If I have agreed with President Bush on anything, it was his avowed intention to strengthen our economy by restoring trust in its systems.  He signed the Sarbanes-Oxley act in 2002 (after the Enron and Worldcom frauds) to enforce some level of responsibility on high-level corporate leader.  The intent was to restore damaged public trust in company 401(k) shared contribution retirement plans.  Indeed, it is the damage done to that public trust that has made it so difficult for the President to "sell" his plan to allow investments (into the private sector of the economy) of our Social Security taxes.  

This week, the Supreme Court overturned the conviction of the accounting firm Arthur Anderson, which was convicted (in 2002) of complicity with Enron officials in defrauding investors, many of whom were investors in 401(k) retirement plans.

This week also saw the resignation of President Bush's personal choice to head the Securities and Exchange Commission, William Donaldson.  (Donaldson assumed that post, also, in 2002).  Donaldson shocked big business by being tough, hitting hard, and playing straight.  He acted in the public interest, not as an instrument of big business, and they hated him for it.

These two events were not just blows to President Bush's plans to increase accountability and responsibility (and, commensurately, trust) in our financial sector.   These are serious setbacks to attempts to strengthen the systems of trust that are essential to our economy.  Who do you trust now?  More or fewer institutions and corporations than you did a year ago?

Trust.  It may prove to be a serious vulnerability.  

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From the financial e-newsletter The Daily Reckoning, which is published by the authors of the NY Times bestseller Financial Reckoning Day:

[Emphasis is mine -- CAulds]

"My tax guy has been bugging me... You know, real estate is where it is at."  NBC quoted a young woman who had bought a second home at a Colorado resort.  According to the report, more than a third of the houses sold in the last 12 months were not primary residences, but second homes or investments.

We had been thinking about the way societies really work.

"Given the very small number and insignificant presence of imperial agents and municipal officials to insure obedience to the state," explains Ramsay MacMullen in his "Decline of Rome and the Corruption of Power," " millionaires, magnates, and other local notables of all sorts must have cooperated, and from their own free will."  It doesn't matter whether you call a political society "free" or a "democracy," or a "dictatorship" or an "empire," it always involves a great amount of collusion and cooperation on the part of the population.

"[Imperial] administrators occupied only a minor place in the system.  The emperor had only a handful of agents, whose means of reaching the people were few and rudimentary.  The police were practically nonexistent.  There were neither social workers nor prosecutors," MacMullen continues.

The people who actually ran things "had no official function, or if they had one, they had no need of it to make themselves heard.  A huge number of decisions were taken each day, and throughout the empire, that conformed to their own desires more than to the law, the emperor, or his representatives.  What's more, these decisions were those that counted, those that concerned property, movement, career choices, success on the farm, commerce or banking; sometimes even a person's physical safety."

In business, as in empire, vast, complex, informal systems work largely on the basis of trust.  People trust others to do more or less what they expect.  The emperor could no more control what was done in Judea or Gaule than we can control what goes into our hamburgers.  Still, we trust there is nothing too unsavory in it.  In the empire, generally, through an extended fabric of personal connections, family ties, official functions, traditions, habits and accepted ideas and procedures, what happened was more or less what everyone expected.  The emperor trusted not only his own functionaries to do what they were supposed to do, but also the local big shots with no official post or authority.  The lowest slave responded to his overseer, who responded to his master, who responded to his patron, who responded to his potentiores, consuls, proconsuls, proteuntes, praetors, quaestors and so forth on up the chain of command to the emperor himself.

America's empire of debt, on the other hand, is built not so much as a pyramid of trust and authority, but as a structure of fraud and misapprehension.

Down at the bottom, are imperial agents spreading deceit and misinformation - such as the aforementioned "tax guy."  You'd think a young woman could trust her tax advisor to give her sound counsel.  Instead, he tells the poor rube to get into the most bubbly property market in American history.  Naturally, she took the bait, aided no doubt by a whole industry of professional dissemblers.  Press reports tell us that appraisers routinely stretch valuations in order to help close a deal.  Mortgage lenders know perfectly well the appraisals are lies, but they wink at them with one eye...while winking at the borrower's phony income declaration with the other.  Again, according to the press reports, lenders no longer verify income claims.

