Two seemingly unrelated stories from the past week illustrate a fundamental problem with today's financial system. While this problem may seem "philosophical" or abstract, it's very real, and we won't put our economy back on a sound footing until we get a handle on it. The problem is this: Banking institutions no longer want to perform the human functions they've performed for a thousand years. Financing has become a robotic form of mass production, designed to generate ever-increasing wealth within an artificial system by draining it from the real world.
In a word, banks have lost their souls.
A recent report blames last May's "flash crash" on software run wild, while the new "robo-signing" mortgage scandal looks a lot like (and is) old-fashioned fraud. The "flash crash," which caused the stock market to plunge 600 points and bounce back within minutes, was computer-driven. In the "robo-signing" scandal the "robots" weren't machines, but bank employees who "mechanically" signed legal statements without checking their accuracy. But both are symptoms of a common disease. They both stem from the banks' insatiable desire to earn the maximum amount of money while expending the minimum amount of effort ,with the least possible real-world interaction. That's led to a mechanized form of banking that's devouring the economy.
Whether it's computerized trading or "robot" bankers, greed is the Ghost in the Machine.
Bankers with soul?
It may sound odd to speak of banks or bankers as having once had "souls." While it's true that they may not have had soul in the same way that, say, Otis Redding did when he sang "These Arms of Mine," financiers have always played a certain human role in the economy. They existed to make sure that capital was available when it was needed, whether it was to outfit sailing fleets for an voyage or plant seeds for next year's grain harvest. While bankers have never been confused with philanthropists, their role in well-functioning economies was clearly defined and useful.
Bankers throughout history lived and worked in the real world. Somebody had to inspect the granaries of ancient Egypt to see if they were full or not. The bankers financing a trading fleet had to meet the ship's captains, inspect the riggings, and make sure there was room in the holds for the treasures of the East. Back then, the money people did whatever they needed to do to see that their money was being safely handled. That's because there were never too many degrees of separation between a bank's money and events in the physical world.
That's changed. For a long time there have been financial transactions that dealt only with other financial transactions, rather than concrete phenomena. But these "abstract" transactions have grown exponentially with the explosion of derivatives and other sophisticated instruments. And it's easy money, comparatively speaking. You won't find anybody from Goldman Sachs inspecting the wheelhouse of a four-masted clipper ship bound for Madagascar.
Automated greed machines
It's natural for anybody, no matter what their level of income, to want the maximum amount of income for the minimum amount of work. This aspect of human nature only becomes a problem when society gives them too much power to indulge that urge. That's exactly what's happening today.
Take automated banking -- or "algorithmic trading," as it's now known. The idea isn't evil -- or if it is, then I have a streak of evil myself. Back in my systems analyst days (the early 1980's) I went to my bosses with a proposal for something similar, just like hundreds of my contemporaries probably did. I was told that it was too risky, and that automation couldn't substitute for human judgement. That was before it had become clear that large financial institutions could count on being bailed out if they got into trouble. That was before the financial sector metastasized to gobble up 40% of the nation's profits, and before the growth of derivatives and similar transactions made the disconnect between "real world" economic activity and non-reality-based financial dealings so extreme.
Today it's a different story: Welcome to the Brave New World. "High frequency trading" -- automated transactions that buy and sell massive numbers of transactions faster than the human brain can react -- now accounts for a reported 73% of all US equity trades. In its report on the "flash crash," the SEC identified six different types of players: "Intermediaries, High Frequency Traders, Fundamental Buyers, Fundamental Sellers, Noise Traders, and Opportunistic Traders." Not a rigging inspector among them ...
A Wall Street Journal article traces the (de)regulatory decisions that helped turn the stock market over to unsupervised computer programs, leading to so-called "dark pools" where trading takes place outside traditional market exchanges.
The house always wins ... and the software runs the house
The result is a system of such complexity that nobody really understands how it works. It's a system where computers, and those who own them, don't just react to changing prices: They can control them. These ultrafast transactions also provide an ideal way for traders to engage in "front running," making money by placing trades for themselves a millisecond ahead of those their customers ask them to make. Since the financial market is dominated by a few large players like Goldman Sachs, each of them has enough data to manipulate the market in their own benefit without ever being detected.
(To this day, nobody has explained yet how the four largest banks -- Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase -- went an entire quarter without losing money in their trading operations for even one day. The chances of that happening by chance in a legitimate system are infinitesimal.)
The mortgage market: Incentives to lie (and be lied to)
Mike Konczal's introduction to bank mortgage fraud includes a series of charts that nicely illustrate the separation of mortgage-backed securities from real-world economics. His illustration of the transactional layers between a homeowner and a mortgage-backed security shows how remote a trust holding these securities is from the actual banking transaction. What's more, it shows where the incentives exist to lie and exaggerate the value of the mortgages being sold.
Not only have financial institutions lost the incentive to touch and inspect the physical objects (homes) behind their loans, but many of them have had the incentive not to know if they're being lied to. That dovetails perfectly with the incentive that sellers had, which was to lie to them.
