Insurance. Or not.

If you have ever wanted to see what a scandal looks like before it comes crashing down, check out the budding Russian insurance industry. Standard & Poor's released last week an interview between an Associate Director of their Financial Services Team and a Russia-based Senior Insurance Analyst.

The video clip, entitled Russian Insurance: High Country Risk and Frail Market Framework is instructive. It describes an insurance sector in Russia that is growing rapidly—faster than GDP growth—in a market where insurance penetration is one-tenth the norm in Europe.

But it is the details that are interesting. Russian insurers are facing high country risk is the theme. The industry is not profitable, largely because 40% of premium costs are paid out to agents and brokers. The industry, the analyst goes on, is highly concentrated and therefore there is significant price competition—note that this is not an inherently logical statement, as high concentration generally offers greater pricing control, but be that as it may.

And at the end of the day, the high up-front costs, coupled with price pressures create an industry that has very low capitalization. And this is a risk for the industry. This is the conclusion of the report.

S&P, along with its brethren bond rating agencies, are struggling to maintain their independence and freedom from federal oversight domestically, even as they are—as illustrated by this video—working diligently to expand their franchises into new, international markets. Their franchise is about independent analysis in the interest of the investing public.

This report has all of the attributes of a dispassionate industry analysis, from which industry participants or investors might glean valuable insights. The report suggests that this might be a good time to become an insurance broker or agent. Or perhaps pursue a roll-up to gain greater price control. Or perhaps simply to short the stocks of Russian insurance companies before some insured event wipes them out.

But somehow, on the heals of a financial disaster in which the rating agencies were implicated for ignoring key risks that would have broad public repercussions, they seem to be falling into the same pattern here. The key conclusion of this report by S&P—that the industry is undercapitalized and is not taking prudent steps to build capital and set aside risk reserves—is eerily familiar. The collapse of AIG, and indeed the entire credit default swap market, was characterized by the under pricing of risk, while participants took out huge "profits" on the front end.

Yet nowhere do either of the representatives of S&P suggest that the Russian insurance sector shares these attributes. This report seems to miss—or simply ignore—this salient point that seems to be a valid conclusion of the Russian industry as they describe it: That the sale of insurance without the careful construction of actuarial risk reserve is a business that borders on fraud. And with 40% paid out up front, it might be a lucrative fraud at that.

Chumps.

This week, four years after the collapse of Bear Stearns, the two hedge fund managers who helped bring about its demise, Ralph Cioffi and Matthew Tannin, agreed to pay $1 million to settle a civil suit brought by the Securities and Exchange Commission. No doubt Cioffi and Tannin made many, many times the amount of their pending restitution during those heady years before the 2008 collapse, and even the presiding U.S. District Court Judge Frederick Block suggested that the settlement amounted to “chump change.” But chump change was the bid on the table, and it looks like the SEC will take what it can get. And as has become customary in these arrangements, Cioffi and Tannin will walk away without any admission of wrongdoing.

The world of finance is indeed a rigged game. As the world of finance came crashing down four years ago, aggregate losses on Wall Street and in the banking sector totaled in the trillions, exceeding the combined profitability of the industry over the previous century. That the Fed made over $7 trillion available to restore our financial system, as tabulated by Bloomberg, was only made more obscene by the fact that billions were restored to the balance sheets of our banks—including Goldman and Morgan Stanley who essentially became banks just so they could benefit from Fed largesse—filtered through a risk-free carry trade from which massive bonuses were deducted before flowing to bank capital accounts.

Americans are not stupid. They know a rigged game when they see it. But if the past four years have proven nothing else, it is that the tightly interwoven relationship between Washington and Wall Street has survived the collapse as strong as ever. From the outset of the crisis—when the banks succeeded in stonewalling the sale of toxic assets and instead got the public dollars for free—the major banks have succeeded at almost every turn in defending their interests. Four years later, the industry is more concentrated than ever, trillions of dollars of derivatives trading remains opaque and the industry culture of privatized profits and socialized risk has been codified into law.

Like the Cioffi-Tannin case, last week’s “settlement” with mortgage brokers, whose patent fraud contributed to the housing bubble and ensuing collapse, was embarrassing—whether one believes it was supposed to constitute compensation for damages, restitution for conduct, or deterrence against future abuse. That settlement, approved by 49 participating states' attorneys general, was one more example of a resurgent finance industry that has walked away largely unscathed from the havoc it wrought.

Late last year, another U.S. District Judge, Jed Rakoff, stood up for the dignity of society—someone had to—when he rejected a Securities and Exchange Commission settlement with Citigroup. It was one of those many cases floating around these days where one of our leading banks sold bundles of mortgage-backed securities to investors, while secretly betting against those same securities. Rakoff rejected the proposed settlement as “pocket change,” and “neither fair, nor reasonable, nor adequate, nor in the public interest.” But the real source of Rakoff’s wrath, like Block’s this week, was that the Citi settlement included no admission of wrongdoing.

And so the game goes on. No one admits to any wrongdoing, and four years later almost nothing has changed.

Last month, the Brits demonstrated the old school way of handling these matters when Sir Fred Goodwin, the head of British banking giant Royal Bank of Scotland was stripped of his knighthood by the Queen. Sir Fred—now just Fred—led RBS from the pinnacle of success—it was the largest bank in the world for a time prior to the 2008 collapse—to total collapse, and an ensuing bailout by the British government.

The Queen's action to restore the honor of the realm came upon the advice of a secretive Whitehall star chamber “responsible for maintaining the integrity of the honors system” after Goodwin and the RBS board were collectively exculpated of any responsibility for the collapse by British bank regulators. To put the gravity of de-knighting in context, others who have been similarly judged to have “brought the honours system into disrepute” and shared Fred's fate include the famous British mole Anthony Blunt and dictators Nicolae Ceausescu and Robert Mugabe.

We, of course, have no queen, no honor system, and certainly no humility among our financial titans.

This week, our finance industry is on the attack again. The industry target now is the Volcker rule—the proposed rule that would limit the ability of banks to trade for their own account. Leading the attack has been JPMorgan CEO Jamie Dimon, who has turned to thinly veiled derision of Paul Volcker, as Dimon continues to make the case for scale and opacity in banking.

For his part, Paul Volcker views the eponymous rule is a political compromise at best, as he has long advocated a return to the Glass-Steagall restrictions that would fully segregate commercial and investment banking. And for good reason. Concentration and risk in the banking system has grown steadily since Clinton-era deregulation, and only increased since 2008. Today, the four largest U.S. banks hold over 50% of the assets of the banking system and the four banks most active in the largely unregulated and opaque derivatives market hold 94% of the $250 trillion volume of financial derivatives in the U.S. banking system.

Since the financial collapse, the industry has won nearly every round as it has sought to protect its privileges and power. While many might complain about the dizzying complexity of Dodd-Frank legislation, the truth is that the industry beat back the most substantive restrictions on derivatives trading as well as any constraints on size or leverage. If it can minimize the effect of the Volcker rule, the industry will have protected the two greatest sources of profitability for the big banks—derivatives and proprietary trading—despite those being the greatest sources of risk to the public and the farthest away from the public purpose of the banking system.

