Five Truths about the Banking Crisis
The first truth to understand about the banking crisis is that people don’t want you to understand it. You are supposed to trust in the judgments of the experts and give them whatever they are asking for, no matter what the cost or consequences. Just ignore the fact that many of these people are the same experts that failed to foresee or to prevent the problem in the first place.
Henry Paulson, the former treasury secretary, is one such expert. Throughout 2007 and most of 2008, he assured the public that the economy was strong, any subprime mortgage fallout was contained, the banking system was safe, and that there were no plans to recapitalize or rescue Fannie and Freddie.
Then, last September when multiple financial institutions were on the brink of collapse, he naturally took responsibility for his errors in judgment and inaction and resigned, right? Well, no. Actually he requested $700B more with virtually unlimited authority.
Of course it wasn’t exactly a request. Give me $700B right now or you get a massive financial collapse and the Second Great Depression. It almost sounds like a scheme cooked up by Dr. Evil. Did Paulson have some kind of doomsday device that he was ready to activate? Was the country really facing a financial meltdown?
We will answer that shortly and the answer may surprise you. Lets move on to Truth #2. This entire crisis was caused by widespread mismanagement throughout the financial industry.
Banks that loan money to borrowers who can’t repay don’t stay in business for very long — or at least they’re not supposed to. The same is true for investment managers that exchange good money for bad paper.
This may seem obvious, but there are still far too many weakly written articles that blame the financial failures on the bad economy or the weak housing market — as if banks couldn’t possible imagine that the economy might slow at some point.
Similarly, pointing the finger at credit rating firms or government regulators or auditors also misses the mark. Yes, all of these parties should have acted earlier to help prevent the crisis. But the situation wouldn’t even exist if not for the widespread irresponsibility of the people we trust to manage the world’s money.
Once the blame is assigned correctly, the ethics of the situation become very clear. Management needs to go, and the institutions they ran into the ground deserve to fail. But we can’t have hundreds of banks and financial institutions fail, right? Wouldn’t the economy drown in a sea of bankruptcies?
“Perhaps they’re surrounded by too many Wall Street executives who are pleading for just a little more time and money to fix the mess that they created.”
Our nation is under financial siege by those who graduated from Harvard, Yale, Columbia, and our other “elite” universities. They are simply looking out for each other. There is a tacit agreement ( I am not talking about an overt conspiracy!) to stick it to the rest of the unwashed masses of America—especially if they are white males. These elites also control the major propaganda outlets and will continue to deceive the general public. It’s only going to get worse.
Great article.
As for the first comment:
“Our nation is under financial siege by those who graduated from Harvard, Yale, Columbia, and our other “elite” universities.”
It isn’t that all the Ivy Leaguers are looking out for each other as much as they all shared the same econ textbook written by Paul Samuelson. It contains some of the quarks and fallacies normal people see as obviously wrong that our leaders persist with no matter what. Samuelson’s textbook is the common thread.
Good article and points.
I hope someone up there is listening.
Mr. Yates, you are half right. You are right about the bad investment policies, but the downward cascade was triggered by the crude oil crisis caused by OPEC’s cutting production. OPEC also cut production in the mid 70′s starting when the impeachment fervor got underway against President Nixon (1973). This caused a huge change in the U.S. economy, but there was no debilitating credit crisis, no ‘bubble’, that was concurrent with that petroleum crisis.
Our present turmoil is a result of a politically attacked and substantially weakened administration, a huge banking crisis, and foreign oil producers. It is an almost exact repeat of the Mid 70′s crisis but with the addition of the bankers. Maybe it should have been Gates, not Paulson, to lead us out of this crisis.
Since 1993 the goverment has pumped 1.3 trillion dollars into the mortage insurance program. you know, the program to help banks when mortage holders default on their loans. Since the banks were receiving this money all along, what caused the current foreclosure crisis?
Our present crisis is due to the Clinton administration forcing lending institution to provide mortgages to minorities possessing poor credit histories. This was analogous to someone shooting a gun on top of a snow-covered mountain. An avalanche is inevitable. Majority whites demanded to be allowed to obtain the same breaks regarding their mortgage requests. The situation soon got out of control. But how many Americans are aware of this fact? A very high number of them have instead been conned into believing the free market has failed due to lack of sufficient regulations.
