Special Report
On the Brink of Depression
By any measurement, the financial crisis of 2007-2009 deserves endless examination and inspection.
“Observe, my son, with what little wisdom the world is
run.”
— Baron von Oxenstiern
By any measurement, the financial crisis of 2007-2009, maybe still going on, has been the biggest finance story since Drexel/Milken and maybe since 1929. It deserves endless examination and inspection. Herewith, in a few “short stops and high hops,” as Phil Rizzuto used to call them, are a few issues that seem to me to bear substantial inquiry.
1.) It has been the policy of the government of the United States at least since the enactment of the Federal Reserve Act just before World War I to smooth out the business cycle, to keep credit flowing, to keep the economy humming and to keep employment high. This was further enunciated in many federal enactments including the Securities Act, the Securities Exchange Act, the Employment Act of 1946, Humphrey-Hawkins, and many stimulus plans of both parties.
That kind of imperative was relied upon by the Bush Administration and the Federal Reserve under Ben Bernanke to use extreme innovation and imagination to rescue Bear Stearns in early 2008. Seeing “systemic risk,” as the popular phrase goes, the Fed created a “special purpose vehicle” to buy bad debts and dicey assets of Bear and thus allow Bear to be a candidate for purchase and salvation.
Why, several months later, did the Fed and the administration decide that they could not use the same level of imagination and flexibility to save Lehman? It was clear to everyone that allowing Lehman to fail would be a disaster for the markets, for credit, for the entire nation’s economy. Not bad — a disaster.
Why, in that case, did the government adopt a “no more bailouts” policy about Lehman?
On the Brink, the new and fascinating book by Henry Paulson, Bush’s last Treasury Secretary and the man largely in charge of the financial situation in 2007-2008, says over and over again that he realized that letting Lehman go down would be extremely bad. He also says that the government was playing hardball and pretending it would not pitch in to help a private solution to the Lehman problem. But he never says when the pose became reality and/or why. (By the way, the title of my first novel, written with my father, was also On the Brink. From Simon and Schuster. Long out of print.)
Put another way, Mr. Paulson says that various persons counted that Lehman might have a capital hole of more than $10 billion, maybe much more, and that the government did not want to be responsible for plugging that hole.
But the losses to the economy following the failure of Lehman have been on the order of hundreds of billions, maybe trillions. Certainly the rescue and stimulus packages needed in the wake of the Lehman failure have amounted to the trillions.
Why didn’t the government put in the small amounts needed in Fall of 2008 rather than have to virtually bankrupt the state later to pick up the pieces after Lehman? If the U.S. went into severe recession, very foreseeable if Lehman failed, losses to the economy on a large scale were extremely foreseeable.
Or, let me try to put it another way: In his book, Mr. Paulson stresses that he had no authority to rescue Lehman. But if Mr. Paulson had simply had a press conference and said, “We will not let Lehman fail. We will take whatever measures are necessary to save it, including asking for an emergency measure from Congress and the same kind of energy from the Fed that it showed in the case of Bear,” Lehman would not have failed. Why didn’t Mr. Paulson do it?
And I know Mr. George W. Bush. He is not an ideologue and he listens and learns. If Mr. Paulson and Mr. Bernanke had gone to him and told him that there must be a bailout, he would have pushed for it and gotten it right away.
Or, I will put it yet another way.
I recently had the great pleasure of speaking to a man at a conference with extreme first hand knowledge of the rescue of AIG. He explained to me why the CDS creditors of AIG had to be paid in full by the taxpayers. His explanations had much to do with that old “systemic risk” again. But if systemic risk justified taking over $10 billion of taxpayer money and paying it to Goldman Sachs on highly questionable credit default swap (CDS) contracts, why didn’t that same systemic risk justify saving Lehman?
Why was there so much urgency about saving Bear, making us taxpayers pay off Goldman Sachs (I am a stockholder), and why so little about saving Lehman?
About the Author
Ben Stein is a writer, actor, economist, and lawyer living in Beverly Hills and Malibu. He writes “Ben Stein’s Diary” for every issue of The American Spectator.
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Alphred| 3.19.10 @ 7:08AM
We have handed far too much power to the financial sector, power as in 'too big to fail'.
AIG should not have been bailed out, even if it took Goldman with it.
At the risk of sounding like a Theodore Roosevelt Republican, any corporation that is too big to fail is too big.
