Even the most market-oriented capitalist would hesitate to encourage Lockheed Martin, Raytheon, or Boeing to produce more sophisticated weapons systems for other nations than we produce for ourselves, even if it meant huge profits for those companies and their shareholders.  It would simply not be in our national security interest.

Yet few voices are raised when America’s leading investment banks secretly encourage foreign governments, such as those in Greece and Spain, to manipulate their national budgets to conceal real deficits; and then those banks receive huge profits for doing so.  The net result is to destabilize international financial systems and cause markets to fall, including in the United States.

Something is wrong here.  Are investment banks chartered in the U.S. free to make profits that are distinctly not in the interest of the U.S. and dismiss their counter-productive manipulations in the name of “free markets”?  Apparently the answer is yes.  If the guardians of our country’s economic interests, such as Mr. Geithner or Mr. Summers, have spoken out to condemn this activity, then they have done so quietly.   These are the same banks that became “too big to fail” and thus demanded, and received, bailouts from the U.S. taxpayers even while piling up continuing huge bonuses.

Something is definitely wrong here.  In an increasingly integrated, globalized financial world, it is wrong for private American financial institutions to go abroad selling financial snake oil to foreign governments knowing their practices to be shady at best and crooked at worst, take their gigantic fees, flee back to New York, and count their ill-gotten gains in the Hamptons while workers in Greece, and in the United States, suffer the consequences.

This is not only wrong.  In a just world it would also be criminal.

Markets are wonderful mechanisms, but only up to a point.  Greed is not self-correcting.  The lessons of corruption never seem to be learned beyond a generation or two.  After a cycle of manipulation and corruption, reforms and regulations are enacted.  But then everyday Americans forget the lessons, vote for politicians preaching “free markets” and “deregulation” and the cycle repeats itself.  Deregulation was the watchword during the Clinton and Bush years.  And see what it gave us.  Bernie Madoff.  Who stole billions while the Securities and Exchange Commission turned a blind, deregulated eye?  

Even if you believe private investment banks should be free to loot and plunder here in the United States, do you also really believe they should be free to do so around the world?  And do you also truly believe this is in the national security interest of the United States?  If so, there are some clever people who have some credit default swaps they wish to sell you.

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37 Responses to ““Markets” and the National Interest”

  1. The Wrong Lessons « afterbirthnation Says:

    […] 2010 March 1 tags: financial reform, Economy, banking by r.e.c. Former Senator Gary Hart discusses the lessons of cyclical market conditions: Markets are wonderful mechanisms, but only up […]

  2. Rat in a Cage Says:

    What is the sound of Capitalism burying itself?

  3. Kevin Kilgore Says:

    You of all people should know the unfathomable damage being done by the great vampire squid Goldman Sachs. They helped take us down 2 years ago, took Greece down, will take other EU countries down and will take us down again…and again and again until the entire wolrd is sucked dry. I have so had it with all this crap in America, at 53 years old I am ready to pack it all in. I have given up on believing in leadership in this once great nation. Buffet and Munger are right…”basically, it’s over”.

    Kevin Kilgore
    US Navy Veteran
    Husband, Father, American

  4. Linda deLeon Says:

    Indeed we need “sustainable capitalism,” not the version our economic system has developed. A recent Planet Money podcast has an interesting take on “Why Greece Matters:

  5. Gavin Neil Says:

    It should be criminal? I COULD be criminal, if only lawmakers made it so. And the bankers who took our money while paying themselves? Lawmakers could stop that tomorrow. And the cycle of regulation and then greed, deregulation, collapse, and re-regulation? Well lawmakers could stop that too, only this time they seem to have stopped without even doing their job of re-regulating.

    A lovely piece, Senator, but actions speak louder. Where, then, are the actions of our Democratic majorities in both houses? If they can’t make it criminal, they can at least reset the cycle of regulation and delay the next cycle for a few years.

    The whole world sees how dishonest and selfish these people are. So when will you stop talking about how bad they are and start doing something about it?

