Into The Grey Zone The future is always a grey zone, never black and white.

Over at Calculated Risk, I was recently compelled to respond to a story about homelessness. I like Calculated Risk. I really do. But I feel that its author ignores one of the key aspects of this entire recession - fraud. My comment that I left there is below the fold, reproduced here since I'm not sure the blog owner will allow it to stand.

lawyerliz said: "So why exactly did Argentina come to this? I never paid attention to it."

A good question might be why wasn't Argentina allowed to complete its prosecutions of Citigroup, BOA, JP Morgan, and other US financial institutions that were indicted on charges of money laundering? This leads to another issue...

One of the things that strikes me about Calculated Risk is its aversion to discussing "The Bezzle". That's a term that has been popularized by Karl Denninger and a few other financial bloggers but they didn't invent it. John Kenneth Galbraith did.

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle. It also varies in size with the business cycle." -- Extracts from "The Great Crash: 1929", John Kenneth Galbraith

One of the leading regulators from the S&L crash has commented recently that never, not one single time, did they go into a bank that was insolvent and not find some form of fraud at work during that crisis. What are the odds that all of these institutions today that are insolvent are all of clean hands? What are the odds, really?

Calculated Risk seems to have an aversion to discussing the very crimes that form the basis of this recession. Calculated Risk does some top notch data analysis but failing to put that information into context, failing to identify indications of probable fraud, means that the value of Calculated RIsk is greatly diminished. In fact, Calculated Risk calling for a resumption of the old spending patterns seems totally ignorant of and complicit in wanting the old system (full of corruption that it may be) to continue. But this is not an inventory led recession. It's a credit based recession, due to extending too much credit, just like the Great Depression. Too much credit, fraudulently allowed and now come back to haunt the very banks that made those loans.

Stories like this one about homelessness simply appear on this blog with no analysis where reams of analysis get spent trying to prove that we're on the verge of a turn in the recession. Pray tell how we'll have any turn in this recession when none of the fraudsters have yet been prosecuted and gone to jail? During the much smaller S&L crisis, thousands of financiers went to jail and quite rightfully so. Enron execs went to jail. Yet Citigroup, BOA, AIG, and others are simply going to be allowed to walk and everything is going to get better?

You can't have a recovery when the middle class is being consumed by criminals. Root out the criminals first, and then you can have a recovery. All we can do now is blow another bubble. So if things look like they are turning around with no convictions, find the bubble. It won't be real economic activity. Instead, it will be more of the same - fraud, built in a culture of fraud.

It's a pity that a great blog like Calculated Risk does not seem to recognize this.