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Propaganda Wars: Our Version – Toxic bloom of lies

We ended the last part of Propaganda Wars with the question,

“So what are the ways the banks ditched safety and robustness in favour of performance, profit and bonus package?”

To answer this we are going to look in more detail at the money banks lend out and are owed back (bank income) which is the Assets side of the balance sheet. Once again we’ll pick on Barclays. First thing to notice is that there are  Assets and what is called ‘Risk Weighted’ assets.

The difference? 20 odd years of all expenses paid, Basel I, II and III meetings in which it was decided that not all assets/loans are equally risky, plus the millions in bonuses paid to bankers for them to weigh the risk that any given asset /loan may not quite deliver.

The gap between those  two lines is supposed to be what makes modern banking so profitable, efficient and yet still completely safe. In the event it turned out it was actually a direct measure of  how much we had to bail them out when all that brilliance and regulation turned out to be bollocks.

The most astonishing thing about this graph is that it clearly claims that as we progressed through the nineties and up to the bubble, banking was becoming less and less risky. The world, according to this graph, was filling up with less and less risky assets. You may balk at this given what we all know happened but that is what the graph says all the same. In 1992 the gap between the face value of the bank’s assets and the fraction of that value that was considered to be risky or at risk was small. The risk weighted total was nearly 3/4 of the actual face value. Which means most assets were risk weighted at one. But as the global volume of debts, of mortgages, securities, derivatives (such as CDS and currency swaps) and bonds of increasingly indebted sovereigns grew and grew, the risk according to the banks became less and less. As the world became more indebted, as banks carried more and more of that debt with less and less equity to support it, the risk of the whole thing became less and less. That is what the graph says at least. Every bank, not just Barclays, carried more and more debt but claimed there was less and less risk in doing so. No where in this graph or in those just like it for the other banks, is there any trace or hint of the vast risk they were all running and which the system as a whole was accumulating.

In 2007, the moment when the first shudders of impending catastrophe ran through the global debt system, Barclays found the risk posed by their assets had plummeted from the 3/4 of face value that it had been in 1992 to less than a third in 2007. And the pattern is the same for all the global banks.

So what had happened in those 15 years? Can we believe the financial world had really become much less risky? Had assets become safer? Were there somehow billions of Dollars and Euros worth of newer, far less risky asset classes in existence than had ever existed before? Well we have four years of incontrovertible evidence that utterly refutes any such rosy notions. And yet, those who claim that there was and is nothing fundamentally wrong with the system, that what happened was just a passing crisis of confidence and liquidity, are in effect asserting that the graph and its claims are absolutely correct. And moreover the defenders of the financial status quo are continuing to assess risk now exactly as they did then. More of the same is what they are lobbying for. Much, much more.

Needless to say I don’t agree.What actually happened, I argue, is that the banks and regulators created the Basel agreements which the banks pretend to hate but in fact largely control. The bankers had decided they understood risk better than anyone else and should therefore be in charge of regulating it, reporting on it and profiting by it. And from this conviction Basel I, II and now III were born as the bastard offspring of the banker’s tumescent avarice and the regulators servile willingness to service them. What ensued was a revolting orgy of rapine excess behind a veil of sober sounding terminology and Basel agreements.

The Basel II agreement ruled that banks didn’t need to hold the same amount of capital against those assets that were considered to be of lower risk – lower risk weighted. This for instance is a typical risk weighting table based on Basel II.

Risk Weight
Cash and equivalents
Government securities
Interbank loans
Mortgage loans
Ordinary loans
Standby letters of credit

So for example government securities (the AAA rated kind only of course), because there is obviously zero chance of them not being paid,  carry no risk. Thus however many billions of euros worth of those a bank has, the total is multiplied by zero and that big, safe risk weighted zero is the ‘risk weighted’ amount the bank has to hold capital against.

As you can see a bank which chose to buy government securities in 2008 or even 2009 when most European sovereigns were rated as AAA, would be judged to be running zero risk from those securities and would therefore not have to hold any capital against them. Of course it is an oddity of banking logic that not all AAA rated risk-free government securities and bonds are equally ‘risk free’.

Thus it was well known by 2003 at the latest that both Italy and Greece had, since 2001 at least, been making major Currency-swap deals with big US banks whose purpose was to artificially reduce the amount of debt those countries appeared to have. The deals didn’t actually reduce the debt. In fact they increased it. But they did hide some of it long enough to ‘fool’ the regulators.

