By madis senner, CPA

Why Enron? Why now? There certainly are many more Enron's out there--but what is unique about Enron, and makes it so compelling a case, is that it is the first large non-financial company to face calamity in recent years. This is an important distinction. Since the 1987 stock market crash, there has been a lot of financial turmoil--from the market crash of 1987, to the rumored troubles of the big money center banks in the early 90's, to the failure of Long Term Capital in 1998. But each of these near disasters was avoided because they fell directly or indirectly under the auspices of Federal Reserve Chairman Alan Greenspan. Greenspan was able to orchestrate a rescue. As a non-financial company, Enron was not so fortunate. Why the previous bailouts and not Enron? The money concerns involved posed some sort of horrendous systemic risk to the financial markets and the economy. That they were too big too fail. Greenspan and other Fed members have consistently denied they have a too big too fail policy--but a recent statement by an ex-Federal Reserve Board member, Alan Blinder, contradicts that stance. Consider his words in '"Too Big to Fail" Deniers Have a Tough Audience', Rob Blackwell, American Banker, June 4, 2001;

'"Everybody knows that there are institutions that are so large and interlinked with others that it is out of the question to let them fail," said Alan S. Blinder, a former Fed vice chairman. "But the last thing a regulator would want to do is tell any particular institution that it's on the list--or tell customers that it's on the list, which of course gives it a very unfair competitive advantage."'

But were all the bailouts done because they posed some sort of systemic risk or was there an element of cover-up, to prevent the public from seeing Enron-like behavior? According to Martin Mayer in his book THE FED:The Inside Story of How The World's Most Powerful Financial Institution Drives the Market , (The Free Press, 2001) in speaking of the Federal Reserve bailout of the speculative investment pool Long Term Capital Management there seems there were several cover-ups occurring simultaneously:

"The belief here is that the reason why the Federal Reserve Bank of New York engineered the rescue of long Term Capital Management hedge fund in September 1998 was fear that the collapse of the fund would have exposed to public view the sloppy performance of the world's great financial Institutions--and the careless, trusting supervision that had permitted this overconfident crowd of Ph.D. economists, mathematicians, and gamblers to carry positions in excess of $100 billion, and derivative contracts with nominal values over $1 trillion, on a capital base of less than $2 billion."Page 266

"Only a few days before the New York Fed felt it had to intervene to save Meriwether from losing his hedge fund, Alan Greenspan had testified to the House Banking Committee that 'hedge funds were strongly regulated by those who lend it money'. The belief that Alan Greenspan knew whereof he spoke, a central tenet of the Fed's status, had been put in hazard," Page 267

Mayer's words in describing Long Term Capital have an eerie similarity with what we see in Enron today. Could it be that the only reason we hear of Enron is because it fell through the cracks in the bailout policy? And how could it be that we allow an anomaly outside the system of checks and balances such as the Federal Reserve to exist in the United States of America?

The Federal Reserve is a unique institution that not only sets policy but also supervises itself--and this, as Mayer just pointed out, can cause problems. Just think of all the heat the Financial Accounting Standards Board (FASB) is taking for failing in its own supervision of auditors in relation to Enron. Financial pundits are fond of talking about the triumph of American Capital markets (see "Built in America', David Hale, Financial Times of London, January 25, 2000) and how they are one of the incipient factors in the reemergence of American hegemony. But given the unique position of the Federal Reserve to set policy and police itself--it all sounds more like a system that would foster 'crony-capitalism'. Consider the words of financial expert Carter H. Golembe, writing in the Minneapolis Federal Reserve banks magazine, 'The Region', in March of 2000:

"…there is under way a worldwide movement to reform bank regulatory structures in order to cope with new market pressures and rapid technological change, something the United States has yet to address. The result in the rest of the world has been the creation of new regulatory structures and, in almost all cases, the separation of the central bank from the supervision and regulation of financial institutions (largely because of fears of conflict of interest problems and a loss of political independence by the central bank."

