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charles hugh smith-Does Our System Select for Incompetent Sociopaths?

charles hugh smith-Does Our System Select for Incompetent Sociopaths?.

(March 26, 2014)

What is the shelf life of a system that rewards confidence-gaming sociopaths rather than competence?

Let’s connect the dots of natural selection and the pathology of power.

In his 2012 book The Wisdom of Psychopaths: What Saints, Spies, and Serial Killers Can Teach Us About Success, author Kevin Dutton described how the attributes of sociopathology are in a sense value-neutral: the sociopathological attributes that characterize a dangerous criminal may also characterize a cool, high-performing neurosurgeon.

As Dutton explains in his essay What Psychopaths Teach Us about How to Succeed(Scientific American):

Psychopaths are fearless, confident, charismatic, ruthless and focused. Yet, contrary to popular belief, they are not necessarily violent. Far from its being an open-and-shut case–you’re either a psychopath or you’re not–there are, instead, inner and outer zones of the disorder: a bit like the fare zones on a subway map. There is a spectrum of psychopathy along which each of us has our place, with only a small minority of A-listers resident in the “inner city.”

While there is obviously a place for high-functioning sociopaths in professions which reward those characteristics, what about sociopaths who substitute deviousness and deception for competence? For some context, let’s turn to thePathology Of Power by Norman Cousins, published in 1988.

Cousins was particularly concerned with the National Security State, a.k.a. the military-industrial complex, which at that point in U.S. history was engaged in a Cold War with the Soviet Empire. Cousins described the pathology of power thusly:


“Connected to the tendency of power to corrupt are yet other tendencies that emerge from the pages of the historians:1. The tendency of power to drive intelligence underground;
2. The tendency of power to become a theology, admitting no other gods before it;
3. The tendency of power to distort and damage the traditions and institutions it was designed to protect;
4. The tendency of power to create a language of its own, making other forms of communication incoherent and irrelevant;
5. The tendency of power to set the stage for its own use.

In broader terms, we might add: the tendency of power to manifest hubris, arrogance, bullying, deception and the substitution of rule by Elites for rule of law.

Natural selection isn’t only operative in Nature; it is equally operative in human organizations, economies and societies. People respond to whatever set of incentives and disincentives are present. If deceiving and conning others is heavily incentivized, while integrity and honesty are punished, people will gravitate to running cons and embezzlement schemes.

What behaviors does our Status Quo reward? Misrepresentation, obfuscation, legalized looting, embezzlement, fraud, a variety of cons, gaming the system, deviousness, lying and cleverly designed deceptions.

Let’s connect the pathology of power and the behaviors selected by our Status Quo. What we end up with is a system that selects for a specific category of sociopaths: those whose only competence is in running cons.

No wonder we have a leadership that is selected not for competence but for deviousness. What’s incentivized in our system is spinning half-truths and propaganda with a straight face and running cons that entrench the pathology of power.

What is the shelf life of a system that rewards confidence-gaming sociopaths rather than competence? Unless we change the incentives and disincentives, the system is doomed.

Of related interest:

The Normalization of Sociopathology in America (October 16, 2010)

The Federal Reserve and the Pathology of Power (November 18, 2010)

The Banality of (Financial) Evil (November 9, 2010)

charles hugh smith-Is the Deep State Fracturing into Disunity?

charles hugh smith-Is the Deep State Fracturing into Disunity?.

(March 14, 2014)

I recently discussed the Deep State and “throwing Wall Street under the bus” with my friend and colleague Jim Kunstler.

When we speak of The Powers That Be or the Deep State, this ruling Elite is generally assumed to be monolithic: of one mind, so to speak, unified in worldview, strategy and goals.

In my view, this is an over-simplification of a constantly shifting battleground of paradigms and political power between a number of factions and alliances within the Deep State. Disagreements are not publicized, of course, but they become apparent years or decades after the conflict was resolved, usually by one faction winning the hearts and minds of decision-makers or consolidating the Deep State’s group-think around their worldview and strategy.

History suggests that this low-intensity conflict within the ruling Elite is generally a healthy characteristic of leadership in good times. As times grow more troubled, however, the unity of the ruling Elite fractures into irreconcilable political disunity, which becomes a proximate cause of the dissolution of the Empire if it continues.

