish outrages, and make no resistance, either moral or physical. Men may not get all they pay for in this world, but they must certainly pay for all they get. If we ever get free from the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by labor, by suffering, by sacrifice, and if needs be, by our lives and the lives of others.”

Frederick Douglass, New York 1857:

“Friends and fellow-citizens: We have met here to-day to celebrate with all fitting demonstrations of joy and gladness, this the twenty-third anniversary of the inauguration of freedom as the ruling law of the British West Indies. The day and the deed are both greatly distinguished. They are as a city set upon a hill, All civilized men at least, have looked with wonder and admiration upon the great deed of justice and humanity which has made the first of August illustrious among all the days of the year. But to no people on the globe, leaving out the emancipated men and women of the West Indies themselves, does this day address itself with so much force and significance, as to the people of the United States. It has made the name of England known and loved in every Slave Cabin, from the Potomac to the Rio Grande, and has spread alarm, hatred, and dread in all the accursed slave markets of our boasted Republic from Baltimore to New Orleans.

Slavery in America, and slavery everywhere, never received a more stunning and killing condemnation.

The event we celebrate is the finding and the restoration to the broken ranks of human brotherhood, eight hundred thousand lost members of the human family. It is the resurrection of a mighty multitude, from the grave of moral, mental, social, and spiritual death, where ages of slavery and oppression, and lust and pride and cruelty, had bound them. Here they were instantly clothed with all the rights, responsibilities, powers, and duties, of free men and women.

Up to the morning of the first of August, 1834, these people were slaves, numbered with the beasts of the field, marked, branded, priced, valued, and ranged as articles of property. The gates of human brotherhood were bolted and barred against them. They were outside of both law and gospel. The love taught in the Bible, and the justice recorded in the Statute Book, did not embrace them: they were outside. Their fellow men had written their names with horses, sheep, and swine, and with horned cattle. They were not governed by the law, but the lash, they were not paid for their work, but whipped on to toil as the American slave now is. Their degradation was complete. They were slaves; and when I have said that, I have said all. The essence of wickedness, the intensified sum of all iniquity, the realization of the idea of a burning hell upon the earth, in which every passion is an unchained devil, let loose to deal out ten thousand pains, and horrors start up to view at the very mention of slavery!—It comprehends all that is foul, shocking, and dreadful. Human nature shudders, and turns pale at its presence, and flies from it as from a den of lions, a nest of scorpions, or an army of rattlesnakes. The very soul sickens, and the mind revolts at the thought of slavery, and the true man welcomes instant death in preference to being reduced to its degradation and ruin.

Yet such was the condition of our brothers and sisters in the British West Indies, up to the morning of the first of August, 1834. The wicked love of dominion by man over man, had made strong their fetters and multiplied their chains. But on the memorable morning which we are met to celebrate, one bolt from the moral sky of Britain left these bloodstained irons all scattered and broken throughout the West Indies, and the limbs they had bruised, out-stretched in praise and thanksgiving to God for deliverance. No man of any sensibility can read the account of that great transaction without emotions too great for utterance. There was something Godlike in this decree of the British nation. It was the spirit of the Son of God commanding the devil of slavery to go out of the British West Indies.

It said tyrant slave-driver, fling away your blood-stained whip, and bury out of sight your broken fetters and chains. Your accursed occupation is gone. It said to the slave, with wounds, bruises, and scars yet fresh upon him, you are emancipated—set free—enfranchised—no longer slaves, but British subjects, and henceforth equal before the British law!

Such, my friends, was the change—the revolution—the wondrous transformation which took place in the condition of the colored people in the British West Indies, twenty-three years ago. With the history of the causes, which led to this great consummation, you are perhaps already sufficiently acquainted. I do not intend in my present remarks to enter into the tedious details of this history, although it might prove quite instructive to some in this assembly. It might prove especially interesting to point out various steps in the progress of the British Anti- Slavery movement, and to dwell upon some of the more striking analogies between that and our movement in this country. The materials at this point are ample, did the limits of the hour permit me to bring them forward.

