Wall Street's Stranglehold on the Economy Is Choking Americans

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America's Founding Fathers were afraid of any concentration of power in the republic. They were particularly afraid that banking interests could hijack our fledgling democracy.

And yet today, 234 years later, our Founding Fathers' worst fears have come true. Wall Street's stranglehold on the economy threatens our very prosperity, and the future of a truly democratic republic.

It's high time we address the truth about Wall Street's tyranny and set a course for a more secure economic future – one that's anchored by a safe banking system, not a system rigged by banks.


Banks Are the Gamblers … But You're Taking the Risks

The credit crisis and Great Recession are the unintended consequences of Wall Street's greed. I say "unintended consequences" because – let's face it – Wall Street institutions tipped over their own money pot and bankrupted the public casino they had created to leverage bets with house money.

It all started with the Community Reinvestment Act of 1977 (CRA). This piece of legislation was designed to prohibit discrimination on the basis of race, sex, or other characteristics in the credit and housing markets. Of course, this eventually led to lax mortgage underwriting standards in later decades.

But it wasn't just the Democrats or President Bill Clinton who pushed for an expansion of and greater reach for the CRA in 1999. It wasn't just the Republicans or President George W. Bush who advocated easier documentation terms for homebuyers in a 2002 speech. It wasn't just all the Democrats and Republicans who pushed for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to package and buy trillions of dollars of low-quality, mortgage-backed securities.

However misguided they might have been, these policies were all well intentioned. But each of these policies had unintended consequences. It was Wall Street that made sure these "consequences" could be shaped into a giant moneymaking scheme.

Consider, for example, the truth about the subprime mortgage mess.

Default rates on CRA-predicated mortgage loans were a lot lower than bankers had provisioned for. What the bankers realized was that even though they were pushed to make more of these types of loans than they wanted to, they actually made a good profit on them.

As long as housing markets were appreciating, CRA homeowners in distress could actually sell their properties and pay off their loans. Bankers sure weren't complaining then.

After Wall Street pumped and dumped tech stocks on an unsuspecting American public – resulting in the "tech wreck" of 2000 … and after the horrific terrorist events of 9/11 … the U.S. Federal Reserve sliced interest rates to record lows and kept them there, much too long.

That's when the subprime-mortgage and easy-credit games took off. Looking at the low default rates on CRA mortgages, bankers figured maybe loan standards were too high and there was room to lower them and still get paid in full. Standards were lowered across the board.

No Intention of Holding onto "Garbage"

Behind the scenes, the big public casino had been readied and the dice were starting to roll. Because Wall Street and its lobbying armies had gutted existing regulations and stifled all efforts to safeguard the public from new exotic derivatives products, there was nothing to stop the juggernaut.

Banks had no intention of holding on to the garbage they were manufacturing. Wall Street securitized all the junk that it gathered together – and then sold it off to anyone who would buy it.

And because not everyone who would buy Wall Street's junk was stupid, the institutions reformulated new products from that junk. The new "collateralized" products were just reconstituted, repackaged loans that redirected internal cash flows from mortgage payers so that some "tranches" of the new collateralized pools looked safe and could get the top "AAA" ratings from rating agencies.

It didn't matter that rating agencies didn't understand the new math; they were in on the game and got rich, too.

To add insult to injury, Wall Street employed another newfangled product. These "credit default swaps" were insurance-type contracts that anyone could offer on anything. But the real beauty of credit default swaps is that these contracts let Wall Street play on every side of every deal: Wall Street profited once when it sold the junk, again when it sold "insurance" on those subprime securities, and over and over again as it traded both the junk pools and credit default swaps.

The best part about the whole scheme (which all the institutions were playing) was that the game was self-perpetuating. As long as finance companies, mortgage originators and banks were able to package and sell their pools of mortgages and other "leveraged loans," the money from the sale of them went back to the folks who originated the individual loans in the first place.

The upshot: Those folks could make more loans and start the entire process all over again.

The more money that was available, the lower rates went. The lower interest rates went, the cheaper it was to finance and hold a portfolio of assets. But because rates were so low, and the return on quality loans was correspondingly low, bankers needed higher-yielding assets to maximize the spread on their "cost of carrying" pools of assets. So what happened?

It became necessary to offer mortgages to lower-quality borrowers in order to charge a higher (and more-profitable) interest rate.

That's how the game snowballed. That's how it became a feeding frenzy.

Where Greed Takes Control

The idea for Wall Street's institutions was to "dance until the music stopped." They all knew they had engineered a housing bubble and that the insane appreciation rates on anything with a roof would eventually fall back to earth. By then, the big players expected they would have found a seat, leaving them to watch the other, less-nimble players stumble and take their lumps.

There was one problem. Wall Street institutions were way too greedy and far too cocky. They believed that they were safe: In their view, they'd either be able to unload their holdings of the junk they'd created, or they had been clever enough to hedge away their risk with their own credit-default-swap-insurance schemes.

Because Wall Street believed it was safe, the institutions didn't see what was really happening. They were all in the same boat … and that boat was sinking.

That boat happened to be the U.S. economy – and other top economies around the world. Because of their greed, banks actually made the boat and forced us into it. They sunk, along with us, but got bailed out while we were left to drown.

Here's Where Things Get Good

At this point, you might find yourself asking: So what? Most of the banks have repaid the Troubled Asset Relief Program (TARP) money that they so desperately needed. Most are returning to profitability, and some are even reporting record profits and paying out record bonuses to executives.

Yes, some banks have gotten bigger, a lot bigger. Yes, there are more profits to be shared, because a couple of swaggering laggards of the old investment-banking mold – namely The Bear Stearns Cos. and Lehman Brothers Holdings (OTC: LEHMQ) – are gone. Is that so wrong? Isn't that part of financial Darwinism in our capitalist democracy?

The truth is not what it appears to be. Bear and Lehman were ruthlessly crushed by their competition so there would be more business to be had by fewer players.

It wasn't evolution. It was execution.

The bigger banks get, the more they rely on a de facto government guarantee. "Too big to fail" is a doctrine pushed by banks that want to be so big that they crush – or at least absorb – their smaller rivals.

