The Fed Selling Put Options On Treasury Bonds to Drive Down Yields?

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pinecarr's picture
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The Fed Selling Put Options On Treasury Bonds to Drive Down Yields?

Eric deCarobonnel, from MarketSkeptics.com, has posted an interesting video, "FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds to Drive Down Yields", at : http://www.marketskeptics.com/2011/04/federal-reserve-is-selling-default-insurance-put-options-on-treasury-bonds-to-drive-down-yields.html . 

The story he tells is backed with several  visual references to Fed Meeting notes from past years.  Per Eric,

Cheap put options are keeping investors in treasury bonds like FDIC insurance is keeping people in insolvent banks.

I would be interested in hearing what others think about this video, especially some of you folks who are more knowledgeable about the workings of the market and market manipulations, as discussed here.   Is this news? Is this credible?  If so, what are the implications to us minions (as well as at the macro level)?

Thanks,

pinecarr

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Pinecarr, fwiw, my take can

Pinecarr, fwiw, my take can be found in an article now up on The Automatic Earth, which I also posted in CM's General Discussion Forum.

http://theautomaticearth.blogspot.com/2011/04/april-17-2011-bailing-out-...

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financial 'warfare'

With the fed doing the 'put option' thing, and with news of the BRICs getting together to discuss their own currency, what would a 'financial attack" against the US look like?

As we slide deeper into this pit, would WWIII come in the form of demolishing the US Dollar in a manner of days?

However,  if so, isn't  that mutually assured distruction, since the $ is the worlds reserve currency? 

Trying to guess as to what the landscape will look like 20 yrs from now.

dj

 

 

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Thanks for the response,

Thanks for the response, Ashvinp, and for the pointers to your article on The Automatic Earth as well as ZH's article.  I'll check them both out.  I appreciate it, as I had missed both of them. 

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This seems pretty important.

This seems pretty important. Enough so that Chris would post his thoughts on the actions the Fed is engaging in. 

Right??

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FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds

 

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http://www.zerohedge.com/arti

http://www.zerohedge.com/article/reason-geithners-weekend-media-whirlwind-tour-white-house-learned-about-sp-downgrade-friday

And for the most unsurprising news of the day, Reuters reports that the White House has admitted it knew about the S&P rating action on Friday. Which means that all the key bond buyers (or sellers are the case may be, Pimco), knew at roughly the same time what the key market catalyst on Monday would be (we can't wait to get a declassified glimpse of Larry Meyer's phone log over the weekend one day in the future).

Isn't this insider trading?

 

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Isn't this insider

Isn't this insider trading?

Would it matter?

I got a feeling the Fed could just come out and say; "Yeah, we just screwed the whole world economy on purpose"

and people would just say; "Oh those crazy guys at the Fed"

Sheesh...whats it take to get people pissed off?

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Amen to that, Johnny! 

Amen to that, Johnny! 

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Would it matter? Sure does.

Would it matter?

Sure does. Bankers can finally do insider trading with impugnity simply saying they were "doing Ben's work".

 

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War

Once this finally gets to shaking out on Main St. we are going to get the soundbites blaming the man on the street. As long as most folks are focused on whatever the talking head says and has no curiosity of their own to find truth, they will feed on what they see.

I say divisive partisan politics, race baiting and class warfare ala CNBC gets folks to reduce their tolerance for others a teency bit more. Then some small catalyst, (like a self immolation, but different) sets the country on fire.

Maybe a day of rage in....Los Angeles? Oakland? Berkley? Phoenix? Dallas? Chicago? North vs South? Eat the "Rich" (upper middle class) campaign? Maybe all of the above at once.

Let's throw some more wood on the fire. It's going to be a long cold night.

Best Wishes,

Jager06

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jumblies wrote:Isn't this
jumblies wrote:

Isn't this insider trading?

With the ongoing massive fraud being perpetrated by the financial community I find insider trading to be peculiarly quaint.

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jumblies
jumblies wrote:

http://www.zerohedge.com/article/reason-geithners-weekend-media-whirlwind-tour-white-house-learned-about-sp-downgrade-friday

And for the most unsurprising news of the day, Reuters reports that the White House has admitted it knew about the S&P rating action on Friday. Which means that all the key bond buyers (or sellers are the case may be, Pimco), knew at roughly the same time what the key market catalyst on Monday would be (we can't wait to get a declassified glimpse of Larry Meyer's phone log over the weekend one day in the future).

Isn't this insider trading?