The Wall Street Journal has called the 1990's the 'Decade of Moral Hazard', Review & Outlook, September 25, 1998 for all its bailouts. In the article the Journal describes moral hazard as;

"…the term the financial community uses to describe the distortions introduced by not having to pay for your sins, in this case financial ones. The prospect of government bailouts leads to abandonment of credit standards and assessments. As moral hazard grows you get a market so skewed by the expectation of bailouts that the vital signs about genuine risk no longer get through. Eventually, the danger turns into one of systemic collapse."

The problem with moral hazard is that as it grows it becomes more pervasive and brazen--safeguards and protections fall to the way side, risk taking increases exponentially and participants get a sense of infallibility. Caution is thrown to the wind and anything and everything is possible. Since Greenspan took office in the summer of 1987 it has been one bailout after another beginning with the October 1987 stock market crash. What we need to realize is that what went on at Enron is hideous but it is a symptom of a larger problem. (A corresponding mindset has developed amongst investors. Henry Hu in "Faith and Magic: investor Beliefs and Government Neutrality", Texas Law Review, March 2000 writes that the Fed along with the SEC have created what he calls 'a stock-based investor religion' that has come to believe that there are no risks associated with stock ownership. Fed Chairman Greenspan called it:'irrational exhuberance'!)

When we take a harder look at what has been going on in corporate USA and on Wall Street, we begin to see much of what transpired at Enron is not unique. When the Internet bubble burst the rose colored glasses were replaced by green eyeshades as many in the press began looking at the reality behind the numbers. Consider the report by the Levy institute, 'Two Decades of Overstated Corporate Earnings: the Surprising Large Exaggeration of Aggregate Profits', Cadette, Levy & Thiruvadanthai': September 2001. The report begins with a quote for noted investor Warren Buffet:

"A significant and growing number of otherwise high-grade managers--CEO's you would be happy to have as spouses for your children or as trustees under your will--have come to the view that it's okay to manipulate earnings to satisfy what they believe are Wall Street's desires. Indeed, many CEO's think this kind of manipulation is not only okay, but actually their duty.
Warren Buffet, 1999

…The macroeconomic evidence indicates that corporate earnings for the Standard & Poor's 500 have been significantly exaggerated for nearly two decades--by about 10 percent or more early in this period and by over 20 percent in recent years. These figures are conservative--the magnitude of the overstatement may be considerably larger. The record is replete with accounting practices that fall within the rules (even just barely) but make it extraordinarily difficult for investors to discern just how well or poorly a company is doing. For many years the investing public has been given a picture of corporate financial performance that is in significant part illusion. Indeed, there are so many questions and issues surrounding the accounting and reporting practices of U.S. corporations that it is difficult to know just how much the public has been misled."

It is not coincidental that the Levy research report found that earnings fabrications grew over time--so it is with moral hazard; speculation, recklessness and bending and or breaking the rules feeds on itself.

Writing about Executive Cheerleaders in; 'Market Watch: Why the Happy Talk From Chief Executive Cheerleaders?' Gretchen Morgenson, May 27, 2001, one senses that what transpired for Enron's' employees that got stuck holding the bag with Enron stock that became worthless may not be so unique;

"Shareholders of Sawtek, a maker of cellular-telephone parts, learned the hardway last Thursday about relying on management projections.Back on April 9, Sawtek announced dismal results for the March 2001 quarter. Nevertheless, management reassured investors on a conference call that day… Investors like what they heard. The company's shares jumped 13 percent the next day and by late last week they had more than doubled. Then came reality. Late on Wednesday, Mr. Anemogiannis warned that Sawtek's business in that Quarter was not quite what he had though it would be just six weeks earlier…

Sawtek shares lost 17.2 percent of their value the next day. Some $200 million in investor money disappeared.

'The law meant there was no penalty for an executive who created the illusion that he could accomplish something that he didn't,' said Bill Fleckenstein at Fleckenstein Capital in Seattle. 'Management could be wrong about their projections but there is no penalty for potentially blowing smoke.'"

