NO ADVERTISING, GOVERNMENT OR CORPORATE FUNDING

  • Latest News
  • Pitch a Story
  • Work with a Journalist
  • Join the Blog Squad
  • Afghanistan
  • Africa
  • Asia
  • Baltimore
  • Canada
  • Egypt
  • Europe
  • Latin America
  • Middle East
  • Russia
  • Economy
  • Environment
  • Health Care
  • Military
  • Occupy
  • Organize This
  • Reality Asserts Itself
  • US Politics
  • Anatomy of casino capitalism


    Jane D'Arista unravels the web of banking confidence schemes -   November 11, 2009
    Members don't see ads. If you are a member, and you're seeing this appeal, click here

    Audio

      Share to Twitter
    Share to Facebook




    I support the Real News because without The Real News we would have no real news at all. - WWH
    Log in and tell us why you support TRNN

    Bio

    Jane D'Arista is a research associate with the Political Economy Research Institute (PERI), University of Massachusetts, Amherst where she also co-founded an Economists' Committee for Financial Reform called SAFER (Stable, Accountable, Efficient & Fair Reform) and gave testimony to Congress on financial reform. Jane served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives, as a principal analyst in the international division of the Congressional Budget Office. Representing Americans for Financial Reform, Jane has currently given Congressional testimony at financial services hearings. Jane has lectured at the Boston University School of Law, the University of Massachusetts at Amherst, the University of Utah and the New School University and writes and lectures internationally. Her publications include The Evolution of U.S. Finance, a two-volume history of U.S. monetary policy and financial regulation.

    Transcript

    Anatomy of casino capitalismPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay. And today we're in Hadlyme, Connecticut, with Jane D'Arista. Thanks for joining us, Jane.

    JANE D'ARISTA, AUTHOR, THE EVOLUTION OF US FINANCE: Thank you for having me.

    JAY: So Jane is the author of The Evolution of US Finance. And volume one, for those of you that are—some of you I know are preoccupied with this—is the history of the Fed. And this entire book is about the whole development of US finance. And US finance, Jane, is one of the things that has gotten us into the trouble we're in, although we're in a weird moment of a recession. We're told we're in a beginnings of a recovery. Stock market's up, bank stocks are up, bank bonuses are way up, and so is unemployment way up. So first let's start with how did we get into this crisis, which seems to be deepening for most ordinary people?

    D'ARISTA: It is deepening for most ordinary people, as you say, because of unemployment. But it's not over by any means. Many of us believe that the same things that brought us to this place last year are now building up to give us a second piece of the storm, and that is the speculative activities of our financial sector, which are ongoing. And they involve proprietary trading, leverage, and the funding operations that make it possible to make an enormous amount of money and to inflate the balance sheets of these institutions. What we're seeing now in 2005 through 2007, many of these institutions almost doubled in size globally. Even England points out that at that time the balance sheets of its banks grew by three times.

    JAY: So give us some examples. What is proprietary trading? And how did it help get us where we are?

    D'ARISTA: Proprietary trading is when an institution trades for its own account, not for its customers.

    JAY: So, just so a place like Goldman, normally a pension fund would come, and they say, "Here's $1 billion. Go and make some money for us." So instead of that they're doing what?

    D'ARISTA: They are buying assets on credit for their own account in order to increase their profits so they can pay those huge bonuses. So proprietary trading does nothing for the customer and it does nothing for the economy. This is just an inside game, a speculative game.

    JAY: So their answer is, "Well, I'm Goldman Sachs. We're here to make money for people that own Goldman Sachs." So what's wrong with this?

    D'ARISTA: Well, it gets them into trouble, because in order to make that kind of money, they have to borrow a huge amount of money (that's called "leverage") in relation to their capital. And what we know about that in terms of ten years ago, 'cause we have the data or the information now, Long-Term Capital Management was borrowing almost $100 for every $1 of their own money, their capital.

    JAY: So give us an example of what one of these kind of trades would look like.

    D'ARISTA: Well, the very large amount of proprietary trading that was going on 10 years ago, and going on now somewhat differently, is you borrow a low-interest-rate currency somewhere in the world. You buy a currency that has a higher interest rate, and invest in the assets of that higher-interest-rate country.

    JAY: So you look around for an economy that's in recession that's trying to attract capital, so they have really low interest rates on borrowing money. You turn around and bring it here.

    D'ARISTA: That's exactly right. In the process, of course, you depress the currency of the country that you borrowed in and you raise the value when you buy another currency (always raises its value). And so then you're getting two things: you're getting a difference in interest rates that is a profit, and a difference in exchange rates that also gives you profit.