Banks want to be a cartel and to be able to raise fees and the cost of money for their greater profitability, at will. Big banks are making money because the government is keeping interest rates low. Big banks are buying a huge portion of the U.S. Treasuries the government needs to sell to finance the deficit. And that deficit has reached its current size because the money was used to bail out the banks and to mitigate the collateral economic damage that Wall Street caused.

It's a financing game, another bubble to re-inflate bank balance sheets by allowing them to generate a virtually risk-free, high-net-interest margin.

We need to be afraid of what our Founding Fathers were afraid of, too much power concentrated in too few hands – especially banking-interest hands.

We need to break up all the big banks. And then we need to spread their pieces around the country, placing credit closer to Main Street. We need to end all proprietary bank trading … to eliminate credit default swaps and collateralized debt obligations… and to instill transparency in all capital markets products, trading platforms, and risk-taking businesses that have any systemic impact.

We need a free market, not a free for all.

Competition and free enterprise are the hallmarks of our economic miracle. I'm for less government, less taxation and more power to the people. But this enormous concentration of power that Wall Street and the U.S. banking system have amassed is tantamount to an assault on our very freedom.

It's time to end the tyranny of the banks. And to once again enjoy the financial freedoms that the end of this tyranny will bring.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Michael Schneider-Christians | January 26, 2010

    Excellent! Well written and historically based, so we understand. I fully agree with the need to break up the too large US banks. They have become institutions to use other people's money to trade for themselves and enrich themselves in the process. Banks have become speculators, not money securers and cautious lenders. The Wall Street Bonus system is sickening.

  2. Graeme Daw | January 26, 2010

    Shah got it dead right.
    Wake up America, it's probably too late, but better late than never.
    Get rid of the Wall Street sharps, they are gouging while America is starving.

  3. David | January 26, 2010

    Reigning in banks must include the FED which I call Fraudulent Economic Delusions. Dont just do banks when pulling back on the reigns, you must include Wall Street, Insurance Companies, Rating agencies, Freddie and Fannie, new and tougher SEC rules, new and tougher penalties for all including Congressional oversight. All of the above have contributed to the demise of the US economy. Have not the Congress and the President swore an Oath to Protect and Defend. Since they have not, is this not treason and other crimes and mideameanors that require expulsion and/or prison time. Bailing out the rich, what a Sick, Sick joke.

  4. Noticias de Bogota, Colombia | January 26, 2010

    Excellent article – one that takes into account the LONG historical perspective that was needed to fully understand how the world got to where it is. Here in Colombia there has been massive bank consolodation over the last 10 years and now there are only about 5 players whereas there had been about 15 previously. Loand rates are at around 15 – 25% p.a while savings account pay 0.25% p.a. – – – there is NO BANKING COMPETITION. NO BANKING FREE MARKET.

    Time for change.

  5. Samuel | January 26, 2010

    Amen!!! Speak on brother!!! Get rid of the middle man, cartel making federal reserve and let's get back to a free market. Then we can be free from the money laundering actions of Wall Street. Americans need to get rid of these money grubbing parasites and make this country whole again. America would then pave the way for other countries to be free from their econmic enslavement and this earth would become, in the words of Louis Armstrong, – "What a Wonderful World!" – "Ooooh Yeeeah!"

  6. Bill Hageman | January 26, 2010

    This was excellent, straightforward, and is exactly what happy. As with all greed it has to come to and end sooner or later. The problem is they usually find other ways to steal.

    Thanks for the excellent article

    Bill Hageman – Plano, TX

  7. mike | January 26, 2010

    you need to email this article to the president and every member of congress so that they can see what role that they are playing in these schemes.You put this scheme in simple terms so that most people can understand.For the most part Congress is arguing about who gets what cabin and who gets to speak on the titanic.

  8. John | January 26, 2010

    Shah Gilani would get my vote to be the next Fed chairman.

  9. Michael Dillon | January 26, 2010

    Excellent article I never for one minute believed the banks were ever in trouble . The banks made tons of money when they made those loans and even more money when almost everyone was refinancing the home loans. Just because the bubble burst for a year or two they still didnt lose nearly what they claimed ,I bet if you look at a 10 year cycle they were all still above water. I knew when it all began that it was going to be the bigger fish eating the smaller ones . Now we only have a few extremely rich banks that have gobbled up the smaller and some not so small fish. The only thing that you left out of the article was the name of these Zionists that now control all the money in the world.

    • Ron | January 26, 2010

      The inherent conflict between democracy and capitalism has never been so apparent. The overwhelming greed and arrogance of this investor class has forced our economy to its knees. It is impossible to overstate the suffering they have caused.

      People like Richard Fuld, Ivan Boesky, MIchael Milkin, MIchael Schwartz, Lloyd Blankfein, Jamie Dimon, Hank Greenberg, et al have not been called to account out of fear that an entire ethnic group would be offended.

      Times such as these are deeply troubling, but they serve to shine light into the dark crevices here these effete cockroaches live.

  10. BrendettNC | January 26, 2010

    POLITICS,MONEY,AND GREED RULES THIS COUNTRY CALLED THE UNITED STATES OF AMERICA PERIOD.
    NOBODY FIGHTS FOR THE LITTLE PEOPLE WHO RUNS THIS COUNTRY!
    IF YOUR NOT RICH IN THE UNITED STATES YOU ARE A NOBODY!
    MONEY IS THE ROOT OF ALL IMMORALITIES IN THE UNITED STATES OF AMERICA. WE CAN THANK OUR FEDERAL GOVERNMENT FOR THE WAY PEOPLE FEEL ABOUT MONEY TODAY!
    MAJOR BANKS WITH THERE CHIEF EXECUTIVE OFFICERS DID RESORT IN UNDERHANDED BUSINESS ENTERPRISE. IT PUT MORE MONEY IN THERE BACK POCKETS CALLED CROOKED DEALINGS THEY DIDN’T EVEN CARE ABOUT THE CONSEQUENCE FROM THERE ON ACTION ! NOW THE PEOPLE HAD TO BAIL THEM OUT OF THERE ON STUPIDITY.
    THERE IS NO COMMONSENSE IN THE UNITED STATES OF AMERICA!
    MAJOR BANKS, AIG, Federal Home Loan Mortgage Corporation wall Street
    ALL CAME TUMBLING DOWN THE HOUSE THAT GREED BUILT!