You remember them? They’re the ones under whose strict supervision the banks were allowed to calculate their own risk weighting on the assets, like government securities, they were holding.

So since 2001 at the latest the major banks would have been well aware that behind the official debt figures of several European sovereigns was a large hidden debt which would make something of a mockery of the AAA rating. So why buy them if the banks knew they were riskier than they appeared? Easy. The key is the lag time between what the official rating agency/government rating says and what the market says.

Once the market (AKA the banks) knew the real risks then the payments demanded on those securities and bonds would go up, making them more lucrative than safer securities and bonds from other countries. BUT because they were still officially AAA rated they could be held as if they were risk free with a risk weighting of zero. This is what we might call rating arbitrage or a case of officially sanctioned having ones cake and eating it as well.

On one side of every bank bankers would hold securities and bonds as risk-free assets while a few yards away on the other side of the bank a whole different bunch of bankers would be busy selling CDS on those same securities at ever higher rates as the ‘market’ judged them to be riskier and riskier. Riskier and riskier in the profit chasing bit of the bank but risk free in Basel and in the office where the bank’s risks were calculated.

In fact Basel II, which took many years of fine lunches and much expert cogitation on the part of the bankers and their regulators, went further. It decided that while some banks and countries (those not so brilliant ones run by foreigners) would be required to follow guidelines like the above chart, for the banks whose brilliance was amply attested to by their enormous…balance sheet, they would be allowed to move on to a new   “internal ratings-based” (IRB) system.

In this approach, institutions will be allowed to use their own internal measures for key drivers of credit risk as primary inputs to the capital calculation, …

subject, of course,

to meeting certain conditions and to explicit supervisory approval.

Yes, quite so! They decide their own risk according to their own model… but subject to approval.

All institutions using the IRB approach will be allowed to determine the borrowers’ probabilities of default while those using the advanced IRB approach will also be permitted to rely on own estimates of loss given default and exposure at default on an exposure-by-exposure basis.

Advanced IRB as well! Of course the models being used are proprietary and therefore NOT open to scrutiny by any outside experts. What do you think, if the bank’s experts came up with two possible models one of which gave a lower over-all risk weighted total which do you think the bank would go for? And if another bank came up with a model that shaved just a little bit more off the risk weighting do you think there would be a subtle pressure to match the undoubted brilliance of their competitor’s model? I leave you to decide if such a thing could possibly have happened at any point in any bank some time between the Basel II update in which this idea was enshrined in 2005 and the bank debt crash of ’08.

So on the surface, according to the official story and the banks own figures the bank’s strategy for stellar growth was to vastly increase the volume of assets they held (Loans made) relative to a tiny capital base (the definition of increased leverage) BUT to somehow do this without increasing any risk, in fact managing to lower their risk. And they did it, according to the banks and regulators, by inventing and then buying hundreds of billions of dollars and Euros worth of new kinds of low risk assets. Except that it was the banks who were deciding if an asset was risky or not.

In case you think I am exaggerating or, lacking in a PhD as I am, just not understanding the subtle brilliance of modern banking and its risk management, read what Mr Haldane, Executive Director for Financial Stability at The Bank of England has to say about it (See pages 9- 10). First his over all point about the brilliance of banking.

…virtually all of the increase in the ROE (Return on Equity = Profitability) of the major UK banks during this century appears to have been the result of higher leverage.

For most banks, the story is one of a significant increase in assets relative to capital, with little movement into higher risk assets (unit risk makes a negative contribution for most banks). Those banks with highest leverage, however, are also the ones which have subsequently reported the largest write-downs. That suggests banks may also have invested in riskier assets, which regulatory risk-weights had failed to capture.

May have failed to capture?! That is a polite way of saying the banks lied, the regulators obliged and we carried the can for all of them.

It gets worse. In this period of ‘financial innovation’ the banks had other tricks and articles of faith that allowed them to hugely increase the risks they ran without appearing to do so. One of the most important tricks was and is to trade one kind of risk for another. A mortgage held by a bank is what is called a ‘Credit Risk’. Credit Risk is the risk that the borrower might not pay you back. Market Risk, on the other hand is the risk that the price an asset can be sold for in the market can go down. Of course it can also go up which is negative risk.

It is an article of faith in the financial world that Credit Risk is greater and therefore carries greater Risk Weighting than Market Risk. The logic is that in Credit Risk all it takes is for the one borrower to default and you’re out of money. But if instead of a loan you hold a security made of slices of many loans, then you are not stuck with it even if some of the underlying loans start to default. You can always find a buyer. With a loan, the risk is all yours and depends on one borrower. With a security you can always sell the product and its risk. The risk is therefore often seen as off-loadable into the magic ‘market’.