    JAY: Now, you off-camera gave me the example, for example, you might borrow yen at one point and come here and buy T-bills that are paying three or four point.

    D'ARISTA: That's exactly right. And so you've got a nice spread there. And you've done this, say, three months, and then you get out of the position and you take your money. And then you do it again.

    JAY: For two or three points to be meaningful, you've got to have a lot of money in play.

    D'ARISTA: Exactly. So where are you going to get that money? You're going to get it from other financial institutions. In other words, what we had was financial institutions borrowing from one another, borrowing in London, New York, Singapore, wherever, and using this money to speculate. I'm not just the only one who says "speculation." The International Monetary Fund at a given point said the global market has become a casino. These are people who were watching it very closely, and they were absolutely right. So the borrowing-from-one-another part of this game means that you have counterparty problems. You have this web of interconnections within the financial sector: "I owe you money; you owe me money. I don't know how much I owe you; I don't know how much you owe me. And we can't quite figure the whole thing out. It's somewhere on the books." But it's a chain that can unravel. So you have two things going on with proprietary trading: you're blowing up the balance sheets of these institutions on the one hand; on the other hand, you're creating this web of counterparty connections. Anything that disturbs the system, that leads to a lack of confidence—'cause all of this is not transparent, nobody knows how much anybody's leveraged or how many counterparties they have, etcetera—stops the system. It's like the music stops and there's a couple of missing chairs there.

    JAY: So it's the Ponzi scheme, essentially.

    D'ARISTA: It is.

    JAY: It's a confidence game.

    D'ARISTA: It is.

    JAY: As long as all the players have confidence, the game will keep going. We can keep playing. And there's so much money, who cares? And at some point, oh-oh, maybe someone's onto this.

    D'ARISTA: Exactly. So when they lost confidence in themselves, what we had was a run on the financial sector by the financial sector, and it all stopped. It wasn't us running to the bank and taking our money out as it was the Depression. This was a new kind of phenomenon that they were engaged in.

    JAY: So, essentially, Goldman, or an institution like that, they know how artificial their books are, and if they've loaned money over here to one of the other financial institutions, everybody knows they're playing a confidence game. So at some point they all have to stop because the whole thing has no real underlying value.

    D'ARISTA: Right. And at the same time what is going on here is that when they do stop and I owe you money, okay, you say to me, "You've given me these assets as margin accounts for the money that you owe me. Well, I think that you need to give me more margin, you need to give me some more assets." If I do that, then I have to take a charge against my capital. In other words, I have to say my whole book is not worth what it was, so this amount has to come out of my capital to balance my books. Having done that, of course, I have less capital and I'm on my way to insolvency. At the level at which they were gambling, insolvency spectacularly fast was upon them, and that was what terrified everybody and which led to all the activity that went on in 2008.

    JAY: Now, one of the pieces of this, 'cause one of the biggest pieces of what they were bundling and selling and using as supposedly an asset were all the subprime mortgages, especially in California and Florida. And, as we know from this series we just published recently from McClatchy, that one of the ideas was, well, real estate can never go down in Florida and California. So at some point they realized this thing is unraveling, that people just can't keep buying and borrowing when they don't have any real wages and real income.

    D'ARISTA: Absolutely right. I mean, the reality of what was going on with the household sector—no wage increases, increases in debt—. Debt as a whole phenomenon in the United States had gone absolutely past the red bars or whatever warning signs should be there. The household sector had gone from something like 64 percent of GDP in its borrowing—and that was high, historically high, in 1997—up over 100 percent in 2007. The same had happened to the financial sector: they were up from 64 percent, also, to 114 percent. That was the leverage, that was this enormous putting on of assets that was going on. And all of this, to step back apiece, was because of the role of the dollar. The dollar was the key currency. Money was flowing into the United States from around the world because it was the safe haven, it was where the assets were, and the central banks were putting their surplus earnings on what they sold us into Treasury bills. So you had enormous liquidity, I mean, just in an immense amount of money, and the financial sector was adding to that because they were, as economists would say, monetizing debt. In other words, every time they went through this proprietary trading game and pledged assets, they used existing assets as margin to borrow, to buy more assets and put them on the balance sheet. So now you're just stacking up the balance sheet.

    JAY: With essentially phony evaluation of assets.

    D'ARISTA: Right. The subprime problem was exacerbated by the fact that a given pool of mortgages could have some very good mortgages in it and subprime, and nobody knew what was in there, how much was good and how much—.

    JAY: Or cared.

    D'ARISTA: At the time, they didn't think about it.