  11. Anderson | January 26, 2010

    It is a real stretch to blame CRA for the subprime crisis. This notion is factually false, but appealing. The CRA law does not require banks to make any unsound loan. Further, most of the problem loans were made by non-bank entities and these firms were not subject to CRA compliance. There is a lot of blame to go around, but blaming CRA is not one of them

  12. saul bernstein | January 26, 2010

    Thank you for a great article..in addition to it I would like to see you write about EXECUTIVE ORDER 11110 which was written by JFK in June of 1963(6 months before he was shot)..it is still in effect waiting for any president to enact it..it would put the FED out of business..
    thanks again

  13. Archie McLachlan | January 26, 2010

    I am an economist and have been warning governments for 10 years that this would happen. Bankers have stolen democracy and denied entrepreneurs money to build new businesses.
    Who are these faceless bankers?
    It would surprise you to know that most of them have never worked in a real job. They are the lazy sons and daughters of wealthy people, who worked 16 hours a day to build the wealth that their family now own.
    The bankers have absolutely no idea how to run a real business in manufacturing, where the real wealth lies. Therefore, they have no wish to finance such enterprises. They prefer to buy and sell paper to each other and think they are successful when they have ripped off someone's pension fund.
    The paper they buy and sell only has real value if it is backed by real assets such as manufacturing.
    'Real estate' is not a real asset because it creates no jobs. If there are no jobs, there is no money to buy real estate so your real estate becomes a worthless asset when the poor, unemployed occupy it illegally, because they have nowhere else to live and no money to pay the owner
    Detroit is a classic example of what will happen to the whole of the USA if people do not get their act together.

    • Dave R. | January 26, 2010

      Excellent points! Detroit is certainly an excellent example, as are portions of many other USA cities.

    • Ron | January 26, 2010

      I agree. We need a national rogue's gallery website on which those people who are responsible for this disaster are held to account. A drop of honest sweat would kill the lot of them.

  14. Jas Gill | January 26, 2010

    Amen! This is an unusual article that calls the "spade a spade". Wall Street and bankers greed and goverment failures in attending to checks and balances to protect and defend the citizens is at the root of our current problems. Barney Franks, Chris Dodd and Maxine Waters are still around in positions of influence. Let us hope your message goes viral, we start seeking innovative solutions to sustainable economic opportunities. There is lot of talk about jobs. Jobs to do what! We need real and sustainable living solutions to improve quality of life for humanity, globally. Clean energy, quality foods, life sustaining medicine, clean water and air, quality of living tools and life support systems as we live longer i.e. body parts and physical assisting tool. There is lot room for innovation and American ingenuity to ride the tide again. How do we get that going is the quest for inquiring minds. Jas

  15. Sanford Backos | January 26, 2010

    You've nailed it!
    Now the question becomes how are the changes made?
    No one in Washington is listening, that became evident during the bailout fiasco of 2008.
    I'm afraid we are still on a course of total economic collapse and current policies are perpetuating it. What the political class doesn't see is the ground swell of anger building in this country. Main street is becoming ripe for a second American revoulution.

  16. H. Craig Bradley | January 26, 2010

    WHO CALLS THE SHOTS

    The "Big Banks" effectively own the U.S. Government and have too much power, as you said. Moreover, U.S. BANKS often excercise their power by "throwing their weight around", at will. Having money in our special interest dominated democracy means banks have plenty of political influence, bought at a price. So, the banks presumably own the politicans, and indirectly, the rest of us.

    You really can not expect change if the "new" people are pretty much a bunch of insiders. So, for all this concentration of power to be decentralized, more meaningfull policy changes are necessary. The first step (prerequisite) would be to remove ALL individuals in power before, during, and immediately after the financial crisis and "great recession" took hold.

    This means removing anyone who had any responsibility for the current state of affairs. Then, and only then, can you begin to hammer-out new policies to prevent future financial crisis and abuse (concentration) of power (political or financial). When in history has this ever succeeded? The odds of proper financial and political reform are long, at best.

  17. bmc | January 26, 2010

    I just wanted to add my name to the list – excellent article!! I always enjoy reading what Shah has to say. It's always written so clearly that even I can understand it! :-)

  18. louis brent | January 26, 2010

    YOU ARE 100% WRONG !

    THE DEMOCRAT PARTY CAUSE THIS PROBLEM, LIBERAL ARE ALWAYS DOING SO CALLED GOOD INTENTIONS, THEY FORCES THE BANKS TO LOAN TO POOR PEOPLE THAT COULD NOT AFFORD TO BY HOUSE. THEY THREATING THE BANKS IF THEY DID NOT LOWER THEIR STANDARDS, THE BANKS HAD NO CHOICE SO THEY FOLLOWED THE STUPID DEMOCRATS WHO ALWAY DESTROY PEOPLE LIVES WITH SO CALLED GOOD INTENTIONS, CASE IN POINT WELFARE, FOOD STAMPS, THIS IS WHY THE BLACKS ARE STILL AFTER 50 YEARS OF DEMOCRAT INTENTION, HAVE KEEP BLACKS IN THE POOR HOUSE, AND THE WORST PART IS THAT THEY ARE NOT SMART ENOUGH TO KNOW THEY ARE BEING USED BY DEMOCRATS AND BY THEIR OWN LEADERS. TEACH A MAN TO FISH, DEMOCRATS TO PEOPLE TO BE SLAVES !

  19. Archie McLachlan | January 26, 2010

    This article should go viral on the internet. It really tells it how it is. Go to work on your e-mail list.
    I have already sent this to 100 politicians.

  20. Damian | January 26, 2010

    Yup the fight sounds like a good one. Bust the cartel.