So what the big banks did, en masse, was to stop holding and making loans to customers (between 2000 and 20007 loans to customers declined from 35% to 29% of total assets) but securities held on the banks trading books almost doubled. In the world of modern bank regulation if two banks each held a loan they could BOTH reduce their risk simply by selling their loans to each other and hold them as securities. As securities they would be lower risk weighted, even though the actual risk and the loans was identical. Where had the risk magically gone? It had been absorbed and guaranteed by ‘the market’.

But risks ‘in the market’ are not accounted for by anyone in any place. There is no measure of it. Like polluters around a lake each flushes their risk away, declares their own site to be compliant with the highest environmental standards and never notices the dying fish or the toxic bloom in the waters off shore.

A further reward of this happy arrangement is that loans are held  on the Bank Book where they sit inert as far as market price goes. Even if the value of the house on which the loan is given goes up, the bank sees no benefit. It is simply a loan bringing in a regular payment. The same loan held as a security is held on the Trading book where it has a market price. The value of a security, the price for which it can be re-sold, does benefit from a rise in the value of the underlying house. It is marked at what is called Fair Value or Mark to Market. And what is more that rise in value is marked directly on the banks profit and loss figures.

So in every way the structure of the regulations which the banks worked hard to shape makes it not only very easy to hide risk but to profit greatly by doing so.

What could go wrong? Well when the bubble burst and prices went in reverse, in 2008 alone, the losses on these structured securities was about $210 billion. Risk? What risk!

Of course the banks were insured for this sort of risk. They had thought it all through. That’s why they’re paid so highly. Sadly they had insured …with each other. Insuring risk was one of the bank’s other favourite strategies for seeming to reduce risk and to profit by it.  All banks as well as insurers like AIG wrote insurance for ‘risky’ assets, securities, CDOs (Collateralized Debt Obligations) etc. The writing of insurance had a symbiotic relationship with what it was insuring. The more risky the assets, and the more of them to insure, the more lucrative business there was available to any bank wishing to insure it. The more insurers there were the greater the apparent market which underpinned and guaranteed the insurance.  The ‘magic’ of the market as absorber of all risk coming in to play again here.

In the end everyone had risky assets they wanted to insure and everyone was keen to profit from insuring them. Do both and you were doubly smart. Your assets were ‘safe’, your bank ran no risks on thoset assets (low risk weighting profile) and you had another whole river of  CSDS ‘assets’ that were themselvs considered and rated as ‘low risk’. Derivatives like CDS are generally not seen as high risk because they are tradeable in the market, the risks are seen as remote, the risks can be laid off on other willing market bidders and anyway what they are insuring are reliable produicts from good banks staffed by very clever bankers.  All in all a wonderfully sound world build on pure, 100%, leveraged bullshit. As Mr Haldane notes (p.11), AIG from ’03 to ’06 made an operating income of $2.3 billion on its CDS. In ’08 alone it made a loss on these same products of about $40 Billion. Which the tax payer had to pay.

In short these clever ‘structured’ products which were the engine of modern banking and still are, were a disaster. A disaster we are still paying for. And they make another appearance in the banks as well. Not the exact same ones, but ‘structured’ products also began to appear in the capital base of the banks as well. ie in the reserve of capital the banks must hold to underpin all the risk they were ‘not’ running. During this same period banks began to replace boring old investor equity with what they called Hybrid capital. The regulators just lay back and thought of England as usual.

Equity is boring like loans are boring. They just sit there. Hybrid capital puts the money back to work. The Capital is put into a ‘product’ that earns an income by being ‘invested’ but then after a certain date also returns the capital. They were guaranteed as a more efficient use of capital, more lucrative and yet also safe and reliable. But as the redoubtable Mr Haldane notes , again,

…such hybrid instruments have shown themselves largely unable to absorb losses during the crisis,..


Now much as I like to quote Mr Haldane and  think he speaks more honestly than almost all his colleagues, I feel we are in danger of being sucked into banker-think here, in spite of ourselves, by this phrase “largely unable”. If the brakes on a car were guaranteed to stop it in case of need , but in the event were ‘largely unable’ to do so the manufacturer would be sued into oblivion. If a parachute was found to be ‘largely unable’ to open or slow the fall of the unfortunate who was wearing it, would we shrug and offer to bail out the manufacturer? If aircraft were largely unable to stay airborn would we wish to pay their executives large bonuses to ensure they didn’t go elsewhere to work?