Lindsey| 3.19.10 @ 10:51AM
Our short term pain would have been our long term gain if we let these institutions fail as they should have. If we had let them fail, the market would have sorted it all out by now and we would be on our way to recovery in this country. Instead we are digging ourselves deeper every day!!!!!!!!
Ryan| 3.19.10 @ 8:49AM
I think that the "too big to fail" issues are part mythology. I'm in the lower end of the commercial debt-purchasing business. There are plenty of companies out there who would be more than willing to purchase even low-grade paper at discount. Yes, a ton of money would be lost, but it keeps the government and taxpayer off the hook.
Heck, my understanding is that it was only PART of AIG that was in trouble - spinning off the bad sector would have been easier.
The problem lies in that there are these big-money guys and their friends in Washington who try to keep them uber-wealthy, rather than by playing by the rules the rest of us have to.
Sometimes I wonder how much money some big corporations really make, that if they're not all just cash flow and debt service - that if they liquidated and had to put everything on the line, what you may have is a lot of big companies who can barely cover their debt in a liquidation.
St Thor| 3.19.10 @ 9:05AM
In response to your first question, Ben. It's simple: follow the money. Henry Paulson was a former head of Goldman Sachs who, when he moved the the Treasury Department was given a waiver so he could keep his Goldman Sachs stock while he oversaw the financial world. Lehman Brothers was Goldman Sachs biggest competitor. What better way to increase Goldman Sachs financial power and influence than to shove Lehman Brothers down the toilet.
owyheewine| 3.19.10 @ 10:11AM
Amen.
The technology revolution has allowed almost instant movememt of money and paper instruments. Trading is faster than the more cumbersome documentation, like the number of defaulted loans in the CDs.
We're doomed to a repeat as soon as the heat is off the more adventurous traders unless the government figures out that strict disclosure rules on capital ratios is far better than another thousand pages of regulations.
basur | 10.27.10 @ 5:58AM
amen :)
Gordan Finch| 4.12.10 @ 4:45PM
Reply, it is Zurich Financial Services -owners of AIG who hold the Key to most of the worlds dept and corrupt wealth. Dept currently $400 trillion
Thats why the Federal Reserve now owns most of its stock. And why AIG/ ZFS pays the heads.
ZFS size is dangerous and needs dismantling no organisation or Government can control thousands of subsidairies spread all over the world like some vile creator of evil.
JP| 3.19.10 @ 9:23AM
I think Ben underestimates the power of the Fed to set the initial pace (ie Greenspan setting the price of risk both in 1998-2000 and 2002-2006). The interest rates the Fed charges banks and other financial institutions creates the foundation for any subsequent business cycle. When Greenspan lowered interest rates to negatrive territory, he unknowingly set off a wave of speculation that eventually ended in the ashes of Sept 2008.
The real moral hazard was not in the traders, but in the interest rates. Add in excessive government intervention early on in the real estate markets (socializing risk via Fair Housing), the actions of 2 other government institutions (Fannie and Freddie), and the perfect storm was created. The exotic (or some would say fradulent) financial instruments such as CDSs are only part of the story. However, when a mortgage banks can borrow large amounts of cash at 0% and in turn use that cash to subsidize high risk mortgages, which give the bank a spread of 5-7% , and when the federal government underwrites the risk (in the case of foreclosure the taxpayer eats the paper), something is very wrong.
Wall St was complicit in this mess; but, so was Congress, the President, as well as both parties. Extend the guilt to house flippers, homeowners who cash in thier every growing equity, and mortgage brokers who sold off thier high risk mortgages even before the ink was dry.
But at the very center of this crisis, stood the Fed.
JoshInHB| 3.20.10 @ 9:30PM
The real moral hazard was not in the traders, but in the interest rates. Add in excessive government intervention early on in the real estate markets (socializing risk via Fair Housing), the actions of 2 other government institutions (Fannie and Freddie), and the perfect storm was created. The exotic (or some would say fradulent) financial instruments such as CDSs are only part of the story. However, when a mortgage banks can borrow large amounts of cash at 0% and in turn use that cash to subsidize high risk mortgages, which give the bank a spread of 5-7% , and when the federal government underwrites the risk (in the case of foreclosure the taxpayer eats the paper), something is very wrong.
This is a gross understatement of what happened.
Securitization effectively eliminated reserve requirements. As you know, in FRB money is created when new loans are made.
http://arxiv.org/PS_cache/arxi.....1426v1.pdf
By end running reserve requirements, the financial industry effectively became counterfitters.
Wall St was complicit in this mess; but, so was Congress, the President, as well as both parties.