One remark in this connection I will make. The abolition movement in America, like many other institutions of this country, was largely derived from England. The defenders of American slavery often excuse their villainy on the ground that they inherited the system from England. Abolitionism may be traced to the same source, yet I don’t see that it is any more popular on that account. Mr. Garrison applied British abolitionism to American slavery. He did that and nothing more. He found its principles here plainly stated and defined; its truths glowingly enunciated, and the whole subject illustrated, and elaborated in a masterly manner. The sin—the crime—the curse of slavery, were all demonstrated in the light of reason, religion, and morality, and by a startling array of facts. We owe Mr. Garrison our grateful homage in that he was among the first of his countrymen who zealously applied the British argument for abolition, against American slavery. Even the doctrine of immediate emancipation as against gradualism, is of English, not American origin. It was expounded and enforced by Elizabeth Herrick, and adopted by all the earnest abolitionists in England. It came upon the British nation like Uncle Tom’s Cabin upon our land after the passing of the fugitive slave law, and it is remarkable that the highest services rendered the anti-slavery cause in both countries, were rendered by women. Elizabeth Herrick, who wrote only a pamphlet, will be remembered as long as the West India Emancipation is remembered, and the name of Harriet Beecher Stowe can never die while the love of freedom lives in the world.

But, my friends, it is not with these analogies and minute references that I mean in my present talk, to deal.

I wish you to look at West India Emancipation as one complete transaction of vast and sublime significance, surpassing all power of exaggeration. We hear and read much of the achievements of this nineteenth century, and much can be said, and truthfully said of them. The world has literally shot forward with the speed of steam and lightning. It has probably made more progress during the last fifty years, than in any five hundred years to which we can refer in the history of the race. Knowledge has been greatly increased, and its blessing widely diffused.

Locomotion has been marvelously improved, so that the very ends of the earth are being rapidly brought together. Time to the traveler has been annihilated.

Deep down beneath the stormy surface of the wide, wide waste of waters, a pathway has been formed for human thought. Machinery of almost every conceivable description, and for almost every conceivable purpose, has been invented and applied; ten thousand discoveries and combinations have been made during these last fifty years, till the world has ceased to ask in astonishment “what next?” for there seems scarcely any margin left for a next. We have made hands of iron and brass, and copper and wood, and though we have not been able to endow them with life and soul, yet we have found the means of endowing them with intelligent motion, and of making them do our work, and to do it more easily, quickly and more abundantly than the hands in their palmiest days were able to perform it. I am not here to disparage or underrate this physical and intellectual progress of the race. I thank my God for every advance which is made in this direction.

I fully appreciate the beautiful sentiment which you farmers, now before me, so highly regard, “that he who makes two blades of grass grow where only one grew before,” is a benefactor. I recognize and honor, as you do, all such benefactors. There is not the slightest danger that those who contribute directly to the world’s wealth and ease will ever be forgotten by the world. The world loves its own. A hungry man will not forget the hand that feeds him, though he may forget that Providence which caused the bread to grow. Arkwright, Watt, Fulton, Franklin, Morse, and Daguerre, are names which will not fade from the memories of men. They are grand civilizers, but civilizers after their kind—and great as are their achievements, they sink to nothingness when compared with that great achievement which has given us the first day of August as a sacred day. “What shall it profit a man if he gain the whole world and lose his own soul?” We are to view this grand event in the light of this sublime enquiry.

“Men do not live by bread alone,” said the great Redeemer. What is true of individual men, is also true of societies, and nations of men. Nations are not held in their spheres, and perpetuated in health by cunning machinery. Railroads, steamships, electric wires, tons of gold and silver, and precious stones cannot save them. A nation may perish in the midst of them all, or in the absence of them all. The true life principle is not in them.