    But who will then buy the US govt debt? Current borrowing needs are over $4 billion per day and about to get a lot worse with the entitlements deficit of social security and health care. The banks are now buying this paper with taxpayer $ from bailouts and other back door credit lines the Feds have created for the banks. The Asians and Arabs have given notice they won't buy it much longer if at all.

    Everyone in DC knows this already. We have a ponzi economy with no way out other than printing endless amounts of money to buy more time and label it with creative names and programs to pump more market rallies and juice the GDP numbers. Self perpetuating lunacy until the music really stops.

  21. Archie McLachlan | January 26, 2010

    You have heard of the BILDERBERG GROUP. George Bush is a member. Bill Clinton is too. Poor Mr Obama is a fall guy. They have already decided that they are not going to pay the debt to China, which would take USA 100 years. They are going to collapse your currency and start again. That is the plan.

  22. Mike | January 26, 2010

    Reinstate The Glass-Steagal Act of 1934 (which was removed in 1999). Then begin the indictments for financial fraud (just like they did in 1933). History is repeating it's self. Mr Gilani, please comment on the voracity of Glass-Steagall. Incidentally, Mr. Bill Moyers of PBS did an excellent and prophetic article in about 200o which forecast the financial meltdown of 2007. Google: "Mr. Weill Goes To Washington" . Few paid any attention then……. A great and insightful read!

  23. Michael | January 26, 2010

    Shah Gilani for President.

  24. PMc | January 26, 2010

    Mr. Galani has an amazing ability to see the truth and explain it well. In regards to this article, the danger is that the pendulum is swinging hard the other way- towards socialism or communism. Not only do we need banking reform, Wall Street reform, etc., but we need to safeguard the very capitalism we now enjoy. Using the present "crisis" as a springboard, the present administration is trying to blame capitalism for the present situation. Make no mistake about it, they are trying to nationalize everything they can get a hold of- Chavez style. Unless we reign in these folks, they are going to wreck the whole economy on purpose, just to "prove" it doesn't work.

    • Ron | January 26, 2010

      Capitalism unrestrained allows the likes of Ivan Boesky access to all the money they can steal; it is the law of the jungle. Trying to reign in these thugs by restricting their influence is not socialism.
      Wake up. This is not a communist conspiracy, it is the inherent nature of power to keep that power and to steal all it is allowed to steal, that is, until someone brings out a noose.

  25. Damian | January 26, 2010

    Owe your banker millions and its your problem. Owe them trillions and its their problem.

  26. Phil Steinschneider | January 26, 2010

    Amen to everything you wrote Mr. Gilani. I agree with you completely.

    Unfortunately, government will be fixing what she, herself, helped create through the moral hazards and unintended consequences of Fannie, Freddie, and numerous other market-distorting noblesse oblige programs.

    Furthermore, the Federal Reserve was the root of our problems, yet few people are talking about reforming that anachronistic institution.

    It's becoming clearer every day that the artificial manipulation of interest rates as a central banking tool has certainly prevented short term volatility, yet the countervailing effect has been two massive crises (1929 and 2008). And the jury is still out as to whether or not the worst is actually over.

    Consequently, I think the time has also come to revisit the fundamentals of central banking, and what tools should and shouldn't be made available to what has become the pusher of free money to addicts of cheap cash.

  27. Robert | January 26, 2010

    The banking system got hit for TRILLIONS in losses during the first wave of the current decline. The government was able to bail most of them out, as questionable as those bailouts were. They have no chance of being able to bail out the banks when the third wave of the current decline gets going good. That's when HUNDREDS OF TRILLIONS in losses that the banks have been desperately hiding in an effort to maintain the illusion of solvency will no longer be able to be hidden, and the illusion of solvency, along with the banking system, will all come crashing down. The banks aren't "too big to fail", they are too big to save, and too big to bail out even if we wanted to.

  28. A. Gram | January 26, 2010

    A excellent historical analysis of how we got to the mess we're in now.

  29. PTS999 | January 26, 2010

    Excellent, Well written article by Gilani Shah! Reading and understanding the innards of how CDOs and CDSs work, didn't require that I have an MBA from Harvard – as these crooked Wall Street bankers would have you believe. It is a mere ploy to pay themselves massive bonuses to justify their claim that these are complex financial products and the general public would not understand them and their inventors (investment bankers) should be paid huge sums of money!!! The solution to bring an end to these crooked games is to support Obama and his team's legislative efforts to break up these institutions. Tax the hell out of these institutions and individuals that have generated 'ill gotten' money over the last several decades – and use this money to pay down the national debt. If these crooked corporations and financiers keep 'buying' the politicians through their lobbyists (and looks like now they have even bought the supreme court judges!) to maintain status quo, then a million of us need to descend on Washignton to protest and bring about the needed changes. If that still doesn't work then it is time to bring about a revolution – much like the pre-world war Europe. For pre-world war Europe was suffering from similar crooked, conniving thievery of such 'fat cats' at the detriment of the general populace.

  30. Billy J. Wright | January 26, 2010

    In my opinion, we will never correct the course until we limit the terms of the House and Senate and then restore the authorities that have been assumed by the President, the Supreme Court, the Federal Reserve, to that described in the Constitution. Then we need to pass a law that the investors in corporations are entitled to vote on the compensation of the officers and directors of the corporation (thus limiting the rediculous bonuses they are voting themselves). This also requires the limitation of voting power of big investors so that they can't control. Now the Boards are interlocking with other companies' Boards and thus vote each other the unreasonable salaries and bonuses. This goes all the way to the bottom now: The Superintendent of Schools in Albuquerque makes $275,000 per year and is guaranteed a raise if the teachers get one. How did administrators ever gain this kind of largess?

    • Ron | January 26, 2010

      I agree. One of the bigger, overlooked culprits here are the boards of directors. In theory they exist to protect the stockholder's interest. IN actuality they are co-opted, often hand-picked by management and consist of weak-willed, complacent yes men who simply want their share of the spoils.