I recently proposed the idea that Wall Street now poses a strategic threat to national security and thus to the Deep State itself: Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)

Many consider it “impossible” that Wall Street could possibly lose its political grip on the nation’s throat, but I suggest that Wall Street has over-reached, and is now teetering at the top of the S-Curve, i.e. it has reached Peak Wall Street.

Consider what the extremes of Wall Street/Federal Reserve predation, parasitism, avarice and power have done to the nation, and then ask if other factions within the Deep State are blind to the destructive consequences:

How The Fed Has Failed America, Part 2 (March 12, 2014)

The Fed Has Failed (and Will Continue to Fail), Part 1 (March 11, 2014)

Can anyone not in Wall Street or the Fed look at this chart and not see profound political disunity on the horizon?

source: Poll Shows Why QE Has Been Ineffective (STA Wealth Mgmt)

I recently discussed the Deep State and “throwing Wall Street under the bus” with my friend and colleague Jim Kunstler: here’s the resulting podcast, which you can download or listen to on whatever device you are using at the moment: KunstlerCast 250 — Chatting with Charles Hugh Smith

Jim’s trademark wit and clarity guide the discussion, and he kindly lets me blather on about the Deep State. I think you’ll find the discussion of interest; you certainly won’t hear this topic being aired elsewhere.

I have covered the Deep State and profound political disunity for many years:

Going to War with the Political Elite You Have (May 14, 2007)

The Shape of Things To Come (July 8, 2011)

The Master Narrative Nobody Dares Admit: Centralization Has Failed (June 21, 2012)

oftwominds-Charles Hugh Smith: How The Fed Has Failed America, Part 2

oftwominds-Charles Hugh Smith: How The Fed Has Failed America, Part 2.

The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Before I explain how the Federal Reserve has failed America, let’s do a little thought experiment. Let’s imagine that instead of creating $3.2 trillion and giving it to the banking sector to play with–funding carry trades and high-frequency trading, for example–the Fed had invested in carry trades itself and returned the profits directly to taxpayers.

Before we go through the math, let’s recall how a carry trade works: Financiers borrow billions at near-zero interest from the Fed and then use the free money to buy bonds in other countries where the return is (say) 5%. The financiers are skimming 4.75% or more for doing nothing other than having access to the Fed’s free money.

If the bonds rise in value (because interest rates decline in the nation issuing the bonds), the financiers skim additional profit. If the trade can be leveraged via derivatives, then the annual return can be bumped up from 5% to 10%.

OK, back to the experiment. The Fed created $3.2 trillion in its quantitative easing (QE) programs. let’s say the Fed’s money managers (or gunslingers hired by the Fed to handle the trading) earn around 5% annually with various low-risk carry trades.

That works out to an annual profit of $160 billion (5% of $3.2 trillion). Now let’s say the Fed divvied the profit up among everyone who paid Social Security taxes the previous year. That’s around 140 million wage earners. Every person who paid Social Security taxes would receive $1,100 from the Fed’s carry trade profits.

The point of this experiment is to suggest that there were plenty of things the Fed could have done with its $3.2 trillion that would have directly benefited taxpaying Americans, but instead the Fed funneled all those profits to financiers and banks.

The Fed apologists claim that lowering interest rates to zero benefited American who saw their interest payments decline. Nice, but not necessarily true. Try asking a student paying 9% for his student loans how much his interest rate dropped due to Fed policy. Or ask someone paying 19.9% in credit card interest (gotta love that .1% that keeps it under 20%)–how much did your interest drop as a result of Fed policy?

Answer: zip, zero, nada. The Fed’s zero interest rate policy (ZIRP)funneled profits to the banks, not to borrowers.

And let’s not forget that many Americans chose not to borrow at all. What did the Fed do for them? It stole the interest they once earned on their savings. Estimates vary, but it is clear that the Fed’s ZIRP transferred hundreds of billions of dollars in interest to the banking sector, income forceably “donated” by savers to the banks.

Lowering interest rates to zero is effectively a forced subsidy of borrowers by savers. But that’s not the only subsidy: who makes money from originating and managing loans? Banks. The more loans that are originated, the higher the transaction fees and profits flowing to banks. So incentivizing borrowing generates more profits for banks.