Egypt died in the sight of all her imposing wealth and her everlasting Pyramids. The polished stone is there, but Egypt is gone. Greece has vanished, her life disappeared as it were, in a trance of artistic beauty and architectural splendor. Great Babylon, the mother of harlots and the abominations of the earth, fell in the midst of barbaric wealth and glory. The lesson taught by the history of nations is that the preservation or destruction of communities does not depend upon external prosperity. Men do not live by bread alone, so with nations. They are not saved by art, but by honesty. Not by the gilded splendors of wealth, but by the hidden treasure of manly virtue. Not by the multitudinous gratification of the flesh, but by the celestial guidance of the spirit.

It is in this view that West India Emancipation becomes the most interesting and sublime event of the nineteenth century. It was the triumph of a great moral principle, a decisive victory, after a severe and protracted struggle, of freedom over slavery; of justice and mercy against a grim and bloody system of devilish brutality. It was an acknowledgment by a great nation of the sacredness of humanity, as against the claims of power and cupidity. . . .

Now, my friends, how has this great act of freedom and benevolence been received in the United States. How has our American Christian Church and our American Democratic Government received this glorious new birth of National Righteousness.

From our professions as a nation, it might have been expected that a shout of joy and gladness would have shook the hollow sky, that loud hallelujahs would have rolled up to heaven from all our borders, saying, “Glory to God, in the highest, on earth peace and good will toward man. Let the earth be glad.” “The Lord God omnipotent reigneth.”

Alas, no such responsive note of rejoicing has reached my ear, except from a part of the colored people and their few white friends. As a nation, we are deaf, dumb, and blind to the moral beauty and transcendent sublimity of West India Emancipation. We have passed it by with averted eyes, regarding it rather as a reflection to be resented than as an example to be imitated. First, we looked for means of impeaching England’s motives for abolishing Slavery, and not being able to find any such, we have made ourselves hoarse in denouncing emancipation as a failure.

We have not viewed the great fact in the light of a liberal philosophy, but have applied to it rules of judgment which were not intended to reveal its true character and make known its actual worth. We have taken a microscope to view the stars, and a fish line to measure the ocean’s depths.

We have approached it as though it were a railroad, a canal, a steamship, or a newly invented mowing machine, and out of the fullness of our dollar-loving hearts, we have asked with owl-like wisdom, Will it pay? Will it increase the growth of sugar? Will it cheapen tobacco? Will it increase the imports and exports of the Islands? Will it enrich or ruin the planters? How will it effect Jamaica spirits? Can the West Indies be successfully cultivated by free labor? These and sundry other questions, springing out of the gross materialism of our age and nation, have been characteristically put respecting West India Emancipation. All our tests of the grand measure have been such as we might look for from slave- holders themselves. They all proceed from the slave-holders’ side, and never from the side, of the emancipated slaves.

The effect of freedom upon the emancipated people of the West Indies passes for nothing. It is nothing that the plundered slave is now a freeman; it is nothing with our sagacious, economical philosophers, that the family now takes the place of concubinage; it is nothing that marriage is now respected where before it was a mockery; it is nothing that moral purity has now a chance to spring up, where before pollution was only possible; it is nothing that education is now spreading among the emancipated men and women, bearing its precious fruits, where only ignorance, darkness, superstition and idolatry prevailed before; it is nothing that the whipping post has given way to the schoolhouse; it is nothing that the church stands now where the slave prison stood before; all these are nothing, I say, in the eyes of our slavery-cursed country.

But the first and last question, and the only question which we Americans have to press in the premises, is the great American question (viz.) will it pay?

Sir, if such a people as ours had heard the beloved disciple of the Lord, exclaiming in the rapture of the apocalyptic vision, “And I saw another angel fly in the midst of heaven, having the everlasting gospel to preach to them that dwell on the earth, and to every nation, kindred, tongue, and people;” they, instead of answering, Amen Glory to God in the Highest, would have responded,—But brother John, will it pay? Can money be made out of it? Will it make the rich richer, and the strong stronger? How will it affect property? In the eyes of such people, there is no God but wealth; no right and wrong but profit and loss.