The elites of Wall Street invariably graduated from our “best” universities. Subconsciously, if not even consciously, their somewhat incestuous friends within government are going to look out for them. They will, of course, be expected to return the favor in the future. Why should anyone be surprised?
David Thomson
‘There is a tacit agreement ( I am not talking about an overt conspiracy!) to stick it to the rest of the unwashed masses of America—especially if they are white males.’
Aren’t the majority of Ivy League elite white males, themselves?
“Aren’t the majority of Ivy League elite white males, themselves?”
They indeed are mostly white. But they also perceive themselves as better than those “reactionary white yahoos.” It’s a snob thing. Also, the Ivy Leaguers have no intention of paying a price for past racial injustices. No, this price will be paid solely by the unwashed white masses.
“My guess is that Seidman also understands Truth #5: Not all financial crises are created equal. When borrowers can’t pay their debts, you get a banking crisis, and as we’ve seen those are painful. But when governments can’t pay their debts you get a currency crisis, which is far worse. During Argentina’s recent currency crisis, the GDP fell by 10% in a single year, the unemployment rate jumped to 25%, and inflation hit 10% a month at one point.”
Partially true. When folks default, you have a housing forclosure crisis. When people go to the bank to withdraw demand deposits and the banks lack liquidity do to too many mortgages non performing, then you have a banking crisis. The numbers I see show that banks are using bail out $$$ to shore up capital and are slow in loaning out the money. Today the spread is huge and i see the huge spread as detrimental to expansion.
There is no mention of derivative exposure, which is the main culprit. There is always a 2-5% bad loan file at most banks, which is well within parameters for banks to handle. It was financial derivatives let loose by the repeal of Glass – Steagal Act in 1999 that exploded across financial environment in the last 10 years.
Derivatives are extreme versions of fractional banking, the actual asset underlying derivative may be less than a fraction of 1% of the price. In other words it is worthless paper that the banking system created and then sold to other banks and institutions, There is no Asset backing the derivative. There is an estimated 500+ Trillion dollars in derivatives now held by the worlds banks, 99% of it is worthless paper. This precipitated the collapse of the banking system.
The Federal reserve also transferred over 2 Trillion to entities unknown and undisclosed, the FED refuses to identify who recieved the Cash and under what terms. This is in addition to the Original Bush Amdinstration 700 BIllion and the Obama Adminstration 850 Billion now being discussed.
There may be trillions more we do not know about, FED Reserve refuses to disclose ledger to the US Govt.
I am frankly surprised that individuals that wrote these articles are not aware of these facts, and if they are then the ommission of them in the article.
Ivy Leagers are part of the Democrat Liberal elite estabishment. The majority of them hate everything about this country except that which works to their advantage or assuages their vanity. They certainly detest the “middle classes” (of any pigmentation) and want to keep them down. The only ones that do not are the ones that made it on their own. That is a completely speciaous arguement that you are putting out.
This crisss was caused by:
1)The stealth redistributionist policies and tactics of the Democrats. Here they used legislation like the CRA and others; litigation against financial institutions (of which Obama was a part); Covering for and indulging of quasi-governmental institutions like Freddie and Fannies; corrupt dealings with other institutions (like Countrywide_; and general media brow beating. They did this to enrich themselves, buy votes, hector capitalists and capitalism, and to further in general their Marxist cause by wrecking the system and manufacturing “crises”. (but I repeat myself)
2) The “non-political”, financial industry branch of of the Democrats, the big players on Wall st. (which are a 75% elite Democrats), took up the ball and weaved out this elaborate, exotic and fraudulent Ponzi scheme based on derivatives based on this sub-prime hustle (MBS’s and the like) and/or new ways to end run the insurance controls on all this by putting out what amounts to “fake insurance” (CDS’s and the like) that had no real value whatsoever. They did this for mostly the same reasons that the Democrats of the political branch of the Democrat part did (though with decidedly less Marxism, they figure that they can control these folks once they get bailouted by them). One must remember what large revolving door between Government and Wall St. and that it is generally Democrats that use it. There is a large contingent of former Democrat government officials/politicians on Wall Street (Rubin, etc.) and another contingent that were on Wall St. but are now in (mostly Democrat) positions as either officials or politicians (look no further than the governor of NJ). Sometimes they are both at the same time (Emmaunal Rahm was a director of either Freddie or Fannie, I forget which).