The meme that this was forced onto unwilling bankers by the Democrats is proved laughable by the fact that the financial industry was taking unprecedented bonuses as they were created the credit bubble. And telling the world what geniuses they were.
Wall Street wasn't complicit with the government.
The were co-sonspirators with the political hacks that they bought.
Extend the guilt to house flippers, homeowners who cash in thier every growing equity, and mortgage brokers who sold off thier high risk mortgages even before the ink was dry.
These people and practices were not only enabled by WS but neccesary to it. They were the front line troops of the credit bubble.
loulou| 3.19.10 @ 9:31AM
Too bad Bush panicked. What an idiot he turned out to be. Didn't show lea-der-ship.
Ken (Old Texican)| 3.19.10 @ 12:55PM
loulu,
Bush did not panic...Paulson did. Bush turned to his advisors, and they fell on their ass.
You do dos keep forgetting how well the country did for six years until the Demos took the congress.
...and yeah, Dubyah was trying to provide for our national defense...dumb or smart...that was his focus.
JoshInHB| 3.20.10 @ 9:33PM
Paulson didn't panic.
He pulled off the greatest fraud in human history.
2 Trillion & counting to his buddies.
Rodban | 4.19.10 @ 2:34PM
Yes, agree with JoshInHB, Paulson did pulled off quite a lots.
Wesley Mouch| 3.19.10 @ 9:54AM
The premise of the article is wrong. The cause of the collapse was not trading gone wrong. The cause was (and is) the marginal utility of debt going to zero. No intervention can fix this. We have bought a little time that is all.
Oldefarte| 3.19.10 @ 11:33AM
Great comments/ideas Ben and all; and the previous point of GOVERNMENT INTERFERENCE cannot be understated. Beginning with the CRA of 1977, government bagan forcing banks/financials to underwrite loans to indigents for socialistic reasons, which largely resulted in the recent financial collapse. Yes, greed played apart, but the underlying cause was this CRA of 1977. Get government, especially liberals bent upon socialism, out of the marketplace, and the economic problems will disappear!!!!!
MTB| 3.19.10 @ 4:07PM
I was reading through the comments and hoping/waiting for someone to say this. You are 100% right! The #1 cause of our economic collapse was due to Marxist-Socialist goverment (i.e. Democrat) intervention by the likes of Barney Frank, Chris Dodd and Maxine Waters. A hue and cry went up about the subprime mortgages, Bush tried to reign them in, but those three bastards refused to listen. Wallah! Economic collapse when people who make $30,000 a year are allowed to buy $250,000+ homes. The market could handle a few defaults, but when the ARMs reset, tens of thousands or hundreds of thousands of people could not afford their mortgages. The rest is where we are today.
Sam| 3.19.10 @ 4:55PM
Thank you for your heavily-partisan explanation for our financial crisis. I pity the people who feel that the explanation to our problems is simply to blame Democrats.
What makes you think it was the Democrats' fault (or Republicans or any politicians) that lenders got greedy and homeowners went along with it?
Yes, the Democratic leadership did push lenders to make high-risk loans to minorities. But we also know that the regulatory agencies led by the Bush Administration failed to do their jobs. Most were even in the pockets of Wall Street.
The point is that many people are at fault, from both parties and all walks of life. Blaming the Democrats in Congress shows that you are too partisan for pesky little things like facts.
Oldefarte| 3.21.10 @ 11:55AM
Sam, YOUR PARTISANED argument prevents you from extending same to the true cause. The Democrats' CRA of 1977 forced banks to loan to indigent mortgage applicants AND those same Democrats' political-government pressure forced their governmental-employee regulators to turn a blind eye [look the other way]. Bankers had to/were forced to devise irregular banking procedures in order to fianacially survive [after being government forced upon the CRA of 1977]such as ARM's, NO INCOME/NO INTEREST type loans. If the Democrats/government had not implemented their socialistic banking schemes in 1977, bankers would have continued making traditional 30 year, 20% down payment type loans, and we would not be in this financial crisis today. Wise up and quit drinking the Democrats' KOOL AID!!!!!!
JR| 3.19.10 @ 11:42PM
Nowhere has anyone even mentioned the nasty oil shocks that saw a tremendous runup in the price of oil by the speculators. This preceded the big fall by all the financial houses, etc. Fact is, the people that make this country run and supply the lubrication (money) that makes it work suddenly find themselves paying triple for fuel and their cars are upside down if they are a guzzler, well guess what? The next thing to go will be credit card and mortgage payments as the whole thing snowballs and more and more people are out of a job.
