Reflections of Fidel
(Taken from CubaDebate)
June 24, 2010
Reflections of Fidel
By Arthur Shaw
Ecuadorian President Rafael Correa criticized the unjust imprisonment of the Cuban Five, jailed for preventing terrorist attacks on Cuba from Miami, Florida.
Pres. Correa condemns the political imprisonment of the Cuban Five as an USA attack on human rights.
In his regular Saturday nationwide broadcast to the Ecuadorian people – this time from Pedro Maldonado in Pichincha province – Pres. Correa expressed his hope that this vile injustice in the USA against the Five will be reversed and the five anti-terrorist fighters and patriots returned their home in Cuba.
The Cuban Five are Gerardo Hernández, Antonio Guerrero, Ramón Labañino, Fernando González, and René González. They were arrested September 12, 1998 and railroaded in rigged trial in an rabid anti-Cuban Miami court in 2000. In May 2009, the GOP-infested US Supreme Court refused to overturn the Kangaroo convictions of the Cuban Five, upon the urging of the Barack Obama regime.
“During the changing of the presidential guard ceremony, we were accompanied by a special guest, Irma Schewerert, a Cuban woman and mother of one of the Cuban heroes, who have been imprisoned in the United States for more than 11 years now,” Ecuadorian Pres. Rafael Correa said. “In real terms, this is an attack on human rights and hopefully this situation will soon be reversed. These Cubans are political prisoners. Political, yes! These ones really are political prisoners.”
“The Five were accused of espionage when what they were doing was preventing acts of sabotage mounted by a particular section of the ultra-right Cuban community in Miami. And instead of being congratulated for it, they were subjected to a questionable trial,” Correa noted.
Correa studied at the University of Illinois at Urbana-Champaign, where he earned a Master of Science in Economics in May 1999, and later a PhD in Economics in October 2001.
Throwing the heroic Cuban Five into the US gulag is consistent with hypocritical protection and immunity that the bourgeois regime in the USA conferred on Luiz Posada and Orlando Bosch, two terrorists fiends who blew up Cuban-owned commercial airliner in mid-air in 1976, slaughtering all 73 people on board. The bourgeois regime in the USA shamelessly pardoned Orlando Bosch after the 1976 massacre and declined to extradite Luis Posada to Venezuela, the country where two pro-US imperialist psychopaths masterminded the plot to destroy the airliner and slaughter its passengers and crew.
In July 12, 1998 published interview with NY Times reporter Ann Louise Bardach, headlined A Bombers Tale, Posada boasted openly about some of the people he murdered and other acts of terrorism committed AFTER the 1976 attack on the Cuban airliner.
Still, the bourgeois regime and most of the bourgeois media in the USA say the Cuban Five should stay in US prisons because the US is anti-terrorist.
The Cuban Five worked to prevent a repetition of the 1973 bombing of the Cuban airliner that slaughtered so many innocent people.
How is preventing another massacre an act of terrorism on the part of the Cuban Five?
Again, how is protecting terrorists who now reside comfortably in Miami anti-terrorist on the part of the US regime?
By Arthur Shaw
Ramon Labañino is one of the Cuban Five, a group of five political prisoners held in five separate US prisons. Labanino had his 47th birthday on June 9 but remained in an solitary confinement cell where he has been held since April 27.
Solitary confinement is a special form of imprisonment in which a prisoner is denied contact with any other persons, excluding members of prison staff. It is considered by some, especially prisoners, as a form of psychological torture. Solitary confinement is colloquially referred to in “American” as the ‘hole’, ‘lockdown’, or the ‘SHU’ (pronounced ‘shoe’).
Labañino is currently being held in a solitary confinement cell at the Kentucky maximum security penitentiary.
The change from prisoner population to solitary confinement resulted from being re-sentenced to 30 years’ imprisonment by the Federal Court of Miami last December. The Miami court changes is sentences in accordance with the latest demands of the reactionary sector of the Cuban American community in Miami.
During a brief interview with Prensa Latina, the proletarian news agency in Cuba, Labañino’s wife Elizabeth Palmeiro explained that her husband is currently “being held in isolation just as he was for the first 17 months after his arrest in 1998.” This time “they have put him in the ‘hole’ claiming alleged security reasons, given that he cannot be together with the rest of the prison population in a maximum security prison if he is now only classified as a “medium security” prisoner.