As with algorithmic trading, all that mattered was to accelerate the buying and selling process. Traders like Goldman Sachs could make money on each trade, while speculating on the overall outcome to make evey more money. In software terms, the process became the output. As a result, the speed with which these mortgages were bought and sold left the actual chain of ownership to many of these homes in question.
Why bankers become robots
Now that many of these houses are in foreclosure, lazy and fraudulent bankers chose to "robotize" themselves by signing documents for court statements without bothering to verify their accuracy. But these documents were affidavits which, as one of Yves Smith's readers points out, "is a legal document which can substitute for live witness testimony in court ... (requiring) that the witness swears to tell the truth, is competent and has personal knowledge of the facts they are testifying about ... (and) swears to tell the truth by being placed under oath by the notary."
These are not "paperwork errors," as bankers and many compliant journalists have described them. Signing an affidavit when you don't know it's true is a crime. In many cases, the banks had to know the claims in these documents couldn't be proven. In a way, they had no choice but to submit fraudulent documents. Their financial edifice was a house of cards, and without proof of their claims they were forced to add more cards to it. "Robo-signing" was the natural next step, after the "robo-lending" and "robo-betting" that built the house of cards in the first place.
This behavior is the end result of lazy, greedy, non-reality-based banking. It is the ultimate - and probably inevitable - product off a system that has turned banks into factories for the automated production of profits without any connection to the outside world.
The soul of a dead machine
The bankers signing these documents were performing a criminal act. But they were also like Mickey Mouse as the Sorcerer's Apprentice in Fantasia, running harder and harder to keep up with the creatures they had animated to do their bidding. As for the "flash crash," we've been assured that new "circuit breakers" will prevent future calamities. But we've also seen a series of subsequent "mini crashes," including one plunge in aluminum prices that was described as the "Jumpin' Jack Flash mini crash" (after the Whoopi Goldberg hacker movie, not the Stones song.)
How did the system get so irrational, so abstract, so voracious and uncontrollable? Another story this week tells us. The US Senate, acting as swiftly and invisibly as a algorithmic trading program, approved legislation that would have created new hurdles for people trying to protect themselves banks from illegal "robo-signed" documents. After a public outcry the President refused to sign the bill, but its very passage showed how a mechanized banking sector can use campaign contributions and political connections as its robotic arms and legs.
While they've been convincing us how busy and important they are, bankers have actually been doing less and less real work, with less grounding in reality as the rest of us know it. The Soul in the Machine has died, especially at the largest and most powerful banking institutions - the ones that remain Too Big to Fail and Too Inhuman to Live.
Don't just repair the machines. Give them a different purpose.
Sure, "circuit breakers" are a good idea, and so are the other reforms many of us focus upon. But while we're all debating the Basel III accord or the "finreg" bill, it's easy to lose sight of the bigger picture. Banking has become detached from human experience and turned into a mechanical, self-replicating function, one that exists only to grow and perpetuate itself.
The real solution is to return banking to its original function as a source of capital for real-life human activities. That means encouraging banks to once again become lenders, rather than merely speculators, while cracking down on all forms of human and "mechanical" lawlessness." Banks can certainly automate themselves, but "cyborg finance" will need to obey Isaac Asimov's Three Laws of Robotics, with special attention to Law #1: "A robot may not injure a human being or, through inaction, allow a human being to come to harm."
I don't disagree with Jon Stokes when he compares the entire stock market to "a single, very big piece of multithreaded software" (in an essay that will be particularly intriguing to geeks like this writer). The only problem with the analogy is that it doesn't go far enough. The entire economy is being driven by software now. Software's only as good as the intentions, knowledge, and wisdom of its programmers. Things aren't going to change until we take the source code back from the people running things now.
As programmers have always said: Garbage in, garbage out.
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Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.
He can be reached at "rjeskow@ourfuture.org."
Website: Eskow and Associates
Follow Richard (RJ) Eskow on Twitter: www.twitter.com/rjeskow
With any luck, Mainstream Media's I.Q. might suddenly jump 5 or 6 point, making it possible that they might pick up on it... and make it an 'issue'.....
...
OK ...not likely...I concede...but please do your part anyway.... ;-)
Florida's Attorney General is correct to file his motion for rehearing that court ruling preventing the AG from investigating foreclosure mill firms who CLEARLY fabricated foreclosure documents!!
It is imperative the MILLS are investigated for INTENTIONALLY FABRICATING court documents because certain lawyers are engaged in SELF-DEALING FORECLOSURES. Most definitely, it is NOT A WASTE OF TAX PAYER MONEY to probe awful, underhanded illegalities surrounding foreclosures which have caused thousands of people to be UNLAWFULLY evicted and homeless –while unscrupulous lawyers became CRIMINALLY ENRICHED.