Oil is the fundamental thing that makes the country work. If it quadruples, what the heck do you think is going to happen? I don't see anyone even mentioning this.
JoshInHB| 3.20.10 @ 9:42PM
The #1 cause of our economic collapse was due to Marxist-Socialist goverment (i.e. Democrat) intervention by the likes of Barney Frank, Chris Dodd and Maxine Waters. A hue and cry went up about the subprime mortgages, Bush tried to reign them in, but those three bastards refused to listen.
If you really believe this you are very mis-informed.
Pressure from demonrats for more loans to minorities was used by the financial industry as an opportunity to create an unprecedented credit bubble.
Remember all of the "poor" bankers victimized by the lib democrats into make bad loans were in fact taking outrageously large bonuses the whole time. And telling everyone that "things were different this time". "There was no housing bubble". Etc.
The most outrageous loans were in fact made at the top of the bubble in 2007, just as bubble theory predicted, not in the late 90s when pressure for CRA loans began.
Oldefarte| 3.21.10 @ 12:04PM
Josh, you are partially correct. Bankers reacted to the CRA of 1977 by being forced to implement irregular loans in order to make a profit. Why do you suppose that bankers DID NOT devise these loans BEFORE the CRA of 1977 [because they were making adequate profits with standard loan products---30 year, 20% down, that's why!]. Bankers' greed went overboard, but not until after 1977, and if the """"government""""" regulators [Democrats] had done their jobs [instead of turning a socialistic BLIND EYE] to this greed, today's financial crisis would not have happened. Again, it was all Democratic social engineering/welfare/wealth redistribution that proclamated A HOUSE FOR EVERYONE, WHETHER AFFORDABLE OR NOT that originated this crisis!!!!
JoshInHB| 3.21.10 @ 7:49PM
Oldefarte,
I'll largely agree with and don;t mean to be argumentative, but the crooks on WS are more responsible for the dreidt bubble than the Demos.
I really don;t unserstand why so many conservatives want to absolve the WS and to a greater extent the financial industry from what happened. Those people do not believe in free markets as proved by the Paulson heist. And they are not republicans - most of their money went to the socialist candidate in the last election cycle.
So why do people on my side defend these crooks?
Oldefarte| 3.21.10 @ 11:44AM
MTB, you spoke [in legalese] THE TRUTH, THE WHOLE TRUTH, AND NOTHING BUT THE TRUTH. Thank you!!!!!
Tim| 3.19.10 @ 11:43AM
In a sort of ghastly simplicity we remove the organ and demand the function. We make men without chests and expect of them virtue and enterprise. We laugh at honour and are shocked to find traitors in our midst. We castrate and bid the geldings be fruitful.
"The Abolition of Man" (1943)
Ted| 3.19.10 @ 12:06PM
Part of the problem is how the big Wall Street finance firms are set up now. Back in the day, partners had a significant share of their personal net worth tied up in the firm's success... or failure. And once they left the firms, they could remove only a certain specified percentage of their financial interest in the firm over a specified time frame (which sometimes was as long as 10-15 years past their departure). So they had a personal financial stake in financial success and had an incentive to avoid failure. Most major Wall Street finance firms are no longer set up this way.
JoshInHB| 3.20.10 @ 9:46PM
This is absolutely correct.
Investment banks should not be allowed to incorporate. Period.
They should all be structured as full liability partnerships. Limiting the liability of their management only encourages reckless behaviour.
Oldefarte| 3.21.10 @ 12:08PM
INCORPORATION status has nothing to do with it. Government regulators should DO THEIR JOBS; and government should not FORCE BANKS TO MAKE MORTGAGES/LOANS TO APPLICANTS THAT CANNOT AFFORD SAME!!!!!!
JoshInHb| 3.21.10 @ 7:53PM
Incorporation absolved the management from any personal liablity for the scams they perpetrated.
It also separated their personal wealth from "their" firms. In the past those two factors help prevent overly reckless behavior.
Mike| 3.19.10 @ 12:30PM
St. Thor is on to the issue. Not only did letting Lehman Bros. fail eliminate Goldman's major competitor, how to explain that we (taxpayers) have to fund AIG's CDS obligations to Goldman Sachs?? The only "winner" in this entire mess has been Goldman (see 2009 bonuses paid to partners if you doubt this to be true).