As is widely known, lunacy prevails among the authorities who run the US gulag which contains over 2,000,000 immates.
The issue is, Elizabeth Palmeiro said, that while the US gulag authorities are deciding where Labañino is to be relocated as medium security rather than maximum security prisoner, “Ramón remains in the hole.”
The prison authorities who run the US gulag hope that this time the “hole” will break Labanino and turn him into an imperialist collaborator
Ramon Labañino, Fernando González, Antonio Guerrero, Gerardo Hernández and René González … the Cuban Five … were arrested on September 12, 1998 in Miami and later subjected to a kangaroo political trial, tampered with by representatives of the reactionary sector of the Cuban American community in Miami. The kangaroo trial resulted in long, unjust, and excessive sentences for the railroaded Cuban Five.
The Five, as the world knows them, infiltrated anti-Cuban terrorist organizations in Florida and their crime was to expose terrorist plots hatched against the Cuba from the United States. Strangely, none of these “anti-Cuban terrorist organizations in Florida” were in 1998 or now on the list of terrorist organizations prepared by the US attorney general although these organizations had murdered over 3000 people in Cuba and destroyed millions of dollars of property.
What does the Communist Party stand for?
The Communist Party stands for the interests of the American working class and the American people. It stands for our interests in both the present and the future. Solidarity with workers of other countries is also part of our work. We work in coalition with the labor movement, the peace movement, the student movement, organizations fighting for equality and social justice, the environmental movement, immigrants rights groups and the health care for all campaign.
But to win a better life for working families, we believe that we must go further. We believe that the American people can replace capitalism with a system that puts people before profit – socialism.
We are rooted in our country’s revolutionary history and its struggles for democracy. We call for “Bill of Rights” socialism, guaranteeing full individual freedoms.
Until we win enough support to change the system, communists call for radical reforms under capitalism. We call for nationalization of the banks, railroads, and industries like steel and auto. Everyone who wants to work should be guaranteed a job or get unemployment payments until she/he can find a job. We say put the unemployed to work at union wages on massive public works programs to rebuild our cities, provide affordable housing for the homeless, build mass transit, and clean up the environment!
Our outlook is based on the social science of Marxism-Leninism. We study history, politics and economics in order to change the world.
Is the Communist Party legal?
Yes. The right to belong to the Communist Party is protected by the U.S. Constitution’s guarantee of freedom of speech and freedom of expression.
But vigilance to protect these fundamental democratic rights of the American people has been needed throughout our nation’s history as corporate interests have repeatedly attempted to outlaw the Communist Party (along with other progressive groups such as trade unions, civil rights groups, etc.)
From the Palmer raids of the 1920s through the McCarthy witchhunts of the 40s and 50s, to today’s rabid radio talk show hosts, right wing politicians and corporate interests have never stopped trying to intimidate workers by making it seem that being a communist or favoring socialism and workers rights is illegal. Nevertheless, in recent years many states, counties, unions and other organizations continue to replace outdated anti-Communist clauses with more democratic and inclusive policies.
What is Marxism? How can I learn more?
Marxism is the system of ideas and practice developed by the great German scholar and revolutionary Karl Marx and his collaborator Friedrich Engels. Working in the late 1800s, a period of revolutionary social and scientific change, Marx and Engels brought together classical German philosophy, English political economy and French socialism to produce an integrated view of society. Marxism has served as a guide for working class and national liberation movements ever since.
Marxist ideas have been elaborated and modernized by other great revolutionaries such as Vladimir Lenin, Ho Chi Minh and Fidel Castro. The validity of Marxism has been repeatedly demonstrated by its role in guiding successful social struggles and revolutions in every part of the world. Marxism is not a rigid dogma, but relies on the scientific method to analyze and change society, so it is constantly developing and adapting as society itself changes.
