142 Should we make the ones who cause recessions pay for them?


Tom Garrett 3 years, 11 months ago

I don't know how much you've read about it, but every word I have ever read says the same thing: Recessions and depressions are caused by people who speculate with money that isn't theirs, cause the market to crash, and cost all of us jobs and moneyt.

Here, for the first time ever, a company is about to held accountable for what it did.

Attorney General Eric Holder said the government is going to sue Standard & Poor's for "knowingly issuing inflated credit ratings," which led to the loss of billions of dollars.

He adds, "S&P falsely claimed that its ratings were independent, objective, and not influenced by the company's relationship with the issuers who hired S&P to rate the securities in question. In reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire to increase its profits and market share to favor the interests of issuers over investors."

Now think about it. How much did that crash cost you? The country? The world? Should we let the same CEO's who nearly busted the country walk off enjoying bonuses for what they did?

According to the lawsuit, S&P rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations between September 2004 and October 2007.

"To date, we have identified more than $5 billion in ... losses, resulting from CDOs that were rated by S&P between March and October 2007," the attorney general said. "During this period, nearly every single mortgage-backed CDO that was rated by S&P not only underperformed -- but failed."

Suing has been tried before. You know how S&P won? It argued--and some court agreed--that ratings are opinions and therefore protected by the right to free speech.

However, we may have them this time. This time, the case centers on allegations of fraud. Attorney General Holder argues that S&P knowingly ignored its own ratings standards for several years prior to the meltdown.

"As early as 2003, analysts within S&P raised concerns about the accuracy of the company's rating system, as well as the underlying methodology," Holder said. "S&P executives allegedly ignored these warnings, and -- between 2004 and 2007 -- concealed facts, made false representations to investors and financial institutions, and took other steps to manipulate ratings criteria and credit models to increase revenue and market share."

One eye-opening chunk of evidence is this pair of e-mails where two S&P analysts talk about bonds which collapsed just a year after S&P gave them a AAA rating:

Analyst Lois Cheng: "Um ... looks like the remaining portion is actually all sub-prime."

Analyst Lauren Sprinkle: "Do you want to address this with them, or let it go?"

Analyst Shannon Mooney: "Hey, let the higher ups handle this."


Tom Garrett 3 years, 11 months ago

Someone has proposed a tax to eliminate part of the problem. Let's talk about it.

It's obvious that in a free enterprise economy there are going to be ups and downs. A farmer's fields get too little rainfall. His crop is small or not up to par. Two things can happen: If it's a local problem then the value of his crop falls and he makes less. The result is a drop in the local economy. Or, depending on how large "local" is, that can hurt a lot of people and have a domino effect.

On the other hand, a bumper crop year can come along, depressing farm prices on a wide scale and causing an even worse fluctuation. And the same kind of "can't win" fluctuations can occur in most industries, usually because of something some business genius has done. It was a problem that Karl Marx claimed that his ideas would end.

And he was right.

"What?" you are saying? "Marx was right?"

Yes! Of course! He was right.

There were no human-caused fluctuations in a Communist economy. None at all. Every year was a depression year. At least for the people. (PS: Gotcha!)

But what is a recession or a depression? A severe slowdown in the economy caused by speculation.

Someone--or sometimes a lot of someones--starts manipulating the market. Prices soar. The speculators reap profits. Not satisfied, they keep on. They keep on pushing and pushing until prices are far beyond reason. I watched that happen up here in Pine. Real estate prices went right out of sight. They were ridiculous. One of the nicest people I have ever met bought the house next door for half again as much as it was worth. When he told me what he had paid for it I blurted out some dumb remark, but he just grinned and said he was a realtor and was going to just use it as a place to vacation while he speculated in houses up here. He was doing quite well. Had five of them when the bubble burst. He lost all of them.

So did a lot of other people. And people who had bought on a variable mortgage with the idea of refinancing when prices went up lost houses all over the place. That's their problem, but lot of people who had done nothing except buy a house got hurt because they lost their jobs, and that is NOT just their problem. The people who caused all this by manipulating the market should pay the freight. And if their was any fraud involved they should spend a few years wearing iron pants in some prison.

But someone, realizing that the computer has come close to screwing up the stock market, says he has a partial solution. I'll post it.


Tom Garrett 3 years, 11 months ago

I'm going to quote a small portion of an article I read in a place called The Moderate Voice.

I neither endorse that site nor beleive it is "moderate."

"No tax can be completely painless, but there is one that comes pretty close."