  31. Bruce L. Davies | January 26, 2010

    Excellent commentary. Although I appreciate the emphasis on the "GREEDY" banking industry, we should not de-emphasize the role of our government; especially the FED. Businesses react to the financial opportunities presented. The FED coupled with Congress established incentives through easy money & legal encouragement for financial markets to use un-common sense. It is most likely that through "good intentions" our elected elites unknowingly believe that "social justice" is served with their counterfeiting money to pay for what the people refuse to pay with taxes. But the distortions created places bad investments in front of sound investments. Since the DC connected know that the debt will be socialized, and the risk non-existent; moral hazard is the result. It did not start with the business community, it started with government. Today, we have morphed from a capitalist system to corporate welfare; fascism. Government has forged an unholy alliance with business. And now, we people will pay… again and again.

  32. Noel Falconer | January 26, 2010

    Stop worrying about what the banks have done. Worry about what they're DOING.

    These guys are bigtime smart. They realise there's no way America can repay its astronomic borrowings from China. (How? Do your products, and productivity, beat the rest of the world hands-down? For that's ONLY PART OF what's needed to export enough.) The answer is to inflate them away. Which your government is doing, aided by banks buying government bonds with government money in a lethal spiral. Yes, this can't continue forever, or even for much longer, and yes, there's going to be a most horrific crash. When it happens – they're arranging – the blood will be yours, the confetti your dollars. Haven't you noticed the new gold-backed US currency?

    I have no easy answer, I doubt one exists.

  33. william h | January 26, 2010

    banks make their money borrowing from people and making loans to others. in a society where almost everyone has spent more than he earned the banks became a powerhouse.
    now things have taken a bad turn the banks are being blamed. They are greedy, they are not trustworthy but they could become so because too many Americans wanted to spent more than they earned and so needed banks to provide them the money to indulge. Now the times have changed it is good to portray banks as they are but let us not forget that it started off with greediness from ordinary people taking loans and mortgages way out of their responsible reach!

  34. C.L.C. | January 26, 2010

    Great article. Problem is, who will lead the charge to destroy this foe . And how can we ( the people ) trust them. The climate for political change has never been so ripe . We abolished the central banking system before, it can be done again !

  35. bert | January 26, 2010

    Some big banks, particularly Goldman Sachs, basically control Government in the financial laws area, maybe more. And much of Government is in cahoots with these banks. If you were politically connected, you were bailed out with billions and other nice things, like laws which allowed you to run your own casino (and almost bankrupting our system, as even Obama admitted). Lehman Brothers and 97% of us poor, abused citizens were/are not politically connected. No bailout money for us nor billions for our financial-casino-like mistakes.

  36. A. Pearsall | January 26, 2010

    Good for you, Shah Giliani! This was an excellent article, all true, and we'll be paying the price for the rest of my life, I guess.

    The best short phrases I've read about the Wall Street guys is that: "Their gains were privatized, and their losses were socialized."

  37. Dave G | January 26, 2010

    Shah, Could you please write an article on interest rate derivatives and their impact on the current economy? Maybe this is a misplaced concern, but if GS has hundreds of trillions of interest rate swaps on their books, couldn't they conceivably hold the fed hostage over interest rates? Thanks.

  38. Richard Lefcourt | January 26, 2010

    Sorry to disagree, Shah but I blame Congress. Banks are run by ruthless, greedy people whose sole interest is profit. But this has always been so. It's Congress that created the loan guarantees that led to carefree lending by the banks. And it's Congress that's responsible for regulating interstate commerce and preventing the rise of monopolies. Unfortunately for all of us commonfolk, neither Congress nor our recent Presidents have had the intelligence and integrity to do their jobs properly.

  39. JJ | January 26, 2010

    Isn't govt responsible for all this?If it weren't for govt insurance on deposits this would never have happened or these banks could have been allowed to just go away.People are always going to try to maximize their income.Big govt is the problem.It's policies caused this mess.

  40. Sebastian Milito | January 26, 2010

    It's not that complicated. We had regulators in charge of overseeing the financial industry who did not believe in regulating. Ideologically aligned with the bankers and brokers and financial operators who believed that financial markets should be left to regulate themselves. Have we all already forgotten Alan Greenspan's admission to congress that at the heart of his beliefs was a fallacy, i.e., that if left alone bankers would do the right thing on their own. That banks could control their own greed and their reckless drive for profits would be self-regulated.
    Come on guys, you can't just toss around out the names of the usual suspects from the right-wing lie machine, Barney Franks ( a homosexual to boot for chrissakes) Chris Dodd, Nancy Pelosi, and walk away believing you have described the problem. Republican ideology which is rooted in the capitalists' need to manipulate the system to its benefit is at fault here. Hence any 'regulation' which doesn't bring subsidies their way or limit competition is bad and unnecessary. Too many Democrats bought into that false ideology as well. It's time to regulate and stop screaming about socialism or communism and throwing out Obama. Does anyone who believes that the financial industry was broken by excessive greed and a lack of oversight really think the Republicans with their so-called 'free-market' ideology will fix Wall Street? If that assumption is correct we can go ahead and fire all the traffic cops in the country because people can be relied upon to police themselves. For over forty years Greenspan believed that bankers had that divine gift denied to everyone else. Our leaders have been rendered incredibly stupid and have been corrupted by the very greed they are supposed to contain. The question is are WE stupid as well? Will we once again confuse ideology with reality and restore to power that false ideology along with its corrupt practitioners? Is the brainwashing by the 'free-market' cabal so overwhelming that we fail to learn anything? No one need worry about socialism taking away your freedoms, the capitalists are already do that job very well.

  41. Dr G Ledgerwood | January 26, 2010

    Of course, the real problem is the Declaration of Independence: all men are created equal etc. etc. That led ineluctably to all this sub prime mortgage stuff…..

  42. DAI | January 26, 2010

    There are so many contradictary comments in this article it makes me wonder if was written by Obama himself. The greed was started by the Government by allowing stupid loarns in the first place. The Financial institutions just did what they were allowed to do. To state that all the bankers knew they created a bubble in housing is just plain bonkers. So you are stating that their houses stayed the same value or they just sold before the crash. And if they all knew, how did we have the failures that occurred. Just another bashing of Wall Street without any factual information.