Some of the best introductions to Marxism are the writings of Marx, Engels and Lenin themselves. The Communist Manifesto by Marx and Engels, should be on everyone’s must-read list. Lenin’s encyclopedia article “Karl Marx,” written in 1914, is an excellent brief description of Marx’s life and work. An even shorter article is “The Three Sources and Three Component Parts of Marxism.” Marx’s excellent histories, such as The Civil War in France, combine brilliant historical analysis with a deep sympathy for people’s struggles. Engels’ Socialism: Utopian and Scientific is a very readable explanation of Marxist socialist theory.
How does the Communist Party work?
Members of the Communist Party belong to clubs in their communities or workplaces. Some clubs are citywide or regional. In the club, members work together to support and initiate struggles for workers rights, peace, equality and justice. We give special emphasis to coalition building and working to strengthen our unions.
Most clubs meet monthly. Meetings include study and discussion of both current developments and long term strategy and tactics. Some members participate in discussions and activities through on-line clubs. In states where there are clusters of clubs they work cooperatively as a district.
Every four years, the party holds a national convention. Delegates elected from the clubs assess the current political situation, set policy and elect a national committee.
The Young Communist League, an independent organization, works alongside the Party at the local and national level.
The national headquarters of the party is located in New York City.
What has the Communist Party accomplished?
Founded in 1919, the Communist Party has helped win important changes in our country. Communists helped organize the great industrial unions including steel, meatpacking and auto. Communists were pioneers in the 1930s in the fight for Social Security, unemployment compensation, the 8-hour day and the 40-hour week. They took a lead in the fight against lynching and to save the Scottsboro Nine. Communists were among those who developed militant direct action tactics – such as the sit-down strikes that helped win unionization of the auto industry. At the height of the Great Depression communist neighborhood clubs organized mass unemployed councils that put back the furniture of evicted neighbors. In rural areas, communists organized to block bank auction of foreclosed farms.
Fighting Jim Crow, communists helped lay the groundwork for the Civil Rights movement of the 1960s. During the Spanish Civil War and in World War II, Communists volunteered to fight fascism. Many died in battle. In the Korean War and early days of the war in Vietnam, Communists were among the few who openly opposed the war. Their pioneering work helped build a huge peace movement.
In the labor movement of the 1970s , 80s and 90s communist workers along with other progressive rank and filers helped build caucuses to fight for more democracy, diversity and affirmative action and against “business unionism.”
In the 1970’s Communists led the movement to free Angela Davis continuing the party’s commitment to defend victims of political repression. We worked for peace and nuclear disarmament. Communists always focus on opposing the U.S. government’s role in supporting dictatorial regimes abroad, from apartheid in South Africa to the fascist dictator Pinochet in Chile.
Why does the Communist Party oppose violence?
Communists believe that social change can only be accomplished through the united action of mass movements which express the majority will of the people. Peaceful methods of change are not only the right thing to do, they are the most effective way to unite and mobilize the greatest majorities.
Violence, on the other hand, is a tool of the big corporations and the governments they control. To preserve their power, they use violence against workers’ and people’s movements.
In contrast, Communists seek to change society peacefully. We work to expand every democratic and electoral avenue as part of our fight for working class political and economic power.
Our party believes that it is possible to make fundamental transformations using the electoral process, the Constitution and especially the Bill of Rights.
What about the Communist Party and religion?
Communists are not against religion. We are against capitalism. In fact, the Party has its own Religion Commission which seeks to build positive relations with religious people and communities in the struggle to make life better for working people. Most religious people believe in justice, peace, and respectful relations among the peoples of the world, and many are motivated by their faith to work for those goals.
Membership in the Communist Party is open to all who agree with our program, regardless of religious beliefs.
What are the CPUSA views on the environment?
One of our main slogans is “People and Nature Before Profits.” We are for developing policy that provides for a sustainable economy and a sustainable ecology. Where possible, we participate in environmental movements, and recognize and work on the environmental aspects of struggles on the shop floor and in unions.
We oppose drilling in the Alaskan National Wildlife Refuge and we oppose the use of nuclear power until there is a safe way to dispose of waste (and if there is no safe way, don’t use nuclear power at all). We fight against subjecting workers to untested new chemical compounds with unknown health consequences, currently being introduced at the rate of 3,000 or 4,000 new compounds each year. We support the use of sustainable forest practices, which also are more labor intensive, creating new jobs and job retraining for laid-off lumber workers.