  6. Bette S Baysinger Says:

    Mr. Hart, wouldn’t you say this problem harks back to 1913 and the creation of the Federal Reserve Bank (now international) with further creation of debt using fractional methods? Or do you think it started ‘way back when’ when some rich, white, male slave owners came here in order to secure themselves their own personal freedoms, and in turn helped build America from the efforts of a whole lot of slave labor? Or both, or perhaps neither?
    Thank you.
    Bette S Baysinger

  7. Clarc King Says:

    Thank you Mr. Hart, A good post that finally questions the counter productive results of these financial machinations. The world is suffering contraction of production in real physical terms, creating a useless populace; this is not an economic model, it is a killing machine, invading one country after another.

    If we continue down this road of enabling international monetarism, we will lose everything; a horrific depression hovers the population.

    Statecraft demands the termination of the monetary financier system, the American System solution; put the Fed into bankruptcy protection, recover the bailout trillions, banks that qualify will join the U.S. National Bank under Glass-Steagall standards. Assert the national authority of the U.S, government and create the long term debt capital that will refinance industry, Credits and currency will be issued into the population’s physical economy with the executive of creating the necessary facilities that enhance our standard of living.

    This solution, along with a fixed exchange rate system can be replicated throughout the world with U.S. leadership and cooperating nations.

    The world is depending on the political process in the United States; rational, courageous, and powerful measures must counterattack the irreversible, accelerating, collapsing operation of the international monetary financier debt based market system.

  8. David Chapman Says:

    Senator Hart,

    We met several summers ago concerning a global retail marketplace business model that used profits to deploy alternative energy. I have followed your writings, you’re always out in front of the issues concerning the American experiment. “Markets” and the National Interest” is right on target. It would seem a no-brainer to eliminate this type of deal making for what it is rampant greed at the expense of global stability. The fact that this type of reform will likely never happen points to the reality that we are now full-on Plutocracy. A business and wealth first movement that began with Ronald Reagan and was aided by every successive president.

    We are witnessing the results of this 30 year effort. 1% of America has more collective wealth than the bottom 150 million Americans. The supreme court has given the corporation equal human status to the people who own the country. The irony that what we as people create and grow corporations that will have more power in our democracy (money) than the people who created it and the market that supports it.

    About five years ago I read that 26 traders (people) made on average of $850 million each that year. That’s more money in one year than the all greatest businessmen before them. What did they create for all this reward. NOTHING of any value to America, just bets on arcane mathematical formulas that the SEC was unable to decipher, understand or regulate.

    The financial system and the government is broken, they have tied their fates to each other and use the American consumer and taxpayer to back their bets. I had great faith in Obama,but he surrounded himself with the very bankers that designed and implemented the this giant greed feast. The reform that is needed will never happen unless the people rise up and take back our democracy. That’s not going to happen, not many Americans even understand what is happening to the country they depend on and call their own.

    I consider you a model patriot, you have always been ahead of the curve and brave enough to do the right thing. I only wish we had you and your wisdom at the center of our decision making process. Keep up the good work it comforts me that we have a few statesmen left in the muddle that is now America.

  9. Steve Jensen Says:

    The “average joes” out there screaming about free markets are still enjoying a few gains from these dangerous games that are being played. But the nature of this elite group of charlatans will not be satisfied with simply having most of the profits…they will eventually demand ALL the profits. And when they do, those very “average joes”, who are the free market champions of today, will be screaming louder and longer than any of the rest of us. It will take amazing compassion to drum up any empathy for them at that time…

  10. John Walsh Says:

    It is the first time that I have seen this fiasco characterized as criminal and it is about time. Naked credit default swaps should be outlawed. To package garbage securities to your clients and then bet against their outcome
    through the purchase of credit default swaps is at best immoral if not criminal.In Greece and Spain investment bankers were complicit in concealing the scope and dangers of their financial well being and then these financial wizards of doom set up a market for credit default swaps to profit off their demise. In essence in both cases shorting the market is synonomous with insider trading.These people don’t need a bonus. They need to be put behind bars. In the case of AIG they sold a product for which they had no ability to cover.I fail to see the difference between them and Bernie Madoff. Throw them in with Bernie and the investment boys.They have ruined lives.

