"We must break the Money Trust or the Money Trust will break us."
- Louis D. Brandeis, 1913
When the economy appeared to be melting down last September, Wall Street bank representatives began showing up in Congress like mobsters walking into a mom-and-pop business looking for protection money.
"Nice economy ya got here.(crash!) It would be a shame if something were to happen to it."
Mobsters and Robber Barons have a lot in common. Neither has any respect for the law or morals, only for power. Neither can ever be satisfied with any amount of wealth. They will always need to steal more and more and more until they've completely bankrupted their victims.
We are now at the mercy of modern Robber Barons, and if history is any judge, it is either them or us.
"The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question."
- Woodrow Wilson, 1911
On February 28, 1913, the House of Representatives released a report with the most banal name imaginable -- Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit.
In spite of the long-winded and innocuous title, the testimony in the report revealed to the world an unseemly and corrupt conspiracy of Wall Street bankers that threatened the very foundations of our democracy. Despite the dangers, many of the recommendations of the Pujo Committee were ignored until after the 1929 Crash.
As a species and a nation, we seem to be doomed to repeat our mistakes.
Dirty political battles between Washington and eastern bankers are not a new concept in America. The Bank War between President Jackson and the Second Bank of the United States is the most obvious and public of these exchanges. Nicolas Biddle, the Second Bank's President, purposely caused the 1834 Depression, by restricting the money supply, to use as leverage against President Jackson.
Unfortunately for Mr. Biddle, his arrogance regarding his ability to cause an economic collapse allowed his ego to get the best of him. He continued boasting, now publicly, that relief would only come if Congress renewed the bank's charter. When Pennsylvania Governor George Wolf, a previous supporter of the central bank, was made aware of the bank President's sentiments, he immediately came out against extension or renewal of the bank's charter.
When someone mentions trusts and trust-busting, people tend to think of John. D. Rockefeller's Standard Oil, J. P. Morgan's Northern Securities railroad company, and Andrew Carnegie's U.S. Steel.
What frequently gets forgotten is the Money Trust of Wall Street. The reason that it isn't mentioned is because it was never totally broken. Instead the decision was to regulate it via the creation of the Federal Reserve.
Nicolas Biddle's dream was finally realized.
Our Financial Oligarchy
"Far more dangerous than all that has happened to us in the past in the way of elimination of competition in industry is the control of credit through the domination of these groups over our banks and industries."
- Pujo Committee
"The dominant element in our financial oligarchy is the investment banker. Associated banks, trust companies and life insurance companies are his tools...Though properly but middlemen, these bankers bestride as masters America's business world, so that practically no large enterprise can be undertaken successfully without their participation or approval."
- Louis D. Brandeis, 1913
What frequently gets lost in economic discussions is that the current depression is different from all other post-WWII recessions. All previous recessions were caused intentionally by the Federal Reserve.
The Fed would raise interest rates in order to choke off inflation. Once the inflation was contained they would lower interest rate. Consumer demand, which was artificially suppressed by the Fed's high interest rates, would then be released and the economy would boom.
That didn't happen this time.
The Fed didn't raise interest rates to choke off inflation. There was no consumer demand that was artificially suppressed, thus there was no pent-up demand that was waiting to be released when the Fed cut rates.
What little "less bad" news that we've heard with home and auto sales has been almost exclusively to do with the tax rebates for first-time home buyers and the cash-for-clunkers program. Both of these programs are limited in time and scope, and both bring future demand to the present, which will leave an even bigger gap in demand once they are finished.
What happened this time was an economic collapse that emanated directly from Wall Street. Its source was bad loans that the bankers and rating agencies pushed onto the financial markets of the world, knowing full well that it was only a matter of time before they blew up and took down the world economy.
The economy didn't collapse because of government regulations. It didn't collapse because the government taxed too much or spent too little. It wasn't because the American consumer stopped spending.
It was because the financial system knowingly overpriced a major financial asset class, and then leveraged itself against that asset class in the vain hope that the Day of Reckoning never came.
The whole financial crisis only came to light because of what amounts to a falling out amongst thieves.
War Between the Ruling Kleptocracy
"Gentlemen: You have undertaken to cheat me. I won't sue you, for the law is too slow. I'll ruin you.
Yours truly, Cornelius Vanderbilt."
It is sometimes forgotten that the 19th Century Robber Barons spent much of their time wasting resources trying to crush each other.
For example, the Erie War crippled what should have been the most profitable railroad in the nation, not to mention the cost from the corruption of the entire New York Assembly. An even more colorful battle involved the Albany and Susquehanna Railroad that resulted in hundreds of paid goons crashing trains into each other and engaging in shooting wars.
History has proven that the unrestrained greed of an unregulated economy is neither fair nor efficient. It also often leads to economic crisis.
Wall Street knows that you can make enormous amounts of money during an economic crisis, and no crisis is more fortunate than the failure of a leading competitor. The perfect example of that is the Panic of 1907.
John Pierpont Morgan again used rumor and innuendo to create a panic that would change the course of history. The panic of 1907 was triggered by rumors that two major banks were about to become insolvent. Later evidence pointed to the House of Morgan as the source of the rumors.
J. P. Morgan's false rumors created a real panic and it threatened to bring down the entire financial center. Morgan nobly contacted his European sources and managed to borrow $100 million worth gold bullion in order to stem the panic. History remembers Morgan as saving the day, and also helping to convince the public that we needed a central bank in this country.