3) The ridiculous mark-to-market rules on valuing assets forced on Financial Institutions that stemmed for political grandstanding in cases like Enron. These had no bases in reality and obscured (and still do) the actual solvency of financial institutions. It is an open question if this was a preplanned landmind put there to cause havoc, but most likely it is just he incompetence of the Congress (which was run by Democrats at the time, but, of course, the GOP like idiots went along with it for fear of the MSM calling them “evil capitalist”). When the crisis was triggered, this caused firms to have to deal with their balance sheets. Note these rules are still in place and as anyone on wall St. knows, should be done away with. Why have they not done so? Do they want to prolong this for political reasons?
4) The whole thing was triggered by some verysuspicious short trading — naked shorts (which are illegal here in the US) and legal shorts. This forced liquidation of all of these bizarre assets that of course had no real value. The Pnzi schmeme collapsed. Now there was a solvency problem masked as a credit problem (or maybe the other way around depending how one looks at it). On top of that many of the financial firms that were in trouble (and either got or are getting monies) were shorting their own stocks as it all blew apart, and many of these firms were big Democrat contributes. What was that about? Pretty strange stuff, and it should be investigated. Soros took a hugeposition in Lehman in the ramp up to this. why? I’d bet that he used them to cover cohorts’ illeagl naked short in off shore exchanges like Dubai. This is extremely hard to trace, and as time goes it get even harder to trace. Why are the Democrats on Congress not investigating.
This third case must be investigates for their is every reason to believe that the crash was created intentionally to help the democrat party in the election run up (and the balance sheets of Soros and his ilk, which donate so much to the Democrats that they could be said to own them). This certainly cannot be dismissed out of hand, though surely some of the big traders and hedgies where just following their noses.
People like Franks, Obamq, Pelosi, Rahm and Dodd are covered with dirt in this and should be under investigations, not sitting at the other side of the table conducting an “investigation”. One day at least some of the truth will get out and then there will be hell to pay. How we have a country left. Hpe we have a Republic left.
The Bush administration brought up to Congress the whole mess something like 17 times in last couple of years alone, and they were dismissed as racists.
Was Paulsen in on it, or was he played? we need to find out.
How we have a country left. Hpe we have a Republic left. =Hope we have a country left. Hope we have a Republic left.
Keep this in mind. Gary Lamphier writes for the Edmonton Journal business section. It is from his column in the November 29, 2008 Edmonton Journal:
When people in future ponder what led up to the great U.S. economic collapse of 2008, I suspect most of the murky financial details will be long forgotten. But two small human tales may well endure in the realm of popular mythology.
Both neatly encapsulate the crazy excesses of U.S. consumer culture.
One stems from the tragic death Friday of a Wal-Mart worker at a store in Long Island, N.Y., who was stampeded by a throng of shoppers after they broke down the front doors, Bloomberg reports.
At least four shoppers were hurt in the mayhem, including a pregnant woman. The dead man was a 34-year-old temp. As he expired on the floor, shoppers continued to stream in, drawn by deals on DVD players and digital cameras.
A few months ago, in suburban Atlanta, a tragedy of a different sort briefly made headlines. A splashy new $450,000 home featured on the ABC TV show Extreme Makeover had to be auctioned off.
Seems its free-spending new owners, who were given the house on the show three years earlier after it was built by an army of volunteers, had used the home as collateral for a loan to start a new business.
When the business went bust, the family had to turn over the keys. They had also received $250,000 in cash, but they managed to blow that, too, on such indulgences as a six-day family trip to Disneyland.
As Forrest Gump would say: “Stupid is as stupid does.”
Thanks for the comments – very much appreciated.
Alex: The reason that people like me, Boswell, Seidman, etc have a simple view isn’t because we don’t understand the issues – we were there in the S&L crisis, and yes they had derivatives too (IOs, POs, CMOs, etc). Its because the issue is very simple.
Banking is a tough industry and sometimes banks fail when they make poor decisions and then hit a rough patch in the economy. It’s happened before and it’ll happen again. The job of the government is not to keep the banks from failing by giving them a blank check, but instead to make sure they fail quickly and with limited damage so that healthy institutions can take their place.