Scott| 3.19.10 @ 1:23PM
Why should we have rescued Lehman? Moral hazard was and is bad enough without another bailout. Moreover, Lehman held mountains of toxic liabilities off its balance sheet, we are now learning. Whether that ruse was legal or not, shouldn't we be glad that the market saw through it and punished Lehman with failure?
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Northern Rebel| 3.19.10 @ 9:46PM
Old Tex is right, President's can't possibly know everything about everything, although our present one seems to think he does.
Henry Ford testified before congress concerning a possible monopoly, and when congressmen were appalled that he didn' t know all the answers, he said "I pay people to know the answers."
So as it should be for the President of the United States.
President Bush's largest mistake was thinking he could get along with the very same people who wanted to destroy him. He was completely unprepared for Washington, as was his father, though both are decent honorable men.
It would be funny if it wasn't so tragic to our nation, watching someone get elected to congress, and seeing them morph into "I am a genius and know everythingman!"
GW was guilty of having a couple of bad advisers, but at least he loves America, unlike the present thug-in-charge!
JoshInHB| 3.20.10 @ 9:50PM
GW was guilty of having a couple of bad advisers, but at least he loves America, unlike the present thug-in-charge!
The TARP was the biggest scam ever.
And one of the 3 biggest decisions of his presidency.
I can't give him a pass on this one. It was the worst decision of any president in at least a hundered years.
By the way, I bet you were against it at the time. I certainly was.
Oldefarte| 3.21.10 @ 12:16PM
Josh, you're FULL OF IT, since the TARP effectively prevented a complete financial collapse of the US and the world. If the major banks had failed from not receiving TARP; every one of us [including businesses that employ people] that has a checking/savings account/ loan would have watched our money being flushed down the toilet. If you want to talk about the worst decisions ever made, start with Kennedy, Johnson, [and now] Obama who have financially bankrupted this country with their governmental welfaric/socialistic proposals that force TAXPAYERS to pay the bills of the indigent constituents of these Democrats!!!!
JoshInHB| 3.21.10 @ 8:13PM
Josh, you're FULL OF IT, since the TARP effectively prevented a complete financial collapse of the US and the world. If the major banks had failed from not receiving TARP; every one of us [including businesses that employ people] that has a checking/savings account/ loan would have watched our money being flushed down the toilet
OK I get it.
You;re one of the crooks
In fact without TARP the investment banks and hedge funds would have collapsed.
So what?
It surely would have hurt you and your buddies.
The general economy - not so much.
All of the BS scare stories would only come about with a complete collapse of commercial banks, not investment banks.
There is an orderly process to deal with insolvent commercial banks. It wasn't tried.
Had the investment banks collapsed there would surely have been a general stock market crash. The market then would have rebounded to true value levels. New investment banks would have formed to provide the services need by the economy. The collapse of the old reckless firms would have provided a really warning in regards to future reckless behavior by the new investment banks.
Its called a free market
Instead TARP
1) Cost uncle sucker upwards of 1 trillion dollars. Which means higher taxes or inflation for all of the rest of us in the years ahead.
2) Guarantees future reckless behavior on the part of financial firms. If they bet big and win, they get rich. If they bet big and lose, well they still get rich and the rest of us get to pick up the tab.
3) Replaced capitalism with corporatism, ie fascism in the financial industry. The consequences of this will play out for decades. You think CRA was bad? Just wait and see what crap politicians cook up now that they are "partners" with the FI.
4)Cause long term damage the entire economy by preventing the clearing of insolvent commercial banks. Instead we have recreated the zombie banks that led to stagnation in Japan for the last twenty years.
5) Caused serious, maybe fatal damage to the social trust that is a nessecary foundation for capitalism. Credit, which for better or worse is basis of our money supply, requires trust to work.
At this point why should anyone feel obligated to pay their debts and be responsible when the financial leaders of the country showed complete irresponsiblity and not only suffered no consequences, but where actively bailed outby the government.
Northern Rebel| 3.19.10 @ 9:52PM
Sam:
Gather your facts before you post on a place where intelligent people converse.
There is video of Barney Fwank, and John Kerry, and other socialist democrats, sayind Freddie and Fannie were just fine, while they were encouraging people with no credit, or collateral, including ILLEGAL ALIENS, to apply for loans everybody knew would never be paid back.
Go back to PUFFINGTON, or KOS, where you can fool someone into thinking you have brains!
Merinas van der Lubbe| 3.21.10 @ 4:20AM
There was one (and *only* one) thing that I admired about the Communist system in the former USSR: when their little scheme came apart, criminals like those two would have ended up in an unheated shack in Siberia.