This Friday, in an assault on the Volcker rule that might on the surface seem to have been in support of Dimon, the Wall Street Journal editorial board ultimately made the case instead for breaking up the large banks. The Journal editorial rightly argued that Dodd-Frank promotes the illusion that an increasingly complex regulatory apparatus can prevent systemic failure. It is simply not reasonable to imagine that regulators can begin to track and monitor, much less regulate, the complex risks embedded on bank balance sheets—hidden away in collateral rules, language arbitrage and collateral valuation.

While the Journal rails against the extent to which the banking industry problem stem from monetary policy and Congressional meddling, in its penultimate paragraph, the Journal concludes that a real solution requires "a Congressional plan either for allowing large banks to fail or for breaking them up."

But too-big-to-fail is a product of the size and systemic importance of banks such as JPMorgan. This is not a question of Dodd-Frank or public disdain for bailouts. It is simply the truth. Given that truth, the remaining option, as the wisdom of the Journal editorial board suggests, is that the banks should be broken up. Then, perhaps, the Volcker rule, as half-baked and problematic as Jamie Dimon insists it is, would not be necessary, and once again we can have a banking system that serves the public interest, instead of the other way around.

The Apple-Foxconn affair.

Apple aficionados suffered a blow a couple of weeks ago. All of those beautiful products, it turns out, are the product of an industrial complex that is nothing if not one step removed from slave labor.

But of course there is nothing new here. Walmart has long prospered as a company that found ways to drive down the cost of stuff that Americans want. And China has long been the place where companies to go to drive down cost.

For several decades, dating back to the post World War II years, relatively unfettered access to the American consumer has been the means for pulling Asian workers out of deep poverty. Japan emerged as an industrial colossus under the tutelage of Edward Deming. The Asian tigers came next. Vietnam and Sri Lanka have nibbled around the edges, while China embraced the export-led economic development model under Deng Xiaoping.

While Apple users have been beating their breasts over the revelations of labor conditions and suicides that sullied their glass screens, the truth is that Foxconn is just the most recent incarnation of outsourced manufacturing plants—textiles and Nike shoes come to mind—where working conditions are below American standards.

While the Apple-Foxcomm story has focused attention on the plight of workers living in dormitories who can be summoned to their work stations in a manner of minutes, the story has also become part of the debate about whether the U.S. should seek to bring back manufacturing jobs or should instead accept the conclusions reached by some economists that not only does America not need manufacturing jobs, but it can no longer expect to have them.

Nobel laureate Joseph Stiglitz argued recently that our difficulties recovering from the 2008 collapse are a function of our migration from a manufacturing to a service economy. While this migration has been ongoing for years, Stiglitz has concluded that the trend is irreversible. His historical metaphor is the Great Depression, which he suggests was prolonged because the nation was in the midst of a permanent transition from an agrarian economy to manufacturing, as a revolution in farm productivity required a large segment of the labor force to leave the farm.

The problem with this deterministic conclusion that America can no longer support a manufacturing sector is that it seems to ignore the facts surrounding the decline that we have experienced. In his recent article, Stiglitz notes that at the beginning of the Great Depression, one-fifth of all Americans worked on farms, while today “2 percent of Americans produce more food than we can consume.” This is a stark contrast with trends in the U.S. manufacturing sector. Manufacturing employment, which approximated 18.7 million in 1980 has declined by 37%, or 7 million jobs, in the ensuing years. However, the increase in labor productivity over that timeframe—8% in real terms—explains little of the decline. Unlike the comparison with agriculture, where we continue to produce more than we consume, most of the decline in manufacturing jobs correlated with the steady increase in our imports of manufactured goods and our steadily growing merchandise trade deficit.

The chart below, based on data from the Bureau of Economic Analysis, illustrates the growth in personal spending on manufactured goods in the United States over the past three decades, and the parallel growth in the share of that spending that is on imported goods. These changes happened over a fifty-year period. Going back to the 1960s, we imported about 10% of the stuff we buy. By the end of the 1970s—a period of significant declines in core industries such as steel and automobiles—this number grew to over 25%. As illustrated here, the trend continued to the current day, and we now import around 60% of the stuff we buy.

Over the same timeframe, as illustrated below, the merchandise trade deficit—the value of goods we import less the value we export—exploded. By the time of the 2008 collapse, the trade deficit in manufactured goods translated into 3.5 million “lost” jobs, if one applies a constant metric of labor productivity to the value of that trade deficit.

This is where Stiglitz’ comparison with the Depression era migration from an agrarian economy breaks down. As he duly notes, the economics of food production has changed, and today America’s agricultural sector feeds the nation and sustains a healthy trade surplus as well, with a far smaller share of the American workforce. In contrast, the decline in manufacturing jobs reflects the opening of world labor markets. Unlike agriculture, we are not self-supporting in manufactured goods, we have simply decided to buy abroad what we once made at home.

This shift has been embraced across our society. For private industry, outsourcing to Asia has been driven by profit maximizing behavior and the pressures of surviving in competitive markets. For consumers, innovations in retail from Walmart to Amazon.com have fed the urge to get the greatest value for the lowest price. And for politicians—Democrats and Republicans alike—embracing globalization was part of the post-Cold War tradeoff: We open our markets, and the world competes economically and reduces the threat of nuclear conflict.

The notion that American industry, consumers and politicians were co-conspiring in the destruction of the American working class was a discussion relegated to the margins of public discourse, championed among others by union leaders, Dennis Kucinich on the left, Pat Buchanan on the right and Ross Perot, while largely dismissed by the mainstream media.

While Apple has been pilloried from National Public Radio to the New York Times for its effective support of a slave economy, most electronics consumer goods are now imported. The irony of the Apple story is that the Chinese labor content may well not be the cost driver that we presume it to be. As in many other industries, the costs of what is in the box can be a relatively small share of total costs, when product development, marketing, packaging and profits are taken into account.

This, of course, is why China is not particularly happy with their role in the Apple supply chain. When the profits of Apple products are divided up, far more of it flows to Cupertino than to Chengdu. And that is the reality of modern manufacturing. Based on National Science Foundation data on the value chain of the iPad, for example, final assembly in China captures only $8 of the $424 wholesale price. The U.S. captures $150 for product design and marketing, as well as $12 for manufactured components, while other nations, including Japan, Korea and the Taiwan, capture $76 for other manufactured components.

If anything, the NSF data—and China's chagrine—reflect a world in which the economic returns to design and innovation far exceed the benefits that accrue to the line workers who manufacture the product. This is one part of the phenomenon of growing inequality, and would seem to mitigate the complaint that is often made that America no longer "makes things." We may not make things, but we think them up and as the NSF data suggests, to the designers go the spoils.

Yet there is no fundamental reason that the decline in manufacturing jobs in America should be deemed inevitable and permanent. For all the talk about the number of engineers in China, the fundamental issue remains price. As a friend who is a consulting engineer who works with Apple in China has commented, “Yeah, they have engineers, but the driver is cost, cost, cost. And the labor quality is awful. We lose a lot of product and have to stay on top of everything, but at $27 per day, you can afford a lot of management.”

This argument conflicts with Stiglitz deterministic thesis. Just as manufacturing jobs left the United States, they can come back as economic conditions change. As wage rates rise in other countries, one competitive advantage of outsourcing shrinks. And if nations—from China to Taiwan—migrate away from their practice of pegging their currencies to the dollar, foreign currency risk exposure will offset some of the cost advantages of outsourcing. And today, as newly industrialized nations like Brazil have seen their own manufacturing sectors ravaged by mercantilist competitors, there is a growing understanding for the need for order and fair rules to govern the forces of globalization.