Sir, our national morality and religion have reached a depth of baseness than which there is no lower deep. They both allow that if men can make money by stealing men and women, and by working them up into sugar, rice, and tobacco, they may innocently continue the practice, and that he who condemns it is an unworthy citizen, and a disturber of the church. Money is the measure of morality, and the success or failure of slavery, as a money-making system, determines with many whether the thing is virtuous, or villainous, and whether it should be maintained or abolished. They are for Slavery where climate and soil are said to be for it, and are really not opposed to it anywhere, though as a nation we have made a show of opposition to it where the system does not exist. With our geographical ethics, and climatic religion, we have naturally sided with the slave-holders and women-whippers of the West Indies, in denouncing the abolition of slavery in the West Indies a failure.

Sir: As to what has been the effect of West India freedom upon the material condition of the people of those Islands, I am happy that there is one on this platform, who can speak with the authority of positive knowledge. Henry Highland Garnet has lived and labored among those emancipated people. He has enjoyed ample opportunity for forming an intelligent judgment in respect to all that pertains to the subject. I therefore most willingly leave this branch of the subject to him.

One remark, however, I will venture to make—and that is this: I take it that both the friends and the enemies of the emancipated have been too impatient for results. They seem to forget that although a nation can be born in a day, it can mature only in centuries—that though the fetters on the limbs can be broken in an instant, the fetters on the soul can wear off only in the ages.

Degradation, mental, moral, and physical, ground into the very bones of a people by ages of unremitting bondage, will not depart from that people in the course even of many generations.

West India freedom, though more than twenty-one years old, is yet but an infant. And to predicate its future on its present weakness, awkwardness, and improvidence now, is about as wise as to apply the same rule to your little toothless children. It has taken at least a thousand years to bring some of the leading nations of the earth from the point where the Negroes of the West Indies started twenty-three years ago, to their present position. Let considerations like these be duly weighed, and black man though I am, I do not fear the world’s judgment.

Now, sir, I like these annual celebrations. I like them because they call us to the contemplation of great interests, and afford an opportunity of presenting salutary truths before the American people. They bring our people together, and enable us to see and commune with each other to mutual profit. If these occasions are conducted wisely, decorously, and orderly, they increase our respectability in the eyes of the world, and silence the slanders of prejudice. If they are otherwise conducted they cover us with shame and confusion. But, sir, these celebrations have been objected to by our slaveholding democracy; they do not think it in good taste. Slaveholders are models of taste. With them, propriety is everything; honesty, nothing. For a long time they have taught our Congress, and Senate, and Pulpits, what subjects should be discussed, and what objects should command our attention. Senator Sumner fails to observe the proscribed rules and he falls upon the Senate floor, stunned and bleeding beneath the ruffian blows of one of our southern models of propriety. By such as these, and by their timid followers, this is called a British celebration.

From the inmost core of my soul I pity the mean spirits, who can see in these celebrations nothing but British feeling. The man who limits his admiration of good actions to the country in which he happens to be born, (if he ever was born,) or to the nation or community of which he forms a small part, is a most pitiable object. With him to be one of a nation is more than to be one of the human family. He don’t live in the world, but he lives in the United States. Into his little soul the thought of God as our common Father, and of man our common Brother has never entered. To such a soul as that, this celebration cannot but be exceedingly distasteful.