The financial products of the bubble years,  in fact the entire market for them, which was made of the very same people who also manufactured them, FAILED. But none of the  rules which would apply to any other form of corporate and product failure have been thought applicable to bankers. And who thought they should not be seen in the same way? The people whose utter failure to regulate them was an equal part of the crisis, like Nitro is to Glycerin.

Bankers and their regulators lied about risk. They hid it. They did not think to ask where risk was accumulating but prefered to talk like wide eyed fundamentalist nut balls about the efficiencey of the hidden hand of the market to make all things work out, find their correct price and be honest about risk, as if it was some kind of coke snorting, dick head God-ling of the modern era.

We have to change the terms of the entire financial and political debate and confront the claim that the banks,as they are presently run, are  safe and necessary. We need to ask, safe and necesary for whom? It must no longer be what must society do to save the banks but what must be done to the banks to save society from them.

We need to do our own very simple risk benefit analysis of the banks. Do you personally get any benefit from a bank being very large? Do you get a cheaper mortgage from a bigger, risk hiding bank? Answer, NO. Big banks can often borrow more cheaply but they tend not to pass this on to us.  On the other hand, is there a risk to you from a bank being very large and hiding all sorts of risks, in order for its bonus pool to benefit? Obvioulsy the evidence from the last 4 years is an unequivocal YES. There is no argument on this point. We have a global crisis entering its fourth year with all central banks still having to keep interest rates near zero, even though doing so cripples pensions and pernsioners, because the banks still can’t fund themselves or pay for their on going losses without free money from Fed and ECB.

The banks, their system and their entire claim to be good at managing risk, have all proven catastrophically wrong. While banking is a necessity, the banks we have and the system they have built and profted from are in fact a massive and expensive systemic risk to everybody and everything else.  The analysis is clear. We get no benefit but run huge risks. In short there needs to be a ‘public good and safety’ requirement on banks and banking. They will of course say this is an unwarrented intrusion of government in to private companies. We don’t, after all, tell car companies how big they may become. True. But the banks themeslves have made it very clear that they see themeslseves as a very special case. Banks unlike any other kind of company are so systemically vital they cannot be allowed to fail. That is what they say. All I am doing is using this against them. If they are so systemically vital and different then they cannot complain if we treat them as special. It is utter lunacy to allow them to become a systemic threat to our well-being. So we should accept their special nature and the special threat they become if allowed to grow too large. We should recognize that the nature of market competition for finding loop-holes in regualtions, for ‘regulatory arbitrage’, makes it suicidally stupid to allow banks to self regulate, to set their own risk weighting, to be honest and above all to have any secrets. A secret becomes a lie as surely as a maggot becomes a fly. If a bank needs to keep secrets, we should wonder why and tell it it to go elsewhere. Banks may benefit from keeping secrets from each other. We, however, get no benefit from their secrets but do, self evidenlty, expose ourselves and our children to massive risks if we allow them.

To allow banks to become too large for the needs and good of the society they should be there to serve, is akin to giving planning permission for a massive chemical waste storage or nuclear storage facility to be built next to schools and hostpitals. No one would allow that. No one should allow banks to become unstable, implosive, socially destructive monsters. Especially when their main socially useful function can be done by smaller, safer banks.

Thank you for reading this. There is a lot more I would have liked to include in this but I will save it for the next part. I have two more parts then I will stop bothering you.


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42 Responses to Propaganda Wars: Our Version – Toxic bloom of lies

  1. deepgreenpuddock March 14, 2012 at 6:30 pm #

    Another interesting read. My concern is focussed on the articulation of political process with the alternative economics analysis provided by this, and other blogs.
    One senses that the argument made about the banks here is beginning to develop momentum in wider and wider circles and even some of those who see themselves as part of the mainstream are beginning to take notice.
    However one also senses that the heart of the political system, which, it appears, regards political parties and policies merely as a means to achieve positions of authority and power, is very reluctant to shift their position with regard to the purpose of money and the relationship that the politicial parties have with money at the moment.
    The politics of this country (and others) is looking more and more Alice and Wonderland. One wonders how and when we are going to stumble back out into the sunlight.