It definitely is, and it has been going on for a long long time. Pimco especially has had the inside line to the Fed's monetary decisions, which is by far the biggest influence on markets for a few years now, and I'm pretty sure Bill Gross admitted as much on CNBC earlier this year (but I can't find the clip right now).

That is also why I am very skeptical of its net short position on treasuries as a short to medium-term bet against the treasury market, as I discussed here - http://theautomaticearth.blogspot.com/2011/04/april-12-2011-bill-gross-master-of.html

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nice find

Nice find Johnny O.  Unfortunately, as long as the American dumkopf remains sated on electronic media and fat/sugar/salt laden crap that passes for food, it would seem they have absolutely zero outrage capacity.  It's surreal. 

 

 

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ashvinp wrote: It definitely
ashvinp wrote:

It definitely is, and it has been going on for a long long time. Pimco especially has had the inside line to the Fed's monetary decisions, which is by far the biggest influence on markets for a few years now, and I'm pretty sure Bill Gross admitted as much on CNBC earlier this year (but I can't find the clip right now).

That is also why I am very skeptical of its net short position on treasuries as a short to medium-term bet against the treasury market, as I discussed here - http://theautomaticearth.blogspot.com/2011/04/april-12-2011-bill-gross-master-of.html

I am sure that it is but it is also clear that at this point insider trading enforcement is a joke.  It is only really used against small time outsiders that use inside information.  Real insiders never have to worry and can trade with impunity.  Most of the this regulation is for show anyways.  FINRA registered people like myself have to take an anti-money laundering class every year, even though I work at a private non-connected firm that handles no customer money, and yet people like FED insiders can make millions off their inside info with no fear of prosecution.

A great example of this is Stephen Friedman.  Here is the case of a ex-Goldman insider that was on the NY FED board of governors during the AIG bailout.  When everyone thought GS was in trouble, he knew that GS was getting $10+ billion in backdoor bailout via AIG and bought over 50,000 shares.  This personally netted him several million dollars profit.  How this is not a clear cut case of insider trading, I will never understand.  He should be wearing an orange jumpsuit in club Fed, instead his is sipping chardonnay with his buddies in the Hamptons.

When the SHTF, I sometimes hope that people like this meet the same fate as Louis XVI.

http://dailybail.com/home/is-stephen-friedman-guilty-of-insider-trading....

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my sentiments exactly
goes211 wrote:

When the SHTF, I sometimes hope that people like this meet the same fate as Louis XVI.

Or at least experience the karmically appropriate life of a King Midas.;-)

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goes211 wrote: I am sure
goes211 wrote:

I am sure that it is but it is also clear that at this point insider trading enforcement is a joke.  It is only really used against small time outsiders that use inside information.  Real insiders never have to worry and can trade with impunity.  Most of the this regulation is for show anyways. 

Oh no doubt. I happen to think most of the American legal system is a joke... especially fields like corporate law, securities law, real estate law, bankruptcy law, etc., but even fields like environmental law. They really do nothing to protect small businesses, small-time investors,  normal homebuyers, small-time debtors or the environment. But what can you expect when the laws are basically proposed, crafted, passed, enforced and interpreted by the same tight-knit group of extremely wealthy people?

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ashvinp wrote: goes211
ashvinp wrote:
goes211 wrote:

I am sure that it is but it is also clear that at this point insider trading enforcement is a joke.  It is only really used against small time outsiders that use inside information.  Real insiders never have to worry and can trade with impunity.  Most of the this regulation is for show anyways. 

Oh no doubt. I happen to think most of the American legal system is a joke... especially fields like corporate law, securities law, real estate law, bankruptcy law, etc., but even fields like environmental law. They really do nothing to protect small businesses, small-time investors,  normal homebuyers, small-time debtors or the environment. But what can you expect when the laws are basically proposed, crafted, passed, enforced and interpreted by the same tight-knit group of extremely wealthy people?

Ashvinp

You'll love this quote that Goes211 posted in another thread.  This sort of thing has been going on for a long time.

Goes211 wrote:

Reminds me of my favorite passage from Frédéric Bastiat's "The Law" (1848)

Property and Plunder

Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.

But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.

Now since man is naturally inclined to avoid pain — and since labor is pain in itself — it follows that men will resort to plunder whenever plunder is easier than work. History shows this quite clearly. And under these conditions, neither religion nor morality can stop it.

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor.

It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.

But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.

Travlin 

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When does Fed Market Manipulation = Private Banking Fraud?

