Capitol Hill Demagogues

I feel that the senate committee grilling of Goldman Sachs employees including CEO Lloyd Blankfein represents an important historical event. Defending Goldman Sachs from the likes of Senator Carl Levin of Michigan is perhaps a difficult challenge, but represents an excellent opportunity to expose a variety of fallacies used by the demagogues on capital hill to advance their socialist agenda. I am not an expert on trading, but based on what I saw my understanding of the financial markets is a bit better than that of the senate committee members questioning Lloyd Blankfein. Either that or the committee members were manipulating people who may not know the ins and outs of the financial markets.

I want to keep this article a bit short and focus on the clear areas of false reasoning used by the committee members. I want to focus on places where they either knew or should have known that they were manipulating passions, prejudices, and misunderstanding to achieve their goal: ironically accusing Goldman executives of fraud. This of course so that they can increase the perverse grip Washington has on our once free nation. Controlling the financial market key players is critical to their agenda.

The timing of the SEC allegations against Goldman Sachs coincidentally matches a key point in the senate agenda: The pushing through of regulations concerning the financial industry. Striking is the apparent possibility that the SEC does not have a legitimate case. Even Bill Clinton admitted that the case is probably without merit. This, however, appeared irrelevant to the committee members who went after Goldman on perceived ethical issues. The lack of ethics was, however, most evident in the Senators own attempts at manipulations. It was apparent that the whole proceeding was nothing more than a scheme to develop popular support for the new proposed financial industry regulations.

I myself, understanding a bit about the complexity of the markets, was surprised that the senators could not come up with something better against Goldman. Considering the magnitude of the transactions that the company engages in and the time period considered it is actually quite amazing that they could not get something better. Everything that executives at Goldman Sachs were accused of was perfectly typical of the industry, in other words, standard behavior. Now some may consider that as a good reason to regulate the industry. That is another issue to consider, but it is more than a bit unfair to be accusing Goldman Sachs of following standard industry practices that were not illegal. Let me proceed by getting to some of the basics of the demagogic reasoning involved. I say basics because some of the Senators manipulations were quite sophisticated. Perhaps I may just list a few things. I am going to keep it simple and clear as that should serve best to make my point.

The first fallacy might have something to do with displacing blame from the real culprit to another person or entity. The Senators and Senator Carl Levin in particular attacked Goldman Sachs over its supposed role in the financial melt down. This is quite ironic as it is the government that caused the financial melt down, not the capital markets. Depending on your political views right, left, center you may or may not agree completely with me on the last statement. But even a left winger should see that the government had some blame in this mess. Let me mention a few key points on that.

First, the government encouraged the origin of bad loans and backed them through its agencies Fannie May and Freddie Mac. Second, the government through its poor fiscal policy has caused our society to become so poor that increasing numbers of people cannot afford houses anymore. This is key and almost always overlooked. Countries with irresponsible fiscal policy become poor. (Look at Greece, Spain, or most countries in Central, and South America.) Socialist countries become poor. (Look at China under Mao, Russia, Laos, North Korea, Vietnam, and every socialist country ever. Note: some poorer than others depending on the degree of socialism, but all poorer than what they would have been.) Societies that tax and spend become poor. The historic increase regulations and income redistribution is why Americans can't afford houses and that's why people are defaulting on bad loans, loans that the government encouraged banks to make out of liberal minded social policy. People in government including Senator Carl Levin have tried to create equality by encouraging bad loans. The real moral and ethical blame for the housing crisis rests with the government, with Senator Carl Levin and his cohorts.

The next fallacy is that Goldman was to blame because it sold short securities that it also sold long. This is an absurd almost third grade fallacy based on a completely mistaken view of the financial markets and how they operate. Even an individual trader might hold a long and a short position (at the same time). This can happen for a variety of reasons. Maybe the time frame, maybe risk management, maybe the type of risk and so on. A company like Goldman with millions of transactions was bound to be any position and all simultaneously.

The next demagogic fallacy is that going short is unethical. Every trade has a long and a short, a buyer and a seller. Selling securities in this instance was the SAME as shorting them. As Lloyd Blankfein said they could have sold more than they did to their, I might add: sophisticated client, and ended up short! Traders in the great depression were blamed for shorting the market. The fact is it is short selling that plays a HIGHLY ethical role in our markets. It stops bubbles from being created. It keeps bad companies shares from going up too much. Had it been easier to trade in the housing market short sellers may have been able to control the bubble sooner. Instead it may soon become more difficult to trade in the markets due to proposed regulations. Further the government surely will try to tax trades discouraging the very activity that balances the markets and prevents bubbles and meltdowns. If the Democrats succeed watch for the markets to become more volatile and for US financial firms to be replaced by those overseas.

The next instance of demagogic reasoning is that Goldman knew about the financial crisis by advance and profited from it. This is demonstrably false. Their profit was a minimal 500 million out of positions totaling more than ten billion. Had Goldman or anyone known about this they could have become endlessly wealthy.

No one knew how far the banks were going to decline in value. It is the essence of the markets that no on knows. That's why securities sell at market value. Goldman did not know, but Senator Carl Levin somehow thought they did. Only because he is so busy taking money from business to give to his constituents that he has to blame them for something. Why didn't Levin know? Why didn't he do something to prevent the crisis instead of everything to create it? Anyway it's a fallacy because had executives at Goldman Sachs known it would have been a good thing. Had Goldman Sachs bet and bet big against the housing market then this would have brought the market into alignment sooner which is better than later. It's all part of the Marxist fallacy to blame those who make money for those who don't.

The next instance of demagoguery is that Goldman should apologize or accept blame for this or that. Why is it everyone always has to do this except the self righteous bigots on capital hill? Have they ever apologized for anything? Everyone needs to stop apologizing to these fools until they start doing so. However, Lloyd Blankfein did accept blame appropriately for the role of is company. It is my consistent belief that America has an elite of self rightous bigots that like to blame people, but the people they blame are more ethical than they are in nearly every instance.

Next, As I watched the testimony I listened to Senator Carl Levin mention several times about money given from Washington to Goldman Sachs. Later I found out it was paid back and at 23% interest. Levin is quite a misleading character indeed. He continually refused to allow Blankfein explain anything. I am not sure if he has a misunderstanding of the markets or if he was trying to manipulate others, probably both. Anyway the fallacy here is that the government should not be giving out money in the first place. Using that as a reason to justify more regulations is quite circular indeed.

I suppose I could find more examples, but for now I want to get this article up. I tried to not get technical. What is my advice on regulation? Simple: let's keep the government out except to make sure fraud does not occur. To that end full disclosure should apply to what is being sold. The industry may need some regulation to prevent fraud and to increase disclosure, but that is not what is coming. What is coming is an attempt to control the industry by those most guilty of the financial crisis: corrupt senators in Washington. Watch as the industry allows it. Big companies always benefit relative to smaller ones as socialism advances. That is regulations put the small companies out first. What is left is a corrupt fascist regime of industry and government. Unfortunately most Americans cannot understand these processes and are subject to the manipulations of demagogues like Senator Carl Levin.