  11. Stephen Herrington Says:

    Semator, this theme is simply not seeing enough circulation. Are “free enterprises” able to ignore the well being and security of their country? Job flight to Asia will ultimately prove to have been a strategic mistake for our economic and so military security, as will the wealth gap in the American economy. Please keep it coming.

  12. Michael Califra Says:

    If Al Qaida or some foreign power had engineered the near financial collapse we experienced in 2008 it would be considered an act of war. But because our government — both parties — are in the pockets of the big financial institutions we hear only an occasional weak reprimand and insincere proposals of reform, which somehow mysteriously get watered down or evaporate entirely when no one is looking. Everyone knows why this happened and how to prevent it from happening again, but don’t expect any real reform to emerge from congress or to be pushed by Obama. If they were serious they would have already instituted a transaction tax on Wall St., which by itself would go a long way toward erasing the budget deficits everyone is so suddenly concerned about. To say our government is broken doesn’t put it in proper perspective. It is systemically and to its core rotten with corruption. Probably beyond redemption. So get ready everyone, because the next meltdown is right around the corner.

  13. Gary Hart Says:

    To Mr. Neil and others who wonder why I don’t “start doing something” I can only say I try everyway a concerned citizen can to change public opinion, through teaching, writing, organizing causes and projects, and accepting media invitations when they (seldom) are offered. By comparison to most, I believe I have remained as active in the public arena for he past 23 years as any former elected official I know (except for presidents). And I intend to continue to do so. In return, I will forward to you the advice of some who ask why I don’t simply shut up.

  14. Gary Hart Says:

    The comment by someone called “vermontroyster” is objectionable and will be taken down.


  15. Jim Whitehouse Says:

    Thank you for your thoughtful calling out of one of the major problems with our current financial system. More people of your stature will help get the word out and hopefully create enough of an outcry than the general whimper that is heard. Our system has become like a cancer, requiring growth at any cost, thereby growing into the unethical practices we now see (which should be criminal). Like a cancer, it will die when it kills the host, unless we can correct the system. Thanks again Gary.

  16. Lois in Belchertown, Ma. Says:

    While I completely concur with your assessment of our situation, some people, Noam Chomsky in particular, have been calling these criminals out for a very long time. You mention how little media attention you are able to get to point out the criminality of what’s going on. Most people in this country don’t even know who Prof. Chomsky is. Of course that’s by design. The corporate press is the main obstacle to engaging the public in stopping the corporate take over of the planet. It is truly the opiate of the masses. I try all the time to encourage people to access non-profit independent media, but old habits die hard. As long as the majority of Americans trust corporate media for their information(?), our battle will continue to be very difficult.

  17. POLpursun Says:

    The checks and balances developed among the three branches of government are fine (nothing is perfect). However, the most important checks and balances do not exist. These are the ones required between the “elites” of the government sector and the “elites” of the private sector. THAT is how, perhaps, government of the people, by the people, for the people has some chance of being more than a mirage.

    This is especially the case given the way money is employed in politics. Take lobbying for instance: why is money necessary here? [that is money passing, directly and/or indirectly, between lobbyist and politician]. It’s “brain grease” that’s required here —– ideas, comments, analysis, etc. re intended legislation, say. ALL elections should be 100%, yes 100% publicly financed. There should be free time from media —– the airwaves belong to the people ultimately. In other words, get private money out of politics.

    The biggest problem with government —– large or small —– is the coupling and revolving doors and “relationships and networking” at the top/”elite” levels of the “bi-sector” —- the governance and executive levels of government and non-government sectors. Sitting ABOVE the “bi-sector” is the web of the international financial super-elites. Thus when one thinks make, mine, grow, provide productive services the finance “industry” is to the real/productive economy as the tail is to wagging the dog. That is, the finance “industry” preys on and/or leeches off the real economy more than serves it. Financial services organizations extract far more of the productivity gains of the economy than their contribution to it would sensibly support.

  18. Yogidad Says:

    Markets are a product of regulation and laws. Naked shorts and credit default swaps where the purchaser has no interest in the transaction could not be accomplished in a truly “free market” at all. Very loud Wall Street paid voices scream “free market” propoganda whenever regulation is suggested that hurts their interests (or perceived interests). But there is no organized, moneyed voice for the millions on the other side. Why can’t unions and retirees combine their power and argue against regulations that hurt their interests? Rise up against the regulations that allow such financial devices as CDS (that are not for the purposes of insurance), derivatives and naked shorts. Ultimately it’s the taxpayers that hold the risk by virtue of regulation that allow such devices and too-big-to-fail institutions, etc.