    JAY: I mean, we saw in the McClatchy series that in the 1990s this New Century Real Estate that was one of the ones accumulating a lot of mortgages and then packaging and selling them to Goldman. In the 1990s, 100 percent of these mortgages were being reviewed to see if people could actually pay. By 2006, 10 percent of the mortgages are being reviewed. But they didn't even care.

    D'ARISTA: That's right. And so what you have is, back in 1984, a piece of legislation that allowed this to happen.

    JAY: Okay. Next segment of our interview, let's talk about that. Like, we all thought, us ordinary citizens, there's some regulations about all of this. How could the banks go wild? And so let's talk about how that happened. Please join us for the next segment of our interview, "Banks Going Wild," with Jane D'Arista.


    Comments

    Our automatic spam filter blocks comments with multiple links and multiple users using the same IP address. Please make thoughtful comments with minimal links using only one user name. If you think your comment has been mistakenly removed please email us at contact@therealnews.com

    Comments


    Latest Stories


    Affirmative Action Ruling Will Further Racial Inequality
    Evidence for Russian Involvement in East Ukraine Based on Shoddy Journalism
    Ivy League Study: The General Public Has Virtually No Influence on Policy
    The Modern History of Venezuela and Popular Democracy - Edgardo Lander on RAI (9/9)
    An Asia "Pivot" Should Mean Cooperating with China to Solve the Global Environmental Crisis
    Assessing the U.S. Environmental Movement
    Intimidation and Political Interference Goes Unpunished in UAW Case
    Exclusive Investigation Uncovers How BP Uses Bribes To Do Business
    The Modern History of Venezuela, The Protests and Democracy - Edgardo Lander on RAI (8/9)
    Greek Politics 4 Years After The Financial Crisis
    CBO Report Confirms U.S. Deficit Back to Normal Level
    Israel Uses Refugees as "Currency" in Arms Trade with Africa
    Who Will Pay for Climate Change Disaster?
    Canada Shifts to Right Under Harper, Mimicking the United States
    The Savings and Loan Crisis Demonstrates the Importance of Glass-Steagall
    South African Platinum Miner's Struggle Challenges ANC Leadership
    TRNN Original Report: Manning Determined to Fight Back After Army Upholds 35- Year Sentence
    Hundredth Anniversary of the Ludlow Massacre
    The Bundy Ranch Standoff Demonstrates Values Shared by Corporations and the Far Right
    The Resegregation of American Schools
    The Modern History of Venezuela, Why Still So Much Crime? - Edgardo Lander on Reality Asserts Itself (7/9)
    What Role Has Russia Played in Eastern Ukraine?
    Can Johns Hopkins Afford to Pay A Living Wage? (2/2)
    University Sit-In Targets World's Largest Private Coal Company
    The Modern History of Venezuela and the Need for a Post-Oil Economy - Edgardo Lander on RAI (6/9)
    Can Johns Hopkins Afford to Pay A Living Wage? (1/2)
    One Percent of Environmentalists Killings Lead to Convictions
    Investigation Finds Former Ukraine President Not Responsible For Sniper Attack on Protestors
    The Modern History of Venezuela from 1973 to the Caracazo Massacre - Edgardo Lander on Reality Asserts Itself (3/9)
    Ukraine Transitional Gov't Moves Militarily To Reclaim Seized Buildings
    IPCC Report Flawed By Narrow Focus on Carbon Emissions
    The Modern History of Venezuela: The Bolivarian Revolution - Edgardo Lander on Reality Asserts Itself (5/9)
    Obama Signs Directives to Reduce the Gender Wage Gap
    Eastern Ukraine Lacks Political Representation in Kiev
    Demystifying the Role of Mitigation in the Most Recent IPCC Report
    Hypersurveillance State Won't Prevent Another Boston Marathon Bombing
    The Modern History of Venezuela from 1973 to the Caracazo Massacre - Edgardo Lander on Reality Asserts Itself (3/9)
    Univ. of Maine Faculty Reinstated After Students Protest Against Cuts
    The Modern History of Venezuela from 1908 to 1973 - Edgardo Lander on Reality Asserts Itself (2/9)
    IMF Will Address Global Inequality, Says Managing Director Christine Lagarde
    Raising Big Banks' Leverage Ratio Good, But Not Nearly Enough