  2. deepgreenpuddock March 14, 2012 at 6:50 pm #

    immediately after posting the comment I went to the guardian and read the story about the quitting Goldman Sachs director and the comments by lord oakeshott. There can be no doubt that the light is slowly getting through about the banks and the people who run them but the political system is so deeply entrenched in the banking organisations that they almost seem as one.Blair’s position as a JP Morgan consultant and beneficiary really needs some close inspection and yet such transparency would seem totally non-negotiable to most of the ‘big’ players in politics now. I personally cannot see any kind of progress occurring while the current political groups remain in place. We need some way of quarantining the current parties and politicians-until an alternative political model can be created. At some point we will have to assert some form of equability of reward and responsibility and some understandable connection to justice. Democracy cannot flourish until there is a visible connection of justice and merit and, importantly the re-defining of merit.

    • Golem XIV March 14, 2012 at 6:54 pm #

      I’m with you 100%

    • Troy Prideaux March 14, 2012 at 10:21 pm #

      Someone should invite Greg Smith to comment here 🙂

  3. Blancrabello March 14, 2012 at 9:04 pm #

    Hello there everyone,

    I’d Just like to start with a thank you to David for a fantastic blog, Ive been blogging since 2009 and i think this is by far the one with most insight and the best discussions. I have a few thoughts regarding a way forward to the ongoing battle between debtor/creditor and an end to the status quo. I believe from my A-level in Politics that £500 pounds and two backers is all that is required to stand as an MP in your constituency. So with this in mind i could not a party of “independents” be an option? Where independent people from their own constituency stand for Govt. The main proponent would be independence from everything but the people in the constituency. Independence from banks, independence from lobbying, money/profit, the embedded parties, journalists etc. And a general ethos of equality, food, housing, work for all. The manifesto could be built up from discussions just as these on an open and frank forum on the “party’s” website. I just feel with the divergent problems of climate change, energy problems and the mother of all financial crises we will need to start acting. Your views david and the views of your contributors would be much appreciated.

    • Golem XIV March 14, 2012 at 9:47 pm #

      Thank you for your most generous comment. As for your idea of a party of “independents” I agree that something is required to change our political impasse.

      What might appeal to the disgruntled I do not know. I am one of them and I don’t know.

      That I don’t know does not worry me. I think we are not yet at the moment when clear alternatives have formed.

      I feel myself to be in an eddy between two currents. Between those who wish for a return to business as it was in the hope that this time it will work better and those who want change but don’t know what they wish to see created.

      At this moment I think we need to fish people from the currents in which they are caught. I do not feel that discussion and questioning and the spreading of dissent is a waste. I feel it is what this moment requires. When the moment is passing and something new is required I don’t know, but feel I will know when it arrives.

      What gives me hope and pleasure is, like you, to witness and be a part of the growing and deepening of intelligent and generous dissent.

      • Hawkeye March 15, 2012 at 3:53 pm #

        We are the “Neo-dissenters” !!

    • Mike Hall March 15, 2012 at 2:14 am #

      I’ll echo your comments about David’s blog & this series in particular.

      As regards solutions, I’ve suggested here & elsewhere that we need to start with democratic representatives (& all other vocations perporting to represent the majority public interest) that actually live within the typical financial means of the majority – for life. Nor, as the majority are also employees rather than owners, can such representaives have significant busibess or investment interests.

      What follows from this is, is to recognise the need for vocational ‘conditions of service’ for certain sectors. Somewhat as we already do, for example, where members of the armed forces are not allowed to strike & must accept death as a possible hazard of their occupation.

      Cut the corruption, small c & big C, off at source – aspiration to the significant wealth of the top few percent. If people want this, fine, but they cannot pretend to represent the interests of the majority. Go into business or seek executive private sector positions, but know that public service and news/currant affairs media will never be options.

      It follows also that any affiliations to interest groups which concentrate power of any kind, including political parties must also be forbidden for those in public interest vocations.

      I’ve not as yet got much traction for such ideas. Probably, we’re not as societies quite ready for such measures. But they are doable & paradigm changing imo.

  4. Charles Wheeler March 14, 2012 at 11:31 pm #

    Was struck by this passage in the Bloomberg article on the latest ‘stress tests’:

    “In their financial statements, the banks themselves admit that the values they place on assets, such as mortgages and consumer loans, don’t reflect what those assets would fetch in the market. Bank of America, for example, reported that as of Dec. 31, the fair value of its loans was about $27 billion less than the value the bank gave them on its balance sheet.”