  19. CheriAnne Says:

    Dear Senator Hart: Isn’t there legal action available in the World Court that the defrauded could take against those banks that participated in such fraud?

    Also, I would go so far to say that American companies that take jobs overseas resulting in economic destabilization in America jeopardize American security and pose national security risk.

  20. Mark D. Says:

    Once again former senator Hart is right on the money on this issue. We truly would be better off in this country with more elected officials with the knowledge and principals of Mr. Hart. Thanks Gary and keep on writing.

  21. L. F. File Says:

    Seems like we need a “Financial Patriot Act”.


  22. Cory Schneider Says:

    Senator Hart,
    Thank you for your thoughts and for maintaining this blog. If only more of our elected representatives took the time to do this.
    Although many of the criticisms that you mount in your article are correct and understandable, there is a fundamental flaw.
    It all falls on the sentence, “Greed is not self-correcting.” In a free market, (one in which the government does not interfere or create moral hazard) greed does indeed have a correction mechanism. It’s called risk. The investment banks you mention have only been able to engage in the incredibly leveraged and incredibly risky behavior that you have decried because they know that the government is likely to bail them out if (when) the curtain falls. This has turned out to be true. (There was only one exception to this rule in our current crisis with Lehman Brothers, and there may have been interesting reasons for this fact) This is the essence of moral hazard, and it is not the only form of this free-market-crushing phenomena that our government constantly upholds.

    The crisis we face in the world today is not the fault of the free market, because we have not had a free market.

    May I humbly recommend a book, Bailout Nation, by Barry Ritholtz?
    It is available on Amazon, and if you visit EconTalk.org, you will see that the most recent podcast (posted March 1, 2010) stars Ritholtz as a guest. I think that you’d enjoy it.

    Take care.

  23. CheriAnne Says:

    To Cory Schneider: With all due respect, there’s just two words: Bernie Madoff.

  24. Gary Hart Says:

    Those “defrauded” by the actions of Goldman Sachs in Greece are the citizens of the EU, and indirectly the rest of us. Whether the Germans and others who are being asked to bail out Greece want to go after Goldman Sachs in the International Court of Justice is an interesting question. As to risk correcting greed, Bernie Madoff indeed. His jail term will not compensate for the losses of those who trusted him and who trusted the SEC.

  25. Cory Schneider Says:

    If you’d like, lay out your argument in a more complete way so we can discuss it.

    But I’ll work with what I’ve been given, and simply say there’s a difference between what you’re talking about and what I am.

    Regulation (good), and government interference which produces moral hazard (bad), are not the same thing. We can have gov’t regulation without having moral hazard, and we should. Sadly regulators, under Bush and now Obama, have been asleep at the wheel. Mortgage lenders, appraisers, et. al. were overvaluing houses in sneaky, dishonest ways, which led to the bubble. This could have been easily avoided, because alerts were sounded during Bush, but regulators ignored them. I wish it weren’t the case. This is not gov’t interference or moral hazard creation (as is the assurance of a bailout, or the giving of loans/grants), it is negligence in their duty to keep people honest (to regulate). Luckily this did not happen in the case of Madoff. Madoff was deceiving people and essentially stealing other people’s money. His business model was directly illegal, and sadly the Federal Reserve’s money creation techniques are equally pyramidal. Madoff also lost big, and is paying the price for it in prison. Your two word argument does not so simply disprove my entire argument, as you wish it would.

    Please listen to the podcast I mentioned, you’d learn a lot.

    And just because I think you might need to hear it:
    Supporters of real free markets are not anti-regulation.
    Just understand the distinction between direct interference/guidance of markets and regulation of markets.

  26. Cory Schneider Says:

    Jail terms for murderers don’t make up for the loss of life of their victims, either, but we take what we can get in reality.
    Again we are not apples-apples here.