I was checking out Jesse's Cafe Americain, and iIt appears that he had posted a link to Eric deCarbonnel's video last week in his "pieces for reflection".   He has since moved it up front and center, and has provided his own commentary in the article, "How Far Can the Fed Go Manipulating Markets Before It Is Private Banking Fraud?" at  http://jessescrossroadscafe.blogspot.com/2011/04/how-far-can-fed-go-in-manipulating.html .  Per Jesse:

When does public policy go too far and become an instrument primarily serving private fraud?

I have had this video on the manipulation of the debt markets by the Fed in the Matières à Réflexion links since last week, but moved it here on request because apparently many missed it, and did not understand its importance, the implications.

It is a fairly good example of the rationale for the Fed and its member banks dealing in paper derivatives to manage perception and attempt to 'manage' longer term interest rates. And by extention it also provides the reason and even some of the means in manipulating the price of gold and silver.

Papers such Gibson's Paradox by Larry Summers demonstrate a belief that the price of gold and silver have a definite correlation to long term interest rates, which the Fed is admittedly trying to 'shape.'

One may make the argument that this correlation between gold and the bond no longer exists since the US is no longer on a gold standard, and futher, just because the FED may use derivatives to distort long term rates, that does not mean the Fed and their multinational banking associates are doing the same thing in related markets such as gold, silver, stock prices, LIBOR, etc. It is circumstantial.

But in point of fact the evidence from the Fed's own transcripts, and quotes from various members and bankers, demonstrates that the perception of at least gold and silver in the market is still an active concern and of serious interest to the Fed. So now we have motive and means, and indications in half hidden documents that it is indeed occuring.

 

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Mr. Bastiat is my new hero

Goes211 wrote:

Reminds me of my favorite passage from Frédéric Bastiat's "The Law" (1848)

Property and Plunder

Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.

But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.

Now since man is naturally inclined to avoid pain — and since labor is pain in itself — it follows that men will resort to plunder whenever plunder is easier than work. History shows this quite clearly. And under these conditions, neither religion nor morality can stop it.

When, then, does plunder stop? It stops when it becomes more painful and more dangerous than labor.

It is evident, then, that the proper purpose of law is to use the power of its collective force to stop this fatal tendency to plunder instead of to work. All the measures of the law should protect property and punish plunder.

But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.

  Mr. Bastiat is my new hero

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Travlin, You're right... I

Travlin,

You're right... I do love that quote, and I'm surprised I have never seen it before.

Thanks for sharing!

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Credit to Goes211

Ashvinp and Johnny

The credit goes to Goes211.  He has read many weighty tomes and enlightened us with his efforts.  This quote was so impressive I saved it.  It fit this conversation perfectly so I just trotted it out for a wider audience.  The really good stuff is ageless.

Travlin 

 

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  Thomas Aquinas and the

 

Thomas Aquinas and the School Of Salamanca,  Fredric Bastiat of France,   Carl Menger from Austria.     

I like your approach goes 211.  Have people judge the ideas themselves before a label is attached to them.   Later they'll find out that the writings of these men heavily influenced what we now know as the Austrian School of Economics.

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Bastiat - not so much

Indeed, Bastiat offers a beguiling essay in his oft quoted “The Law”. While an interesting, perhaps even compelling excerpt, upon further examination it becomes obvious that although the commentary is effective -the conclusions are not.

Frederic Bastiat was in fact a radical libertarian who wrote and commented during a period in France that was marked by tectonic political struggle largely dominated by Socialists. His polemic was an interesting and entertaining counterpoint to the Socialist arguments of the day, although his theories and commentary were largely disregarded. There are several reasons for this:

1.)    He was at heart anti-protectionist, and a firm believer in laissez faire free markets, and in effect, used his theories to explain that poverty existed only due to a lack of freedom.

On account of its shallowness and manifest disregard of certain facts of social life, Bastiat’s writing has had little influence on the leaders of economic thought. Its popular influence, however, was remarkable, and it is this which has justified the devotion of so much space to it. This influence was increased by the extreme free trade party in England, called on the Continent generally the Manchester Party, after the city where it had its stronghold. But Bastiat’s system has also reacted upon this party, leading it to greater extremes in doctrine. In Germany a party was also formed between the years 1840 and 1850, op­posing all interference of government, and accepting Bastiat without reserve. Prominent members of this party were Prince-Smith, an Englishman by birth, J. Faucher, Victor Bohmert, and Max Wirth.