Humans make decisions based on the incentives and disincentives in place at the time of their decision. Lowering the cost of money (interest) to zero creates an incentive to gamble the money on low-yield bets. After all, if you can earn 3% on the free money, then why not skim the free 3%?

If speculators had to pay 6% for money and 7.5% for mortgages (the going rate in the go-go 1990s), then the number of available carry trades plummets. The only carry trades that make sense when you’re paying 6% for money are those with yields of 10%–and any bond paying 10% carries a high risk of default (otherwise, the issuer wouldn’t have to offer such a high rate of interest to lure buyers).

All of these incentives to borrow money at zero interest rate are only available to banks and financiers. And that’s the point of the Fed’s policies: to stripmine the bottom 99.5% and transfer the wealth to banks and financiers. Lowering interest rates to zero incentivizes carry trades and speculative bets that do absolutely nothing for America or the bottom 99.5% of taxpayers.

A self-employed worker pays 50% more tax than a hedge funder skimming billions of dollars in carry trades. A self-employed worker pays 15.3% in Social Security and Medicare taxes and a minimum of 15% Federal income tax for a minimum of 30.3%. (The higher your income, the higher your tax rate, which quickly rises to 25% and up.) The hedge funder pays no Social Security tax at all because the carry trade profits are “long-term capital gains” which are taxed at 15% (20% if the Hedgie skims more than $400,000 a year).

Despite the Fed apologists’ claims that ZIRP and free money handed to banks and financiers create jobs and start businesses, there is absolutely no evidence to support this claim. The only beneficiaries of Fed policies are tax accountants for the banks and financiers and luxury auto dealerships. Since Porsches and Maseratis are not made in the U.S., the benefits of the top .5% buying costly gew-gaws and evading taxes is extremely limited.

Attention, all apologists, lackeys, toadies, minions and factotums of the Fed: is there any plausible explanation for the wealthiest .5% pulling away from everyone else since the Fed launched ZIRP and QE other than Fed policies? And while we’re at it, how about publishing a verifiable list of companies that were founded and now employ hundreds of people because the owners could borrow millions of dollars at zero interest?

Get real–no new business can borrow Fed money for zero interest. The only entities that can borrow the Fed’s free money are banks and other financial parasites.

The truth is the Fed incentivizes and rewards the most parasitic, least productive sector of the economy and forcibly transfers the interest that was once earned by the productive middle class to the parasites. Though the multitudes of apologists, lackeys, toadies, minions and factotums of the Fed will frantically deny it, the inescapable truth is that the nation and the bottom 99.5% would be instantly and forever better off were the Fed closed down and its assets liquidated.

The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Source: Wealth, Income, and Power (G. William Domhoff)

oftwominds-Charles Hugh Smith: Who Gets Thrown Under the Bus in the Next Financial Crisis?

oftwominds-Charles Hugh Smith: Who Gets Thrown Under the Bus in the Next Financial Crisis?.

The speculative excesses and political power of Wall Street pose a strategic threat to the Deep State, and as a result a showdown between the Deep State and the surface machinery of governance that has been captured by Wall Street is looming.

The basic idea of the Deep State is that the visible machinery of governance–electoral politics and the Federal Reserve–doesn’t set strategic policy, it ratifies and implements decisions made behind closed doors. In Mike Lofgren’s definition, the Deep State is “effectively able to govern the United States without reference to the consent of the governed as expressed through the formal political process.”

In my analysis, the Deep State is the National Security State which enables a vast Imperial structure that incorporates hard and soft power–military, diplomatic, intelligence, finance, commercial, energy, media, higher education–in a system of global domination and influence.

The Dollar and the Deep State (February 24, 2014)

Ukraine: A Deep State Analysis (February 27, 2014)

Like any other bureaucracy, the Deep State is prone to group-think, the tendency to join the prevailing “herd” in accepting a dominant paradigm and narrative that identifies key dynamics and sets priorities.

Group-think responds to both success and failure. In the case of the Deep State, key elements of the neo-conservative paradigm have been discredited. The Rise and Fall of the Failed-State Paradigm: Requiem for a Decade of Distraction (Foreign Affairs)

(Anyone seeking a public reflection of the current thinking within the Deep State would do well to read Foreign Affairs, with an emphasis on reading between the lines.)