  43. Mike | January 26, 2010

    Gentlemen,
    Let's stop the political swipes and pay attention to what Mr. Gilani has pointed out to us. In my opinion the financial meltdown was caused by the removal of the Glass-Stegall Act in 1999. You nonbelievers need to Google "Mr. Weill Goes To Washington" (PBS article by Bill Moyers done in 2000 which predicted the 2007 financial meltdown).That removal legislation was brought by the Republican majority and signed by a Democrat President (Bill Clinton). He was urged to sign it by Alan Greenspan and Paul Rubin. The blame goes to both political parties. In my opinion, if the Glass-Steagal Act was reinstalled as law, the current dangerous financial behavior would soon stop. Then we need to look to curtail derivatives before that also crashes the markets. Eventually, we need to begin the indictments for financial fraud which has occurred between 2000 and the present. In my opinion, if Obama can't or won't reinstate, we'd better be looking for candidates who will. In my opinion, this 1929 all over again and we need another FDR and a New Deal, brought by whichever political party has the desire to rescue the American People!

  44. gmcguire | January 26, 2010

    This article is excellent and so are the comments. But can the banking and financial systems in this country be changed? I doubt it. Those in elected federal government power who could initiate change will not. Their elections are bought by banks and financial corporations with campaign contributions. The recent Supreme Court decision allowing unlimited corporate funds into the election process confirms this. Even the highest court in the land is subject to the firmly entrenched financial oligarchy's power over this nation's past, present and future. One kind of minority slavery was abolished about 150 years ago only to be replaced with total citizen slavery to the Masters who have been given financial control of this country by our own "elected" politicians and unelected officials. Who is there now or in the future who could/would abolish our financial enslavement?

  45. sinna mani | January 26, 2010

    Sometime ago I used to be an economics teacher and I used to tell my students the dangers of speculating with other people's money be it on commodities or shares. I did not find a ready response among my students. They thought I was some kind of weird socialist who did not like the system. Now the plain truth is there for anyone to see. But this may not be so for institutionally corrupt politicians. Ordinary people must be educated: the real wealth creation depends on producing goods and services which satisfy human needs. Inorder to hoodwink the public some of the services the so-called financial service industry provides are called products, perhaps of speculative imagination. The ones reponsible should be locked up with the ones who are already serving time. Otherwise where is justice for those who are already inside.

  46. Hugh R. | January 26, 2010

    The founders recognized that they must separate church and state but failed to separate political from economic power. That failure left politicians free to create the Federal Reserve, Freddie and Fannie (both of which are supposed to be private but controlled by the politicians), and the thousands of regulations required by the failure of those institutions. The Community Reinvestment Act (CRA) is just another political creation politicians justify with an appeal to Altruism, and enforce with threats of further political action and back up with extortion using entities like ACORN.

    In fact, the CRA was an unworkable boondoggle from the beginning, designed ultimately to transfer wealth from banks and their depositers to its creators, the politicians. And that is exactly what it does.

    Gilani's piece merely trumpets the Obama party line, trashing banks and bankers while protecting politicians. That line can also be found in the writings of Marx and Engels–with the names changed to protect the guilty.

  47. freebird123 | January 26, 2010

    U.S is already an advanced nation SYSTEM around the world, the lesson learned is how can make it more close to perfect, more better…

    Again, I think the bottom lines are freedom, people and nature!!!

    As an individual invester/trader, everybody need to follow discipline, cut fear and stop greedy, all the time…could you or i change the market bumpimg?

  48. carl smith | January 26, 2010

    Saul, and for those interested: http://en.wikipedia.org/wiki/Executive_Order_11110

    Here's the text:

    Revocation
    E.O. 11110 was never reversed by President Lyndon B. Johnson and remained on the books until President Ronald Reagan issued Executive Order 12608 on 9 September 1987 as part of a general clean-up of executive orders. E.O. 12608 specifically revoked the sections added by E.O. 11110 which effectively revoked the entire Order. By this time, however, the remaining legislative authority behind E.O. 11110 had been repealed by Congress when Pub.L. 97-258 was passed in 1982.[1]

    In March 1964, Secretary of the Treasury C. Douglas Dillon halted redemption of silver certificates for silver dollars. In the 1970s, large numbers of the remaining silver dollars in the mint vaults were sold to the collecting public for collector value. All redemption in silver ceased on June 24, 1968.

  49. Paul Coote | January 26, 2010

    Shah, This is a brilliant article, you said it all.My only point is that it was a "free for all" for the few. Archie,s comments speak volumes too.
    I vow to read this article every day for the rest of the year.

  50. krzy51 | January 26, 2010

    This article is funny because it starts out correctly stating that Democrats and Republicans, in the Congress and in the White House, and the Fed, and all the other regulatory bodies had a HUGE role in this debacle. Of course the rating agencies had a huge role in this as well, as did your everyday Joe who went and borrowed 90% of the value of his house because he thought he would never lose his job and that "housing prices only go up." Duh.

    But now that the whole bubble that benefited everyone collapsed Gilani and all the other populists want to make this narrative really simple: It's all Wall Street! Give me a break. Wall Street didn't keep interest rates at zero. Wall ST didn't regulate itself. Wall ST didn't regulate Fannie and Freddie and the Insurance Companies. Wall ST didn't make Joe Blow buy a new house he couldn't afford. That's not to say that Wall ST had nothing to do with it-but guys, grow up and get real!

  51. Ray C. | January 26, 2010

    The government has no business telling the banks how much to pay employees. The government should insist on total transparency by the banks regarding all compensation. The government regulations should also insure that at least 50% of the voting on compensation be controlled by non-employees. If more then 50% ownership is held by employees they or their family should only be able to vote a percent of their shares (regarding compensation) that would give their aggregated vote no more than 50% or perhaps 45% of the votes cast.

    Ray

  52. Tom Caracciolo | January 26, 2010

    The most important “truth” existing in our U.S. today is the irrefutable fact that we no longer have a Democracy. People are very angry because of our situation of taxation without representation resulting from powerful interests literally owning our Representatives in Congress and our U.S. Senate. Public Policy is not allowed to exist and has no force or effect.