The Apple-Foxconn affair spooked consumers of Apple products—at least for a news cycle or two. Like Claude Rains in Rick’s Cabaret, we were shocked to confront the reality of labor conditions in China. But the story was less about China than about us. That Foxconn could put eight thousand workers to work within thirty minutes to accommodate a last minute design change by Steve Jobs was not—as Jobs suggested in a meeting with President Obama—an argument for why those jobs could never come back to America, but rather it was illustrative of the astonishing narcissism of the Apple world.

It is true, no American factory could deliver for Apple as Foxconn did. But on the other hand, there really was no need to. That story was less about what Foxconn could deliver than what Foxconn’s customer had the audacity to demand.

This story raised the question of whether we care where our products are made. The answer is unclear, however many Americans have long cared about purchasing cars made in this country, and Clint Eastwood's Super Bowl ad has raised awareness of this question. What is clear is that if Americans care about where their products are made, companies will care. Therefore, even as the President promoted tax credits for insourcing—the new word for bringing those jobs back—perhaps another step would be to build on the power of choice. Perhaps not all Americans care where their products are made, but many certainly do. But even if one does care, it tends to be difficult to find out.

Perhaps a simple step would be for companies to provide that information to consumers. Even if it was voluntary labeling, knowing who chose to provide information to their customers would tell many of us all we need to know. Then we could find out whether the Apple story really changed anything, and whether consumers might be willing to take more into account that the last dollar saved if it enables us to sustain a diversified economy into the future.

Speaking Greek.

“The pace and composition of the deleveraging process needs to be consistent with the macroeconomic scenario of the adjustment program and should not jeopardize the provision of adequate levels of credit to the economy.”

Thus spoke one European finance official this weekend, as one more confab of ministers from the eurohood gathered to assure the world that all is proceeding apace toward “a more balanced monetary union governance model and effective firewalls.”

The tendency to speak in finance jargon—one is reminded of the incomprehensible utterances of Alan Greenspan—may suggest to some that they have the problem under control. However, the lack of frank discussion of the underlying issues suggests instead that they have a tiger by the tail and are making it up as they go along.

Each week now brings new assurances that a deal is imminent, and yet as the weeks go by it is becoming harder and harder to imagine that after all of the complex negotiations, the end will not be more straightforward: Greece defaults and exits the eurozone.

It may be inevitable, and it may be for the best. Maybe not for Germany, maybe not for the banks, but for Greece.

The United States began as poorly structured fiscal union. The debts of the nation and the debts of the states were comingled and the boundaries of responsibility poorly defined. Like Europe, the United States is a federation with a single currency and centralized monetary policy, but with fiscal authority retained at the state level. And early on, there were periods of fiscal crisis that were first resolved with the federal government assuming the debts of the states. But it was only after state defaults on their own debts that long-term stability was achieved, as new working rules—established under state constitutions—were established that clearly delineated the responsibilities of the states and of the central government.

Europe—or more precisely the eurozone—was created with similar failures to define boundaries of responsibility. It is not surprising that nations bound together with a common currency, but each retaining spending authority, would find themselves subject to fiscal pressure. This problem was exacerbated by the implied debt guarantees that allowed each state to borrow freely, while giving the banks and other investors little incentive to make credit decisions reflective of each country's management of its fiscal affairs.

The European experience mirrors the experience of nations that have pegged their currency to the dollar. There are benefits of maintaining a common currency, but the peg cannot be sustained if a nation fails to manage their affairs—such as was the case of Argentina—or if they outperform the nation to which they have pegged their currency—such as Taiwan and Singapore. In either cases, market forces will exert pressure over time to move away from the peg and allow their currency to depreciate or appreciate until a new balance is achieved.

Greece is the Argentina of Europe, and enjoyed the benefits that access to a common currency offered, until it was no longer able to pay its bills. Argentina finally defaulted a decade ago, but not before its families of means squirreled their pesos away in dollars stashed in foreign banks—much as Greeks are doing today.

There was no impediment to Argentina’s ultimate default. The currency market did for Argentina all of those things that are being demanded of Greece today. Everything was adjusted downward in real terms. Salaries and pensions—public sector and private alike—funding public services. The population became poorer, their futures cast into doubt, but unlike Greece, no public official had to cast a ballot.

Each week, the Germans—along with their junior partners in France—are putting the hammer to the Greeks. Cut public sector spending. Cut worker salaries. Cut pensions. Sell the airports and trains. And this week demands to cut private sector salaries by 25%. Now, German ministers have taken the final, inevitable step and suggested that Greece must have a fiscal overlord to set budgets and spending levels.

While the world has focused on Greece's failures—with the implication that it was German beneficence that allowed Greek participation in the euro in the first place—it is easy to loose sight of the fact that Germany has been the greatest beneficiary of the creation of the eurozone. The advent of the common currency eurozone with 330 million people created a massive, captive market for the German export machine. After China and ahead of the United States, Germany is the second largest exporting nation on earth, and the bulk of what it sells is to other European countries. There are no innocents in this morality tale. All those Greek bonds and Italian bonds and Spanish bonds and other bonds that are now at risk were issued to sustain an economic bubble of consumerism from which German exporters were among the largest beneficiaries. If Greece lied on its application for admission, the Germans had good reason to look the other way.

Those who have benefited from the euro want it to survive this crisis. Failure is not an option—insisted European Central Bank member this weekend. It is not an option for Germany, whose currency would skyrocket if the eurozone nations went their separate ways, punishing its export-dependent economy. It is not an option for France, for whom the euro is the key both to containing the German colossus with which it has fought several wars and to creating a counterweight to U.S. global power and prestige. It is not an option for China, that badly needs an alternative currency to the dollar for its massive foreign currency holdings.

And then there are the financial imperatives of achieving an orderly unwinding of the exposure of the European banks to Greek default risk. Each week, we are assured, a deal to restructure Greek debt—theoretically averting a default—is almost done. The parameters of such a deal are not in question. The banks holding Greek bonds would write off more than half of the value of their bonds against their fictitious capital reserves—fictitious because those reserves have been invested in sovereign euro-denominated bonds, among which are these very same Greek bonds. Hedge funds will be strong-armed into accepting the same deal, though their write-offs will be against their own—rather than other people’s—money.

But essential to the suggested resolution would be the forbearance by the ISDA—the International Swap Dealers Association—in pronouncing that no "credit event" has taken place, such that those same banks will not have to pay out on credit event losses as the sellers of credit default swaps against those same Greek bonds. Such an outcome would seem to be unlikely based on the merits, but in a world that has dangerously comingled the financial and the political, anything is possible.

For all of this—to sustain the illusions that are Europe and the stability of its banks—all that is asked of Greece is that it voluntary cede its powers of democracy and self-determination. Yes, Greeks can still elect their leaders, but those leaders will no longer control the destiny of the nation.

But even if a default by Greece on its March 20th bond payment is diverted, nothing will actually have been solved. At best, a new package of loans will be arranged, and the default will be delayed until some later date.

This solution is backwards. Instead of affirming Greece's responsibility for its own choices, it will have been stripped of its sovereignty. Instead of having to face up to the challenge of building its own future with real rules—as ultimately each nation must—it will move forward instead as a vassal state to its Franco-German overlords.