For the sake of argument, let’s assume the leaders of the U.S. Deep State are not complete morons. Granted, that is quite a stretch, given that these are the people who gambled the lives of thousands of American troops and trillions of dollars in treasure on discretionary wars in Iraq and Afghanistan.

But it is also reasonable to assume that the neo-conservatives who naively assumed that residents of Baghdad would not only welcome their foreign liberators with baskets of flowers but would magically reconstruct the social institutions that had been systemically destroyed by Saddam over the previous 30 years–yes, those neo-con nincompoops– have been quietly put to pasture on their mini-estates in Northern Virginia.

In other words, it is reasonable to assume that the Deep State has accepted that “mistakes were made” and flushed those responsible for the previous decade’s disasters.

The Deep State undoubtedly has its own niceties and protocols, but it is by necessity ruthlessly Darwinian: failure is not only always an option, it is inevitable as a systems-level consequence of tightly connected, interactive complex systems; such failures are known as “normal accidents,” catastrophes resulting from seemingly small miscalculations and miscues that cascade into systemic crises.

As a result, incompetence cannot be rewarded lest the Deep State itself suffer the consequences.

The Deep State’s prime directive is to preserve the Deep State itself and the nation it depends on for its survival. My analysis starts by identifying the vectors of dependency. (To the best of my knowledge, I am the first to use this term in this context.) The Deep State depends on the survival of the U.S. nation-state, but the nation-state does not depend on the Deep State for its survival, despite the certainty within the Deep State that “we are the only thing keeping this thing together.”

Strategy is one thing, responding to crisis is another. The surface government (elected officials, regulatory agencies, the Federal Reserve, etc.) responds to crisis in two basic ways: it chooses whatever short-term politically expedient fix reduces the immediate political pain (also known as “kicking the can down the road”) and it sacrifices the interests of politically weak groups to protect its cronies and fiefdoms.

This crisis-response triage requires that somebody gets thrown under the bus. In the 2008 financial crisis, the Fed threw savers and the bottom 95% under the bus to funnel hundreds of billions of dollars–what was previously paid in interest–to the banks to rebuild their broken balance sheets. The Fed also provided limitless liquidity to bank trading desks and financiers to skim billions from carry trades, effectively channeling the nation’s financial resources to enrich its cronies, the top 1/10th of 1%.

The Deep State must take a longer view, and make strategic triage decisions. All sorts of people, groups and policies are routinely tossed under the bus–foreign leaders, resistance groups, civil liberties, etc.–as the Deep State adjusts to long-term developments and crises with strategic consequences.

Many Deep State decisions and policies are barely noticed, even though they are completely public. For example, the U.S. Deep State recognized that the dissolution of the Soviet Union opened an extremely dangerous door to nuclear weapons falling into non-state hands. So the U.S. spent tens of billions of dollars helping secure the thousands of Soviet nuclear weapons left in limbo after the breakup.

Though the Deep State’s institutional bias is to focus on conventional national security issues, it must also monitor potential strategic threats created by issues such as climate change, immigration and Peak Cheap Oil. The financial crisis was apparently an unexpected and unwelcome distraction from the geopolitical Great Game, and the response of the Deep State was muted.
while the surface policies of the Federal Reserve and Federal government appear to serve the interests of the financial Elites, I am beginning to discern the possibility of a strategic Deep State response to the next (and inevitable) financial crisis.

This crisis is simple to summarize: the paper claims on wealth so far exceed actual wealth that something’s gotta give. These claims include trillions of dollars in shadow-banking bets (derivatives and other leveraged claims all teetering on a tiny base of real collateral) and trillions of dollars in debt-based claims on future income.

Simply put, the vast majority of these claims will have to be zeroed out, i.e. these phantom-claim “assets” will be voided and declared worthless. This leads to the key question: who will the Deep State throw under the bus to preserve itself and the nation-state?

Once again, identifying the vectors of dependency clarifies the strategic priorities. As I pointed out in The Dollar and the Deep State, the pre-eminence of both the Deep State and the U.S. nation-state depend on the U.S. dollar remaining the key reserve currency in the global economy.