    The rich and powerful have fully implemented the Golden Rule; i.e., he who has the gold makes the rules. I have just learned that our United States current situation of unequal economic opportunity (whereby our middle class has finally been reduced to total apparent ineffectiveness) is no different than the rest of our real world. Bush Sr's referral to Middle America/working class Americans as the "Tyranny of the Masses" in 1991 (or 1992) accurately predicted the eradication of our middle class that we experience today not only in America, but around the world. In 1999 a United Nations Development Program study showed that the world's two hundred richest people had a combined wealth of over $1 trillion, equal to the combined annual income of 41 percent of the world's people (2.5 billion)….the globe's three richest people had assets that exceeded the combined GNP of all of the least developed countries put together. Global inequality has only increased. In the year 2001 85% of the world's population earned 20% of gross world income, and 15% of the rich nations' people made 80% of the gross world income, and the top 1% of the world had the same combined income as the bottom 57%. I see only one possible solution to our own national problem and that is to completely do away with all lobbying in Washington DC as it now exists because our current situation is government of the people by the lobbyists for the rich and powerful. I respectfully submit that nothing will change until we rid ourselves of the current system whereby the powerful few control our elected representatives in Washington DC.

    Why is it that NO ONE appearing on television in the U.S. is willing to address the fact that we no longer have a Democracy in our American land of the free and brave? What we do have is government of the people by the lobbyists for the rich and powerful. I believe that there is no way to change our current national situation until we establish an all encompassing statutory law that absolutely forbids any monetary amount or any thing of any value that can be accepted by any elected individual or civil servant (national, state, county or city in the U.S.). That includes money heretofore contributed to election campaigns; for example, by way of very expensive television ads that tell people how to vote. I know some people will argue about the high expense of television air time when it comes to making available TV prime time to all candidates. This is not a problem since we already have a national Public Broadcasting System that would be only too happy to accommodate people running for office and would do it to cover only their actual costs. A small extra charge at federal tax time to be paid by everyone would easily cover the costs. No more TV ads on commercial TV telling people how they should vote. Individuals, Corporations, Small Businesses, Registered Organizations, etc. would still be able to lobby our elected individuals however no one would be permitted to contribute or offer ANYTHING in pursuit of their goals. When this becomes a reality, and only then, will we have government of the people by the people and for the people.

    The foregoing needs to be addressed as soon as possible and therefore should be included in President Obama’s address on Wednesday, January 27, 2010.

  53. POLpursun | January 26, 2010

    OK, fifty-two cards face up: I read the caption to this article. Did a triple take. Could not believe my eyes as they say. Here? ——- such a headline?! So, I read it again and proceeded to read the first few lines —– the first five sentences.

    Wow!! Are we at the embryonic stage of the formation of the critical mass which when gathered will result in the dog wagging the tail in lieu of vice versa: Clearly, as it currently stands, if we think make, mine, grow and provide productive services, the financial "industry" is to the real economy as is the tail wagging the dog.

    The financial "industry" extracts far in excess of its productive contribution to the productivity gains of the real economy. Indeed, banking system or casino? ——- It has been proffered that, "By December 2007, an estimated $681 trillion were riding on complex, high-risk bets known as derivatives." That's more than 10 times the GDP of the world!

    Then, I read this sentence, "It all started with the Community Reinvestment Act of 1977 (CRA)." So, while I concur with the article's caption and, indeed, the article in general, I think one must go back at least as far as the Federal Reserve Act of 1913 and the Sixteenth Amendment which was introduced to Congress as a package deal along with it. This was the opening step to the introduction of the Federal income tax (Fit). The specific purpose of the Fit was to have taxpayers pay the interest due to the banks on the federal debt.

    The point(s) here is/are that the Fed is a private corporation owned by large private banks. The bulk of the money supply is created by private banks making loans with "new" money (not money from pre-existing deposits). In other words, it is money created out of thin air and is "concretized" by accounting entries. Note: the banks/Fed do not explicitly create/print the money required to pay the interest on the loans. Indeed, this money is "provided" by other loans —— a veritable pyramid scheme. The fractional reserve banking system has a multiplicative effect on the extent of the increase in the money supply resulting from loans. In deference now to being succinct, the Fed, if it is to be, should be a federal agency.

    Further, whatever the government quantitatively, qualitatively it should be the entity printing the legal tender ——- debt free money to jump start real economic activity. Hence no inflation, particularly if the economy —- the real economy —– is in the doldrums. This is distinct from the situation where huge debts are owed to the essentially predator/parasite banks and inflation occurs because the currency is devalued to produce the dollars (no real economic activity involved here) —— come what may, the banks must prosper. Let others eat cake and choke on it.

  54. Roger Cross | January 26, 2010

    This is a lot of bunk. This is just another profiteer to try to get ahead by bashing banks. Bankers want to make money and protect their investors. What a revelation! I guess it's not so on main street, in the bureaucracies, or with self-appointed financial gurus promising fantastic returns with little risk. I bet the people who are working in blue collar jobs don't try to get the best deal.

    Contrary to popular belief, banks definately did not welcome the Community Reinvestment Act. As a bank officer in Chicago, I can tell you that there was considerable pressure from regulators and community organizers to make bad loans. If the author was forced to take risky loans what would he do? Be altruistic and swallow the loss? I think not.

  55. Matt | January 27, 2010

    The root of the problem is Fannie and Freddie (and FHA and FHLB, etc) that handed out over $6 trillion of taxpayer money. This was a far greater mistake than anything Wall Street ever did. It's only surprising it took them 60 years to figure out how to tap the flow. As for regulations, they address only the symptoms of the problem, and usually just make things worse. Keep in mind that the same people who are responsible for regulating fraudulent mortgages were also pushing for higher lending at F&F – the Demopublican Congress and presidents. Regulation is a political game in which the taxpayer always loses, even if it takes 60 years.

    To make matters worse, we bailed out the failed banks (BofA, Citi, GS, etc) and now we are the ward of huge zombies. Under these conditions (along with an artificially inflated housing market and artificially low interest rates) our economy will remain fundamentally unsound. We should have just let them fail. That's how the free market works. Yes it would have been more painful at the time but today we'd be much healthier. No big banks – problem solved.