We seek to build unity between the environmental movement and other important movements: the labor, civil rights, women’s, youth, peace, and immigrant rights movements, to name a few.
To build a better world, we must have a world to build on. The greatest environmental threat is that of nuclear war. We are for complete disarmament and for the destruction of all nuclear weapons.
There was environmental damage in the former socialist countries. Some of that was due to their efforts at forced industrialization, which put the environmental dangers of such development low on their list of priorities. A related problem was that in adopting machinery and industrial processes from advanced capitalist countries, they unintentionally adopted the capitalist economic realities embedded in the machinery and processes. In other words, capitalist industrial development is based on not having to pay the costs for most of the waste products it generates. When socialist countries used that as a model to develop their own industry, they ended up with the same skewed industrial waste model.
They did this for several good reasons—to short cut the process of technological change, to quickly provide more goods for their citizens, to be able to compete with capitalist countries. However, unintentionally, adopting technological processes designed to function in capitalist reality, they brought in environmental problems that relied on the ability of industries to dump waste without paying the social and environmental costs. To adapt, rather than just adopt, major industrial processes will take more time.
Why does the Communist Party fight to expand democracy?
We believe that the broad participation of working people in every area of life is the gateway to a more just and humane future. Socialism offers the best environment for democracy to fully flourish because it sharply limits the power of corporations to dominate politics and the economy. Socialism’s democratic potential can only be realized, however, if broad sections of the people are wholeheartedly engaged in every aspect of society’s decision-making processes.
Under capitalism, the Communist Party USA fights to expand the limited democratic rights we now have. For example, we fight for the Employee Free Choice Act and the right of workers to join unions.
We are proud of our record against undemocratic laws that upheld racism, sexism, or other forms of discrimination. By standing up to the McCarthy witch hunts, Communists defended democracy. We call for abolition of torture, total reform of the prison system, and an end to the death penalty.
Communists see the struggle for democracy as empowering people, just as we see people empowering democracy.
Why is the working class at the heart of the communist program?
The working class and working people as a whole are the overwhelming majority of society. The working class creates everything that the world’s people need to survive and thrive – from food, housing, health care, energy, education to transportation, music and art. Because working people make the country go, they are also uniquely positioed to change the society. Workers, when united and working together with other oppressed people, have the power to change the world.
The Road to Socialism USA, the program of the Communist Party, is aimed guiding the struggle to eventually win political, economic and social power for working people so they can make sure that everyone fairly and equally enjoys the fruits of their labor. You can find out more in the Party Program.
Why is the fight against racism, sexism and oppression so important to the communists?
We make the fight for equality an important part of every struggle we fight. The Communist Party fights for full equality for people of all races, for women and men, straight people and LGBT, for speakers of all languages, for young people and older people, and for people of all religious beliefs or none. The U.S. working class includes millions of immigrant workers. We stand for full rights for these workers, regardless of their documentation status. We believe in equality because it is just and right. Even more, the fight for equality is key to uniting the working class into a powerful force for the changes we need.
Is the Communist Party USA part of an international movement?
Yes! We are internationalists. Capitalism is a global system of exploitation and oppression. We have relationships of solidarity with communist and workers parties in countries across the globe. We believe that the world working class, and those oppressed by capitalism in any form are natural allies. We work in solidarity with all movements around the world that struggle for independence, peace and economic and social justice.
We believe that the freedom and advancement of the American people is closely tied to the freedom and advancement of all working people and the oppressed around the world.
By Arthur Shaw
The National Electoral Council of Venezuela (CNE) reported that 6,465 candidates have registered to run in the elections in September, for 165 seats in the National Assembly.
VHeadline commentarist Arthur Shaw writes:
Wow! …6,465 candidates average out to something like 40 candidates per seat.
Does the excess of candidates help revolutionaries or counter-revolutionaries?
Will the excess of candidates dilute the revolutionary (PSUV) or the counter-revolutionary (that is, bourgeois-led opposition) vote?
The revolutionary tactic is to run only one candidate for each seat in the hope that the revolutionary sector of the working class will concentrate its votes for this single candidate and thus give the single revolutionary candidate the most votes and the victory. The revolutionaries pray that the counter-revolutionaries will adopt the opposite tactics, that is, the revolutionaries pray the reactionaries will run about 40 candidates for each seat and dilute the counter-revolutionary turn-out over a field of candidates, giving the revolutionaries the victory on a silver platter.