Bastiat did not deny that the poor and unhappy existed, though he found the ground for their condition in a mere lack of freedom, and bade the laborer be content and grateful to the capitalist. His followers in Germany went still further. In their admiration of our present social organization, they denied the existence of a social problem. The world looked so happy to them that they could find no poor man in it. It became at one time quite the thing to speak of the so-called poor man. Cliffe Leslie says: "Political writers and speakers of this school have long enjoyed the double satisfaction of beholding in themselves the masters of a difficult study, and of pleasing the powers that be, by lending the sanction of science to all established institutions and customs, unless, indeed, customs of the poor. Instead of a science of wealth, they give us a science for wealth."

2.)    He promoted a viewpoint of the political economy from the perspective of the consumer, which was antithetical to the intellectual discourse of the day (and still is).

Bastiat often refutes protectionism by enjoining us to look at things from the consumer’s point of view—tariffs protect producers at the expense of consumers, impoverishing everyone who would otherwise benefit from the magic of comparative advantage. “Consumption is the goal of all our efforts,’ he declares in a typical formulation, “and it is only by adopting the point of view of the consumer that we shall find the solution to all our problems.” This is a core idea of neo-classical economics, that the point of production is consumption, and maximizing consumption maximizes well-being. As Bastiat says, “human labor is not an end but a means. It never remains unemployed.” The last part of that is to refute the lump-of-labor fallacy; human ingenuity will find new uses for our productive capacity and we can never run out of work. But why? The answer to that runs counter to Bastiat’s first proposition, that labor is a means. It is also an end, in that people need meaningful work to perform in order to be personally fulfilled. This notion is at the heart of the early Marxian critique of Adam Smith in the Economic and Philosophical Manuscripts.

So when we are encouraged to fixate on the consumer’s point of view to resolve all sorts of labor-related economic issues, what we’re essentially being told is: Give up your fantasy of meaningful work and be happy with the range of goods you can consume. Be a shopper, not a maker.

And, from “The Law”:

But, generally, the law is made by one man or one class of men. And since law cannot operate without the sanction and support of a dominating force, this force must be entrusted to those who make the laws.

This fact, combined with the fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort, explains the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence by slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, and in proportion to the power that he holds.

But ultimately, his interpretation of the use of government as a tool of those that make the laws falls flat. The US Constitution considers that separation of powers is the appropriate response, and anticipates the need for checks and balances, and structures a body politic for this express purpose- a concept apparently lost on Mr. Bastiat.

And of course as we see, when the system of checks and balances fails, surely many failed theologies are resurrected. Below is a contemporary quote from Bill Black, pertinent to the accounting control fraud that we observe in our time, I’d submit we need more men like him and less like Mr. Bastiat.

 

It is one of the paradoxes of life that the most practical means to ensure that the system does not collapse is to insist on justice for all and to ignore demands for special treatment premised on claims that justice places the system at grave risk of collapse. Nietzsche argued that the ubermensch (generally translated as “Superman”) transcended the normal rules. The elites claim impunity from normal rules on the basis of their purported superiority and because they claim that they are so important that applying the normal rules to them will harm society. Some pigs are more equal than others. What any competent financial regulator learns is that the best way to destroy a financial system is to refuse to hold the elites accountable. Regulators that insist on doing justice prevent the heavens from falling.

 

And:

The injustice of Geithner’s “elite frauds go free” doctrine is every bit as extreme as the stupidity of believing that giving fraudulent CEOs de facto immunity is the road to financial stability. It is a travesty that I have to defend the importance of integrity and justice. No nation can be great if it allows its elites to loot with impunity and prosecutes its whistleblowers. Geithner is destroying the things that made America great. He did so as part of Bush’s wrecking crew and he is doing so now as part of Obama’s wrecking crew.