Perhaps it is time to gather those ministers and elected leaders into a room and tell them to go home. For all of their sakes, perhaps it is time that they open their eyes and let Greece be Greece. Better now than later, because all is not proceeding according to plan.

Because there is no plan. They are just making it up as they go along.

Rage against the machine.

Mitt Romney was a good governor of Massachusetts.

That alone should disqualify him from being the Republican nominee. Like Bill Weld and Frank Sargent before him, he was part of the cyclical antidote to the deeply rooted Democrat machine politics of the state, the periodic salve to the status quo.

And he could be a good president, but the longer this goes on, the less likely it is that we will ever find out. Newt Gingrich—a man more in love with his own voice than any in memory—can smell blood. Who knows if it is Romney’s blood, or the blood seeping from dying Republican dreams of taking over the nation’s capitol.

Romney’s weaknesses are well known—his pro-choice past and creation of Obamneycare—but these are failings that could be turned to positives in the suburban Pennsylvania and Ohio suburbs that loom to be ground zero in the battle for the White House. The choice for Republicans always looked to be nominating from the right and going to war with a motivated base, or accepting Romney—liberal warts and all—and fighting for the independent center.

The world is different now from a decade ago when W. strategists Karl Rove and Matthew Dowd crafted a political strategy in a world with no center. Today, the center looms, and whatever the illusions of Rick Santorum, Republican chances are zero if they cannot win the suburbs.

But Newt's campaign is not about a political position. It is about Newt, and what he chooses to say at any given moment in time.

To hear Gingrich attack Romney for paying an income tax rate of 15%, one forgets for a moment that there is no hint of impropriety in Romney’s tax returns. It is all legal. He paid what he owed. He did not write the tax code. He never served in Congress, and thus cannot even be accused of sanctioning those inequities. He is just the Republican version of Warren Buffett, a very rich guy who benefits from how we tax investment income.

To hear Gingrich attack Romney for earning his fortune in private equity, one could easily disregard the fact that private equity—like venture capital—is one of the best functioning sectors of our capital market. Private equity groups raise money privately, they invest in real companies—either nurturing young, emerging ones, or redeploying the assets of failing ones—their funds have no real or implied public guarantees and investors fully accept that their money is at risk. He was not a hedge fund trader, simply making money from money, or from the part of Wall Street that took the world financial system down.

It has been odd to watch these attacks coming from Gingrich. Without doubt, the Obama campaign was poised to raise exactly those arguments against Romney in the fall, and just as assuredly, Republicans would have dismissed those attacks as reflective of Democrat ignorance of how the real world works. Now, by choosing to attack Romney from the left, Gingrich has essentially endorsed that line of attack and undermined one more of Romney’s potential defenses.

Romney was badly hurt in the wake of those attacks. As shown in the graph below from Intrade—a prediction market website that allows individuals to take positions on political events in the form of traded futures contracts—the price of a contract betting that Romney will be the Republican nominee plummeted from its peak at $92—comparable to a 92% chance—on January 18^th to $65 six days later in the face of Gingrich’s withering assault.

Romney was bruised by the assault, but recovered, as illustrated in the graph showing his bounce back to $88. He finally acceded to demands and published his tax returns, and within days Republicans came to their senses and realized that, in fact, they are Republicans, and making money is not supposed to be a disqualifier.

But the damage was done. While Romney has bounded back to nearly $90, the beneficiary of the Gingrich scorched earth strategy has been the President, whose odds ticked upwards at the same time as the Romney crash, and now remain at $55, and solidly above 50-50 threshold for the first time in months.

Gingrich insists that he is in it for the long haul. Campaigning in Florida he asserted that he will remain in the race through the convention. “Romney’s got a very real challenge in trying to get a majority at the convention. This party is not going to nominate somebody who is a pro-abortion, pro-gun control, pro-tax increase liberal. Look, it’s not going to happen.”

Grand Old Party stalwarts Bob Dole and John McCain see the damage that is being done as the party has moved farther away from its orderly and disciplined past, but their efforts to return order to the process and avert the train wreck that they fear have been to no avail. Speaking for the grass roots this weekend, Sarah Palin—who has a way with words like no other—said it best. “You’ve got to rage against the machine at this point in order to defend our republic and save what is good and secure and prosperous about our nation. So, if for no other reason, rage against the machine. Vote for Newt, annoy a liberal, vote Newt, keep this vetting process going, keep the debate going.”

Unless Newt comes to his senses, or—more likely—lightening strikes, David Plouffe and the President will continue to watch as the campaign that once loomed to be an uphill battle becomes easier every day.

The worm turns.

Negotiations to avert a default by Greece continue to move haltingly. The closer the parties get to a resolution—presumably replacing existing short-term debt with new, long-term bonds with a reduced coupon—the clearer it is becoming that a solution may require 100% participation of bondholders while sustaining the illusion of “voluntary” investor participation.

The holders of the Greek debt range from European banks to hedge funds. The European banks—for decades among the titans of the world financial system and the envy of U.S. banks—have been a shadow of their former selves since 2008. Many were essentially insolvent in the wake of the 2008 collapse, and only survived through a combination of sovereign guarantees, public injections of capital and actions by the U.S. Federal Reserve Bank.

Those banks are the largest holders of Euro-denominated sovereign debt of Eurozone members, in large part because they viewed that debt as carrying an implied guaranty—much as U.S. banks viewed the mortgage-backed securities that were their undoing—and because those bonds were eligible collateral for their borrowing from the European Central Bank. In a larger sense, however, those purchases reflected the extent to which the banks have become an integrated part of the public policy apparatus of the new Europe, where the boundaries between the public and private sectors have becoming increasingly blurred.

Hedge funds, on the other hand, live with no such ambiguity. Hedge fund buyers of Greek bonds are in it for financial gain. If a fund trader buys a medium-term Greek bond, they do so in anticipation of being able to sell that bond in the future at a higher price or in the extreme case holding the bond until it matures at 100% of its par value. To effectively protect against downside risk, they might concurrently enter into a credit default swap that would pay off in the event Greece were to default on its payment obligation. Ideally, a well-structured trade provides an upside to the hedge fund regardless of the outcome for Greece. Heads they win, tails they win, and only the math would tell you which way they would win more.

But in the new world order, things are not so simple. There are many participants involved, and each has their own set of metrics for a successful outcome of the Greece workout. The proposed resolution would provide for a swap of currently outstanding Greece bonds for new bonds that would pay out over a longer term, at lower rates. In theory participation is voluntary, but clearly some are kicking and screaming as they seem to be voluntarily coming to the table.

For the banks, the proposed swap is not such a bad outcome. First, because their holdings are of both short and long-term bonds, and based on the complex portfolio accounting, what they lose on swapping their short-term bonds in the deal, they make up in part at the long end. Second, as part of the complex public-private Euro-policy apparatus they have been told by their new political masters to play ball. But finally, and of critical importance, the European banks want to avoid an official default—or any outcome that could be defined as a “credit event” by ISDA, the International Swap Dealers Association—on Greek debt, as those banks are the primary providers of the credit default swap insurance purchased by the hedge fund community, and they want very much not to have to pay out on those derivative contracts.