    The solution is to let the free market function, and most of all, End the Bailouts!

    http://decouple.org

  56. Viswa Ghosh | January 27, 2010

    Shah Gilani is truly wise. His wisdom cuts across party lines and cuts through the haze. I hope Barack Obama, folks in the Senate & Congress read this and act fast. Truly democracy and free market are under threat.

  57. Ernest Elzeer | January 27, 2010

    Extreme Overbuilding has been a major cause in setting off our economic collapse.

    Beginning late 2005 the hype over new homes and extreme oversupply devastated the existing real estate market. The extreme negative equity situation prevented re-financing and sale of existing homes.

    Much misinformation has been propagated regarding "sub prime". Many claim low down payments are a large part of the problem. Since the 1940's, millions of zero down VA loans were created each year with no negative consequence. Areas with extremely high default rates have loans which are mostly based on documented (w-2) income. Individuals who mismanage their finances are always likely to default.

  58. CS | January 27, 2010

    At least one comment included overbuilding, thankfully. But the role of homebuilders in this crash is almost always neglected or understated, and I'd like to point out more about how they were involved. First, overbuilding as somneone said, was part of it. The demand was artificially created by the builders and others in the housing and finanance industries, and uninformed home buyers rushed like lemmings to shoddily built, overly price inflated houses in areas that were ridiculously far from centers of employment, shopping, etc. The houses were typically also oversized energy hogs with high property taxes. And, builders opened up their own mortgage co's, something even many educated buyers are still unaware of despite numerous cases of predatory and illegal lending that went along with the "convenience" of using the builder's lender. It is no surprise, then, that many of the new homes went into default rather quickly. When builders began to shut down for lack of lemmings to sell to anymore, some developments were not finished, with their amenities and even streets going unfinished, too. The value was never real, and prices quickly dropped, leaving many owners upside down in their already toxic loans. So whether voluntary or forced, many defaulted. Now many are voluntarily walking away simply because they see it as foolish to keep making big payments on a junky house that isn't worth what they owe on it. Builders are a big part of what happened and it's obscene that this industry paints itself as a victim. Some small potatoes players have been tried for mortgage fraud but the big ones just pay a fine and go on. Google builder mortgage fraud. Look at the latest FBI mortgage fraud reports. Builders figure heavily in this, and mainstream media has glossed over it or ignored it altogether. Washington is giving them corporate welfare. Many in this industry should be going to jail not getting rewarded.

  59. Ann "Rockerchic" Minch (The Debtors Revolt lady) | January 27, 2010

    This was an EXCELLENT essay! Well laid out, easy to understand and the truth – whole and unvarnished… Bravo!!!

  60. jimbo | January 28, 2010

    All of us that are aware should send out a concerted message as to what the heart of all this crap is, The Private Central Bank of the USA, the Federal Reserve. It is Federal in name only.? The US government borrows money from these thugs and pays interest on it. What a racket, sit back print money and collect interest. The government used to print its own money. The income tax for the most part was enacted to pay this interest. Perhaps the sheeple will understand this since it is so simple.

  61. Hans svensson | January 31, 2010

    "Wall Street`s stranglehold…" .
    This is the most interesting statement I have noticed from the US for decades.

    But you have to dig much deeper into US Megalomania, US Arrogance, US incombrehensible GREED,US asocial behavior.
    You have to dig into your blunted definitions of personal succes,which means the readyness of walking over all others dead bodies.

    I am not a young left-teenager. I am a 65 year old lawyer who has changed from admiring USA into a feeling of disgust.

  62. Robert Gifford | January 31, 2010

    Didn't Rosevelt tell the big bank's after the depression, that if they didn't start loaning
    money out he would print new money and theirs would not be worth anything.
    It's the same old story now, the Banks are sitting their waiting for some other bank
    to go under so they can step in and pick it up for twenty cent's on the doller.
    Not one of them give a damn about this country as long as they can make more money.

  63. rman1900 | January 31, 2010

    It's too bad that the basic innate / intrinsic human characteristic is at play.
    Some call it greed. But that has an almost premeditated or conspiratorial
    connotation. I prefer to call it gluttony. It is it just simple human behaviour
    that we will over indulge ourselves – it is a trait that almost all children has.
    Give any child too much candy and they will stuff themselves until they vomit.
    We are all like this – bankers being no different. However, over time as we
    mature, we try to condition ourselves to control this behavior. Sadly,
    bankers have not figured this one out yet.

  64. Loyst Streeter | January 31, 2010

    Only when all federal and state elections are paid for by a public election fund, will this Nation be able to have fair elections, and politicians who are not the shills of corporations.

    Unfortunately, trying to get Congress to pass this type of legislation, is like finding a publisher who will publish an expose' on the publishing industry.

  65. james | February 2, 2010

    The debt;and nothing but the debt.You are not supposed to pay down ANY debt;you arec supposed to SERVICE the debt.The principal never really goes down much .Dump credit,quit shopping at the company store;or they will surely own your soul.Better to live in a trailer and be free than in a mansionwhere you are enslaved to a master who attaches the chains to you;while pulling them when it's time to kneel.WELCOME TO THE RETURN OF MONARCHY;MAN'S OLDEST FORM OF GOVERNMENT.

  66. J.T. | February 13, 2010

    Looking in from the outside, it seems to me that USA is a country where the left hand does not know what the right hand is doing. It is a country that is dysfunctional at every level. A time bomb that if not dismantled will implode and explode to the detriment of many.

  67. Adebiyi Adedapo | February 15, 2010

    Ooooh!! my God never belived our banks can get so corrupt. Big Banks as we all know are killing the society by bringing about ghostly figures whicw are not in existence.

    * Finding a way to mop out truants who try finding shortcuts in the finacial service industries.
    * Leaving on credit as plunged us into recession(Meltdown).

    In Nigeria things we had experiece is not because it was meant to happen, but it was due to our overdependance on OIL SALES. Hence, i would say let us practice governance the way it should be and effective focus on diversification. LETS ALL GIVE A DAME ABOUT OUR COUNTRIES.

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