Sunday, December 21, 2008

Secrecy and Confidentiality

Crush the Infamy of Treasure Island

By John Taylor; 2008 Dec 21, 10 Masa'il 165 BE

I have been caught up in the bailout crisis and other economic news. I can think of little else these days. I want to share some of the results of my reading. I promised in this series to examine these two questions: How do we go from ignorance to knowledge in economic matters? and, "To what extent is our ignorance a matter of sin, a wilful affront to God, as opposed to a lack of technical know-how?" Judge for yourself how close I am getting to an answer.

Even in my casual literary reading, which has been some novels of Voltaire, I have been getting hints. Here is Voltaire, an 18th Century man that you would think would have nothing to say about current events. Yet I was surprised to come across a cynical quip about the very fellows who brought on the present economic disaster, though it is only attributed to Voltaire and may not be authentic:

"If you see a Swiss banker jumping out of a window, follow him, there is sure to be 10% profit in it."

This comment is spot on. If you see a banker, follow him all the way down because you can bet that he wrote the rules and he is on the way to a huge profit; only the little guy walking around on the sidewalk will be crushed. Not coincidentally, exactly that steady stream of ten percent a year is exactly what Bernard Madoff promised investors for decades, and delivered until a month ago when he turned himself in for what he admitted was a Ponzi Scheme on an unheard of scale.

It is now known that he stole some fifty billion dollars, three times more than the proposed bailout of the big three Detroit automakers. This was by far the longest lasting and most expensive in history, the first truly "world-class," world-embracing swindle. Madoff used the technique that every introductory informal logic class warns against: the old snob appeal come-on. "Our fund is closed," his agents would tell the stooge, "but I can get you in on the ground floor if you treat me well." The only consistent red flag was the complete secrecy in which the fund was wrapped; this cloak over the nature of his investments warned off a wary few. The others were taken in and fleeced.

Paul Krugman, who won the Nobel Prize for economics this year, warned in a recent editorial that Madoff is not an isolated case. This is no bad apple taken out of a barrel of good apples. Rather, the whole investment sector is a stinking, rotten barrel. The baneful influence of bankers and other investors is the heart of the Depression that threatens us all.

"The financial services industry has claimed an ever-growing share of the nations income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it is not just a matter of money: the vast riches achieved by those who managed other peoples money have had a corrupting effect on our society as a whole." (The Madoff Economy, New York Times, December 19, 2008,

Bankers' incomes are on average seven times more than the rest of the economy, and twenty million dollar bonuses are not unusual. "The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence." So much money comes their way that it bumps the statistics of the entire economy in their direction,

"We are talking about a lot of money here. In recent years the finance sector accounted for 8 percent of Americas G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing -- and it probably was -- we are talking about $400 billion a year in waste, fraud and abuse."

The difference between Madoff and the rest of the investment industry is that Madoff skipped a few steps, stealing money directly from his clients. The end result is the same all around, "the money managers got rich; the investors saw their money disappear." "Legitimate" money managers walk off with multi-million dollar bonuses no matter what, even if they ruin their clients and the company they work for. In spite of the dubiousness of their contribution their prestige is actually enhanced by their huge pay checks.

"There is an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they are doing."

As the Bible says, money -- and the love of money -- is the root of all evil. If that is so, then love of those who bring in great amounts of money is surely the trunk and branch of all evil.

With such an ocean of easy money at their disposal, these fat cats were in a perfect position do more damage than just offering a bad example to the world. They used their funds to actively corrupt the political process, most notably making the SEC, the former watchdog into a slobbering lapdog. They propagated the specious appeal of Milton Friedman's philosophy of extreme freedom one greased palm at a time. This, Krugman points out, corrupted not only American culture but its talent pool, since the "magnetic pull of quick personal wealth ... for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else..."

This the Book of Proverbs calls "whoring and wickedness." What Madoff's agents called it was a "black box." In other words, complete secrecy. Let me share a personal anecdote about secrecy riding on the back of confidentiality.

In October a representative of my bank called me up and told me that my credit card had been "compromised" and they were issuing a new one to me. I asked what business or other agency had done the compromising, and was informed that that is confidential information. So what am I supposed to do with my new credit card number, give it to the same parties who had it before? One or more of them may be a crook, and I have no way of knowing which one. This is something my father used to tell me through the years: companies and corporations have more rights and protections than individuals do. If I steal a box of matches I will be summarily arrested and have no right of privacy. But if a company commits a crime, or even is a victim of a crime, confidentiality is assured. If I steal fifty billion dollars on behalf of a corporation, though, the only way I will be caught is if I openly admit it to my sons, and they turn me in to the authorities, as happened to Bernie Madoff.