Or consider the actions of the brokerage community which is under fire for its stock market research, its incestuous relationship with its investment banking clients and its allocation of IPO's (initial public offerings) among other things. The comments of acting head of the SEC last summer in; 'S.E.C.Leader Cites Conflicts of Analysts at Large Firms', Gretchen Morgenson, August 1, 2001 shows that a backlash against Wall Street business practices was building:

"Laura S. Unger, the acting chairwoman of the Securities and Exchange Commission, told Congress yesterday that the agency had found that conflicts of interest run deep and wide among analysts at almost all the nation's largest brokerage firms. And, in an interview after her testimony, she said that some of the analysts' actions might become the subject of enforcement cases brought by the S.E.C."

To many outside the financial community, it may seem unfathomable that one person could create such an environment of moral hazard and disregard for ethics and the law. But up until September 11^th, many people thought Alan Greenspan was the most powerful person in the world. Perhaps he still is. In his book Maestro Bob Woodward noted "On January 20, 200, a new president takes the oath of office. He assumes the oath of office in a Greenspan era.' As if the president were subordinate to the Federal Reserve Chief.

Amity Shlaes in the Financial Times of London, January 9, 2001, "COMMENT & ANALYSIS: A fitting legacy for America’s beloved dictator: The legislation guiding US interest rate policy is flawed. Alan Greenspan should lead a reform effort before he retires", tells us of the enormous clout Greenspan has;

"How can it be, at a time of unprecedented faith in free markets, that we even think a government authority might have such strength? And how can it be that the world’s monetary order rests on the shoulders of an individual, much admired but still fallible economist?
The answer is America’s uniquely flawed and outdated monetary law, which gives the nation’s monetary chief the sort of discretion of which his peers in other developed countries can only dream. Mr. Greenspan is so powerful that today he is perceived as a loving dictator. This is only natural. For as we know from history, wherever the law is weak—in any area of politics—public credibility tends to vest itself in an individual."

Doris Kearns Goodwin, Speaking on "The News Hour with Jim Lehrer", PBS, March 20, 2001 is even more specific when she talks about THE MYSTERIOUS FEDERAL RESERVE and how it flies in the face of checks and balances our country was founded upon;

• "They (congress) have created a very unusual agency in the whole Fed system.
• It’s exempt from normal government appropriations,
• It doesn’t have to wait for Congress because it has its own money that continues to work around.
• It’s exempt from GAO looking at its monetary situation.
• It’s even exempt from part of the Freedom of Information Act.
• And so it’s got this mystery to it."

Given Goodwins' comments, it would seem so easy for Greenspan, as Martin Mayer implies, to cover his own tracks by bailing out Long Term Capital Management.

And the political Greenspan, a un-elected bureaucrat, has used his power to his advantage. In early 2001, after chiding President Clinton on deficits for years, he endorsed President Bush’s tax cut which jeopardized the elusive budget surpluses. But the more worrisome feature of Greenspans' view deals with his laissez-faire attitude towards/policy of (hypocritical we would say) free markets.

Speeches repeatedly have been about maintaining free and open markets and letting the markets themselves decide. As an Ayn Rand acolyte he is against anything that impedes the market--even regulation. He also has been a big proponent of not legislating the derivatives market and has aggressively spoken on several occasions about such.

Minimum Wage: "(T)he reason I object to the minimum wage is I think it destroys jobs. And I think the evidence on that, in my judgement is overwhelming." Alan Greenspan, Testimony before the House Financial Service committee, July 18, 2001

He has been a big proponent of financial innovation, AKA derivatives. The problem is that derivatives allow for leverage and can be a good way for companies such as Enron to hide their actual positions.

