GRETCHEN MORGENSON and LOUISE STORY add more detail to the story of the collapse of our financial system and how it was brought down by the gang of financial innovators at such respectable financiers at Goldman Sachs, Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc. link here

The article strongly suggests that the bankers knew what they were doing. They created bundles of mortgages and sold them off to credulous investors. Then they cranked up mortgage creators to market still more toxic mortgages on which to sell more credit default swaps (CDSs).

When that didn't satisfy the demand from investors, they came up with synthetic swaps. They knew the many of the mortgages were toxic and after selling them, bought swaps against their failing. When the demand for these grew too large, they created synthetic collateralized debt obligations (CDOs) and bet against them as well.

The mechanics of these transactions is a little complicated. First there is a bundle of mortgages. The investors who buy the package expect a steady flow of income. They are okay until the mortgages go bad.

In a totally separate transaction, banks bet against the mortgages by creating a synthetic collateralized debt obligation (CDO) made up of credit default swaps set up to pay when the mortgages fail. The banks pay a steady income to the sellers of CDSs until it goes under as the mortgages default. Then the bank collects from each CDS writer for each mortgage that defaults. The losers in these transactions are the ones who bought the CDSs. They may have no knowledge of the quality of the underlying mortgages that they are guaranteeing but are depending on the good faith of the seller.

The article notes, "Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities. But Goldman and other firms eventually used the CDOs to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients' interests."

These and other industry practices are now the focus of "investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street's self-regulatory organization."

We are likely to see some indictments, if the sources quoted in the article can back up their assertions in court. There clearly was a conflict of interest between the firms and the buyers of these securities such that the firms appear not to have been acting in good faith. Former representatives of these firms now hold high positions in Washington.

Right now, one would have to question the sanity of anyone who trusts any of these firms with his money but so far they are still profiting greatly. From a purely economic point of view, these transactions are totally unproductive--the gains are matched by the losses on the other side. They only add to gross output to the extent of the net fees to the banks for creating and marketing the obligations and even that is of negative value to society--equivalent to that of services provided by casinos.

Binyamin Appelbaum and David Cho return to the problem of fixing America's credit system and of reforming the broken complex of supervisory authorities link here. The context is the reappointment of Ben Benanke to chair the FED and the push for regulatory reform which redefines the role of the FED, given the running failure of the regulators to protect consumers and the banking system from fraud or excess that produced the bubble and brought the economy down. The story has details that you probably haven't heard before and pins a fair amount of blame on Bernanke. In my mind, it raises a serious doubt about reappointing him in the absence of a prior major reassignment of regulatory duties, removing a number of them from the central role of the FED. The FED's primary duty remains using interest rates to control inflation and foster full employment. To argue as some do that the FED is ill-suited to preventing or popping bubbles doesn't persuade me that it shouldn't be done. The more deep seated issue is ending regulatory capture by Wall Street and that won't happen until we find a better way to finance politics.

Once again we get to watch the advance of monopoly with the planned acquisition of NBC Universal by Comcast. One needs to read the details to see the full power of the deal link here. It turns out to be about a lot more than NBC broadcasting as NBC Universal owns several more cable companies and content in addition to the NBC network. GE would retain 49 percent of the joint venture, so we will have two giants in cahoots.

"Almost one in four cable subscribers in the U.S. is a Comcast customer. NBC Universal owns cable networks such as Telemundo, MSNBC and Bravo, TV shows such as Jay Leno's, regional stations such as Washington's WRC (Channel 4), and Universal movie studios," writes the Post's Cecilia King.

She notes that the "merger will be a test for how regulators will deal with the Internet video market, which doesn't fall directly under the FCC's jurisdiction. But the agency is exploring competition in online video, and it could use the merger to implement conditions that would set guidelines for the burgeoning market."

We can now see the folly of our deficient planning and regulation of radio and TV, which has permitted the growth of such giants and the extraction of maximum revenues from the public. Video over the internet promises to break what is a monopoly on distribution but will it be allowed to happen? Don't hold your breath.

Had we the luxury of starting over, we should rather have separated the means of distribution, the pipes, from control of the content. We might also have opted for local government control of the pipes, in the process creating a bilateral monopoly to exert some control of content fees.

Now we face a new situation. In time, video over the internet might destroy the hold of the cable companies over the pipes, but the outlook isn't good with the cable companies providing internet access and the only competitor in most places being the phone company, another congenital monopolist.

The Washington Post has a business article today entitled "Crackdown targets counterfeit drugs" which leaves out most of the truth link here. There is no mention that some of these drugs are generic and perfectly legal in the country where they are made. And that the US has for some years stopped enforcing imports of such drugs by individuals. That policy seems to have changed now, if this story is to be credited. However the amount of spam from sellers of such drugs doesn't seem to have abated.

The story begins, "In highly orchestrated raids around the world this week, Interpol officers in Europe, drug agents in the United States and task forces from Sweden to Singapore hunted down counterfeit prescription drugs in an effort to stem a rapidly growing criminal business preying on financially pressed consumers looking for bargains.

"The operation, code-named Pangea, is expected to be disclosed Friday in an effort to put fraudulent businesses on notice that police around the world are fighting back against what has become a $28 million industry in the United States alone." That seems like peanuts compared to the cost of such enforcement operations. And no attempt is made to separate the benefit of the drugs for people who otherwise could not afford treatment. Or the incremental loss to others who use them but must now pay the monopolist's price. For context, note that other news articles report a rise in drug prices of 9% in anticipation of the passage of a health care reform bill. The industry is hardly suffering.