In California, house prices have raced so far ahead of incomes that barely one in ten buyers can afford the median house.  Yet thanks to "creative finance" more houses are sold than ever before.

Thus is the foundation of the debt pyramid laid down in a bed of mutual deceit. Upon it, comes another level of fabrications.  Lenders do not stick around to see how the loans work out.  Instead, they pretend the credits are good, and package the mortgages into convenient units so that 'investors' can buy them.  The financiers know damned well that many buyers can't really afford to pay for the houses they buy, but they see no point in mentioning it.  Nor do the investors want to know.  They're in on the scam too.  The smartest of them even have figured out how it works:  the Fed holds down short-term rates below the inflation rate...so that investors in long-term mortgage financing, and buyers of U.S. Treasury obligations, can make an easy profit.

Further up the feeding chain of imperial debt are a whole legions of analysts, economists, and full-time obfuscators whose role is to make us all believe six impossible things before breakfast and a dozen more before dinner.  We have already explained, in detail, how the economists at the Bureau of Labor Statistics did to numbers what guards at Guantanamo did to prisoners.  They roughed them up so badly, they were ready to say anything.  We found out yesterday, for example, that productivity is increasing at a 2.9% rate - the fastest pace in nine months.

Productivity is supposed to measure output per unit of time.  But a simple trick has bent the yardstick.  The statisticians are allowed to adjust output to "quality enhancements."  If a computer this year can process information ten times as fast as the last one, the worker who assembled it has multiplied his output 1000%.   This abuse of statistics is what allows Americans to deceive themselves about their own economy.  It is healthy, they say.  It is growing.  It is stable.  All these "facts" are little more than elaborate prevarications.

Economists, commentators and policy makers take up these distortions and add their own twists.  It is obvious to anyone who bothers to think about it that an economy that spends more than it earns is in decline.  But try to find an economist willing to say so!  They've all become like rich notables in the time of Trajan, doing the emperor's work whether they are on his payroll or not.  They will tell you the economy is 'expanding,' but it is an expansion similar to what happens when a man escapes from a fat farm.  The longer he keeps expanding, the harder it will be for him to get around.

On the issue of the trade deficit they will say what the Senators and Consuls want to hear, as Levey and Brown did in "Foreign Affairs" magazine, when they said, "The United States' current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon."  In fact, the story of international trade circa 2005 is the most preposterous tale economists ever heard.  One nation buys things it cannot afford and doesn't need with money it doesn't have.  Another sells on credit to people who already cannot pay...and builds more factories to increase output.

Every level colludes with every other level to keep the flimflam going.  On the banks of the Potomac, people of all classes, rank and station are pleased to believe that all is well.  And there, at the Federal Reserve headquarters, is another group of loyal dissemblers.  Alan Greenspan and his fellow connivers not only urge citizens to mortgage their houses, buy SUVs, and other acts of wanton recklessness, they also control the nation's money and make that it too plays along with the fraud.  They do not even have to "clip" the precious metal out of the imperial coins; there is none in it already!

From the center to the furthest garrisons on the periphery, from the lowest rank to the highest - everyone, everywhere willingly, happily and proudly participates in one of the greatest deceits of all time.  At the bottom of the empire are wage slaves squandering borrowed money on imported doodads.  The plebes gamble on Adjustable Rate Mortgages.  The patricians gamble on hedge funds that speculate on huge swaths of mortgage debt.  Near the top are Fed economists urging them to do it!  And at the very pinnacle is a chief executive, who cuts taxes while actually increasing spending on bread, circuses and peripheral wars.  (It might add that some of the biggest whoppers in the history of warfare were told to the American lumpenpublic in an effort to stir up support for the war against Iraq...but it hardly seems worth mentioning it.)  

http://www.dailyreckoning.com/Issues/2005/DR060305.html