    TRNN Replay: Austerity Road to 19th Century
    Has Palestinian Maneuvering Revived Peace Talks?
    Late Jackson Mayor Lumumba's Son Wins Primary to Replace His Father, Runoff Election Ahead
    Quebecers Reject PQ and Elect a Liberal Government Representing Big Business
    TRNN Debate: Decriminalization vs. Legalization
    The Beginning of the Chavez Era - Edgardo Lander on Reality Asserts Itself (4/9)
    "Off With His Head": Court Upholds Obama's Power to Kill
    Workers at Nation's Top Hospital Strike For Fair Wages
    From Exile to Radicalization in Venezuela - Edgardo Lander on Reality Asserts Itself (1/9)
    Rwanda 20 Years Later: Genocide, Western Plunder of Congo, and President Kagame
    Ukrainian Protesters in the East Demand More Autonomy From Kiev Government
    Hunger Strikers Demand President Obama Halt His Record 2 Million Deportations
    Indian Parliamentary Elections - A Primer With Vijay Prashad
    West Looks to Carve Up Ukraine & Privatize Industries Held by Kleptocrats
    Where Are Israeli-Palestinian Peace Negotiations Headed?
    The Multiple Kingdoms of Saudi Arabia (5/5)
    Do the Afghan Presidential Elections Signify Progress?
    Republican Presidential Hopefuls Pay Homage to Billionaire Casino Tycoon Sheldon Adelson
    Will Extremist Lieberman Become Israel's Next Prime Minister?
    Why do the Saudis Want the US to Attack Iran? (4/5)
    Immigrant Advocates and Families Tell President Obama 'Not One More'
    Elections, Pipelines, and Protests - The Canada Panel
    Chris Hedges on "Israel's War on American Universities"
    Baltimore Residents Decry Lack of Affordable Housing
    Yellen Talks the Talk But Will She Walk the Walk?
    Hopkins Hospital Workers Speak Out against "Poverty Wages"
    Will Venezuela's New Floating Exchange Rate Curb Inflation?
    The European Central Bank's War on Wages is Pushing Europe's Economy to the Brink
    Supreme Court Decision Opens Floodgates for More Campaign Cash
    Charles Keating, the Financier Behind the Savings and Loan Scandal, Dies at 90
    Saudi Arabia and the al-Qaeda Monster (3/5)
    Maryland Residents Voice Opposition to Natural Gas Fracking Export Facility
    Supreme Court Ruling Gives Wealthy Individuals More Influence Over Elections
    What are the Saudis Afraid Of? - Madawi Al-Rasheed (2/5)
    Baltimore's MICA Adjunct Professors Set to Vote on Unionization
    Boycott of Israel Moving to Next Level?
    Hypocrisy Dressed Up as "Realism" Justifies American Alliance with Saudi Dictatorship
    Immigration Reform in the Shadows of Cesar Chavez's Legacy
    Leaked Senate Report Shows Use of Torture As "Ineffective"
    UN Report Says Climate Change Will Threaten Food Production Worldwide
    The Hypocrisy of US Calling for Enforcement of International Law
    How the Ecuadorian Economy Grew in a Global Recession
    'Shadows of Liberty' Trailer
    Kristina Borjesson on Why CBS Shut Down Her investigation into Flight 800 (2/8)
    Glen Ford on Racism in the American Media (3/8)
    Paul Jay on What Drives Corporate Media and What Drive The Real News (4/8)
    Creating a New Media Paradigm After Citizens United (5/8)
    Should The Left Engage with the Mainstream Media? (6/8)
    What Is the Financial Backing For The Real News? (7/8)
    Standing up to Character Assassination (8/8)
    Oligarchs, Fascists and the People's Protest in Ukraine
    TRNN Debate: Is Obamacare In the Interest of Workers?
    Too-Big-To-Fail Advantage Remains Intact For Big Banks
    Obama and the Saudi Agenda
    TRNN Replay: Investigating the Saudi Government's 9/11 Connection and the Path to Disilliusionment - Sen. Graham on Reality Asserts Itself pt 1
    The Iraq War's Real Legacy
    Petitions with 100,000+ Signatures Call for Snowden's Passport to be Reinstated
    We Need to Harness People Power - Andy Shallal on Reality Asserts Itself (4/4)
    BC Pipeline Fight and Quebec Elections - The Canada Panel
    Jonathan Schell - 1943-2014: Board Member of TRNN on Why We Need The Real News
    Teachers on Strike from the UK to Argentina
    Connecticut Poised to Become First State with $10.10 Minimum Wage
    Oil Spill Threatens Wildlife and Local Economy
    DC School Test Scores Up, But Poor Black Kids Are Doing Worse - Andy Shallal on RAI (3/4)