"A tax that will be relatively painless for the vast majority of citizens would be a small stock transaction tax..."

"The amount of the levy that has been discussed is three basis points on every trade, or three cents for every hundred dollars traded."

"... estimated that this tax would bring $352 billion into government coffers over ten years."

Here's why I think the author of the article wants the tax. He says--correctly--that high frequency trading accounts for about half of all trades. He points out that some companies have algorithms that allow them to trade hundreds of thousands or millions of shares in milliseconds in order to make money buying or selling. He adds that this practice is clearly responsible for many of the bad things that happen on the market, including making it almost impossible for an individual to compete, and making the market far too "volatile," and that "these companies provide nothing of... value with their trading."

I've read about these programs. They take advantage of tiny little moment-to-moment fluctuations in prices. A stock price might drop by--say--ten cents, which is almost nothing, but if you buy and sell half a million shares in 30 seconds you've made $50,000. Do it all day every and you make millions. But you are nothing more than a leech who causes problems for everyone.

The author of the article ends with this comment: "A transaction tax would [not affect average] American citizens, raise significant revenue, and [would pose] no danger to the financial system. In fact, it could reduce stock market volatility and lessen possible disruptions to the market. Seems like a no-brainer even for our Congress."

And you say.....


Tom Garrett 3 years, 10 months ago

No comments?

You think Wall Street speculators should be allowed to cause the whole nation to go into a tailspin like the one we're in?


Pat Randall 3 years, 10 months ago

NO. Someone should be investigating them. Do you know how many smaller speculators live here in Payson? Some of them lost the homes they were living here. Don't other countries owe us money?


Tom Garrett 3 years, 10 months ago

It's a balance, isn't it?

We don't want to interfere with the free flow of the market, but we don't want to allow greedy, venal robber barons to take advantage of us. In any system based on private enterprise there is a certain amount of speculation. Someone invests his time, thought, and money, opens a business, and hopes it will do well. Sometimes it does; sometimes it doesn't. That is the way our private enterprise systems works. It is supposed to reward honest effort, and there is nothing else that can match it for efficiency--not to mention the feeling it inspires in all of us that it is somehow "natural."

But there are those who put their time and thought into ways of manipulating the system instead of ways to use it as it was intended to be used. Quite often, they get themselves into a position of authority in some corporation and use that position to do things that make money, not by earning it honestly, but by essentially cheating someone else out of what he has earned or invested.

It happens between and among businesses, and in the stock market. If we really care about private enterprise--and we must--we should make it absolutely illegal to in any way attempt to manipulate the stock market, or to speculate with other people's money, or to engage in any practice which is not straightforward and honest. And our laws should be such that any crime that is for over $100--whether it's mugging someone in a dark alley, or stealing the dividends he earned with his investments--is going to send you to prison. And the larger the "mugging" is, or the larger the number of times it is repeated, the longer that prison stay is going to be.

You know something? Very few of us get hurt by some mugger or some drug dealer packing a Saturday Night Special, but think of the millions of honest Americans who are out of work right now, their houses lost, their cars gone back to the dealer, their furniture sold for a song because there was no place to store it--all gone. Think of the years invested in some job, the sense of helplessness, the utter futility, the harm done to the innocent, the loss to everyone, everywhere, and you will quickly realize that our legal system is set up to punish those who commit "showy" crimes like murder, crimes that are actually quite rare, instead of punishing the crimes from which we ALL suffer.

White collar crime is the primary cause of suffering, both in this country and around the world. Until we make up our minds to force our legislators to address it as what it is--a cancer that is eating away at the very roots of our private enterprise based society--we will continue to slowly and inexorably slide downhill into a morass of greed.


Bernice Winandy 3 years, 10 months ago

Yes, those who caused the recession and benefitted from that which caused the recession should pay. I think that is why the tax raise for the top 1% or 2% is appropriate. But, I guess their are certain people who don't agree. i.e. look to Congress


Tom Garrett 3 years, 10 months ago

Don't feel like you're the only one who does that kind of thing, Bernice. Everyone does it.

Strange, isn't it though?

One place where we all feel embarrassed is when we make a mistake like that. I wonder why?


Tom Garrett 3 years, 10 months ago

One last comment.

You know the only thing wrong with the idea of having the "people who cause recessions" have to pay for them is that when Washington gets done passing some bill or other about it, the "people who cause recessions" is likely to be interpreted as everyone in the business world, not the few people who genuinely abuse a system that is generally pretty good.

If you just heard a loud sigh it came out of me.


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