We have also seen a defiant Greenspan who prides himself on his cryptic speech. 'Greenspeak' it is called. But why? David B. Scilia and Jeffrey Cruikshank in The Greenspan Effect: Words that Move the Markets , (McGraw Hill) say that ;"the Fed is intentionally secretive"(page 20), arguing consensus thinking that smooth operations demands the Fed be secretive. Such thinking only shows how powerful Greenspans' hype has become--people write books trying to glean hidden meaning in his words as if he were a prophet sent by god. He may not be a prophet but he certainly thinks that he is righteous and thinks he is above the law. Robert D. Auerbach, professor at the Lyndon B. Johnson Scholl or Public Affairs, writing in Barrons, December 10, 2001'That Shreddin Fed; Just 18 minutes of Watergate Tapes were erased, while the Fed 's 'edits' veil years of historic record", tells of Greenspans' defiance and refusal to make himself accountable, He has refused to tape FOMC meetings and, according to Auerbach, even shredded the minutes of FOMC meetings in defiance of congress:

"The Fed chairman was determined to turn off the recorder for 'organizational discussions' after what he called 'a frankly outrageous request for the tape of our discussion in October a year ago, ' according to the January 31-Febraury 1, 1995 meeting Transcript…

The 'outrageous request' Greenspan referred to came from former banking Committee Chairman Henry Gonzlez who insisted that Congressional staff members hear a recording at an October 15, 1993 FOMC conference call.. In that tape most of the presidents of Fed district banks and board governors agreed not to mention the previously unknown existence of the FOMC transcripts when they testified before the Banking Committee about FOMC written records.

Greenspan, who was to cover this subject for the banking panel, didn't mention the 17 years of transcripts at the hearing. Gonzalez later accused the witnesses of misleading Congress.

A week after the hearing Greenspan ended the Fed's 17 year secret by informing the banking committee that 'unedited tapes exist for each regular meeting of FOMC held after the March 15-16, 1976',in a letter to Gonzalez. Thirty-eight of the transcripts (or tapes) for 104 FOMC conference calls were reported missing, however."

Greenspans' speeches and words on free markets, derivatives has influenced and encouraged a hands off approach by legislators. He has even waxed poetic about the evils of the minimum wage--regulation. But the words of the Fed influence not only legislators but the markets as well. They (words) add to the air of moral hazard. Throw oversight out the window --don't want to cramp the market’s style. And the leverage provided by derivatives is just financial innovation--not the age-old speculation such has always been before.

The powers gained by Greenspan as "umbrella supervisor" are still evolving. But the power is not lost upon Greenspan who was extremely cocky as noted by Mayer (The Fed) when he spoke before insurance regulators four days after the legislation was passed:

The following are a few of the issues, questions of power and problems the new legislation poses:

Given Greenspan’s embrace of free markets, the air of moral hazard permeating the financial world and what has transpired since the Fed has been given 'umbrella supervisory' status over banks--banks that could go after securities business is not surprising, evidently not to the Fed though. To understand what they did, we first need to understand that banks have a special privilege with the federal reserve which gives them the lowest cost funds, a fact not lost upon Greenspan. Essentially banks used their low cost bank funds to buy the underwriting business of investment banks; Patrick McGeehan noted such in 'Banks Get Business at the Expense of Elite Firms', New York times, June 15, 2001:	Turning a blind eyeIt is hard to believe that Mr. Greenspan is not aware of what is going on in the banking world given what Larry Parks says in his bookWhat Does Mr. Greenspan Really Think?, Fame.org, 2001. In his book Mr. Parks goes to great lengths to analyze the speech of Chairman Greenspan before The Catholic University Leuven, Leuven Belgium, January 14, 1997: [Greenspan]"'Increased availability of a central bank credit facility, even it not drawn upon, can induce increased credit extension by banks and increased activity by their customers, since creditors of banks are more willing to finance banks' activities with such a governmental backstop available.'page 18
	[Parks]In other words, since depositors know that the Federal Reserve will bail out banks if banks become insolvent, depositors become indifferent about putting their money in (lending to) banks regardless of the risks banks take. At the same time, banks are "induced" to leverage more and take greater risks since they also know that the Federal Reserve will rescue them if need be. As a result, despite the enormous risks that banks take, they are able to pay less interest to depositors, This deprives savers of interest to which they are entitled, and, at the same time, enables banks to make riskier bets and amass bigger profits.
"Officials of rival investment banks argue that J. P. Morgan Chase and Citigroup have been buying business by cutting prices. They can do that, their critics say, because they have abundant access to cheap money provided by their depositors and they do not account for the true cost of the loans they make and commit to make." As if aggressive lending where not enough to raise red flags. Given the Enron debacle, in which the liabilities off-balance sheet was hidden, the finding that banks are not properly reflecting their liabilities either is very worrisome—if not downright frightening. It should also be noted that J.P. Morgan Chase and Citigroup are the two largest lenders on the hook to Enron. McGeehan goes on to say; "Goldman Sachs lodged a complaint about the banks' methods with makers of accounting rules, arguing that the big banks are understating the risks of the loan commitments they are making. If banks had to carry those loans at their true value, Goldman officials said, they would price them differently and lose some of their competitive advantage." Andrew Bary Writing in Barrons, "Truth in Lending?: Wall Street Rivals say big banks use cut-rate loan commitments to snag underwriting business', May 28, 2001 notes that banks have been trying to buy business using their financial clout and goes on to talk about the risks it poses: ""The commercial banks have been aggressive in using bundled pricing and below-market pricing in some instances to win business,' says Henry McVay, brokerage analyst at Morgan Stanley… In his report, Mayo (banking analyst at Prudential Securities) writes investors are underestimating the risks posed by the industry's $4.7 trillion in credit lines and other contingent liabilities because banks aren't reserving adequately…. Mayo argues that banks haven't reserved adequately for credit lines and other contingent loans. "The risks related to this issues are underappreciated,' he told Barrons. In the report, "Shh! Banks' contingent Liabilities Have Tripled in the past Decade," Mayo notes that off-balance-sheet exposure has exploded to $4.7 trillion form $1.5 trillion a decade ago and now equals 30% of total bank loans."	(Greenspan)'If that takes place in an environment of strained resource availability, expanded subsidies to depository institutions--which are often referred to as the "safety net"--can only augment the pressures.' Mr. Greenspan is making an important point: he is saying that the 'safety net' that taxpayers provide to banks really constitutes a subsidy. By definition. A subsidy entails wealth transfer. In this case, ordinary taxpayers are transferring wealth to banks. For the remainder of this speech, every time Mr. Greenspan says 'safety net', think 'subsidy/wealth transfer'. The Federal Reserve Banks of Minneapolis enlightens us further: "The subsidy bankers receive from deposit insurance has two components, each of which has tangible value. First, the insurance reduces the cost of banks liabilities [deposits which banks take in]. Banks have access to funds at rates lower than those paid by uninsured financial institutions. Moreover, it is clear from the worst period of the bank failures of the 1980s that even the most conspicuously unsound banks have access to deposits at rates only marginally greater than rates offered by sound banks. The second component of the deposit insurance subsidy is lower capital than would otherwise be required by the marketplace. A lower capital requirement means a bank has the opportunity to be more leveraged and take on more risk. Even those who will hold that a stable banking system requires a policy of 'too-big-to-fail', acknowledge that bank capital has declined dramatically since the institution of deposit insurance.'" Page19 Later Parks goes on to have Chairman Greenspan tell us how he (Greenspan) is going to prevent banks from as Parks says "milk the safety net subsidy to the extreme'. To say that Greenspan's words conflict with his publicly held opinions is an understatement!": [Greenspan]'"The disconnect between risk-taking by banks and banks' cost of capital, which has been reduced by the presence of the safety net, has made a necessary degree of supervision and regulation that would not be necessary without the existence of the safety net.'… That is regulators are compelled to act as a surrogate for market discipline since the market signals that usually accompany excessive risk-taking are substantially muted, and because of the prices to banks of government deposit guarantees, or of access to the safety net more generally, do not, and probably cannot, vary sufficiently with risk to mimic market prices.' [Parks]He is saying that if the banks were not regulated, they might milk the safety net/subsidy to the extreme." Maybe Chairman Greenspan and other Fed governors should start a new milk commercial--HOW CAN GREENSPAN TELL US WITH A STRAIGHT FACE THAT HE IS GOING TO COUNTER ABUSE OF THE SAFETY NET WITH REGULATION AND OVERSIGHT--WHEN HE HAS CONTINUALLY SAID HE DOES NOT BELIEVE IN OVERSIGHT AND REGULATION!!!