John Pierpont Morgan
Morgan didn't save the system from a crisis of his own creation out of the goodness of his heart.
Of course Morgan did not go unrewarded. Recall from our story of two weeks ago that Teddy Roosevelt, despite his antitrust proclivities, allowed Morgan to purchase the Tennessee Coal and Iron Company for about $45 million when the true value was closer to $700 million, thus expanding Morgan's steel empire.
If this sounds somewhat familiar, it should. Recall the failure of Bear Stearns.
Bear Stearns had been unpopular with the rest of the Wall Street oligarchy since it refused to participate in the bailout of Long-Term Capital Management in 1998, despite helping to create the problem.
The most suspicious fact of the Bear Stearns failure was the massive increase in short positions on March 10 and 11, 2008, with only five days left before expiration. Some insiders knew something they shouldn't have. John Olagues makes a strong case that it was insiders at JP Morgan Chase that were shorting Bear Stearns and helping to create a "run" on their stock, knowing full well that they would be taking over the bank with the Fed's help.
How would people at JP Morgan Chase know that ahead of time? They were in position to make the deal.
The Fed and U.S. Treasury brokered a deal for J.P. Morgan in haste without question. Usually, such huge deals or mergers would go through committees or FTC oversight, but none of that here -- a quick weekend jaunt in the park. It was not surprising that no red flags were raised about J.P. Morgan's chairman, James Dimon holding a board seat at the Federal Reserve Bank of New York when the deal was made.
Bear Stearns was bought by JP Morgan Chase at a price of $2 a share. A week later it was raised to $10 a share. Was it shame or a guilty conscience to caused JP Morgan Chase to give back a small amount of their quick profits?
JP Morgan Chase was in a position to profit from Bear Stearns' demise, and another profit from its taxpayer-funded acquisition, just like in 1907.
Later on that year, JP Morgan Chase managed to purchase Washington Mutual, a bank with $307 Billion in assets, for the price of $1.888 billion after the FDIC seized the bank. Back in April JP Morgan Chase offered to purchase WaMu at a far, higher price, but WaMu refused.
"You should have sold to JPMorgan Chase in the spring, and you should do so now. Things could get a lot more difficult for you."
- Treasury Secretary Paulson to WaMu CEO Kerry Killinger, August 2008
A Naked Coup
"We're moving to an oligopolistic situation."
- Kenneth Guenther, Independent Community Bankers of America, 1999
"The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money."
- Louis D. Brandeis, 1913
It's too big of a coincidence that the biggest winners on Wall Street are also the most politically connected, and no one is more connected than Goldman Sachs.
Bush's Treasury secretary, Hank Paulson, is a former Goldman C.E.O., and his replacement at Treasury, Tim Geithner, was mentored by Goldman alumni. Mario Draghi, who is leading the crisis response for the E.U., is a former Goldman vice chairman.
Merrill Lynch C.E.O. John Thain was once Goldman's co-president, and Wachovia chief Robert Steel was a vice chairman. Ed Liddy, the new C.E.O. of A.I.G., was Goldman's vice chairman. World Bank president Robert Zoellick was a managing director. Even Neel Kashkari, the 35-year-old tapped to oversee the $700 billion Troubled Assets Relief Program, served at Goldman as a vice president.
And the list goes on. Robert Rubin, President Clinton's former Treasury Secretary, was once the co-chairman of Goldman Sachs. Jon Corzine, now the governor of New Jersey, is a former Goldman Sachs CEO. A top aide of Tim Geithner is former Goldman lobbyist Mark Patterson.
It's so obvious, so in-your-face, that one must assume that Goldman Sachs feels itself invulnerable.
By now everyone should be aware that Goldman Sachs was the biggest beneficiary of the AIG bailout, to the tune of $12.6 Billion, and will be the winners again if AIG finally goes under.
With Paulson in charge of the Treasury at the time, it appeared that Goldman Sachs was bailing out Goldman Sachs. Rich bankers were bailing out rich bankers, and working-class taxpayers were footing the bill.
America has been purchased in a leveraged buyout. For about $5.2 Billion Wall Street has purchased the complete deregulation of the the financial sector, and unprecedented political influence that even now allows them to defeat any new regulations they choose. It's actually a very good return on investment.
"America's economic system is where it is today because gambling became the financial sector's principal preoccupation. The pile of chips grew so big that the Money Industry displaced real businesses that provided real goods, services and jobs."
- Harvey Rosenfield
This corrupt collusion between financiers and government officials was spelled out in no uncertain terms in Simon Johnson's article, The Quiet Coup. Simply put, America is following the path of petty Banana Republics.
Elite business interests -- financiers, in the case of the U.S. -- played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Johnson goes on to say that chaos and confusion are very much in the interests of the ruling oligarchy, as it lets them take things, both legally and illegally, with impunity.
This message is echoed by Matt Taibbi in his article The Big Takeover.
The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron -- a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.
It seems hard for you and I to believe that anyone, any group, would purposely engineer an economic crisis for personal benefit. That's because you and I aren't consumed with ego, greed, and lust for power like the bankers on Wall Street are today.
History has shown, time and time again, that this is exactly what these people do. Why should now be any different?
Goldman Sachs and JP Morgan Chase have already benefited from the crisis.
The spirits of Nicolas Biddle and John Pierpont Morgan are alive and well today in the plush offices of Wall Street.