For Greece, the objective is clearly to survive the restructuring with a balance sheet that causes as little domestic pain as possible, and to retain access to new borrowing going forward. To any rational observer, this outcome seems counter-productive, as it is hard to imagine that such continued market access for new borrowing will not lead all of the parties back to the table for a new workout down the road. Same script, another year.

For the hedge funds, this may be, to use that paternalistic cliché—a teachable moment. The banks seem to be getting out of the deal what they need—putting off a hit on their capital and avoiding a credit event under their credit default swap exposure. For its part, Greece seems to have garnered increasing leverage the longer the negotiations drag on, at least in part through its threat to recast the terms of the bonds. The bonds were sold under Greek law, and someone seemed to have realized that the Greek parliament could have the power to unilaterally change the terms of the outstanding obligations. It is hard to fathom that such an action would be legal, but no doubt Greek legislators would be only too eager to vote on the matter. It is the hedge funds that seem to have ignored the extent to which rules in the financial markets are increasingly subject to political intervention, and they may find themselves to be the odd man out.

The deal on the table is evidence of the growing interplay between the financial markets and political forces. Like the GM bondholders, the hedge funds are finding themselves subject to massive political and coercive pressures to consent to a workout that takes away both the upside that they thought they owned and the downside protection that was their fallback. In the most ironic of twists, hedge fund managers have threatened to sue in the European Court of Human Rights to prevent the usurpation of their economic rights through the proposed “voluntary” restructuring. Perhaps they are right on the merits, but it may be that trading and making a profit on the life and death of nations is not going to be as easy as it once seemed.

Early on, the new, dynamic interaction between the private financial markets and the political world was evident in the enormous pressure felt by Greek politicians to vote to cut public sector salaries, pensions and services. Now, the worm seems to have turned and the politicians have the upper hand and are turning the screws on the hedge funds.

Somehow, this Greek saga that was once front page news has drifted into the background, though its outcome may yet rock the financial markets. But the roles are shifting, and it is now apparent that the Greek politicians are not as dumb as they seemed, nor the hedge fund traders as smart as they thought.

Veering from the playbook.

House Republicans, just days after standing their ground, decided instead to head home for Christmas dinner.

So much for the principles that brought them to power in 2010. So much for ending business as usual in the nation’s capital.

But their language changed by the end. Gone was the moral outrage, the appeals to end the mindless spending that was bankrupting the nation. This week, the House Republican talking points led with the insistence that America’s working men and women deserved more than a two-month payroll tax holiday. Somehow, the Tea Party-spawned House Republicans had morphed into demagoguing Proletarian heroes.

But this was an important moment. After all, when the current House majority seized the reins, they were clear that their mission was to curtail spending as the singular path to curbing massive fiscal deficits, while not impeding the morally righteous task of cutting taxes. Specifically, the House Republicans changed “Paygo” rules that had been in effect for many years—whereby tax and spending measures must be budget-neutral over a 10-year period, as scored by the Congressional Budget Office—to provide instead that such constraints should not apply to tax cuts.

This perspective—that deficits are not a function of the mix of revenues and expenditures but rather a function of spending alone—is a odd vestige of the Reagan era, when cutting taxes emerged as the sine qua non of the modern Republican Party and liberated the GOP from its stodgy traditions of fiscal prudence and school marmishness. At the time of the Reagan revolution, when marginal tax rates where high, one could make a fairly reasoned argument of the supply-side premise, that cutting taxes would increase revenues. But that argument was bound up in the facts and economics of that era, and only attained that status of a moral imperative in the ensuing years.

But in the debate regarding extending the payroll tax cut, for reasons that are unclear, the House Republican did not merely forsake their rule that tax reductions are morally self-justifying, they went to the mattresses to demand that they be paid for like any other legislation of Democrat-inspired spending.

Then, suddenly, they got up off the mattresses, changed their votes and went home.

Fast forward to late next year and the implications of the House action looms large. At the end of 2012, the Bush-era tax cuts are set to expire just like the payroll tax cut that was just extended. Under the House Paygo rules, Republicans would no problem demanding that such tax cuts remain permanent, despite the $4 trillion of projected costs over ten-years. But the payroll tax debate should cast the stance of the House Republicans in a new light. This month, for the first time in recent memory, the Republicans took a stand against tax cuts because of the fiscal implications of those cuts.

For the first time in recent memory, Milton Friedman and the Republican Party of my grandfather were redeemed. This was a significant point that should not be lost.

Because the simple truth is that to extend the Bush tax cuts is wrong.

Little if anything has been said in the public debate over those tax cuts to remind the public about why they had an expiration date to begin with. After all, changes in the tax code tend to be eternal, and ability to rely on the rules of the tax system is a bedrock principle of our economy. But the Bush-era tax cuts had to expire if they were going to comply with the fiscal rules in place when the cuts were enacted into law. To meet the ten-year Paygo scoring rules, the Bush-era tax cut legislation provided for rates to return to the levels in effect in 2001 after seven years in order to pay for the largesse that was bestowed upon taxpayers over the period the cuts were to be in effect.

Oddly, in the debate over extending those tax cuts, up until now the Democrats and Republican essentially had to act under different political rules. Democrats, because they are the party of wanton over-spending and fiscal profligacy, had to justify how extending the tax cuts would be somehow fiscally justifiable. Republicans, because their brand includes the long-defunct notion that they are the party of fiscal prudence, felt no such constraint, and they have felt free to argue that the cuts be made permanent, whatever the fiscal impact might be.

The argument in Congress that the Bush-era tax cuts should be extended has given the lie to the notion that Congress is subject to any rules, even the ones it places on itself. The argument that tax rates should not be increased in the face of a recession is utterly disingenuous. Those arguing to gut the 2001 and 2003 tax bills now would be doing so regardless of our economic condition.

Look back at the historical record. Even as the Bush-era tax cut legislation was being considered, Republican leaders assured their base that by 2010 those cuts would be made permanent, as the Republicans pledged from the outset to attack as taxers any who would let the cuts expired. That is to say, even at the moment of the original legislation, those who supported those tax cuts eschewed any intention of adhering to the fiscal rules that Congress had imposed on itself. At the time, the cynicism was breathtaking. But as political calculation, it was prescient.

This month, House Republicans veered from the Republican orthodoxy on cutting taxes without offsets in favor of their Tea Party anti-deficit principles when they demanded spending cuts if the payroll tax cut was to be extended. For the first time in recent memory, Republicans returned to pre-Reagan principles and demanded that tax cuts be paid for.

A cynic might argue that this was not a change from the Republican playbook. They might suggest instead that we have seen the emergence of a codicil to the principle that tax cuts are morally self-justifying that suggests that such cuts must be paid for if the benefit accrues to working class Americans. Or perhaps the House leadership simply got caught up in needing to oppose anything that Democrats supported, and lost sight of the fact that they were in the odd position of opposing a tax cut.

In acting to demand that the payroll tax cut extension be paid for, will the House Republicans apply the same rule to extending the Bush-era tax cuts? That would be a game changer. But it is more likely that the House Republicans will get their act together, and once again the $4 trillion cost—and profound hypocrisy—of extending the Bush-era tax cuts will be subordinate to the higher moral principle of cutting taxes—without regard to cost.

Neoconservative denouement.

With the end of the war in Iraq, one chapter of the Neoconservative history is ended. Its outcome will not be known for decades to come.