Instead, not only did they get away with it, but to add insult to injury the public is forced to continue to endure their creepy presence among us. (Why does the DemonRat Party attract such repulsive insects, anyway? - and I submit Pelosi, Waxman, Stabencow, Boxer, Slaughter, Schumer... the list goes on... as further examples...)
Northern Rebel| 3.19.10 @ 9:53PM
(sic) saying. I hate typo's!
Bill Hussein O'Stalin| 3.19.10 @ 10:47PM
I have a great difficulty swallowing the line that the federal reserve had little to do with the current recession. In fact, they created it and there's little doubt of that.
According to Ludwig Von Mises, "All easy credit ends badly," and the current recession is a living embodiment of that theory.
Ironically, the easy credit rolls on postponing the inevitable. The massive bail outs show we have little faith in our system. If Goldman Sachs and AIG went down so much the better.
In the meantime ponder this. It's an apt description of what's really needed.
Ezekiel 25:17: The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he who, in the name of charity and good will, shepherds the weak through the Valley of Darkness; for he is truly his brother's keeper, and the finder of lost children. And, I will strike down upon thee with great vengeance and furious anger those who attempt to poison and destroy my brothers! And, you will know my name is The Lord when I lay my vengeance upon thee!
Bill Hussein O'Stalin| 3.20.10 @ 8:42AM
Here's why Lehman and Goldman Sachs & AIG should have been allowed to fail. They all knew what they were doing. In this article from the WSJ, an employee of Lehman was dismissed just two days after writing a memo to upper management about their corrupt practices.
There's no way this could have been pulled off without a massive cover up not only in the private sector, but at the Treasury.
In my opinion it's most likely still going on and the U.S. Treasury is being looted by millionaires.
http://online.wsj.com/article/.....Collection
Matthew Lee, a Lehman Brothers Holdings Inc. senior vice president, warned in a May 2008 letter that he believed "senior management" may have violated Lehman's internal code of ethics by misleading investors and regulators about the true value of the firm's assets.
Mr. Lee addressed his letter to then-Chief Financial Officer Erin Callan and Chief Risk Officer Chris O'Meara, among others, only days before he was ousted from the firm.
Northern Rebel| 3.20.10 @ 12:44AM
Bill O H:
I agree: Greenspan screwed up our economy by keeping interest rates too low when we grew out of the the paper deficit despite the greatest tax hike in history.
It's because the American people rolled up their sleeves, and persevered in spite of Clinton's policies.
Thank God that was the case, so that we could wage war on the evil bastards who took down the buildings, that for some reason haven't been REBUILT TEN STORIES HIGHER THAN THE ONES THAT WENT DOWN! (That's a FUCK YOU to all NY politicians.)
Anyhoo, had Greenspan been a tad more aggressive, we would have had 10% growth in our GDP, instead of 4%, and we would have been in position to withstand the Obamination that is occuring now.
Instead, China has our balls in it's evil slimy fingers, and the only thing keeping them from squeezing, is that we buy their lead poisoned shit!
I wonder if Hamilton realized what his central bank scheme would turn out like 200 years later.
Oldefarte| 3.21.10 @ 12:26PM
Bill and NR: This blaming of Greenspan and financials is typically ignorant. The extended low interest rates were intended for financially capable/intelligent individuals and businesses to take out inexpensive loans to grow their firms, hire employees/expand and to expand the economy [ever heard of the economic multiplier effect?]. They were not intended for Democrats to use the power of government to force banks into loaning to fianncial indigents. The credit crisis is due to this government coersion and to the government's not performing their regulatory functions properly, period!!!!!
Ralph Novy| 3.21.10 @ 9:23PM
Oldefarte, you ignorant slut....
LOL
JoshInHB| 3.21.10 @ 9:49PM
The extended low interest rates were intended for financially capable/intelligent individuals and businesses to take out inexpensive loans to grow their firms, hire employees/expand and to expand the economy [ever heard of the economic multiplier effect?].
RIIIIIGHT-
Thats why the low interest rates occures simultaneously with an abandonment of underwriting standards. Becaus those financially capable borrowers couldn't be bother with things like LTV ratios, downpayments or income verification.
Yes government coersion is why all those risky loans were made. Especially in 2002, 2003, 2004 and 2005 when the reps contolled the WH and Congress. Right OF. Or where the socialists BF & CD so powerful even then that they could force reluctatn lenders into reckless loans?