The data doesn’t let us say whether God or some other divine being answered the prayers of the revolutionaries for dilution of the counter-revolutionary vote because the excess of candidates may be interpreted in two ways … either a Venezuelan electoral peculiarity or a dilution.
Some Venezuelans, it seems, like to run for public office … their running has nothing to do with winning or losing. They only want to run. To accommodate these Venezuelans who like to run, Venezuelans organize and register hundreds of political parties so that a candidate can easily find a place on a ticket. Presently, there are about 700 parties … more than enough … registered with National Electoral Counci (CNE).
So, these 6,465 candidates may express this peculiarity of some Venezuelans for running … or … the 6,465 may be dilution.
The bourgeois media in Venezuela and the USA tell us that the opposition made deal for a unified campaign among its 40 parties. The terms of the deal were supposed to be that about 30 of the opposition’s 40 parties would not field candidates at all in order to improve the odds of opposition victory. That the 10 opposition parties that would field candidates would cut up among themselves the 87 electoral districts. And, a party entitled to run candidates would only field candidates in electoral districts assigned to the party.
Given the rumors of this deal for a unified opposition campaign in the bourgeois media, everybody was surprised when the opposition staged a farce called a primary election in April 2010 in which reactionary candidates sought the opposition’s nomination in only 15 of the 87 electoral districts. Only about 300,000 reactionary voters turned out for the opposition primary election. Two weeks later, the PSUV held its May 2010 primary election which attracted 2.6 million voters who nominated candidates in all 87 electoral districts.
So, the question seems to be whether most of the 6,465 candidates, who registered for 165 legislative seats up for grabs in September, are representatives of the opposition or mere expressions of electoral peculiarity that involve a mere love of running for office?
We cannot be sure but it sure seems that the 30 parties in the opposition that agreed not to run candidates are indeed running candidates either in the parties’ name or in the name some front group.
Again, we cannot be sure but it sure seems that the 10 parties entitled to run candidates, under the unified campaign deal, are running candidates in electoral districts assigned to them and, in violation, of the deal, running candidates in districts not assign to the party.
The tactics of the opposition are so confusing. It’s hard to make heads or tails out of them. The bourgeois media aren’t any help in understanding these tactics. Some people believe that not even the opposition understands what the opposition is doing or trying to do.
Let’s step back and try to get an overall picture of the September race.
There are 165 seats in the National Assembly up for grabs. The revolutionaries want to hold on to their two-thirds majority in seats, because a two-third majority is required to amend certain laws called organic laws. So, the revolutionaries got to win, at least, 109 of the 165 seats. The opposition is trying to get, at least, 57 of the 165 seats to prevent a two-thirds revolutionary majority. The 165 seats will be filled like this … 110 seats contested by individuals in 87 electoral districts, 52 seats contested by lists submitted by parties in the various states and 3 seats contested by indigenous candidates before the indigenous sector of the electorate. The counter-revolutionaries are expected to get their seats out the 110-seat group that are individually contested. Revolutionaries are believed to have an edge with 52 candidates chosen by proportional representation and the 3 indigenous candidate. To keep their two-thirds majority, the revolutionaries will have to get a good chunk of the seats in the 52-seat group filled by lists submitted by parties at the state level.
The 110 seats that are individually contested drew 5,245 of the total 6,465 candidates registered with the electoral council.
So, if the 40 parties which compose the opposition are welching on their rumored deal for a unified campaign, then the deal-breakers are part of 5,245 candidates seeking 110 seats available to candidates in their individual capacity.
Will the various counter-revolutionary candidates coordinate their campaigns against the single PSUV candidate or will the counter-revolutionary deal-breakers stab each other in back and spit on each other?
Logic suggests that the counter-revolutionaries are running as much against each other as against the single revolutionary candidate in the race. So, if one of the counter-revolutionaries in the pack pulls away from the pack in name recognition or candidate visibility, the pack is likely to stab him in back or, at least, spit on the frontrunner. The counter-revolutionary candidate who pulls down, tears up, and defaces more campaign materials of his counter-revolutionary opponents is the candidate who is most likely to emerge as the frontrunner in the pack. These were tactics that opposition candidates used in their poorly-attended April 2010 primary elections.