In his famous 2003 interview in Vanity Fair magazine, then-Deputy Secretary of Defense Paul Wolfowitz was forthright in explaining that while their public case for going to war in Iraq was based on weapons of mass destruction, they chose the WMD argument because it was the most salable. It was the rationale for the war, but not the reason.

Some, such as Dick Cheney, saw the war in Iraq was a means to achieve American control over oil fields whose development Saddam was ceding to Russian, Chinese and French companies, and putting boots on the ground within striking distance of both Saudi and Kuwait oil fields, to deter future threats to America’s interests in the region.

Others, such as Donald Rumsfeld, saw Saddam as a proven threat to the region, who would be increasingly allied with international terrorism as a strategic threat to America’s interests. That group—that garnered sympathy in the outgoing Clinton administration—viewed action in Iraq as imperative both to forestall further aggression by Saddam, and to prevent an alliance with terrorist groups that had declared war on America and the west years earlier.

For Wolfowitz and his Neocon brothers-in-arms, however, the motivation was more idealistic. Iraq was an opportunity to bring a reformation to the Arab world—to end centuries of oppression and dictatorship dating back through the Ottoman Empire and the Caliphates, and set it on a path toward modernization, democracy and freedom.

It is ironic that a decade later—after a cost of thousands of American and Iraqi lives and trillions of dollars of total projected costs—the argument that was chosen to sell the war was the easiest to have been proven wrong. For Wolfowitz and his brethren that is OK, because WMD was never really the reason. It was simply the rationale.

Today, as winter sets in following the Arab Spring, it is hard not to reflect on the Neoconservative casus belli. One cannot point to the evolving democracy in Iraq and suggest a direct cause for democratically inspired movements that have shaken the Arab world. The contemporaneous evolution of communications technologies that have been so evident in media coverage of the Arab Spring certainly suggests a range of changes in the world that might have been causal factors. Yet images of Iraqis exercising their new-found rights of suffrage had to have an effect.

The devolution of the Arab Spring as the early excitement gave way to the increasing violence in Iraq should have been anticipated. Even as the commentariat pronounced a new world order, real world factors were bound to counter the idealism of the moment—whether the military in Egypt or the tribalism in Libya, or the Algerian history of one man-one vote-one time that looms in the background as the Muslim Brotherhood and other Islamist parties loom to seize power in a matter of months through the ballot that they failed to achieve after decades of armed struggle.

This is a dissatisfying outcome. In an era of instant news and communication, the notion that it may take generations for new political and social dynamics to evolve is hard to accept. Through the Iraq war, we have created turmoil in the region. We have let the jinni out of the bottle and when things begin to look worse for it—when new regimes become hostile, when women’s rights are suppressed, when all those leaders across the Muslim crescent who graduated from American universities take power and rail against us to play to their local electorate—there will be little we can do.

But we already know that living in a world of increased freedom can pose difficult challenges. We have been down this road before.

If our experiment in spreading democratic freedom across the Muslim world seems like it may have rough moments, we need only look back at our now-decades old experiment in spreading economic freedom, known as free trade.

Just as the Neoconservative vision held that building democratic institutions across the Muslim world was critical to addressing the long-term threats that emanated from that region, Richard Nixon’s openings to China and the Soviet Union began a process of bridging the west and the Communist world through economic engagement as a strategy to mute the risks of military—and ultimately nuclear—conflict.

While we may have to wait fifty or a hundred years to see how the Neocon strategy of democratization of the Muslim world pans out, we are beginning to see the impact of our free trade strategy.

By and large, free trade has worked. At least with respect to the muting of military and nuclear conflict. Russians are now deeply engaged in their own economic and political development, even as they struggle to migrate toward a system based on laws in lieu of tsars and commissars. China, meanwhile, has embraced free trade with a vengeance—or a free trade world to be more specific. A quarter century ago, according to U.S. Census data, our trade with China was negligible. Since that time, through an unrelenting mercantilist strategy China has seized the advantages available to a provider of low-cost labor to become our largest trading partner—and each year our trade deficit and job losses have grown.

The price of our free trade policy on the American worker and middle class was not unanticipated. Most famously, 1992 Presidential candidate Ross Perot described the “giant sucking sound” of jobs that would be drained from this country with the advent of free trade agreements supported by Democrats and Republicans alike. And the economics of his statement were unarguable. Lower labor costs, lower regulation and reduced enforcement of environmental laws had been the basis of the rise of the Sunbelt and the decline of the industrial Midwest domestically, and Perot was suggesting nothing other than the same dynamics would lead to the internationalization of the deindustrialization of America.

But few warned the American people. Across the punditocracy of the time Ross Perot was roundly derided as a crank and a scold. But Perot's followers, the political antecedents of the Tea Party, knew a con job when they heard one.

Many may not care for Paul Wolfowitz and his friends that imposed a bloody and costly war upon the Iraqi and American people. But in his ideological fervor Wolfowitz is part of a uniquely American tradition. Few empires have offered their lives and treasure that other nations might be lifted up. And in that sense, the Neoconservative aspirations were an outgrowth of the highest rhetoric of John F. Kennedy.

With the advent of free trade, America willingly and deliberately sacrificed the livelihoods of its working class as the price of raising people out of poverty from Xinjiang to Sochi. With the Iraq war young American men and women gave their lives that future generations from Mosul to Tunis might see their lives transformed. But like free trade, there will likely be more pain yet to come, and the next chapters of the story will play out over decades. A remarkably unsatisfying outcome.

The missing voice on Wall Street.

Whatever one’s view of Occupy Wall Street—and how quickly those on the right and those on the left have gone to their respective corners and hammered out their talking points—it is a positive step that there might be some thought given to where we are and where we are going. But so far, one group has been fairly quiet, if the point is to address the undue political clout and financial power—to say nothing of economic risk—now manifest in our leading banks. It is the voice of the American banker.

Not Jamie Dimon, the CEO of JP Morgan, who continues his reign as the doyen of US banking—nor Goldman Sachs CEO Lloyd Blankfein, who occupies a very different role in the public imagination—but rather the leaders of 7,500 other banks across the country. These are the banks that continue to play the critical role of commercial banking in our economy—they take deposits and make loans.

As a result of two decades of consolidation, the commercial banking industry in the U.S. has become increasing concentrated. Today, the four largest banks, JP Morgan, Citibank, Bank of America and Wells Fargo, comprise just over 40% of the total assets of the U.S. commercial banking system.

Contemporaneous with this consolidation was the integration of investment banking and commercial banking, with the final removal of Depression-era restrictions two decades ago. Legislated changes in 1999 and 2000 paved the way for the new focus on trading within the commercial banking world, and the explosive growth in derivatives.

But the purpose and rationale for a publicly-supported commercial banking system remains its depository and lending functions. Banks take deposits, which are federally guaranteed, and they use a combination of these deposits, equity and debt capital, and loans from the Federal Reserve Bank to make loans—to judiciously allocate capital across the productive sectors of the economy.

A quick scan of the list of highest loan/deposit ratios among bank holding companies published by American Banker illustrates the richness of the banking sector, with institutions ranging from Bank of America to Big Sandy Holding Company, the owner of Mile High Banks in Colorado that boasts 160 shareholders. The ratio of loans to deposits may not be the most appropriate metric for assessing bank performance in their public mission, but to a lay person it seems to be a reasonable start. Wells Fargo and Bank of America, both commercial banks with deep roots on Main Street, are among the top 200 banks in that ranking, while neither JP Morgan nor Citibank, both banks culturally rooted in Wall Street, appear on the American Banker list.