And of course the poor lenders who had no choice but to make those loans just had to give themselves billions of dollars of bonuses because they knew that the loans they were forced to make were worthless?
JACKASS
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The American Spectator : On the Brink of Depression Search links to this page. Here’s an excerpt:
Bill Hussein O'Stalin| 3.20.10 @ 7:13AM
Does TAS realize that their site is being attacked by Democratic operatives, throwing commercial looking ads on to dilute the discourse?
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On the Brink of Depression | DepressionLog.info links to this page. Here’s an excerpt:
Clinton Lovell| 3.20.10 @ 6:00PM
Another interesting article by Mr. Stein. Like many who have their bread buttered by Wall Street, Mr. Stein is a big fan of trying to save trees while the forest burns to the ground.
Mr. Stein points out some problems stemming from the latest financial debacle, but never connects the dots, "...In the current situation, we cannot really blame Fed action for the recession. It came through the crisis on Wall Street, largely caused by immense traders betting against each other..."
The reality is they are connected by a common thread - our entire banking system is based upon the fraudulent concept of creating wealth using the principle of liability expansion. This fundamental principle is the foundation upon which our banking and credit system operates and it is made of jello. This is the real problem with our economy that none of these economic gurus want to talk about, because; it would change the nature of the game. Instead of having an exclusive monopoly on credit, investment, wealth and economic opportunity, we have a monopolistic system where all borrowers and lenders start out being illiquid, but the law says that some (the lenders) are not and we have to sustain their position - even when they screw up. This is the economic equivalent of building a house on a sinkhole and getting the government to insure it against all hazards. Every time the house gets swallowed, taxpayers get stuck with building you a new house. Good for you, but not exactly good for the rest of us.
Unlike the other nuts, I have an actual solution and not just a string of complaints. What Mr. Stein does not talk about is the fact that, under our system of economics, wealth is created in two ways - by expanding your liabilities or by expanding your equities. We created a banking system based upon expanding liabilities because it provided the banking class with an exclusive economic advantage that everyone else in our economy (including the government) must sustain when we could have created a system based upon equity expansion.
What would be different?
Well, there would be an end to discriminatory credit practices like "credit scoring" - a process that means different things to different people at different times - a corrupt process that allows for discrimination.
There would be an end to banking panics and an end to a run on the dollar. Imagine a system where the value of the dollar is sustained by a systemic approach that makes the so-called gold standard look like a kooky and antiquated idea. Imagine an end to inflation (as equity investments are not inherently inflationary as loans are) and a new way of sustaining government fiscal outlays that doesn't rely upon taxation.
That's the beginning, but will we ever get there as long as we continue to save trees as the forest continues to burn to the ground?
I don't know, but I am certain Mr. Stein will have much to say about the trees in his yard.
JoshInHB| 3.20.10 @ 9:57PM
Unfortunately you cannot un-invent fractional reserve lending.
My thesis is that the credit bubble of 00s was caused by Wall Street investment banks and hedge funds engaging in fractional reserve lending outside of existing regulatory framework.
Clinton Lovell| 3.21.10 @ 9:30AM
No you cannot un-invent fractional reserve banking but you can replace it with something more efficient and less risky like a defeasance-based credit system for durable goods purchases and equity-based financing structures for housing finance. Fractional-reserve banking will never be sustainable because it requires us to believe that stakeholders in the economy that have unequal rights will continue to work together to create equal opportunity. It has never worked before and it never will work in the future.
JoshInHB| 3.21.10 @ 10:23AM
I agree that FRB has been an evil since its invention and is inherantly unstable and one step removed from fraud.
However,I think the best that can be done is to strictly regulate FRB with higher reserve requirements.
If you could change the banking system to eliminate fractional reserve lending, ie require 100% reserve for demand deposits and only allow equity to fund lending. Then some new business / organizations would self create and engage in a new form of FRB.
That's what happened in the Credit Bubble as HF and IB borrowed short (moneey market funds) and lent / invested long through a number of exotic instruments. The funds paid for the investments were relent to other HF and IB thus creating a money multiplier effect.
Oldefarte| 3.21.10 @ 12:36PM
Clinton Lovell: What you say is pure BULLEXCREMENT!!! Your statement "....Well, there would be an end to discriminatory credit practices like "credit scoring" - a process that means different things to different people at different times - a corrupt process that allows for discrimination....." has already previously occured-----it was called THE CRA OF 1977, which [to end the socialistic end of the rightful banking 'discrimination' based upon financial inadequacies] forced banks into loaning to indigent applicants. Your [and Democrats] WEALTH REDISTRIBUTION/SOCIALISTIC political schemes will be put to an end beginning in November of 2010!!!!!