It could be argued that the preceding is nothing more than the ongoing process of financial innovation and development and that securities firms will have to merge to compete. Dream on. Cynically we would say merge because they will become too big too fail? The fact is that banks have gotten new powers, which the Greenspan Fed is suppose to supervise, and they have decided to aggressively try to buy business and off-load the risk off their balance sheets similar to the way Enron did. What has transpired since banks were allowed to engage in underwriting under the Fed's supervision clearly shows that the Greenspan Fed is either: a) does not understand what is transpiring, b) is incapable of supervising, c) does not really care, or d) is rolling the dice like everyone else--hey it can cover its own tracks and bailout everyone.

I guess to many it was not a surprise the bailout King was given supervision of the Airline industry bailout by Congress in the fall of 2001. Washington felt that Greenspan was doing such a good job that he should be rewarded with more responsibility. Truly he is embraced in Washington like no other! But the perversion of justice goes well beyond increasing the power of person that defies the principles of American democracy. Who is this person we have given more responsibility for oversight and supervision to, and whose interests does he represent? Here is what he has to say (Alan Greenspan) in Ayn Rand Capitalism: The Unknown Ideal; With additional articles by Nathaniel Branden, Alan Greenspan, and Robert Hessen, The New American Library (1966). From 'The Assault on Integrity', by Alan Greenspan pages 112-116): "Protections of the consumer against 'dishonest and unscrupulous business practices has become a cardinal ingredient of welfare statism… Government regulation is not an alternative means of protecting the consumer. It does not build quality into goods or accuracy into information. Its sole 'contribution' is to substitute force and fear for incentive as the 'protector' of the consumer. The euphemisms of government press releases notwithstanding, the basis of regulation is armed force. At the bottom of the endless pile of paper work which characterizes all regulation lies a gun… Protection of the consumer by regulation is thus illusory. Rather than isolating the consumer from the dishonest businessman, it gradually destroying the only reliable protection the consumer has: competition for reputation. While the consumer is thus endangered, the major victim of 'protective' regulation is the producer: the businessman… Government regulations do not eliminate potentially dishonest individuals, but merely make their activities harder to detect or easier to hush up." Given those words it could be argued that Greenspan does not believe in oversight and regulation--then why get involved in government? Does he believe it is his duty to intentionally undermine the role he has been asked to play by doing nothing? He is like a policeman turning a blind eye to crime while walking the beat. It is no wonder Greenspan has been slow to move on predatory lending and other consumer initiatives and has been such a vehement opponent of minimum wage legislation. What is happening on Wall Street and corporate America is much larger than Enron. We need to spend more time on the big picture and less on the details of what went wrong at Enron. We have to realize that there are more Enrons out there. That the real problem is that we have abandoned the democratic principles our country was founded upon. We have given too much power to one person, an un-elected bureaucrat, who has taken it upon himself to put our country on a reckless course in the pursuit of free markets. What is also egregious about the concept of free markets is that it is applied un-evenly and unjustly--the rich and powerful are bailed out while the poor are left to fend for themselves.