LONGSTANDING foreclosure frauds incorporate falsified CIVIL as well as BANKRUPTCY court pleadings; repetitive and illegal property flipping (thus blighted neighborhoods); “simulated auctions” and “straw buyers”; FALSE “lift stay” motions and FALSE “proof of claims;” and "fee-splitting." Certain lawyers achieve extra benefits from litigating against foreclosure defense lawsuits, as they MISREPRESENT to their mortgage-clients property owners are delaying foreclosures, but actually its continual deceptive foreclosure lawyers' activities while billing $$$$ to mortgage clients and actually committing MALPRACTICE + fraud upon the courts + fraud & illegal exploitation of homeowners!
Because fraudulent foreclosures include many facets, culmination can take years while arranging cash cow “PAWNS” needed for big pay-offs. [Super Future Equities Inc. v. Wells Fargo, et al., @ http://www.bankruptcylawnetwork.com/2007/05/11/what-are-those-mortgage-servicers-doing/. Again, LIKE AMERICA NEED JOBS, FORECLOSURE MILLS NEED INVESTIGATION!!! http://www.lawgrace.org/2010/09/30/important-facts-about-foreclosure-and-mortgage-fraud/
To flesh out your nautical references with a boatload of irrelevant information:
I'm not aware that there ever was a four masted clipper ships, although there were many four and one five masted windjammers. I'm also unaware of any clipper that had a wheelhouse, the wheel was always on the weather deck, even into the windjammer era. Private subscription of shares was a common alternative to merchant banking, and (I have this anecdotally from the oldest captains I sailed with when I started sailing many years ago) the captain was sometimes required to hold a share. I don't know if, when they were used, banks inspected the ship or approved the captain, but insurance companies did and to a certain extent, I suppose, still do. Although government regulation, oversight, and inspection have superseded that function (flag nation "certificate of inspection", assigned loadline, licensed captain and officers, classification society "class certificates", etc).
The American Bureau of Shipping (a government chartered agency) writes the rules for ship construction, inspects during construction and periodically throughout the life of the ship. Maybe something like that for banks, now that the government has thrown up its hands and abandoned the responsibility, would be a good idea.
It turns out that humans are more complicated than that, but if you tell generation after generation of business people to "maximize profit" regardless of the cost (to the firm to themselves to society to the planet) You get soulless profit machines.
Game theory was designed by a paranoid schizophrenic. And his world view became the way we conduct business in the US. The entire business world truly is mentally ill. And we are all enablers.
The Federal Reserve needs to be abolished & central bank function returned to the government.
Insurance companies operating as banks in a shadow economy need to be exposed and relabeled as banks. And if the insurance company is too big to fail, it needs to be turned into a utility company too.
Andrew Jackson;
It's easy to conceive that great evils to our country and it's institutions might flow from such a concentration of power in the hands of a few who are irresponsible to the people... Controlling our currency, receiving our public monies, and holding millions of our citizens in dependence would be more formidable than any military power of possible enemies....
The news today is about how easy it is to buy our elections with the new ruling in the citizen united case without having transparency about those funding candidates, but the danger is truly with the judicial side as it will be fairly impossible to show any type of conflict of interest in any case in the courts....
Accountability,,, is what the conservative agenda is aiming to destroy in America,,, keeping all major Industry safe from any accountability for the economic condition of any population its preying on...
Third world America rules have been in play for decades...
Yet despite the needed emotional detachment, good bankers must still use their judgment of human nature to make good decisions.
Digital decision making is certainly detached from emotions but decisions are made without any true understanding of human nature at speeds which could NEVER occur in any human system.
The high-speed traders play utterly no useful role, instead existing only to make the fastest race towards money for nothing. Shut them down by requiring that trades be made no faster than possible by the finest human minds.
This is fraud, pure and simple. Swindling. Usury. Extortion. Uttering. Racketeering. Heh... oh yeah, and bribery.
The list goes on and on. And... we are certainly not the first country to have experienced it (although this is probably the most gigantic example in history ... heh ... "yet").
It is Crime, and High Crime. Treat it accordingly. Do not flinch.
Vote people who are not owned by them into congress, and move your money out of their greedy grubby mitts. If you own their stock, sell it. If you bank with them, move, if you have loans, refinance with people local.
Ah, banks never had souls to begin with. If they did they would not charge you interest which inturn creates inflation via having to constantly create more currency.
Several years back, I looked into a re-fi from a local bank. What i didn't know was that they were "jobbing out" their financing to a third party mortgage company. When the product they eventually sent me was ANYTHING but what I asked for, I asked why I simply couldn't get a loan from the bank itself. "Oh, we don't handle those anymore. We're the middle man now." (This was before the housing bubble broke.)
Huh? So the largest loan transaction an individual could make was no long enticing enough for banks? So how were they supposed to make their nut, exactly? Banking is broken in a lot of ways...and the desire for a quick buck has replaced sound financial principals that kept banks afloat and profitable for generations.
Not exactly "smart money."
When all we're doing is gambling, isn't one party to the wager always injured?
In other words, isn't the problem not just that we're not inspecting the value of the commodities traded, but that the commodities often have no value other than in the trade itself?