Ralph Novy| 3.21.10 @ 9:21PM
Clinton:
"... our entire banking system is based upon the fraudulent concept of creating wealth using the principle of liability expansion."
Nicely put.
But ... you pretty much totally lost me when you suggested creating a system based upon "equity expansion." Whoosh.
Please expand.
Ralph
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Michele San Pietro| 3.21.10 @ 10:54AM
The crisis simply doesn't exist! According to press terrorists, there is always a crisis in the United States when the President is a Republican, whereas times are definitely better when the President is a Democrat. Those press terrorists must go to hell!
Petronius| 3.21.10 @ 12:57PM
Don't worry M, they're down here. As I'm on the membership committee, we're happy to oblige. All the presstitutes in Hell are with the cock fight promoters until the 1st of the month.
Larry| 3.21.10 @ 3:02PM
Ben -
I agree with Paul Craig Roberts on this one. None of those CDS contracts or similar speculative derivatives (other than the ones made between the debtor and the creditor themselves) should have been honored; they could have been declared void by a bankruptcy court (or declared so by Congressional fiat, if necessary) and made unenforceable as against public policy on the basis of the sham nature of the transactions. This way, most of the money that was spent would not have to have been spent. The same would be true of the Lehman situation. This is a disaster of all proportions that has rocked the American economy and will continue to do so as long as credit in this country remains screwed up.
Larry| 3.21.10 @ 3:11PM
One more thing: I think, Ben, you dismiss the extent of the role of the Fed too lightly. It is clear from my recollection that what was worrying everyone for most of the first half (or more) of the decade was deflation. You can read that concern in many of the statements of Greenspan and other economists during this period. In spite of that, the Fed has somehow become complicit (along with the other branches of the Federal Government who were complicit in creating the housing bubble in the name of "affordable housing") in creating a credit crisis.
Focusing the blame on Wall Street, while quite true, should not cause you to short shrift the Fed's policies. Lack of proper reserve requirements in these transactions is also a failure of government oversight.
Ralph Novy| 3.21.10 @ 9:12PM
Yes.
Kingfish | 3.21.10 @ 3:18PM
and why should we listen to Ben on this matter? Anyone remember the Youtube video of him making fun of Schiff? The problem was NOT that we didn't bail out Lehman, it was that we bailed out Bear and THAT set the expectation in place that we would bail out LB as well. We don't help Bear, then Lehman is bought out by someone, and we probably avoid the Lehman carnage.
Ralph Novy| 3.21.10 @ 9:09PM
Ben:
Sitting hard on whatever preconceptions/prejudices I might have about you and your economic/political philosophy, I was surprisingly "with you" until you reached "And I know Mr. George W. Bush. He is not an ideologue and he listens and learns."
At that point your credible-argument train derailed ... and went on to careen into countless, hapless bystanders.
Disappointed.
ralph s| 3.21.10 @ 11:00PM
I really have a problem with the debt, but now that its out of hand what stops the federal reserve from just printing more dollars and let inflation run rampant ? That is the way for the govt. debt to be be paid with worthless dollars. Yes not good for those of us who have been responsible, but I don't the Fed. or govt. care about us anyway.
JoshInHb| 3.21.10 @ 11:23PM
Unforutnately for all of us,this is exactly what will happen.
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Sitting hard on whatever preconceptions/prejudices I might have about you and your economic/political philosophy, I was surprisingly "with you" until you reached "And I know Mr. George W. Bush. He is not an ideologue and he listens and learns."
At that point your credible-argument train derailed ... and went on to careen into countless, hapless bystanders.
Sell A Note | 10.10.10 @ 5:11PM
Government "smoothing things out" is the problem not the solution. Every time the Federal Reserve or the Federal government tries to keep things on an upward straight line, the peaks and valleys for the economy get more exaggerated. Please don't "help" any more.
Improve My Life | 10.10.10 @ 5:15PM
Unfortunately, most of the Fed and government's meddling is to benefit their big business friends. Why do we continue to tolerate this? Hopefully, November 2010 will be a start.
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Caused serious, maybe fatal damage to the social trust that is a nessecary foundation for capitalism. Credit, which for better or worse is basis of our money supply, requires trust to work.
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