Who is picking the public pocket? The article doesn't say, but the Pharmaceutical Research and Manufacturers of America (PhRMA) is probably behind this, though how a global operation was arranged remains an open question. Maybe we'll find out more later today, as the article promises.

The audit of the AIG bailout is now out link here. Mary Williams Walsh summarizes it here link here.

One can forgive some of the failings in light of the pressure to reach a deal that preserved the financial system. But not all. Once again, one has the feeling that the long arm of the epitome of Wall Street, Goldman Sachs, has produced a "solution" that was very good for it. Examples:

**No real effort was made to get the companies benefiting to take less than the book value of their loans. The Goldman argument that it had successfully hedged its deals with AIG and deserved to be fully compensated is faulted, on grounds that the hedges would not have survived the almost certain meltdown.

**The FED considered itself an AIG creditor rather than a regulator and "could not impose its will on banks but instead asked for voluntary concessions," in contrast to the auto bailout where the terms were crammed down them. Moreover it decided it could not treat foreign banks differently from domestic banks for fear of retaliation.

**Some banks argued that they could not legally take less than the contracted amount unless AIG declared bankruptcy, a long judicial proceeding that had to be avoided.

**The authorities insisted on secrecy to prevent the collapse from spreading but that was mistaken as whenever public funds are spent, the public is entitled to know.

I have been waiting for more articles, but they seem to have stopped coming. So now it is time to post a suggestion that you read what there are, listed on the right of the link here. It is a pretty strong case against Goldman Sachs totally profit oriented, self-regarding behavior put together by McClatchy news. Not a court case, I think, but one which underscores that without regulation or breaking up Goldman, a financial crisis will recur, brought on by much the same behavior: *corrupted results from the rating agencies which produced misleading reassurances to investors. *lending on subprime mortgages, reselling them, and betting that the housing market would tank along with the mortgages it sold. The final irony is Goldman's current claim attacking McClatchy's series but with no specifics and asserting that it has not profited from the government's bailout of the financial sector.

This subject will appear off-topic initially but bear with me. The Economist magazine has a long article, "Japan's technology champions," about the mid-sized highly specialized companies which dominate several manufacturing fields link here. The prime example is the world's sole maker of the huge forged pressure vessels for nuclear power plants. But there are a host of others that number among the top two or three firms in their industry. All share a characteristic attention to rigorous quality standards.

While computers, for example, have become commodities, certain components are highly technical and hard to make, like the substrate in the fabrication of chips. The article notes that for these firms, the "technology is tacit, not formal. It cannot be transmitted by writing a manual or reading a patent application. Rather it accumulates by working with colleagues over many years. This poses a barrier to entry for rivals."

Other features of these firms result, including their avoiding mergers based on the fact that the strength of the company lies in its current employees, their heavy spending on r & d, on keeping the core technology secret, on owning their supply chain, and even on manufacturing their own specialized tools.

Here again, we see that technical progress is not the result of patents or copyrights, but from the tradition of innovation that put these firms at the top of their industries. This is particularly important as economies pass from the copying and catch-up phases that we see in the emerging industrial states. The next stage is developing the innovative technical skills on which rising incomes in leading economies like the US will depend.

The New York Times editorializes on patents today, in particular the application for one on a "method for hedging financial risk in energy trading" that is now before the Supreme Court link here.

It concludes, "Allowing an abstraction of this kind to be protected would take patent law too far."

Most of the argument misses the weakness of patents. Instead, it ends with "Patents perform a useful function, promoting innovation by ensuring inventors the right to profit from their creations for a period of time. But overprotection through patents is as dangerous as underprotection. It can stifle competition and infringe on the rights of non-patent holders. Not every bright idea should be protected as a property right."

The positive in this is that a main stream newspaper would question patents, observing the costs of overprotection except that it fails to mention that, in practice, they stifle innovation in contravention of the constitution.

However, those of us who have concluded that the whole system of patents and copyrights is systematically harmful and has to go, need to recognize that it is not going to happen by court cases, no matter how helpful. What is required is legislative change. That will require a political party, e.g., like Pirate Bay.

The victims of the Great Recession keep emerging from the carnage wrought by the big financial players. This one comes from the "retirement communities" link here. People buy into them thinking that all is well for their old age. It may not be, as a number of the companies had big plans to provide services they can no longer finance or have made guarantees on deposits that are now controlled by the contingencies in the fine print of their contracts. What seemed certain when the buyer signed up may no longer be so. The prospect is they will not recover until the economy, particularly employment, has recovered and new tenants can afford to buy into them.

The News Hour Monday had an interview with Ken Rogoff and Carmine Reinhart, authors of This Time Is Different and you can still see the video or download the transcript here. Its conclusions are sobering:

Our current crisis is like all the others studied over an 800 year span. They all result from ignorance (of the past) and from the mistaken belief that this time is different. The crises are made up of ballooning housing and equity prices, staggering borrowing from abroad, slowing economic growth, deregulation, and a mountain of short term debt.

These were the common features of financial crises of Asia in the 90s, of Latin America in the 80s, on Wall Street in 1907, in Germany in 1873, in the Mississippi bubble of 1720, and the 1340 Florence collapse. The current decline on Wall Street from peak to bottom was average, 35%, as was that in housing prices. The recovery so far has been typical of the past, when on average, stocks went back to their peak in two to three years while unemployment took two years to reach a bottom and five more to reach the pre-crisis level. Governments double their debt in three years, historically followed by defaults too numerous to mention.

If we examine the US response to the current crisis, we are not doing very well in either our diagnosis or our repairs to break the mold.