This past Friday, there was a very illuminating column in the Financial Times by James Rickards who wrote:

We have given Wall Street huge incentives to burn down your house.

  Rickards’ article used Greece’s financial woes as the example for the way Wall Street makes money. Start by understanding Rickards’ perspective: he is the former general counsel of Long-Term Capital Management–which was, in some sense, a canary in the coal mine to what we went through in 2008. In 1998, LTCM got into huge trouble and caused a financial panic that financial and political leaders believed might cause a worldwide collapse. Sound familiar?

  The short version: LTCM was a hedge fund that used complex mathematical formulas to make profits on trading i.e., they actually made nothing real but pocketed profits based on financial alchemy–with a system that was entirely based on huge leverage. That is, debt and guesswork. LTCM did all this with a message that its arcane and complex trading system would make money like a "vacuum sucking up nickels that no one else could see."

  There are two important points here. First, LTCM had to be bailed out by…the Federal Reserve Bank, which did nothing to stop the very risk trading in advance. Second, there was, then, no substantial change in the way Wall Street did its business. Had there been real reform, we might have avoided 2008.

  Why? Rickards explains, using Greece as the current example:

Now the piñata party begins. Banks grab their sticks and start pounding thinly traded Greek bonds and pushing out the spread between Greek and the benchmark German CDS price. Step two is a call on the pension funds to put up more margin, or security, as the price has moved in favour of the buyer. The margin money is shovelled to the hedge funds, which enjoy the cash and paper profits and the 20 per cent performance fees that follow. How convenient when this happens in December in time for the annual accounts, as was recently the case. This dynamic of pushing out spreads and calling in margin is the same one that played out at Long-Term Capital Management in 1998 and AIG in 2008 and it is happening again, this time in Europe.

Eventually the money flow will be reversed, when a bail-out is announced, but in the meantime pension funds earn premium, banks earn spreads, hedge funds earn fees and everyone’s a winner – except the hapless hedge fund investors, who suffer the fees on fleeting performance, and the unfortunate inhabitants of the piñata. What does any of this have to do with Greece? Very little. It is not much more than a floating craps game in an alley off Wall Street.[emphasis added]

  Bottom line: some people make lots of money, whether trading helps fund something positive or, more important, when everything starts to unravel.

  And that’s what we need to keep in mind when we are contemplating changing the rules of the game. The greed driving Wall Street is fueled by a system that rewards a very small elite–whether they do the right thing or whether they do the wrong thing. Making a profit on Wall Street has almost nothing to do with the question about whether the people are better off.

  Politicians understand that people are angry about the robbing of America. Some of the response has been quite cynical and even comical.

  Wall Street clearly understand its objectives and interests. For that reason, it is pouring tens of millions of dollars into the pockets of politicians and lobbying to defeat any reform–including a concerted attack on the Consumer Financial Protection Agency that the president has proposed.

  The question for us: will we see this clearly? Will we vote and act for real change, not phony change?