But sarcasm aside, I hold it to be eminently fit that we keep up those celebrations from year to year, at least until we shall have an American celebration to take its place. That the event we thus commemorate transpired in another country, and was wrought out by the labors and sacrifices of the people of another nation, forms no valid objection to its grateful, warm, hearty, and enthusiastic celebration by us. In a very high sense, we may claim that great deed as our own. It belongs not exclusively to England and the English people, but to the lovers of Liberty and of mankind the world over. It is one of those glorious emanations of Christianity, which, like the sun in the Heavens, takes no cognizance of national lines or geographical boundaries, but pours its golden floods of living light upon all. In the great Drama of Emancipation, England was the theatre, but universal and everywhere applying principles of Righteousness, Liberty, and Justice were the actors. The great Ruler of the Universe, the God and Father of all men, to whom be honor, glory, and praise for evermore, roused the British conscience by his truth, moved the British heart, and West India Emancipation was the result. But if only Englishmen may properly celebrate this great concession to justice and liberty, then, sir, we may claim to be Englishmen, Englishmen in the love of Justice and Liberty, Englishmen in magnanimous efforts to protect the weak against the strong, and the slave against the slaveholder. Surely in this sense, it ought to be no disgrace to be an Englishman, even on the soil of the freest people on the globe.

But, Mr. Chairman, we celebrate this day on the broad platform of Philanthropy—whose country is the world, and whose countrymen are all mankind. On this platform we are neither Jews nor Greeks, strangers nor foreigners, but fellow citizens of the household of faith. We are the brothers and friends of Clarkson, Wilberforce, Granville, Sharpe, Richard Baxter, John Wesley, Thomas Day, Bishop Portius, and George Fox, and the glorious company of those who first wrought to turn the moral sense of mankind in active opposition to slavery. They labored for freedom not as Englishmen, but as men, and as brothers to men—the world over—and it is meet and right to commemorate and imitate their noble example. So much for the Anti-British objection.

I will now notice a special objection. It is said that we, the colored people, should do something ourselves worthy of celebration, and not be everlastingly celebrating the deeds of a race by which we are despised.

This objection, strange as it may seem, comes from no enemy of our people, but from a friend. He is himself a colored man, a high spirited and patriotic man, eminent for learning and ability, and to my mind, he has few equals, and no superior among us. I thank Dr. J. M’Cune Smith for this objection, since in the answer I may make to it, I shall be able to give a few of my thoughts on the relation subsisting between the white and colored people of this country, a subject which it well becomes us to consider whenever and wherever we congregate.

In so far as this objection to our celebrating the first of August has a tendency to awaken in us a higher ambition than has hitherto distinguished us, and to raise our aims and activities above the dull level of our present physical wants, and so far as it shall tend to stimulate us to the execution of great deeds of heroism worthy to be held in admiration and perpetual remembrance, for one, sir, I say amen to the whole of it. I am free to say, that nothing is more humiliating than the insignificant part we, the colored people, are taking in the great contest now going on with the powers of oppression in this land. I can stand the insults, assaults, misrepresentations, and slanders of the known haters of my race, and brave them all. Hook for such opposition. It is a natural incident of the war, and I trust I am to a certain degree prepared for it; but the stolid contentment, the listless indifference, the moral death which reigns over many of our people, we who should be all on fire, beats down my little flame of enthusiasm and leaves me to labor, half robbed of my natural force. This indifference, in us, is outrageous. It is giving aid and comfort to the men who are warring against our very manhood. The highest satisfaction of our oppressors, is to see the Negro degraded, divested of public spirit, insensible to patriotism, and to all concern for the freedom, elevation, and respectability of the race.

Senator Toombs with a show of truth, lyingly said in Boston a year or two ago in defence of the slavery of the black race, they are mentally and morally inferior, and that if the whole colored population were swept from this country, there would be nothing in twenty years to tell that such a people had ever existed. He exulted over our assumed ignorance and over our destitution of valuable achievements. Of course the slaveholder uttered a falsehood, but to many it seemed to be a truth, and vast numbers of the American people receive it as a truth to-day, and shape their action accordingly.