    And, on an emboldened Jamie Dimon:

    The merry-go-round continues …

  5. nell March 15, 2012 at 12:19 am #

    nice one golem. Informative and laugh out loud funny as well. You have a wonderful turn of phrase. My fave moment tonight was the comment.
    ‘If aircraft were largely unable to stay airborn would we wish to pay their executives large bonuses to ensure they didn’t go elsewhere to work?’

    • steviefinn March 15, 2012 at 1:56 am #


      Might I make a suggestion, when you have finished the series that you put it in consecutive order on the blog as a separate entity to all the other articles,so it doesn’t get lost in a pile of future articles. I know I would like to have it easily accessible as a point of reference & I am sure others would too, also it could be easily accessed by new visitors to the blog. I will have to read it a few times in it’s entirety anyway, I once attended a short lived accountancy course & couldn’t get my head round it at all, this kind of stuff has to be increasingly forced into my ageing brain.

      I know you are very busy, it’s just a thought.

      • Golem XIV March 15, 2012 at 9:25 am #


        We are as one on the having to read things several times. Last night I was reading a very long court document which is stuffed full of fantastic detail. Got to bed and thought – what a brilliant source. Then I thought – what did it say again?

        Have to start all over again this morning.

        I will put the series in it’s own folder as I did with Liar’s Lexicon. It’s a good idea. Thanks.

  6. Masurian March 15, 2012 at 1:59 am #

    Just want to say Golem, exceptionally brilliant polemic, even for you! Extraordinary light being shone on a murky world of make believe economics. So please continue to blaze away brightly, you have my gratitude and respect.

  7. simoncz March 15, 2012 at 2:16 am #

    Interesting article on money.


  8. Mike Hall March 15, 2012 at 2:44 am #

    A couple of things stand out here in the story David is unfolding for us, as ideas to take away & keep.

    The first is that what all the banking deception & fraud amounts to is the creation of levels of debt far beyond any useful purpose in the real economy. The extraction of debt service – interest & ‘fees’ – is the banksters’ fundamental business (scam). Leverage is the key here. Most all ‘products’ where leverage is involved must be banned – globally – & what useful activities remain strictly regulated.

    (Tho’ I do not consider full reserve banking or ‘pegged’ currencies to be required or desireable. The benefits of fiat currency for public purpose under an MMT economics system are too important to ignore.)

    The second is the blindness again of the mainstream economics profession to principles that Keynes highlighted 80yrs ago during the (1st) Great Depression. Another ‘fallacy of composition’ where the risk behaviour of a single institution might work in isolation, but profoundly does not in aggregation. Or, to put it another way, ‘macro’ economics considerations are profoundly different from the simple summation of the ‘micro’ situations.

  9. The Dork of Cork March 15, 2012 at 3:04 am #

    Conor McCabe of dublinopinion.com has dug up a very interesting article entitled –

    Presentation by Mary Cussen and Clive Jackson, Bank of Ireland: “Securitization in Ireland”
    Go to the original power point presentation – Working Party on Financial Statistics – OECD Conference centre, La Muette: 2-4 November 2009
    as it is a higher resolution.

    I really am bamboozled by double entry crime waves but the sudden reductions of Mortgages owed to Irish Financial institutions as seen on the Irish Central Bank bulletins periodically now may suggest people are not paying their mortgages back to irish banks & therefore the state now. – but to other entities.
    Any ideas ?

    • Golem XIV March 15, 2012 at 4:52 pm #

      Wow what a great source doc! Thank You.

  10. The Dork of Cork March 15, 2012 at 3:07 am #

    sorry left out a bit – “go to the oringinal piece as it has a higher resolution.”

  11. The Dork of Cork March 15, 2012 at 3:27 am #

    Please google this post from the Irish economy blog some time ago.
    Scroll down to myself & Eoin Bonds remarks.

    1 Dec 2011 – The Irish Debate on the Single Currency. This post was written by Frank Barry.

    He never answered by last question ………. I could be very wrong here but I don’t like dead air from a master of bullshit.

  12. The Dork of Cork March 15, 2012 at 3:30 am #


    go to the bottom of page.

  13. Patrick Donnelly March 15, 2012 at 3:50 am #

    Precisely described!

    That is why banks are being kept alive…… to hide the facts and more importantly, where the real value has gone, not all in bonuses!