Geithner’s “elite frauds go free” plan is not new. Speaker Wright demanded that my colleagues and I go easy on fraudulent Texas S&Ls to save the Texas economy (which the S&L frauds were savaging – but he assumed they were salvaging). The five senators that became known as the “Keating Five” told us that Lincoln Savings was critical to the health of Arizona’s economy. In reality, it was the worst threat to Arizona’s economy. One of my agency’s presidential appointees, Bank Board member Roger Martin, argued that if Keating was a fraud and had made Lincoln Savings insolvent by looting the S&L it was all the more important to keep him in charge so that he could use his exceptional political power to get zoning changes that would reduce losses. He opposed any closures of insolvent, fraudulent Arizona S&Ls on the grounds that the Arizona economy was fragile. Here’s the difference. We, the professional regulators, explained in excruciating detail why leaving frauds in charge of S&Ls would massively increase losses and harm regional economies. Only one of the three Board members (Larry White) listened to us – the other two (Martin and Bank Board Chairman Danny Wall) took the unprecedented action of removing our jurisdiction over Lincoln Savings because we refused to withdraw our recommendation that it be promptly taken over and Keating removed. We told the Keating Five to their faces that they were intervening on behalf of a fraud. Even before Wall and Martin removed our jurisdiction over Lincoln Savings they expressly ordered us to cease our examination of Lincoln Savings, to cancel the upcoming examination (nominally, they ordered us to postpone it indefinitely), and ordered that the formal investigation of Lincoln Savings (which had produced the admissions of fraud) be terminated (nominally, suspended). The result was that Lincoln Savings became the worst S&L failure. Losses increased substantially after our examination, investigation, and supervision of Lincoln Savings were halted. All of this became a national scandal when House banking chairman, Henry B. Gonzalez, over the opposition of the Democratic leadership, conducted a series of intense oversight hearings that exposed the Bank Board’s capitulation to the political extortion of the Keating Five and Speaker Wright. Danny Wall resigned in disgrace as a result of those hearings.

For those readers who doubt that regulators can ever be trusted let me note several facts about the Keating Five meeting (which occurred 24 years and one week ago). Four of the Senators were Democrats, one was a Republican. Speaker Wright was a Democrat. Four of us from the Federal Home Loan Bank of San Francisco met with the Keating Five. To this day, I have no idea what the political affiliations, if any, of my colleagues were. It was irrelevant to us. We detested the frauds and their political allies. Our job was to protect the public. We were constantly abused, sued for hundreds of millions of dollars, investigated, and threatened with being fired. We prioritized the most elite, most destructive frauds for removal from the industry, enforcement actions, civil suits, and prosecutions. We persevered.

In 1990-91, as the nation entered a recession, and the banking agencies were accused of preventing the recovery of the fragile economy through excessively strict regulation, suits, and prosecutions we ignored those accusations and used normal supervisory means to end a developing wave of nonprime lending by California S&Ls. Our supervision prevented any nonprime crisis in that era. Indeed, we were so effective that the fraudulent S&L leaders of that era “voted with their feet” and left the S&L industry to escape our supervision. For example, the most notorious nonprime lender of that period, Roland Arnall, the head of Long Beach Savings, gave up his federal charter and created a mortgage banking firm (Ameriquest) so that he would not be subject to our supervision. One of his primary mortgage banking competitors was controlled by a married couple we removed and prohibited from a California S&L they controlled.

Compare and contrast Mr. Black’s view of law with Mr. Bastiat, in sum do you dismantle it or enforce it:

Effective regulators are the cops on the beat who are essential to defeating the Gresham’s dynamic that arises when frauds gain a competitive advantage. As regulators, we know and deal regularly with a large number of honest bankers. When we leave criminals in place as CEOs by discouraging even investigations of their fraud we endanger their honest competitors, our economy, and our democratic system. Geithner’s path is the coward’s retreat from imagined fears. If he really believes that the fraudulent bank CEOs are essential to the “success” of our economy then he must believe that our economy is fatally flawed and he should be leading the charge to radically transform it.

 

Seems pretty obvious to me.

Source

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darbikrash, I agree with you

darbikrash,

I agree with you that, while Bastiat correctly perceived the dynamics of the legal system, he incorrectly diagnosed the root cause. It was a lack of freedom, but not necessarily caused only by the discipline of government, but also by the discipline of the capitalist marketplace, in which productive workers are increasingly separated from the fruits of their labor and, therefore, alienated from themselves.

At the same time, I think people like Bill Black and other so-called "liberal progressives" fail to notice the diminishing returns to complexity, and this is now most evident in the push for increasingly complex federal regulatory regimes to address every single predicament we face. That will not solve the problem and will actually be counter-productive in many instances. The constant exploitation by the elite class seems to be rooted not in our failure to enforce existing regulations or our lack of imagination to create new ones, but in the complex structures of our global society itself.

IMO, both the capitalist system of production and the inreasingly centralized state are both the enemies of true freedom, and so the only question that remains is what level of freedom do we really want to have, and what level of sacrifice are we really willing to make for it.

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ashvinp wrote: IMO, both the
ashvinp wrote:

IMO, both the capitalist system of production and the inreasingly centralized state are both the enemies of true freedom, and so the only question that remains is what level of freedom do we really want to have, and what level of sacrifice are we really willing to make for it.

Well said, ashvinp.  I'm just afraid Joe Q Public doesn't give a flying you-know-what as long as they have their bread and circuses.  (Sorry; getting jaded).

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