The general sentiment of mankind is, that a man who will not fight for himself, when he has the means of doing so, is not worth being fought for by others, and this sentiment is just. For a man who does not value freedom for himself will never value it for others, nor put himself to any inconvenience to gain it for others. Such a man, the world says, may lie down until he has sense enough to stand up. It is useless and cruel to put a man on his legs, if the next moment his head is to be brought against a curb-stone.

A man of that type will never lay the world under any obligation to him, but will be a moral pauper, a drag on the wheels of society, and if he, too, be identified with a peculiar variety of the race he will entail disgrace upon his race as well as upon himself. The world in which we live is very accommodating to all sorts of people. It will co-operate with them in any measure which they propose; it will help those who earnestly help themselves, and will hinder those who hinder themselves. It is very polite, and never offers its services unasked.—Its favors to individuals are measured by an unerring principle in this: viz—respect those who respect themselves, and despise those who despise themselves. It is not within the power of unaided human nature to persevere in pitying a people who are insensible to their own wrongs, and indifferent to the attainment of their own rights. The poet was as true to common sense as to poetry when he said,

“Who would be free, themselves must strike the blow.”

When O’Connell, with all Ireland at his back, was supposed to be contending for the just rights and liberties of Ireland, the sympathies of mankind were with him, and even his enemies were compelled to respect his patriotism. Kossuth, fighting for Hungary with his pen long after she had fallen by the sword, commanded the sympathy and support of the liberal world till his own hopes died out. The Turks, while they fought bravely for themselves and scourged and drove back the invading legions of Russia, shared the admiration of mankind. They were standing up for their own rights against an arrogant and powerful enemy; but as soon as they let out their fighting to the Allies, admiration gave way to contempt. These are not the maxims and teachings of a cold-hearted world. Christianity itself teaches that a man shall provide for his own house. This covers the whole ground of nations as well as individuals. Nations no more than individuals can innocently be improvident. They should provide for all wants, mental, moral, and religious, and against all evils to which they are liable as nations. In the great struggle now progressing for the freedom and elevation of our people, we should be found at work with all our might, resolved that no man or set of men shall be more abundant in labors, according to the measure of our ability, than ourselves.

I know, my friends, that in some quarters the efforts of colored people meet with very little encouragement. We may fight, but we must fight like the Sepoys of India, under white officers. This class of Abolitionists don’t like colored celebrations, they don’t like colored conventions, they don’t like colored Anti-Slavery fairs for the support of colored newspapers. They don’t like any demonstrations whatever in which colored men take a leading part. They talk of the proud Anglo-Saxon blood, as flippantly as those who profess to believe in the natural inferiority of races. Your humble speaker has been branded as an ingrate, because he has ventured to stand up on his own right, and to plead our common cause as a colored man, rather than as a Garrisonian. I hold it to be no part of gratitude to allow our white friends to do all the work, while we merely hold their coats. Opposition of the sort now referred to, is partisan opposition, and we need not mind it. The white people at large will not largely be influenced by it. They will see and appreciate all honest efforts on our part to improve our condition as a people.

Let me give you a word of the philosophy of reform. The whole history of the progress of human liberty shows that all concessions yet made to her august claims, have been born of earnest struggle. The conflict has been exciting, agitating, all-absorbing, and for the time being, putting all other tumults to silence. It must do this or it does nothing. If there is no struggle there is no progress. Those who profess to favor freedom and yet deprecate agitation, are men who want crops without plowing up the ground, they want rain without thunder and lightning. They want the ocean without the awful roar of its many waters.

This struggle may be a moral one, or it may be a physical one, and it may be both moral and physical, but it must be a struggle. Power concedes nothing without a demand. It never did and it never will. Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress. In the light of these ideas, Negroes will be hunted at the North, and held and flogged at the South so long as they submit to those devilish outrages, and make no resistance, either moral or physical. Men may not get all they pay for in this world, but they must certainly pay for all they get. If we ever get free from the oppressions and wrongs heaped upon us, we must pay for their removal. We must do this by labor, by suffering, by sacrifice, and if needs be, by our lives and the lives of others.

