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Let me preface by saying that I’m neither an economist nor a banker, nor a Wall Street professional. In the eyes of many, especially economists and bankers and Wall Street professionals, that disqualifies me from even commenting. Tough shit.
I have, however, spent over twenty years looking at various sizes, shapes and flavors of financial fraud schemes. Maybe that’s the lens I’m looking through, you decide.
What I used to rely on when I investigated things (and when I invested my own money) was a multiple layered system which mostly guaranteed for me that what I was seeing was what was really there, and that the playing field was reasonably level. If you were half-assed intelligent and did a bit of research you could make reasonably good, reasonably safe, investments. Maybe not the best, but descent.
The structure was something like this. First, there were agreed up accounting standards and practices. So if a company said they made X amount of profit, you cold be sure that whoever did the books was following the same rules I’d learned, and you would reach the same conclusions. Second, there was a strong enforcement arm standing behind the bookkeepers in the form of the SEC, FDIC, and various other regulatory bodies, both governmental and professional. So if somebody decided to cook the books, and someone always did, there was someone there to klonk them on the head pretty hard.
And standing behind the regulators was a third layer, the Justice Department and the FBI and the IRS, all with spiked baseball bats in their meaty hands, waiting for someone who either was so egregious or who slipped on past the regulators. And the results were not pretty for those who strayed into the arms of this third layer. Jail and bankruptcy and ruin for the most part. Did anybody ever get away with one? Sure, but they were really few and far between, and you genuinely could have confidence in the system.
Now let’s fast forward to today’s financial system. The accounting standards and practices are now made of opaque flexible gel. You can bend them and twist them, but you can’t see through them. I have no idea in looking at a company or bank’s financials which, if any, rules were followed. Or not followed. Or changed for the company’s benefit. Did they really make that profit? Did they really have that loss? Are those assets really AAA and worth what they claim? I have no idea, and perhaps neither do they.
Standing behind the bookkeepers today is well, no one. The SEC is a joke. State regulators have all but disappeared. (They took care of Spitzer nicely, didn’t’ they). When, not if, a company cheats on its books, or in its prospectus, does anyone notice or care? In the name of deregulation and at the behest of those doing the thievery, the SEC has reduced it’s once mighty regulatory framework to a few watered down suggestions. Its enforcement of what is left is virtually nonexistent.
And finally, standing behind the regulators, is, well, no one. Absent the baseball bats with spikes is a Justice Department with a flaccid noodle in its collective hand. The FBI has refocused on terrorism big and little, with nary an agent to spend on white collar crime. No one is watching the cash register.
As a result, our current financial system is in a state of anything goes. And anything does, mostly your money. How anyone can knowingly invest in any of this is beyond the scope of my understanding. Yet everyone seems to have agreed to go on as if nothing has changed, as if it is still 1969, and you can make financial decisions based on sound and trustworthy information.
I tried and tried to come up with an analogy. This is the best I can do. Let’s say the AMA and the American Cancer Society decided that too many people were dieing of cancer. So they all agreed that in order to solve this serious problem, they would no longer declare anyone to have died of cancer. It was a tremendous success. Cancer death rates plummeted, and they all congratulated each other. And everyone else was happy, too. When people dropped dead, no one noticed. In fact, they picked them up, propped them in chairs, and took the corpses out to lunch, congratulating them on how good they looked, now that their cancer was cured.
However, sooner or later, the bodies start bloating, and start to stink, and pieces start dropping off, and their hosts are headed for a rude wake up call. This is where our financial system is going.
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