  27. Jeff Simpson Says:

    There are many questionable financial practices available out there that are not illegal but that clearly should be illegal. Engagement on this issue does not require elaborate training or an especially deep understanding of economics. When I examine a given practice in the finance sector, I always ask myself a simple question: Does this practice serve an economic function?

    Here is a simple example: If you are betting against a bond being paid off by the borrower, you must be holding this bond. If you are not, you have no business betting on it.

    The practice of anticipating large trades and buying stocks (or whatever else it may be) only to make a few pennies as you resell moments later serves no clear market function (despite an article I saw claiming that this practice helped push prices towards their ‘correct’ value more quickly — this justification is baloney). Those that purchase stocks should be required to hold them for some minimum period of time, perhaps at least an hour if not a full business day.

    And those that buy oil futures must be required to put more money down than the 5 or 10% currently required (this is not a new argument) to back up their cavalier trading practices.

    Yes, Wall Street will scream bloody murder, but the fox is guarding the henhouse and this has to end.

    In some sense, greed is self-correcting. Consider the Roman Empire, or France circa 1888. If the abuses go unpunished and greed remains unchecked for long enough, there is a extralegal correction mechanism that kicks in automatically, albeit ungracefully.

    It is simply a question of whether the political establishment will realize that it is in their own self interest to reign in the forces of greed that are currently running amok. These are interesting times in which we live.

  28. Cory Schneider Says:

    Sorry for multi-posting, but I hit ‘submit’ a little early.

    Madoff knew he was breaking the law, and he knew of the risks involved, but he took those actions because of his lacking moral fiber and at least partially because he didn’t foresee any disciplinary action being taken. The latter has a historical basis for being true, and I am with both the senator and commenter CheriAnne that this is definitely wrong. I just don’t think that regulation is necessary in the case of the CDS issue, and many others, because I see that the real cause of the problem was the positive action taken by the government in assuring banks that they’d be bailed out at the first sign of trouble. If not for that, there would likely be no need for regulation of these financial instruments, because the risks involved would be enough deterrent to keep it from becoming so large (too big to fail) in the first place.

    Our main disagreement, I suppose, is the acceptance that there is both the negative action of failure to regulate fraud, and the positive action of meddling in the economy that tends to have either unforeseen or ignored consequences.

    Take care.

  29. Gary Hart Says:

    The original intent of this blog was to call into question the activities of private U.S. investment banks that were not in the best interest of the nation where they are chartered. The activities involved here had to do with helping debtor nations (Greece) conceal the true extent of its debt by shifting large portions of that debt off the books. It may not have been illegal (hardly a high moral standard), but it certainly was unpatriotic. And all for a measly billion dollars in fees.

  30. CheriAnne Says:

    Cory, Maybe in the end we believe more than the surface would indicate. In your first post, you wrote that the correcting mechanism in the free market was risk. In other words, everyone gambles at their own peril. Which is exactly what people did with Bernie Madoff, because it was very apparent that his scheme was a Ponzi scheme. Anyone looking at rate of his returns had to know, had to know, it was “too good to be true”. But “greed” got the best of them. I suppose one could say “tough luck” to all who got burned, but, on the other hand, it is absolutely tragic what happened. But if it is best to allow free market to correct itself, why does Bernie Madoff have to go to jail? If people assume the risk, what did Bernie Madoff do that was so wrong? But, if Bernie Madoff did do wrong, then we must have some way to judge what he did was wrong, and we must have some regulations in place to check in step of a long process, each point at which wrong could be done. So in the end, maybe we agree on some points, and maybe we disagree on some points. But its all friendly.

  31. Lois in Belchertown, Ma. Says:

    Matt Taibbi is the best at dissecting what Wall St. is really pulling off. Check out his latest post.
    These crooks are breathtaking in there willingness to rob the world blind.

  32. Michael Califra Says:

    Madoff and Greece aside, it’s quite clear that our own SEC was asleep at the wheel while the worst of the abuses were going on, despite having been warned many times of the shenanigans taking place in the markets. I’d like to know why Christopher Cox hasn’t been grilled more thoroughly by congress as to what the directives handed down by the Bush administration were at the time. Even of he were acting on his own in the firm ideological belief that government should not regulate markets, a case of criminal negligence can surely be made against him. Why is no one in Washington ever held responsible for their actions anymore?