It doesn’t matter whether a bank loses money on bad loans, bad investments, bad derivatives, or a bad day at the dog races. The effect is the same – if it doesn’t have enough reserve capital to meet requirements, then it shouldn’t be making more loans and investments with government guaranteed deposits. Shut it down. Same principal applies to any financial institution.
And has anyone noticed that the people that are trying to make the situation seem the most complex are the ones asking for the most money? “But you don’t understand derivatives, mark to market, or liquidity… we need to give banks a trillion dollars to take all those toxic assets off the books… maybe we can make a ‘bad bank’ or nationalize the banks…” No, actually I do understand all of those things, and you still haven’t convinced me how your bad loans and bad investments suddenly became my problem.
- Tristan Yates, author Enhanced Indexing Strategies
Linciln: You realize that those incidents hae nothing to do with this crisis what so ever.
And it is not an just an American crisis. Canada may do worse than we will. Certainly the EU and China are going to have a real tough time.
You quote sounds like more MSM misdirection with an added dash of Canadian Labour smugness. I imagine that it will most profoundly not be the case that those events will be remembered at all. I would venture that people will be struggling to remember the existence of the Edmonton Journal a few years hence.
Most of this crisis is due to government monkeying around with markets and credit. It has nothing to do with Christmas shoppers. Sale were down if I recall.
If the Democrats would just give tax relief and pullback some regulatory nonsense, this crisis would blow over in a 5 quarters and in 2 or 4 years we would actually be in a better place than before it started. Why don’t they do it?
“Why don’t they do it?”
Your question is easily answered. The “elites” are power hungry. Center-right economic doctrines substantially advocate a hands off approach to the economy. Well, what’s in it for the elites? How can they satisfy their lust for power in such an environment? Keynesianism, on the other hand, is tailor made to keep them happy. It tells the elites that they should be running things. The entrepreneur class should bow before them and do exactly what they say. After all, these arrogant individuals strongly believe that they should be our benevolent dictators. Only a disgusting and reactionary scum bag could presumably object.
David: Just so.
So England would be in a currancy crisis right now. Is that right?
At what point does the world dump dollars? We keep acting like Argentina, when is the world going to treat us like Argentinia?
Tax cheat Geithner wants to set up a “Bad Bank”. Can we set up a “Bad Government” which is most of of current government and kick them out to watch the bad bank, then bring in a good government to do what government is supposed to do?
I don’t presume to know what all the financial terms mean (mark/market, derivatives, etc.), but I know one thing: we’re talking about a lot of money here.
Can one of our financial gurus please explain to me why it’s better to give these banks this money than it is to give it to the citizens? It just seems like that if the gov’t is gonna spend 1.5 trillion dollars to bail us out, it should go to us-not to the people who got us all into this mess!
Correct me if I’m wrong, but isn’t 1.5 trillion divided by 300 million (estimated population) equal to $5,000?
So if the gov’t gave all citizens (who actually ARE LEGAL citizens) of legal age (18 or above) this money, wouldn’t this spur the economy better? That might equal $7,500 or even be close to $10,000 each (according to demographics).
I don’t know about you, but if the gov’t gives me $10,000, it’s going straight to the bank! Liquidity problem solved! Also, it will be spent over time or invested-economic crisis solved!
I should have been an economist!
Feel free to correct me if I’m wrong!
HonestJon
320 HonestJon – Won’t work. People will just sit on the money. Some will spend it. Many will do what you say, or pay down their bills. But it will still get sat on in the end. No temporary incentive will work, because everyone knows it to be temporary. If you have a chunk of cash, but have no real means to replace it, you tend to hoard it. Spend some, and the recipients will hoard it.
Furthermore, it doesn’t really add to the cash in the system. It’s borrowed money. It’s already out there. It’s a matter of whither the money gets allocated. Sure, it’s Chinese money or whatever, but it can be put to other uses. If businesses ask for it, they can get it, because no other country is likely to stand a better chance of making it pay.
The problem isn’t the lack of capital. The problem is that everyone is in a defensive crouch. Everyone is waiting to see what the government is going to do first. Until then, you can’t make a proper risk/reward assessment. If the gummint said, we are going to do nothing for two years, except remove a couple really bad laws, let the market sort itself out, then reassess then, then the country would sort itself out in fairly short order. The problem is the danged gummint.