Secrecy is key. Black boxes are the problem.

I have been reading the Book of Proverbs with our kids in our daily study session. The force and severity of the language in there is surprising -- not to say shocking -- to the kids, as well as myself. Wisdom personified rails against the "stupid" people attracted to religious cults using prostitutes to spread a secret doctrine wrapped in hidden ritual. It makes you think. The good thing about modern monotheistic religions is that they are not cultish, they do not have secret beliefs and practices. Everything is more or less open to examination. Such is not the case with modern finance.

Secrecy is extremely dangerous. It should be eliminated as much as possible everywhere it turns up. Andrew Carnegie called what we should do having "glass pockets," complete transparency in all income and spending, having all accessible to public scrutiny in order to minimize wrongdoing. Plato explained why with his story of the "Ring of Gyges," a magic ring that gives total confidentiality by making its bearer invisible. This, he points out, is a sore temptation to commit wrongs.

The Qur'an also talks of an opposition between usury, living on unearned money, interest, and living in the light, being "well-grounded in knowledge,

"That they took usury, though they were forbidden; and that they devoured men's substance wrongfully;- we have prepared for those among them who reject faith a grievous punishment. But those among them who are well-grounded in knowledge, and the believers ... To them shall We soon give a great reward." (Qur'an 4:160-162, Shakir)

Salvation, then, depends on glass pockets, knowing where your money comes from. Whatever covers over inevitably hides dark deeds, incompetence, apathy, crime and injustice. There is a good reason that open software is proving not only cheaper but more bug-free and robust than the commercial variety. Many eyes and a bright light make everything safer.

On the geopolitical scale, it is hard to underestimate the evil influence of secrecy. Secrecy -- in the form of "off-shore" banking, or tax havens, seems to be the main reason that world government has not been considered over the past century. Having many weak governments competing with one another rather than one strong government for all leaves many dark holes in which criminality and money for nothing can thrive. The old world order is an extremely lucrative place for those who do not lose sleep over how dirty their income is. According to a recent article in the Globe and Mail,

"Nearly one-third of wealth kept abroad globally is in Swiss banks: the Swiss Bankers Association and consultants estimate this at $2.2-trillion (U.S.), making the Alpine state the globe's biggest offshore centre ahead of Britain and Luxembourg." <>

A recent article by George Monbiot called "Pin-Striped Pirates" describes the addiction of Great Britain to hot money, and the contribution it has made to its perpetuation. He links this to the recent activity of pirates off the shores of Somalia. He points out that a quarter of the world's tax havens are colonies of England. "The obvious conclusion is that Britain retains these colonies for one purpose: to help banks, corporations and the ultra-rich to avoid tax." England, dependent on this hot money, then blocks any attempt at reforming the international monetary system. And the cause of it all is tight secrecy.

"Because of the secrecy surrounding the treasure islands (legal banking tax havens), no one knows how much money they divert from developing countries. Christian Aids estimate  of $160 billion a year  is the lowest figure, though 60% greater than the international aid the poor world receives. The Pope suggests $255bn; the US research group Global Financial Integrity proposes $900bn. In all cases we are talking about the means by which hundreds of thousands of lives could have been preserved in the world's poorest countries. But Britain's network of tax havens permits multinational companies, dodgy businessmen and corrupt leaders to snatch money from the poor." (Pin-Striped Pirates, Why does the UK retain a handful of colonies? To destroy the world's taxation systems," Guardian, December 16, 2008,

In the worst news of all for those who hope for change, President elect Obama has appointed one of the bankers to oversee the present bailouts, which also are veiled in total secrecy. Billions of dollars in rescue money, none of it accountable, none open to public scrutiny. Here are Naomi Klien's latest comments on how they retain a cloak over all they do, in spite of massive inflow of public money.

"One thing we know for certain is that the market will react violently to any signal that there is a new sheriff in town who will impose serious regulation, invest in people and cut off the free money for corporations. In short, the markets can be relied on to vote in precisely the opposite way that Americans have just voted. (A recent USA Today/Gallup poll found that 60 percent of Americans strongly favor "stricter regulations on financial institutions," while just 21 percent support aid to financial companies.)  When transferring power from a functional, trustworthy regime, everyone favors a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign." (In Praise of a Rocky Transition by Naomi Klein, The Nation, December 1, 2008 <>)

I may talk more about dark financial secrecy in future instalments of this series.
John Taylor


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