JP Morgan and Citibank are at the top of another list—this from the Bank Trading and Derivatives report published by the Office of the Comptroller of the Currency, the lead federal regulator of the commercial banking system. JP Morgan and Citibank are ranked one and two here, with a combined $134.2 trillion of total outstanding derivatives contracts, or 54% of the total $249.3 trillion of derivatives in the commercial banking system. Add the third and fourth ranked banks, Bank of America and Goldman Sachs, and those top four hold $191.1 trillion, or 77% of the total derivatives exposure in the banking system. By comparison, those four banks hold 46% of the total risk-based equity of all banks that participate in the derivatives market.

Without doubt, certain derivative products play a valuable role in commerce, trade and commercial risk management. Commercial, industrial and agricultural clients—the traditional clientele of the commercial banking sector—reasonably need to hedge interest rate exposure, foreign currency risk and commodity prices. But the $134.2 trillion of contracts for JP Morgan and Citi alone far exceeds the levels of economic activity that one might imagine being hedged—the $89.6 trillion of interest rate hedges is six and one-half times our national GDP, the $10.4 trillion of foreign exchange hedges are five times the dollar value of the imported goods and services that domestic firms might conceivably want to hedge in a given year, and JP Morgan’s $6.1 trillion book of credit derivatives approximates the total value of corporate debt outstanding in the U.S. economy.

Does this matter? Beyond the shock value, are there valid reasons to reassess the appropriateness of this volume of derivatives business and the potential financial risks that it entails? Does the fact that one-quarter of commercial banks do no derivatives business at all, and only one percent of US banks have enough derivatives exposure to warrant public concern, suggest that the extent of the derivatives exposure of the top banks is not necessary for assuring effective and efficient client service? This is not a question of government meddling in private affairs. Quite the contrary, the commercial banking system has been constructed based on a system of deposit insurance and access to loan capital from the Federal Reserve. Accordingly, these banks are engaged in businesses that are directly supported by public resources and guarantees, and therefore can expect public scrutiny.

The argument JP Morgan would make is that their “derivatives book” is fully balanced, with every positive exposure balanced by a negative exposure. That is to say that for all their long positions in a given currency, or interest rate movement or General Motors bond, they have an offsetting negative position. They are not “net long” or “net short.”

Similarly, their derivatives book is balanced with respect to counterparty credit exposure. For every position where they might be taking, for example, Deutsche Bank risk, they have a balanced and opposite position that theoretically keeps them neutral and protected against counterparty credit events.

Thus, in the case of JP Morgan, as reported to the OCC, its total $78.1 trillion derivatives portfolio actually leaves it with total net credit exposure of $361.0 billion, or just 2.71 times their risk-based capital. So, the theory goes, despite the eye-popping numbers, JP Morgan, and by extension other banks active in the derivatives business, are managing their affairs. And, they would submit, the risks are manageable.

But the theory seems to miss two salient points.

The first point reflects the corruption of the culture of commercial lending as banks embrace the trading culture that is central to the derivatives world. The mission and purpose of the commercial banking system is the efficient allocation of capital across society. Commercial banking has been seen as a sleepy world of bankers with green eyeshades, pouring over financial statements, even as Jimmy Stewart, playing George Bailey in Frank Capra’s 1946 movie “It’s a Wonderful Life,” portrayed the iconic Main Street banker, who made America work.

And that remains the mission of America’s commercial banks. They invest in Main Street businesses, small businesses that grow from the dreams of their founders, businesses too small to issue stock or access the bond market, and they partner with them from one decade to the next.

Commercial banking is a slow business that takes time. This is a sharp contrast with the world of derivatives trading. Derivatives trading is a form of securities trading with magnified, and in certain cases unlimited, leverage. As noted above, derivatives contracts have two primary risk attributes, event risk—did interest rates move against your bet, or did GM go belly up—and counterparty risk—this was the AIG problem, where AIG could not perform on its end of the derivative contracts and there was a scramble among counterparties to get what they could.

As in the AIG episode, the collateralization provisions of the standard derivatives contracts now constitute the largest area of risk exposure. With the downgrades of Bank of America and Wells Fargo this month, and the turmoil in the European banking system, it is easy to imagine an AIG-type event on the horizon. Many have forgotten that AIG did not collapse because of housing bond defaults. It collapsed because it was downgraded from double-A to single-A, and that downgrade triggered a collateralization event that required AIG to post $180 billion of collateral.

Unlike a hypothetical loan to a local restaurant that is collateralized by their real estate and equipment, AIG did not pledge specific collateral to its counterparties. Like every financial institution, AIG was highly leveraged and its outstanding obligations were many times its available capital resources. Accordingly, as—Goldman Sachs demonstrated when it pulled $7 billion out of AIG in advance of other creditors—in a derivatives credit event, time is not your friend and counterparties have to move quickly to protect your interests.

This stands in stark contrast to the commercial lending world. If that restaurant were to have a cashflow problem, the bankers from Mechanics Bank would not come crashing in—You, grab the pans, I got the Fryolator—to get a jump on Mission National Bank or Union Bank. Rather, the rules governing commercial lending, foreclosure and lender liability result in the need for a senior lender to exercise prudence and carefully consider the impact of its actions on the borrower—as well as dealing with competing interests of other creditors, equity holders and management—even as it seeks to protect its financial interests. This results in a slower process that is more deliberative and enables the workout of complex situations. In contrast, in a derivatives event everything has to be done over a weekend, to avoid spooking the markets. To put it simply, in the derivatives world, you grab the Fryolator first, and ask questions later.

The second point builds on the first. If commercial banking is an operational business that takes time and attention, investment banking and trading are transactional worlds of urgency and short attention spans. Profits and bonuses are the immediate imperative, and relationships and character—the core of commercial banking—are relatively unimportant. In the past two decades, the culture of investment banking—the culture of Wall Street—imposed itself on the world of commercial banking. Dating back to Salomon Brothers merger with Philipp Brothers and culminating in Sandy Weill’s assault on Citicorp, Wall Street’s pursuit of capital created the world today, where a handful of leading commercial banks are imbued with the culture of Wall Street and increasingly largely diverted from the traditional, slow function of commercial lending.

Which leads to the question that should be addressed: Why?

Why should American banking be captive of the political clout and financial interests of four or six or eight firms? It simply is not in the interest of the overwhelming majority of commercial banks to let federal policy be driven by the political power of or risks related to that handful of firms. Two of those firms, Goldman and Morgan Stanley, only became commercial banks in the wake of the financial collapse in 2008 in order to gain access to the resources of the Federal Reserve Bank, and have no business remaining bank holding companies now that the crisis has ebbed. Whatever one believes about the fairness of public dollars and protection being used to support those two large investment banks, that time is past and the linkages with the public purse should be firmly severed.

This is a question that is not being asked, but that must be asked. As our political parties fight for access to Wall Street money, the ability to make sound policy that serves the larger interest of assuring a sound and effective commercial banking system has been undermined. Nor is Occupy Wall Street raising the questions that must be asked in a way that will reach the wide range of legislators the need to take notice.

