The Precondition for an Economic Recovery According to Keynes and Confirmed by, of all People, Greenspan

Most of the blogosphere has been skeptical of the rally in equities since the beginning, with ZeroHedge pointing out that the rise can be attributed, basically, to free money courtesy of the Federal Reserve, and aided and abetted by High Frequency Trading and the principal program trading of the usual suspects. Now, even for those who are not conspiracy minded, charts such as these speak volumes(pun intended).

From ZeroHedge.

I would like to point out one possible explanation for this phenomenon from a contentious source that I have quoted before. I maintian that Keynes is misunderstoond by many and that he is not the source of all wisdom, but, rather, someone who asked the right questions at the right time and pointed out many problems in the workings of the economy in periods of turmoil.

Unfortunately a serious fall in the marginal efficiency of capital also tends to affect adversely the propensity to consume. For it involves a severe decline in the market value of Stock Exchange equities. Now, on the class who take an active interest in their Stock Exchange investments, especially if they are employing borrowed funds, this naturally exerts a very depressing influence. These people are, perhaps, even more influenced in their readiness to spend by rises and falls in the value of their investments than by the state of their incomes. With a "stock-minded" public as in the United States to-day, a rising stock-market may be an almost essential condition of a satisfactory propensity to consume; and this circumstance, generally overlooked until lately, obviously serves to aggravate still further the depressing effect of a decline in the marginal efficiency of capital.
When once the recovery has been started, the manner in which it feeds on itself and cumulates is obvious. But during the downward phase, when both fixed capital and stocks of materials are for the time being redundant and working-capital is being reduced, the schedule of the marginal efficiency of capital may fall so low that it can scarcely be corrected, so as to secure a satisfactory rate of new investment, by any practicable reduction in the rate of interest. Thus with markets organised and influenced as they are at present, the market estimation of the marginal efficiency of capital may suffer such enormously wide fluctuations that it cannot be sufficiently offset by corresponding fluctuations in the rate of interest. Moreover, the corresponding movements in the stock-market may, as we have seen above, depress the propensity to consume just when it is most needed. In conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no reason to expect. I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands.

The point of contention is, and has been, the last sentence, which raises the blood pressure of everyone involved, on both sides, like nothing else ever written about economics (save maybe Marx). I am not venturing out on a limb when I say that the powers that be have read this passage and drawn their own conclusions from it. Even Greenspan said :

The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment. The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies. Corporate debt, as a consequence, has been upgraded and yields have fallen. Previously capital-strapped companies have been able to raise considerable debt and equity in recent months. Market fears of bank insolvency, particularly, have been assuaged

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Juxtaposing these two quotes does not a proof of a government engineered market melt-up make, but one does have to wonder.

Goldmanites in Power

Doing a search on Goldmanites in Power results in all kind of interesting posts which make one have to wonder. Now, regardless of whether you subscribe to the vampire squid theory or not, you have to be awed by the sheer size and interconnectedness of the network of Goldman Sachs alumni and the US government. But lest Goldman Sachs be accused of provincialism here is evidence that their tentacles reach is not confined to the Corporate United States of America. From a great blog called Future News Today:

Here are some more examples of Goldman Sachs power taken from the article "The Goldman touch". (I have also posted a copy of this article on my blog for safe keeping in case the link gets stale.)

Henry "Hank" Paulson - Current Secretary of the Treasury of the US, former Chairman and CEO of Goldman Sachs. OK, you already knew that one.

Mark Carney - Governor of the Bank of Canada. Before joining the public service, Carney had a thirteen-year career with Goldman Sachs in its London, Tokyo, New York and Toronto offices. He was heavily involved in Goldman Sachs's work with the Russian financial crisis of 1998.

Mario Draghi - Governor of the Bank of Italy. He was a London-based partner at Goldman from 2002 to 2005.

John Thain, who once ran Goldman's mortgage desk, was hired late last year to take over troubled Merrill Lynch & Co. Mr. Thain was running the New York Stock Exchange at the time of his hiring.

Joshua Bolten, took over April 14, 2006, as President George W. Bush's Chief of Staff "with authority to do whatever he deemed necessary to stabilize Bush's presidency, and he has moved quickly with changes". He was Executive Director for Legal and Government Affairs at Goldman Sachs in London from 1994 to 1999.

Robert Steel was appointed by Paulson to be Under Secretary for Domestic Finance. He was lured away from Mr. Paulson's Treasury to resuscitate Wachovia Corp., the fourth-largest U.S. bank. (Or at least they were before they collapsed.) Mr. Steel is a former Goldman Sachs Vice Chairman.