Hence, my friends, every mother who, like Margaret Garner, plunges a knife into the bosom of her infant to save it from the hell of our Christian Slavery, should be held and honored as a benefactress. Every fugitive from slavery who like the noble William Thomas at Wilkesbarre, prefers to perish in a river made red by his own blood, to submission to the hell hounds who were hunting and shooting him, should be esteemed as a glorious martyr, worthy to be held in grateful memory by our people. The fugitive Horace, at Mechanicsburgh, Ohio, the other day, who taught the slave catchers from Kentucky that it was safer to arrest white men than to arrest him, did a most excellent service to our cause. Parker and his noble band of fifteen at Christiana, who defended themselves from the kidnappers with prayers and pistols, are entitled to the honor of making the first successful resistance to the Fugitive Slave Bill. But for that resistance, and the rescue of Jerry, and Shadrack, the man-hunters would have hunted our hills and valleys here with the same freedom with which they now hunt their own dismal swamps.

There was an important lesson in the conduct of that noble Krooman in New York, the other day, who, supposing that the American Christians were about to enslave him, betook himself to the mast head, and with knife in hand, said he would cut his throat before he would be made a slave. Joseph Cinque on the deck of the Amistad, did that which should make his name dear to us. He bore nature’s burning protest against slavery. Madison Washington who struck down his oppressor on the deck of the Creole, is more worthy to be remembered than the colored man who shot Pitcairn at Bunker Hill.

My friends, you will observe that I have taken a wide range, and you think it is about time that I should answer the special objection to this celebration. I think so too. This, then, is the truth concerning the inauguration of freedom in the British West Indies. Abolition was the act of the British Government. The motive which led the Government to act, no doubt was mainly a philanthropic one, entitled to our highest admiration and gratitude. The National Religion, the justice, and humanity, cried out in thunderous indignation against the foul abomination, and the government yielded to the storm. Nevertheless a share of the credit of the result falls justly to the slaves themselves. “Though slaves, they were rebellious slaves.” They bore themselves well. They did not hug their chains, but according to their opportunities, swelled the general protest against oppression. What Wilberforce was endeavoring to win from the British Senate by his magic eloquence, the Slaves themselves were endeavoring to gain by outbreaks and violence. The combined action of one and the other wrought out the final result. While one showed that slavery was wrong, the other showed that it was dangerous as well as wrong. Mr. Wilberforce, peace man though he was, and a model of piety, availed himself of this element to strengthen his case before the British Parliament, and warned the British government of the danger of continuing slavery in the West Indies. There is no doubt that the fear of the consequences, acting with a sense of the moral evil of slavery, led to its abolition. The spirit of freedom was abroad in the Islands. Insurrection for freedom kept the planters in a constant state of alarm and trepidation. A standing army was necessary to keep the slaves in their chains. This state of facts could not be without weight in deciding the question of freedom in these countries.

I am aware that the rebellious disposition of the slaves was said to arise out of the discussions which the abolitionists were carrying on at home, and it is not necessary to refute this alleged explanation. All that I contend for is this: that the slaves of the West Indies did fight for their freedom, and that the fact of their discontent was known in England, and that it assisted in bringing about that state of public opinion which finally resulted in their emancipation. And if this be true, the objection is answered.

Again, I am aware that the insurrectionary movements of the slaves were held by many to be prejudicial to their cause. This is said now of such movements at the South. The answer is that abolition followed close on the heels of insurrection in the West Indies, and Virginia was never nearer emancipation than when General Turner kindled the fires of insurrection at Southampton.

Sir, I have now more than filled up the measure of my time. I thank you for the patient attention given to what I have had to say. I have aimed, as I said at the beginning, to express a few thoughts having some relation to the great interests of freedom both in this country and in the British West Indies, and I have said all that I meant to say, and the time will not permit me to say more.”