The opposition may be nonchalant about the candidate situation because the opposition isn’t doing candidate-based or driven campaign. The opposition may be doing an issue- or media-based campaign in which the central propaganda line of the bourgeois media is “The economy is breaking down.”
Of course, no “breakdown” is happening or about to happen.
In other words, the campaign isn’t about candidates, rather it’s about the alleged “breakdown.”
If this is what the opposition, the bourgeois media, and US imperialists are up to, then the revolutionaries in proletarian media and so-called “community” media just have show the electorate the many economic successes of the revolution, which the bourgeois media either never mentions or always denies.
Socialism is a transitional combination of capitalist and non-capitalist sectors of the economy. The capitalist sector in Venezuela is being sabotaged by capitalists in the hope of manipulating the September election. But the economy isn’t breaking down.
Indeed, the non-capitalist sector is flourishing.
Inflation in May 2.6% … first five months 14.2%
The Central Bank of Venezuela (BCV) and the National Statistics Institute (INE) have released the latest inflation figures. In May, inflation was 2.6%, which comes as a relief to the government after April’s disastrous 5.2% figure.
The total inflation for the first five months stands at 14.2%, which is 5.3 points more than it was for the same period in 2009.
The factors that helped bring down inflation in May were housing services (0.7%), rents (0.9%), clothes and shoes (1.1%), communications (1.2%), educational service (1.4%), health (2.1%), home equipment (2.2%).
Alcoholic beverages and tobacco were up 4.4%, along with transport 3.5%, restaurants and hotels 3.2%, non-alcoholic beverages and food stood at 3.3%.
The government’s readjustment of prices in May contributed to that month’s lower inflation rate.
By Arthur Shaw
More than 1,900 registered nurses at five Texas hospitals have voted to join National Nurses Organizing Committee-Texas (NNOC-Texas).
The NNOC is an affiliate of the 155,000-member National Nurses United (NNU).
The election wins by the nurses took place during the past two weeks, with the latest victory coming at the Valley Regional Medical Center in Brownsville. They join the registered nurses in Texas who chose to exercise their rights as US workers at work at four other Hospital Corporation of America (HCA) hospitals: Corpus Christi Medical Center in Corpus Christi, Del Sol Medical Center and Las Palmas Medical Center in El Paso, Rio Grande Regional Hospital in McAllen.
Only one private hospital in Texas has been previously unionized, Cypress Fairbanks in Houston, also a NNOC-Texas/NNU facility.
The relation between supply and demand for RNs in Texas favors the nurses and thus helps the NNOC labor organizing drive.
A study prepared for the 79Th Session of the Texas Legislature found that in 2010, Texas will have a demand for 180,000 NRs. But Texas will have a supply of only 150,000 RNs. So, Texas in 2010 will be short about 30,000 RNs. http://www.dshs.state.tx.us/chs/cnws/SB132PP.ppt#271,10,Part
Also significant is study conducted by the US Bureau of Labor Statistics which found Texas has only 676 RNs per 100,000 people while the USA average is 836 RNs per 100,000 people. So, Texas is about about 160 RNs short per 100,000 people.
So, in Texas, the demand for RNs exceeds the supply of RNs in 2010. So, the RNs in Texas are smart to make their organizing move now. And, the NNOC-Texas is also smart to jump in at this time.
By Prof. James Galbraith
The following is the text of Professor James K. Galbraith‘s written statement to members of the Senate Judiciary Committee delivered a few days ago. Professor Galbraith teaches at the University of Texas at Austin. Readers may be interested to know that he is the son the famed liberal Democrat economist John Kenneth Galbraith.
Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.
Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud.
There are exceptions. A famous 1993 article entitled “Looting: Bankruptcy for Profit,” by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.” The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.
Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a “license to steal.” In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.
The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found “fraud, abuse or missing documentation in virtually every file.” An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.
When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.
A third element in the toxic brew was a simulacrum of “insurance,” provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.
Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?
An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.
Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.
Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”
If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?
Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?
Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.
But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.
In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.