    Obama's Proposal To End NSA Bulk Data Collection Won't Protect Privacy
    How Google, Apple & The Biggest Tech Companies Colluded to Fix Workers' Wages
    An American Should be One that Questions Their Government - Andy Shallal on RAI (2/4)
    What's Driving Putin & Obama's Posturing on Ukraine?
    Hundreds of Students & Faculty Occupy College Campus to Fight Cuts to Public Higher Ed
    Due Process 'Impossible' In Harsh Death Sentencing Of Over 500 Muslim Brotherhood Members
    Has Anglo-American Capitalism Run Out of Steam?
    Being the "Other" in America - Andy Shallal on Reality Asserts Itself (1/4)
    TRNN Debate: Should Baltimore 'Ban The Box'?
    How Fallujah Became the Iraqi Government's New Battleground
    Why I Decided to Blow the Whistle on the NSA
    NASA Climate Predictions Show Serious Threat To Humanity
    Professor Who Teaches Israel-Palestine Conflict Accuses College of Violating His Academic Freedom
    CIA and NSA Wrongdoing Requires Independent Investigation, Says Former Church Committee Staff
    Are Tuition Breaks Enough To Combat High Student Debt And Low Graduation Rates?
    Industries Across the U.S. Are Stealing Wages From Their Lowest Paid Workers
    Who In Ukraine Will Benefit From An IMF Bailout?
    NSA Recording All International Calls From U.S.
    Israel "Making Lives Miserable" for Africans, Hoping They 'Self-Deport' (2/2)
    BP Gets Green Light to Drill in Gulf, But Has Safety Improved?
    Residents Still Not Drinking Tap Water Two Months After West Virginia Spill (1/2)
    Libya's Descent Into Turmoil Three Years After NATO Intervention
    From Pipelines to Peladeau - Canadian Report
    Israel "Making Lives Miserable" for Africans, Hoping They 'Self-Deport' (1/2)
    Congressional Progressive Caucus Budget Strikes Back Against Austerity
    Libya Three Years Later - Chaos and Partition
    Why Was Gaddafi Overthrown?
    Should Ukraine and West Accept De Facto Crimea Joining Russia? (2/2)
    Tony Benn Saw Socialism as the Culmination of Democratization
    Why Didn't Bush/Cheney Attack Iran and Can Obama Make and Sell a Deal? - Gareth Porter on Reality Asserts Itself (3/3)
    After Late Mayor Lumumba is Laid to Rest, What's Next for Jackson, Mississippi? (2/2)
    Crimea Referendum: Self Determination or Big Power Manipulation? (1/2)
    Sen. Graham: President Must Side with Openness About CIA and 9/11
    Manufacturing a Narrative for War - Gareth Porter on Reality Asserts Itself (2/3)
    Protesters Hit the Streets of Brooklyn to Demand $15 Minimum Wage
    Hammer: 'Moral Bankruptcy' Behind Massive GM Recall
    White House Withholds Thousands of Documents from Senate CIA Probe
    I Grew Up Believing in Time Magazine's Version of America - Gareth Porter on RAI (1/3)
    Western European Banks Vulnerable to Ukrainian Sovereign Debt Crisis
    TRNN Debate: What's Driving Inflation in Venezuela? (2/2)
    CIA vs. Senate: Who Is Obama Protecting?
    Will Tipped Workers Get Excluded Again From Minimum Wage Hike?
    TRNN Debate: What's Driving Inflation in Venezuela? (1/2)
    After Late Mayor Lumumba is Laid to Rest, What's Next for Jackson, Mississippi?(1/2)
    TRNN Replay: A Look at Who's Poised to Become No.2 at the Fed
    How Right-Wing Nationalism Rose to Influence in Ukraine (2/2)
    Netanyahu Attacks Boycott As Campaign Enters New Phase
    Moving Towards a Police State - Michael Ratner on Reality Asserts Itself (7/7)
    Fighting Reagan's Secret, Illegal Wars - Michael Ratner on Reality Asserts Itself (6/7)
    Puerto Rican Independence Movement and Cuba Further Radicalized Me - Michael Ratner on RAI (5/7)
    The Butcher of Attica - Michael Ratner on Reality Asserts Itself (4/7)
    MLK and a Radicalizing Moment in American History - Michael Ratner on Reality Asserts Itself (3/7)

    RealNewsNetwork.com, Real News Network, Real News, Real News For Real People, IWT are trademarks and service marks of IWT.TV inc. "The Real News" is the flagship show of IWT and Real News Network.

    All original content on this site is copyright of The Real News Network.  Click here for more

    Problems with this site? Please let us know

    Linux VPS Hosting by Star Dot Hosting