Thank you for the response, Tristan Yates
In 1933 Congress passed the Glass Stegal Act, which prohibited Banks from leveraging financial instruments, purchasing security houses to sell financial products, or to expand and become so large,
” they could be allowed to fail”. This was in response to forces that created and amplified the Depression, the main culprit being the Federal Reserve system. The Nation was in the middle of the great depression and Congress passed legislation to prevent Federal Reserve and its member banks from damaging the Nation again.
In 1999 Congress and President Clinton Repealed the Glass Stegal act, which allowed banks to leverage themselves, create and market worthless derivatives, and become so large ” they cannot be allowed to fail”. The repeal of Glass Stegal in 1999 set the stage for what we are experiencing today.
Its simple, our legislators did not learn from History, or from their own legislative experiences. There is an estimated 550 TRILLION in worthless Derivatives currently being held by banks, and main reason money sent to banks will be swallowed up.
Several times in 2006-2008 the US treasury sent delegations to China to beg and plead with Chinese banks to involve themselves purchasing Derivatives from the WEB System (Western European Bank). The Chinese asked bankers to explain derivatives market, they could not explain what derivatives were, or how they were valued, so the Chinese said thanks but no thanks. If only our own leaders had used this example of common sense.
There is only one viable solution; Nationalize the Banking system and stablize it. The Federal Reserve is running wild, transferring trillions of dollars at will and without legislative oversight ( 2 Trillion we know about so far, there is probably far more we dont know about yet). These are cash transfers to destinations unknown and refusal by Federal Reserve to explain and justify, It is theft plain and simple.
The President must force banks to open their books and inspect exactly what is asset and what is worthless paper, which will not happen until the Govt takes over the bank and can view ledgers themselves.
The raw truth is we are witnessing an Economic war between entities that print money ( the Federal reserve and its member Banks) and entities that value money ( the Government and the Taxpayer / citizens). The Federal Reserve is not part of the Government but a Private entity. It will come to a tipping point when the taxpayer revolts and demands accountability from its Government and REAL oversight of the Nations Banking system.
Thanks for the response, Mr. Malone! You noted that everybody is in a defensive crouch. Good point! Everyone is hunkered down in the bunker right now-partly because President Obama won’t give it a rest. Everything I’ve heard him say seems to scare the bejeebers out of everyone everyday-he keeps on talking us down. Him droning on about “economic catastrophe” sure as the world ain’t gonna help any. What ever happened to “hope?”
You also said that it’s borrowed money, it’s already out there. You are correct, to be sure. But, isn’t it borrowed money just going back to the banks as well?
I agree that a lot of people would hoard the cash though that would be a tremendous change from what has been the norm for the last couple of deacdes where everybody seemingly spent (and overspent)like mad.
Here’s my point, Marc: The money WOULD get spent or invested eventually. Maybe the gubment could put a time limit on how long it could remain unspent (I heard that proposed on Newshour with Jim Lehrer). That way everyone would surely spend it before it expired. How about that, sir?
ANYTHING is better than giving it to the banks!
Regards
HonestJon asks the question millions of Americans are asking. Why not just give “us” the money? Why give American taxpayer dollars to an institution that failed in its responsibility to manage its portfolio? The answer is, government wants to expand & it wants to nationalize so it can control business & money & almost everything else about your life. When one asks why not nationalize the banks, they fail to realize that means the government takes even more control of the everyday lives of all. Like we should give such power to those who have mismanaged this affair from the get go?
Capitalism is not wrong, nor was it the culprit here. The problem was POOR management by the banks & other financial institutions & government imposing POOR regulations. There were enough regulations, they were simply not followed through on & perhaps by some who were bought off. But, poor regulations caused this, plus the use of instruments that simply were junk.
In the end, if you look at the “stimulus” packages proposed, all we will do is give government more control, heap more debt onto American citizens, & do little to actually fix the bad loans that are still out there.
Spending money on social programs, especially through agencies that worked hard to get the vote out for the current crop of politicians, is payback, or payola.
Tax cuts do not solve all of the problems. But they solve more than the spending bill we face today. Worse is one political party, with a desire to force their will on the opposition to teach them their place, will burden America, perhaps forever or as long as this constitutional republic lasts until bankruptcy.