  33. Gary Hart Says:

    Mr. Califra, a very good question. In part it is Washington cronyism, and in part is the failure of the media to do their job.

  34. Jeff Simpson Says:

    It takes a certain amount of gall to claim pure, ideological innocence despite overwhelming evidence indicating systemic regulatory failures. The public was not sufficiently protected from Madoff’s Ponzi scheme, credit default swaps betting against Goldman-Sach’s own product that were obviously a conflict of interest, bundled mortgages receiving insanely rosy bond ratings based on the delusional mantra that real estate always appreciates (so borrower creditworthiness was immaterial), and 2008 financial sector bailouts paying 100 cents on the dollar versus historical averages more around 20-40.

    And yet none of these scoundrels are held to account, despite our collective acknowledgement of this fact. To hold the guilty accountable would clear out a great swath from the ranks of the ruling elite.

    The cosy relationships, the PAC-only access, the nepotism, the professional inbreeding — these are all deplorable conditions. True public servants are apparently not rising to the political ranks required to protect the public interest.

    I once saw a talk from a fellow at Morton-Thiokol where he talked of the failures that led to the Challenger accident, and he spoke of their ‘build and burn’ testing philosophy. They would make a prototype solid fuel rocket booster, set it off, and learn from their mistakes. Repeat as needed, to approach a desired level of performance. This was in the larger context of how better to achieve a desired result.

    It is sad that we as a society are not even learning from our build and burn approach, never mind embracing a culture imbued with better anticipatory skills.

    It is clear that we have received some very poor performance from the financial markets and the government response to their ailments, and yet it is also readily apparent that little reform has as of yet been implemented, and so we are poised for a second failure that, given our present mode of treading water (borrowing), will likely be worse. Our tolerance of the exporting of similarly flawed accounting practices is just one more indicator of how we have failed to learn from our mistakes.

    I could be wrong, but I don’t see how the near certainty of the GOP regaining political control bodes anything but an increased emphasis on military domination and the garnering of additional international enmity (not to mention drastic cutting of domestic programs). Terrorist recruiting will, I expect, become easier if the GOP regains power and returns to their jingoistic, hegemonistic modus operandi.

  35. D. Dexter Says:

    Hiding in a Wall street canyon, a place where the past will always bury the future, the banker waits.


Banks too big to fail, morph into banks too big to govern, and we wonder why, as we huddle around our desktop campfires waiting for the next OPEC stimulation package to knock us off our collective log(in).

    Monopoly control over legal tender has a long, mean spirited, history. A system that places malignant cells of usury along side the enlightened idea of democracy, is just plain, poor design.

Democracy tries to give all a level playing field. With time, usury by its’ nature, must dominate or die. It uses the algebraic concept of exponential growth to accomplish this domination; it now encompasses the entire planet. Coincidentally this exponential growth accents human greed.

    Exponential growth will always do an end run over any attempt to regulate [i.e the constitution]. Communism, democracy, fascism, capitalism, dictatorships, or monarchies; this old boy has no loyalty to any. He will however, eat one or two for breakfast.

    The ego oriented, antiquated system has seen its’ day in the sun. Its’ quaintly out of place in the technological world, where, as we speak, scientists are in the process of transforming skin cells into functional neurons.[take a few seconds to brood about that]

    Hammurabi [1800 BC] economics needs to be completely replaced with behavioral economics. We know our limitations and we design around them. Surely we can colaborate to come up with something with good behavioral design elements. Complaining is silly. Do something, or forget about it! So slick back your hair, lick your eyebrows and grab your very best example of the “eggbeater centrifuge”; we must not blink, we can do this. It is time to “assemble” an exit management matrix.

    Now the bankers’ perspiration, leaking from the brim of his Gabbana Red’s, [see worlds’ most expensive sunglasses] sketches an unmanaged path down his pampered cheek. He dabs at the moisture with a thousand dollar bill, he ain’t got a chance; it is time! Let the triage begin.

  36. Pearlie Lovaas Says:

    Overall, its a great post, but you may have spent a littlemore time with it. but an excellent post

  37. Dominique Konopski Says:

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