  14. backwardsevolution March 15, 2012 at 8:42 am #

    David – I enjoyed your article(s) very, very much. So well written, and funny too! Thank you. Yes, the banks MUST be stopped, else the same thing will occur again. In fact, I think the banks must be chomping at the bit to stir up some more chaos. From Charles Hugh Smith:

    “Apparently you only need a few things to make a mockery of the entire global economic system, and big banks garnered these few important things through “regulatory capture”:

    1) Unregulated, unenforced rules (particularly for derivatives)
    2) license to “mark to model” (assign your own values to your assets)
    3) ability to peg present value to irrational expected future returns (based on unlimited, exponential growth)
    4) infinite leverage (no effective requirements for reserve capital in unregulated “shadow” markets)
    5) massive size, so that the bank or company is “too big to fail”
    6) non-transparency and non-accountability.

    So here we have a system where you can 1) make up your own rules, 2) establish any value for any asset you choose, 3) inflate that value a hundred fold based on ostensible future value and returns, 4) leverage that inflated value another thousand or a million fold simply on your say-so, enough to buy up multi-billion dollar firms if you choose, 5) lean on taxpayer bailouts when you get into trouble, and 6) do this without any disclosure or accountability, all based upon a self-interested formula you concoct to enrich yourself.”


  15. backwardsevolution March 15, 2012 at 9:22 am #

    Good short video re OTC derivatives. Janet Tavakoli (a derivatives expert) and another fellow are interviewed re how to put derivatives on an exchange.

    Notice how Janet is kind of laughed at, sort of made fun of when she speaks of the “fraud” involved in the past, how no one was held accountable, and that what’s being discussed right now by Tim Geithner is not going to measure up. The interviewer tells her at one point, “Well, write your congressman then.”

    There’s a whole huge layer (bankers, media, economists, politicians, regulators, and many more bad old boys) who do NOT want to talk about any wrongdoing or future potential for fraud, and they do NOT want to be reined in by anyone. They’re going to Basel their way through this one too; bluff that they’ve achieved something, then go to town.


    • Golem XIV March 15, 2012 at 9:31 am #

      Thank you for the link.

      Only a paid for gimp would laugh at Ms Tavakoli.

      She is a very bright person and I have great respect for her. She began to warn of the crisis and the abuses and stupidity which underlay it years BEFORE the crisis began and has been relentless in her criticism ever since.

  16. John Souter March 15, 2012 at 10:22 am #

    Well done David – it will not be long before you have identified and labelled all the trees in this forest founded in a toxic swamp.

    My analogy is rather simpler. Basically, a society immersed by greed makes greed a necessity of survival for and within that society.

    The problem with greed is exposed when it has consumed beyond the point where it can no longer satisfy its gluttony.

    Our problem – even amongst those who have bothered to try and educate ourselves in the machinations of financial idiocy – is we are hoping others will do something about it tomorrow when we know that ‘something’ has to be done today.

    The daily grind of commitment is the hurdle to change and the primary defence for those who exploit our timidity.

    • Charles Wheeler March 15, 2012 at 3:53 pm #

      “Basically, a society immersed by greed makes greed a necessity of survival for and within that society.”

      Well put. As the checks and balances that preserve civil society – and markets – are swept away it becomes ‘every man/woman for themselves’. Thus, an ideology based on self-interest becomes a self-fulfilling prophecy.

      We can see it at work in the tax system where government action and taxation has been relentlessly discredited to the point where people see it as an expropriation, rather than the necessary basis for the kind of collective action that is essential to the underpinning of capitalism by providing infrastructure, education and healthcare that ‘free markets’ will/can never provide. As people see the 1% detach themselves from society by amassing tax free wealth, it becomes still more difficult to justify the system.

      And yet, as society crumbles through atomisation, we all become worse off collectively and individually. As the cake shrinks, those at the top can only maintain their ‘share’ by imposing austerity on the rest, strangling the goose that lays their golden eggs.

  17. Enrico March 15, 2012 at 11:37 am #

    Hello everybody,
    my comment is slightly OT, or better, I could post it under any of Golem’s articles!
    It’s been a few months now since I started getting informed about economics. I’ve always been sensitive to social justice but as many other people out there I’ve always directed my anger at politicians without ever giving too much thought to the economic power forces shaping our world. This blog has provided me with truly valuable information. In spite of that I’m still at a loss when trying to explain other people what money is and how it works. More often than not I don’t even bother sharing my opinion with other people, I can’t simply tell them that they should “blame the bankers”, because yes, that might be the bottom line, but there must be a firm ground underlying strong accusations. I can sum up the content of an article such as the one above but then I’m always bothered with the basic questions: “How does money work? how is it created?”. I came across Chris Martenson’s crash course, the film “Money as Debt” as well as MMT and Austrian models.Each one fascinating but also in contradiction. I’m searching for an authoritative “Money 101”, one which simply describes processes without judgements, and especially one which can explain the ways Euros are created ( I live in Italy) and made circulate ( since most explanations mostly focus on the creation of dollars). Any advice is welcome!