The author of the article is right. Deal with the bad institutions & debt now & do so according to the laws on the books now. Then, we can recover. But this “stimulus” package is all wrong & it will create even more problems, that we may not be able to recover from.
BTW, it was suspiciously convenient that this crisis hit just in time to push one political party over the edge, & just as the other party had gotten its second wind & was developing momentum. Especially when one considers the already hundreds of millions some wealthy supposedly altruistic types (ie:George Soros), had committed to that one successful political party already! It do give one pause, don’t it?
The Federal Reserve is not a Govt entity. It is a Private organization independant of Govt. oversight and regulation. Allowing the Federal Reserve to continue draining US Capital out of the Country and sending it to Europe is the main problem.
The Battle is between Government and the Federal Reserve system of Banking. The Government has no choice but to involve themselves and weed out International Bankers from interfering in the American Banking system.
Allowing Banks to operate without opening their books and identifying what is asset and what is worthless paper will just suck up whatever funds are sent. 350 BILLION has already been sent to Banks, where did it go..? There is another 350 BILLION on its way…and the same will occur, it is being used to offset Derivative losses, which are held in European banking systems.
Nationalize the Banks like Sweden did, get them back on their feet and reregulate markets and then set the banks free. Otherwise nothing will occur, we will just continue shifting taxpayer funds to a broken system. The system must be fixed first, The laws on the books at this time allow banks to do as they please, which caused the situation. If we do not correct the absense of regulation we accomplish nothing.
Congress alone is authorized to coin ( create) money, so why have we allowed a Foreign entity ( the Federal Reserve) to create money and charge the Government (the taxpayer) interest? and how can we allow this to continue..?
If it was such a good idea for the Government to take over AIG, then why the resistance to taking over the Banking system..? the solution for AIG is the same for the Banking system, take the institutions over and fix them. Otherwise we will continue spending trillions with nothing to show for it.
Confessions of a Heartless Republican
I’ve been called many things over my many years, a few good things, some not so good things, mostly average things, but never heartless. Still, I have to conclude that I am heartless. I’ve determined that I must be since I don’t feel sorry for subprime mortagees who may lose their homes or who may already have been dispossessed.
In my defense and to mitigate my heartlessness and insensitivity, I should add that I do sincerely and deeply empathize with the children of those people. Kids don’t understand such things as “foreclosures” and other multisyllabic words associated with the adult world. All they understand is that they are being uprooted from the place they’ve called home perhaps for their entire short lives and that they have to move to a different place, to different schools, to different neighborhoods where they will encounter strangers and be forced to make new friends and to acclimate to new environs.
All that is very difficult for youngsters and for those kids I have a great deal of sympathy because it’s all none of their doing or responsibility. For their parents, however, I have little empathy.
Before I am cast out from the society of human fellowship and tossed into the sewer of reprobate misanthropes, do hear me out.
This attack of heartlessness came on with a rush tonight as I watched on local news a horde of demonstrators armed with signs proudly declaring their status as subprime mortgage holders who were incensed. They were loudly picketing in front of homes of some CEO’s who were in some way associated with the effort to deny them the right to remain in their domiciles merely because they were unable to make their monthly payments to their mortgage holders.
I should add at this point that I have no sympathy with banks and mortgage companies, either. Many have operated immorally and unethically in granting home loans to individuals who they were fully aware could not afford them. Maybe they could pay the monthly nut during good times but when bad times struck they would be stuck. And bad times, as they inevitably do, have arrived with a vengeance.
Other institutions granted those loans under threats of being accused of discriminatory practices by the federal and local governments. Those, also, deserve condemnation for their corporate pusillanimity.
Some few resisted such governmental strong-arming, and those I would applaud, but they are relative rarities.
Which brings us to the question of precisely what “subprime mortages” and “subprime lending” actually mean. Terms of fairly recent vintage, USA Today defined the meaning: “Subprime lending — higher-interest loans to consumers with impaired or non-existent credit histories — has been the fastest-growing part of the mortgage industry.
Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages.” http://www.usatoday.com/money/perfi/housing/2004-12-07-subprime-day-2-usat_x.htm
The operative words there are “higher interest” and “impaired or non-existent credit histories,” …
(Read the rest of this article at http://genelalor.com/.)