The collapse of the U.S. dollar would destroy the foundation of both the Deep State and the U.S. nation-state, hence my conclusion that the Deep State will not enable that collapse.

As for all the financial claims on real wealth that will have to go to zero value, let’s identify the operative vector of dependency with a question: which scenario most threatens the Deep State: 50 million hungry Americans taking to the streets shouting, “we’re mad as hell and we’re not going to take it any more!” or 10,000 financiers losing a couple trillion dollars in phantom wealth?

In other words, the phantom financier claims of Wall Street now pose a strategic threat to the integrity of the U.S. and its Deep State.

The Deep State needs a functioning U.S. nation-state, and a mass uprising arising from the collapse of the state cannot be suppressed with a few whiffs of grapeshot. The collapse of global pre-eminence and state financing of food stamps and other social welfare programs directly threaten the Deep State.

The collapse of financier fortunes? While that would hurt some Yalie cronies, the Deep State is not Wall Street; it attracts those who prefer power to wealth and strategy to trading. I have no doubt whatsoever that the leadership of the Deep State would have no qualms about throwing bankers and financiers under the bus once they pose a strategic threat to the U.S. dollar and other financial interests vital to the Deep State, for example, keeping 300 million Americans distracted, placated and docile.

It’s certainly not lost on the Deep State that a palpable hatred of bankers, financiers and the Federal Reserve is taking root across the land. I know this is outside the mainstream, but I think it is increasingly likely that the financial system’s skimmers and swindlers are being recognized as potential strategic threats to the Deep State.

What is essential to the Deep State’s survival and supremacy and what is not essential? Are 10,000 obscenely wealthy financiers essential? No. Between saving the U.S. dollar and making whole the $100 trillion in nominal-value bets made by financiers in offshore shadow-banking accounts–there’s no contest.

Conventional wisdom has it that Wall Street dominates the state and the Fed. To the degree that these formal surface institutions can be influenced by lobbying, campaign contributions and plum positions, this is true. But these surface institutions only ratify and implement Deep State directives.

I know this sounds “impossible” within conventional narratives, but I am increasingly confident that the financiers’ phantom claims on real wealth will be thrown under the bus in the next global financial crisis. Look at it this way: there’s essentially nothing left to stripmine from the bottom 80%; most have been reduced to neofeudal debt-serfdom. Since the survival of the nation-state depends on the 80% remaining either passive or productive, the Deep State has a vital strategic interest in both the U.S. dollar and in maintaining the social welfare programs that enable the bottom 80%’s survival.

The Three-and-a-Half Class Society (October 22, 2012)

The Deep State also needs the top 20% to remain productive to maintain U.S. soft and hard power. Transferring trillions of dollars in real wealth to make good the claims of the financier class would require the stripmining of the whatever assets the top 20% still hold. This transfer would directly threaten both the nation-state and the Deep State.

The dominance of Wall Street over the formal, visible machinery of governance has persuaded many that Wall Street is the Deep State. I believe this is a serious misread of the real Deep State. As I noted in The Dollar and the Deep State, to even discern the outlines of the Deep State requires a senior military position or national-security civilian equivalent.

Those writing knowledgeably about Wall Street and finance typically show near-zero knowledge of high-echelon U.S. military and national-security assets, policies and networks, so this blind spot is understandable.

It’s widely assumed that Wall Street rules the roost in both the mainstream financial media and in the alternative financial blogosphere. In my view, the speculative excesses and political power of Wall Street pose a strategic threat to the Deep State, and as a result a showdown between the Deep State and the surface machinery of governance that has been captured by Wall Street is looming.

Though everyone who is convinced the U.S. dollar will go to zero is confident that Wall Street will emerge victorious from the next financial crisis, I am convinced of the opposite: the Deep State will do whatever it takes to eliminate strategic threats to the integrity of the Deep State and the nation it depends on for its power and survival. In a financial crisis that threatens the dollar and the Deep State, the phantom claims of Wall Street’s financier skimmers, scammers and swindlers will be tossed under the bus with few qualms. The triage might even be performed with a certain relish.

Put another way: we’ve reached Peak Wall Street and it’s all downhill from here.

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