The Seedy Side of High Finance--Financial Innovation hits the Pawn Shop Market--Fringe Banking(See notes for definition) Unfettered by regulation, encouraged to innovate and flush with cash the banking industry has descended upon what was traditionally the domain of the pawnshop. A host of products have been created since the early nineties; predatory lending, pay day loans, car title loans, pay check cashing, anticipatory loans, rent to own---all of which charge exorbitant fees that can run over 100-400% annually, if not more. James H. Carr and Jenny Schuetz, 'Financial Services in Distressed Communities: Issues and Answers', Fannie Mae Foundation, August 2001 says; "Fringe industries engage in at least 280 million transactions each year for gross revenue of more than $78 billion that extract fees of at least $5.5 billion." The Fed and others have argued that such new financial innovations are providing valuable financial services to the 'subprime' market and higher costs reflect the additional costs associated with the risky nature of the business. (Subprime refers to loans made to less creditworthy customers.) But as Carr and Schuetze found out 35-50% of the households that relied on subprime lending qualified for and could have borrowed at lower cost prime loans. State regulations and usury laws govern most fringe banking, so it may be argued that it falls outside the jurisdiction of the Federal Reserve. Similar arguments were heard about the predatory loan market but after much pressure the Federal Reserve enacted the 'amendments to Regulation Z ' in December 2001. The Federal reserve was also given wide purview as we noted previously when it gained 'umbrella supervisor' of the financial services industry in 1999. Clearly the Fed has a host of tools and rules it could use to reduce exploitation of citizens forced to rely on fringe banking. But it sees no need to come to the rescue, instead it allows market forces to go 'unleashed' upon the public. It could for example, it could have banks that because of their special privilege get low cost funding from the Federal Reserve provide free checking and savings accounts to low income citizens--to compensate for their special privilege with community service! According Carr and Schuetz resolving the problem begins by measuring its size: "An important missing tool to address the issue of market failure in distressed communities is a robust set of data that could more easily enable policy makers, regulatory agency personnel, researchers, nonprofit community activists, and other interested parties to pinpoint critical areas and issues for examination and possible action." What is so startlingly about this suggestion is that Federal Reserve Chairman is a renowned stickler for data, a numbers wonk that gets up at 5:30 AM each morning to take a two hour bath and mull over data. Evidently $78 billion+ slipped through the cracks. Not only does fringe banking show that the 'Enron Way' has filtered down to lowest economic levels of American society it also shows the extent of moral hazard in our country--Exploitation and risk taking of the poor and those least able to protect themselves. Just think of the bailout scenario; A large bank gets into trouble because it had lent too much money to smaller financial institutions that had over-extended themselves with risky loans in communities hard hid by business cutbacks. The bank is bailed out while the borrowers have their homes, cars and valuables foreclosed on. Often Fringe Loans counter the intent of government programs to help the poor as seen with Earned Income Tax Credits (EITC) and Tax Refund Anticipatory Loans (RAL); "'Cash-strapped consumers will pay about $800 million in RAL finance charges alone to borrow their own money,' says Jean Ann Fox, Director of consumer protection for CFA, stated…'The EITC lifts almost five million people, over half of them children, out of poverty,' Margot Saunders, NCLC Manager stated. "EITC recipients need every penny of those benefits to build assets, pay necessary bills, and make ends meet in this economy. '...forty percent of taxpayers who get refund anticipation loans are EITC recipients...'Taxpayer benefits for the working poor belong in consumers' pockets, not the coffers of tax preparation firms and their partner banks.' Jean Fox stated...'Ten million families do not have bank accounts. Without bank accounts, cash-strapped consumers cannot recieve speedy refunds that are electronically deposited,' Margot Saunders said.""Tax Loans Skim Hundreds of Millions from Working Poor', Consumer Federation of America, January 31, 2002.

Payday lending grew nationally from
300 stores in 1992 to
8,000 (+) stores in 1999
Savings for the Poor
Dr. Michael Stegman,
Univ. of North Carolina

"when the laws undertake to make the rich richer and the potent more powerful, the humble members of society...who have neither the time nor the means of securing like favors for themselves, have a right to complain of the injustice of their government...There are no necessary evils in government. Its evil exist only in its abuses. If it would confine itself to equal protection...it would be an unqualified blessing...Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress...It is time to pausing our career to review our principles."

'We the people' of the United States of America demand the following:

• The Federal Reserve should be stripped of its independence and made answerable to we the people of the United States of America.
• The ability of the Federal Reserve to set policy should be separated from the power to supervise and regulate.
• The policy goals of the Federal Reserve should restated with an objective of looking to serve all americans not just the priviliged few.
• A thorough investigation and study should be undertaken to determine how the Federal Reserve can better service the public at large.

