Call it Money Laundering

September 22, 2008

Haggling has set in over the details and advisability of the $700 billion proposed comprehensive buy-up of bad financial market debts, and it shows in today’s market judgements of “sell the dollar,”  “buy commodities,” “stay away from money market funds” and “sell securities.”  Oil and gold are around 20% above recent lows, and the euro and Swiss franc are some 4% stronger than their lows last Friday.  The DJIA is down 175 points.  Non-believers in Henry Paulson’s plan wonder why other policy options are not being considered, if America is perhaps making too big a leap down the road of socialism, if the scourge of moral hazard will ever be washed away should the plan be approved, how it will be possible to administer the new bureaucracy, and if sufficient independent oversight can be in place to prevent a whole new level of corruption.  Power corrupts, and absolute power corrupts absolutely.  At the root of all these fears is that sense of deja vu that another rush to judgment is being thrust upon the public that will be deeply regretted, like the Gulf of Tonkin Resolution, the wage-price controls of 1971, and the war to rid Iraq of its weapons of mass destruction.

Blame games are toxic, and they impede dealing with problems that need urgent attention.  Understanding everything that created the financial crisis will be necessary to design those modifications in the international monetary system, which will best promote greater safety from general failure, yet not erase the element of risk-taking that is essential to capitalism.  Fed policy has been criticized for being too loose from 1997-2004 and for not comprehending the gravity of the crisis back in August 2007.  Fiscal policy under Bush was blamed for squandering a budget surplus with massive guns-and-butter spending and equally massive tax reductions.  Others hold the lack of financial industry regulation as primarily responsible for steering the U.S. and global economy into its present dangerous waters.  The problem with all these accusations is that they exhaust energy looking backward and offer no way for society to exact its pound of flesh.  Unless the highest-placed people are seen to be penalized, a psychology of trust in capitalism will not  be restored, not in one, three, ten or twenty-five years.  The major obscenity is the picture of CEO’s from ruined financial institutions walking away with fat parachute deals.

The core crime behind the financial system breakdown was money laundering.  Bank loans to unworthy borrowers were sliced, diced, repackaged as securitised bonds and reintroduced into the financial system as unrecognizable and completely safe assets.  Behind the smoke and mirrors of complicated mathematical algorithms, the intent was not to create a safer financial system as advertised, but rather to conceal the identity and source of tainted assets from ultimate investors.  That’s not different from the techniques and purposes of organized crime or those who finance terrorism, and far more innocent victims worldwide will be hurt by those 21st century Masters of the Universe than the sum of all people who perished on 9/11 or in wars pursued in the wake of 9/11.  Perpetrators of this brand of money laundering should be prosecuted as we would other brands of money laundering and be subject to penalties of equally heinous crimes. 



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