Paulson replaced Mr. Steel with Ken Wilson, the head of Goldman Sachs's financial services group. The Wall Street Journal describes him as, "The Goldman Sachs Man Behind Your Bailouts". I particularly liked this qoute, "[he] will be unpaid until Jan. 1, at which point Wilson will return to Goldman Sachs." So he is working on the bailout as a charity project. Right.

But here's what I really found startling from "The Goldman touch" article.
The same phenomenon is visible in other countries, as well. Indeed, there were three ex-Goldman executives at the table in April when the Group of Seven finance ministers and central bank governors turned their attention fully to the credit crisis at a meeting in Washington.

Along with Mr. Paulson, there was Mr. Carney, who had taken up his job as head of Canada's central bank only a couple of months earlier, and Bank of Italy Governor Mario Draghi, who was a London-based partner at Goldman from 2002 to 2005. Mr. Draghi also leads the influential Financial Services Forum of central bankers and regulators, which spent six months preparing the report that became the basis of the G7's demands for more transparency by banks and other regulatory changes.
But is there some sort of nefarious conspiracy here? No, of course not according to the article.
Of course, this cloistered culture, populated as it is by power and wealth, has roused its share of suspicion among outsiders, who view the firm as a kind of secret society – just do a Google search on “Goldman Sachs and conspiracy.”

Current and former Goldmanites dismiss the notion that the spread of former executives to positions of influence is a Machiavellian plot to further enrich the company. There are no secret handshakes, they insist; no covert collaboration to extend the firm's reach.
Oh, I feel much better now.

Here is an expanded version from the Huffington post.

TREASURY DEPARTMENT
Henry Paulson: Served as Treasury Secretary under President George W. Bush.
Was CEO of Goldman from 1999 to 2006.

Robert Rubin: Served as Treasury Secretary under President Clinton.
Previously, he was co-chairman of Goldman from 1990 to 1992.

Robert K. Steel: Served as Under Secretary of the Treasury for Domestic Finance, the principal adviser to the secretary on matters of domestic finance and led the department's activities with respect to the domestic financial system, fiscal policy and operations, governmental assets and liabilities, and related economic and financial matters.
Retired from Goldman as a vice chairman of the firm in 2004, where he worked as head of equities for Europe and head of the Equities Division in New York.

Mark Patterson: Chief of Staff to Secretary Tim Geithner
Was director of government affairs at Goldman.

Dan Jester: Key adviser to Geithner, who played a key role in shaping the takeover of Fannie Mae and Freddie Mac.
Was strategic officer at Goldman.

Steve Shafran: Adviser helping to shape Treasury's effort to guarantee money market funds.
Was expert in corporate restructuring at Goldman.

Kendrick Wilson: Brought in to advise former Treasury Secretary Henry Paulson, another Goldman alum -- after a personal call from his old Harvard Business School classmate, George W. Bush -- to advise him on how to fix the financial markets. Paulson brought Wilson to Goldman in 1998 from Lazard Freres. Before that, Wilson was president of Ranieri & Co., which was established by Lew Ranieri. While at Salomon Brothers in the 1970s, Ranieri pioneered mortgage-backed securities, the exotic financial instruments that helped stoke the mortgage bubble. In other words, the man brought in to fend off a financial crisis appears to be a protege of one of the men who helped cause it.
Was senior investment banker at Goldman.

TARP
Neel T. Kashkari: Appointed by Paulson to oversee the $700 billion TARP fund and was considered Paulson's right hand man during the crisis, all at the tender age of 35. Kashkari was criticized for the lack of oversight of the funds disbursement, which he said would have been impossible since the funs are fungible. This assertion has been largely refuted by Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. Kashkari was also responsible for recruiting Reuben Jeffrey.
Was technology investment banker for Goldman in San Francisco from 2004 to 2006.

Reuben Jeffrey: Selected by fellow Goldman alum Kashkari as the interim chief investment officer for the bailout. He was formerly the chairman of the CFTC, a role currently held by fellow Goldmanite Gary Gensler, as well as Under Secretary of State for Economic, Energy, and Agricultural Affairs.
Was executive for 18 years at Goldman, beginning in 1983.

Edward C. Forst: Left his post as executive vice president at Harvard to serve as an advisor on setting up TARP, but has since returned to the school.
Was global head of the Investment Management Division at Goldman for 14 years.

FEDERAL RESERVE
William Dudley: President of the Federal Reserve Bank of New York.
Was former chief economist and advisory director at Goldman where he worked from 1986 to 2007.

Stephen Friedman: Was chairman of the Federal Reserve Bank of New York until May 2009, when he was pressured to resign after buying Goldman shares in December and January. Previously, he was director of President George W. Bush's National Economic Council.
Joined Goldman in 1966 and was co-chairman from 1990 to 1994.