Join the Fed Head Protest. For more information about the Protest and the Federal Reserve go to:Stop the Money Flow of Injustice!

Let's Get Congress to distance themselves from Greenspan like they did from Enron and Enrons' political contributions-Only faster!

NOTES

• There was limited discussion of the derivatives market which is an explosive issue. At the time of this writing some of the scams Enron employed in the swaps market to recognize income were being uncovered. As we noted before Greenspan has been a big advocate of derivatives and I am sure we will be addressing this issue in the future.



• For more on central banking and how policy undermined democracy in the USA go to: The Japanese Paradigm which compares the Japanese financial bubble of the 1980's to the USA financial bubble of the 1990's.



• Fringe banking: Financial services, primarily lending, for the less creditworthy or those without access to traditional banking. Borrowers often find themselves on a financial treadmill which does not stop. As with loansharking if the loan is not paid back quickly the effect of high interest rates exponentially increases what the borrower owws. Often the borrower ends up working to pay back interest--or worse! Some techniques:
  Predatory Lending-Targets the elderly and people of color, often with good credit, to take out loans for home repair against the equity in their homes. Allows for the attachment of hidden or exorbitant fees, balloon payments and high interest rates among other things. Can also refer to swapping homeowners that have low interest government loans into higher interest rate mortgages at private institutions in order to free up cash by borrowing against the increased value of their home.
  Deferred Deposit Loans: Better known as pay day or post check loans. Borrowers leave a check with a lender for the amount of the loan plus a fee which the lender agrees not to cash until payday. Fees run 300% to 1,000% annually. Not all states allow for pay check loans but the state of Nevada, hobbled by a drop in tourism, was doing a brisk business around Christmas time as noted by Micheal Squires in the LasVegas Review-Journal, "Tough Times: Short Term Loan Firms Prospering", December 23, 2001.
  Auto Title Loans: High interest short term loans against a car's title. Given people need their cars lenders are willing to lend because they know the borrower will do anything to keep their car.
  
  
• The issue of fringe banking and the exploitation of less well off Americans is an enormous issue with tremendous social repercussions. It is a very devisive issues that widens the gulf financially, racially and ethnically in our country. It also shows why the Fed should be stripped of its independence and that we need a set of policy goals which lead all government agencies--a united goal with the best interest of all Americans at heart. To prevent a renegade institution from gaining too much power and circumvent deomcracy and justice to suit its own agenda. At some point the surge we have seen the last few years in fringe lending/banking will come back to haunt us--social divisiveness, crime, to name a few--which will cost all of us. Think of it like preventative medicine which you take to avoid a major illness of disease, it costs a lot less in long run. We only briefly touched the topic. We did so because I am a firm believer that the Federal Reserve has the ability, if they were inspired to move to do so. For more information on fringe banking go to:
  The AARP web page has several sections dealing with predatory lending, fringe banking etc.AARP
  CRA-NC, the Consumer Federation of North Carlonia has articles and links on pay day loans: CRA-NC
  PIRG's state page on consumer issuesPIRG
  Consumer Federation of America: Consumer
  ACORN-Community Organizing;Articles/info: ACORN
  Consumers Union: Union



• The power of the Federal Reserve reaches globally through the multinational corporations and banks which are the prime beneficiaries of Greenspans' pro business bailout policy. Other countries have also linked to the Federal Reserve and US Monetary policy by pegging their currencies to the US dollar.(See "The Buck Should Stop Here', Madis Senner, Barrons, October 7, 1997)
  
  
• One of the more traditional arguments against the Federal Reserve is that creates fiat money, money out thin air, which debases our currency. Such advocates are for sound money. To learn more about sound money, fractional reserves and other related issues go to:Fame.org



• You can access the Federal Reserve directly at: Federal Reserve
  
  
• To read our other article about the Federal Reserve go to: Stop the Money Flow of Injustice


Back to Table of Contents

Back to 'The Market is Rigged'


If you are interested in subscribing to our on going analysis and expose of the markets please sign in below!


Subscribe to Riggedmarket
Powered by groups.yahoo.com