What is missing from the new focus on Wall Street is the voices of the American banking community. Through consolidation and crisis we have gone down a path that has undermined the effectiveness and stability of our commercial banking system. Derivatives trading—now central to the profitability of those largest banks—entails uncharted and unknowable risks to the financial system, and it is part of a cultural shift that has impaired the effectiveness of those banks in serving their primary function of commercial lending. The Dodd-Frank and Sarbanes-Oxley laws were created at moments of crisis in response to the egregious practices of a small number of market participants, but now constitute enormously expensive regulatory regimes that constrain and impair the effectiveness of thousands of banks that simply have not heretofore been part of the problem.

Occupy Wall Street might make good media, but if we are to address the serious challenges that confront us about the structure and direction of our commercial banking system, the voices that must be heard above the din are those of Main Street bankers across the country whose future success is critical to our long-term economic recovery.

So little, too late.

Three years ago, it all fell apart. A decade of borrowing and greed finally culminated in the collapse of Wall Street, and it has taken three years for any visible protests to bubble to the surface. Occupy Wall Street, as they call themselves, is just now making it onto the news.

How is it that after Americans have watched their retirement savings disappear, after a 31% decline in housing values and an estimated $7 trillion of lost assets on the balance sheets of American homeowners, only a couple of hundred people manage to show up and protest what Wall Street power and arrogance has done to America, and how little has been done to exact retribution on behalf of a bewildered nation.

One casualty of our political wars has been the absolute loss of accountability for the excesses and the collapse. Reasonable regulation of the financial sector has long since given way to the imperative of political fundraising. During the Clinton years, Democrats gleefully won over Wall Street money—traditionally a Republican entitlement—as the Rubin-Summers cabal trampled thoughtful opposition and engineered the 1999 and 2000 laws that loosened regulation of financial services and gave the green light to unchecked derivatives trading. Today, Republicans have won back Wall Street’s affections through their opposition to the Dodd-Frank regulation, while disingenuously trumpeting to the world that they oppose too-big-to-fail.

The simple fact is that through unbridled financial largesse—the financial services sector was unmatched in its level of political contributions over the past decade—concentration of power and market share in the financial industry has continued to grow, even as little has been done to alleviate the risk of future financial crises.

Few across the political landscape would actually let our large banks fail. That is not a political argument or observation, it is simply a fact of the world that we live in. Since 2008, as our major financial institutions became insolvent, our Government has bent over backward to assure that the public’s money was poured onto the balance sheets of the private banks. While TARP has become the piñata for the right, that program’s $700 billion authorization paled beside the $16 trillion in loans made by the Federal Reserve Bank—to American and foreign banks alike—to sustain the liquidity of the global financial system.

In another era—perhaps on another planet—insolvent banks would be allowed to fail. Their assets would be sold off, depositors in insured accounts would be protected, and bank bondholders and equity holders would lose out. It was called capitalism. The paramount responsibility of investors was to assess risk and make investments. Those who were astute evaluators of risk would do well. Those who were not, would not. It was the way it was supposed to be. And the benefit to society was an efficient allocation of capital and economic growth.

Not so today. Barely 20 years after the fall of the Berlin Wall—the supposed triumph of the capitalist west—capitalism has been reduced to a shell of its former self. In today’s world, investors are protected from the risks they assume. In today’s world, the largest financial institutions are insulated from the consequences of their own worst behavior, and even in the wake of the global financial collapse engineered by their own excesses, the political parties continue to vie for their dollars—even as they continue to utter pious obeisance to such notions as accountability and responsibility. In today’s world, millions of American households lost trillions of dollars of equity in their homes as values collapsed, while at the same time the Federal Government has engineered the restoration of trillions of dollars of bank capital in the name of restoring confidence in the financial system.

Last week, London-based trader Alessio Rastani stunned the world by pronouncing that he prays for another recession. “As a human being,” Rastani pronounced, “I don’t want a recession, but as a trader it creates good conditions to make money.” Anyone who has been paying attention might have noticed that traders tend to find ways to benefit from the world's ills, yet for some reason, Mr. Rastini’s comments were deemed to be news.

Last month, Vermont Senator Bernie Sanders was excoriated for publishing oil trading data from the Commodity Futures Trading Commission that detailed the trades of leading Wall Street firms that participated in the speculative trading frenzy that pushed oil prices through the roof in advance of the 2008 election. Sanders was derided by industry figures for actions that would “have a chilling effect on derivatives trading in the U.S.” and the ensuing news stories focused on whether Sanders had broken any laws, while largely ignoring that the data Sanders released confirmed what had previously only been conjecture: It was Wall Street traders rather than Chinese demand and other market forces that led to the spike in energy prices in 2007-08, which drained American checkbooks and dominated the early debate in the run-up to the 2008 presidential primaries.

In our digital world, Occupy Wall Street’s protests have been rendered quaint. The earnest youth chanting slogans are an artifact of decades past as they hunker down in lower Manhattan. They seem to miss the point that Wall Street is no longer a physical place, but has ascended into metaphor. Wall Street is no longer the buildings that line Wall and Broad, or even the gleaming new Goldman Sachs edifice across the way. Rather, it is the mind set of banks and hedge funds, the traders and derivatives architects, that seek competitive advantage and lucre as they move from one target to the next where a windfall might be had, with little or no regard for the havoc and destruction that increasingly lie in their wake.

For months we have followed the morality play of Greece, a nation and a people that must be brought to their knees for their willful profligacy in order to protect the balance sheets of the European banks that have been the major buyers of Greek debt. Now, the story line has evolved, it is about Contagion, a public health metaphor that aptly labels the seriousness of the risk, while at the same time seemingly suggesting an unknown cause. This week, Moody’s Investors Service downgraded Italy by three notches, from the pristine Aa2 to the pedestrian A. Unlike the Greece saga, this downgrade did not suggest poor fiscal management on Italy’s part—indeed, Italy is a country that heretofore has balanced its budgets—rather, Moody’s action reflected its fear that “financial market shocks” could undermine Italy’s fiscal position.

So we have come full circle. Once, as in the case of Greece, it was poor fiscal management that led to deteriorating financial position and ultimately drew traders like sharks smelling blood in the water. But now, as Moody's highlighted in its downgrade of Italy, it is the financial assault itself that Moody's suggests would undermine the ability of a major global power to manage its fiscal affairs.

Financial market shocks. Contagion. These are not natural phenomenon, but the cumulative actions of an industry run amok, an industry now preying upon the world that that has nurtured its growth.

Early on in the financial crisis, we debated the question of moral hazard and the consequence that if we did not let banks fail, bad behavior would be rewarded. But we are way past that stage. Now, the greater risk is understood to be the interconnectedness of each bank to the others. This is the lesson we took from Lehman Brothers and AIG: Where once failure was important to the effective functioning of capitalism, now it is deemed to be unacceptable. The global financial system is now an organic whole, daisy chains of hundreds of trillions of dollars of linked derivatives that could come tumbling down and crater the world financial system if even one major bank were to be held accountable for its own financial and risk management decisions.

It has been three years, and what have we learned? Perilously little.

Nothing that Mr. Rastani said should have surprised anyone. As Moody's made clear this week, the continuing, unfettered conduct of Wall Street now directly threatens the stability of major industrial countries. It has undermined the core principles of our economic system and corrupted our democracy. The question facing Occupy Wall Street is whether anyone in America is paying attention anymore.