COMMODITIIES FUTURES TRADING COMMISSION
Gary Gensler: Appointed by Obama to head the CFTC. This was the commission headed by Brooksley Born in the late 1990's, when Alan Greenspan and Robert Rubin overruled her attempts to regulate credit-default swaps; fellow Goldmanite Reuben Jeffrey also held this position. Gensler worked in the Treasury Department as Assistant Secretary of the Treasury from 1997-1999 and as Under Secretary from 1999-2001, a position he received from Lawrence Summers.
Was partner in Goldman from 1979-1996

OTHER
Sonal Shah: Appointed to Office of Social Innovation and Civic Participation and an Advisory Board Member for the Obama-Biden Transition Project in 2008. Shah had previously held a variety of positions in the Treasury Department from 1995 to early 2002.
Was a former Vice President at Goldman from 2004 to 2007.

Joshua Bolten: Former chief of staff with the Bush administration as well as former director of the Office of Management and Budget until 2006.
Was executive director of Government Affairs for Goldman Sachs from 1994 to 1999. Bolten was instrumental in recruiting his fellow Goldman alum Henry Paulson as Treasury Secretary.

Jon Corzine: A strong supporter and political ally of Obama, Corzine is currently the governor of New Jersey. Before being elected governor, he served as the New Jersey representative to the U.S. Congress from 2001-2006, where he served on the Banking and Budget Committees.
Began working for Goldman in 1975 and worked his way up to chairman and co-CEO before being pushed out in 1998.

Robert Zoellick: Currently serves as president of the World Bank and previously was deputy secretary of state.
Was previously a managing director at Goldman, which he joined in 2006.

James Johnson: Was involved in the vice-presidential selection process for the Obama campaign and served as president and CEO of Fannie Mae.
Board member of Goldman.

Kenneth D. Brody: Was former president and chairman of the Export-Import Bank of the US.
Worked for Goldman for 20 years, founded and heading up its high-technology investment banking group and leading the firm's real-estate investment banking group.

Sidney Weinberg: Served as vice-chair for FDR's War Production Board during World War II.
The head of Goldman from 1930 to 1969, nicknamed "Mr. Wall Street," he worked his way up at the firm after starting as a $3-a-week janitor's assistant.

LOBBYISTS
Richard Gephardt: Was House Majority Leader from 1989 to 1995 and House Minority Leader from 1995 to 2003.
His lobbying firm was hired by Goldman to represent its interests on issues related to TARP.

Michael Paese: Former top staffer to Rep. Barney Frank, the chairman of the House Financial Services Committee.
Is Goldman's new top lobbyist. He will join the firm as director of government affairs - last year, that position was occupied by Mark Patterson, now the chief of staff at the Treasury Department. Paese has swung through the revolving doors several times - he previously worked at JPMorgan and Mercantile Bankshares and was senior minority counsel at the Financial Services Committee.

Faryar Shirzad: Former top economic aide to President George W. Bush and Republican counsel to the Senate Finance Committee.
He now lobbies the government on behalf of Goldman Sachs as the firm's Global Head of the Office of Government Affairs.

Richard Y. Roberts: Former SEC commissioner.
Now working as a principal at RR&G LLC, which was hired by Goldman to lobby on TARP.

Steven Elmendorf: Former chief of staff to then-House minority Leader Rich Gephardt.
Now runs his own lobbying firm, where Goldman is one of his clients.

Robert Cogorno: Former Gephardt aide and one-time floor director for Steny Hoyer (D-Md.), the No. 2 House Democrat.
Works for Elmendorf Strategies, where he lobbies for Goldman and Citigroup.

Chris Javens: Ex-tax policy adviser to Iowa Senator Chuck Grassley.
Now lobbies for Goldman.

GOVERNMENT - GOLDMAN
E. Gerald Corrigan was president of the New York Fed from 1985 to 1993. He joined Goldman Sachs in 1994 and currently is a partner and managing director; he was also appointed chairman of GS Bank USA, the firm's holding company, in September 2008.

Lori E Laudien: Former counsel for the Senate Finance Committee in 1996-1997
Has been a lobbyist for Goldman since 2005.

Marti Thomas: Executive Floor Assistant to Dick Gephardt from 1989-1998, he went on to serve in the Treasury Department as Deputy Assistant Secretary for Tax and Budget from 1998-1999, and as Assistant Secretary in Legal Affairs and Public Policy in 2000.
Joined Goldman as the Federal Legislative Affairs Leader from 2007-2009.

Kenneth Connolly: Was staff director of the Senate Environment & Public Works Committee).
Became a Vice President at Goldman in 2008.

Arthur Levitt: The longest-serving SEC chairman (1993 to 2001).
Hired by Goldman in June 2009 as an adviser on public policy and other matters.