    • Nell March 15, 2012 at 12:11 pm #

      You may find the book ‘Where does money come from’ useful. There is a pdf overview of the book.
      However, the book explains the British system, not the European system. The European system is a special case, unlike the UK, countries using the euro do not have the power to issue currency. This power resides with the ECB.
      You may want to track down reporter Paolo Barnard, who has a strong interest in european economics. http://www.youtube.com/watch?v=C0bu6vU32J8
      He may have recommendations.

    • Charles Wheeler March 15, 2012 at 4:05 pm #

      Could try this from Randall Wray of the Modern Money Theory school.


      You’re not alone in finding it difficult to fathom – it’s pretty obvious that many pundits, politicians and policy-makers also struggle, which is why most just ignore the whole issue.

      MMT advocates will tell you that current policy prescriptions are based on beliefs that went out with the gold standard. The Austrian school will offer a still different analysis.

      It’s difficult to get your head around because so much is counter to the ‘economy as household’ model most politicians parrot in lieu of a better understanding – or because it suits an ideological purpose.

    • Hawkeye March 15, 2012 at 4:07 pm #


      I second the recommendation from Nell about the NEF book “where does money come from”.

      I would say that all the sources you cite make reference to the source of money creation actually originating from private banks. This is applicable to the UK, US and Euros (in fact almost all Western / developed country monetary systems). The process of loan origination by private banks creates high powered money (bank deposits). Actual cash (narrow money) is the responsibility of the central bank / Treasury. So, any seeming difference between the different sources you cite, is probably because they put certain emphasis in different places, or disagree on what constitutes money in the first place (is it just cash, or Treasuries, or bank desposits, or credit derivatives too?).

      Steve Keen is probably the best source on this subject, and is fast becoming a well respected academic on the subject:



  18. Dave Holden March 15, 2012 at 12:18 pm #

    Hi Golem,

    Nice piece. Just as an aside, you may find this EconTalk podcast interesting


    “Charles Calomiris of Columbia University talks with EconTalk host Russ Roberts about corporate debt, capital requirements, and financial regulation. This is an in-depth conversation about how debt works on a firm’s balance sheet and the risks that debt vs. equity pose for the survival of the firm.”

  19. John Souter March 15, 2012 at 2:09 pm #

    Enrico – watch this link it outlines the basics.


  20. dave March 15, 2012 at 3:21 pm #

    excellently put. thanks David

  21. StevieFinn March 15, 2012 at 4:05 pm #

    I sincerely hope this is valid, I dare not raise my hopes, but could justice be closing in on Geitner & the rest of the robber barons ? the ” too big to jail ” actually under threat as one of their top brass incredibly gets arrested, you know like they are actually just like the rest of us, accountable.


  22. Jon March 15, 2012 at 5:10 pm #


    You should try the book by David Graber: “The first 5000 years of debt”.

    It’s an anthropological study that completely tears apart the basic assumptions in existing theories on money – from the myth of bartering as the starting point, to the primordial notion of debt. Must read for all of you in here…

    By the way Golem; thanks a lot for you blogging.

    • Charles Wheeler March 15, 2012 at 9:07 pm #

      Here is an interview with David Graeber on the subject of money as debt:

  23. Enrico March 15, 2012 at 10:29 pm #

    Thanks to all of you. I devoured “Debt: The First 5000 Years” last Christmas.
    Graeber’s is a far reaching and overwhelming book that lent me new spectacles for looking at relationships of power, tying up in one bundle so many scattered facts.

  24. YesMaybe March 17, 2012 at 3:27 am #

    Excellent post! You really have a knack for getting to the heart of things and explaining them clearly all the way through. Previously I’d heard of risk-weighted assets plenty of times, but didn’t know what that involved. And in the news all the talk is of Basel III, so it was great to get the history of Basel I and II in order to put into perspective what we can expect from the banks’ plans to comply with Basel III. Thanks a bunch!

    • Golem XIV March 17, 2012 at 10:55 am #

      My pleasure. Hope you’ll comment again sometime.


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