A Good Look at How We Got Here

There are few economists who predicted the worst financial crisis since the Great Depression (and, quite likely, of all time) and the first economic downturn in the world's developing countries in sixty years (which makes you wonder why they even studied the discipline to begin with).

Still, that doesn't mean that a number of them haven't added value with their ex-post analyses of what happened and why. Indeed, I'd be the first to admit that some published commentary has helped me better understand certain aspects that were harder to discern before it all went bad.

While I can't say for sure whether he had correctly anticipated the events of the past two years, it does seem that Nobel Prize-winning economist and Columbia University professor Joseph E. Stiglitz has been quick off the mark in terms of recognizing what has been unfolding, the severity of the unraveling, and its root causes.

 In a January 2009 commentary for Vanity Fair, "Capitalist Fools," Professor Stiglitz offers some helpful insights on key developments that helped get us to this point.

Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.

There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.

What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road—we had what engineers call a "system failure," when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.

No. 1: Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown—as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation—or "liar"—loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them.

Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen—for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk—but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else—or even of one’s own position. Not surprisingly, the credit markets froze.

Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn’t put it as memorably as Warren Buffett—who saw derivatives as "financial weapons of mass destruction"—but we took his point. And yet, for all the risk, the deregulators in charge of the financial system—at the Fed, at the Securities and Exchange Commission, and elsewhere—decided to do nothing, worried that any action might interfere with "innovation" in the financial system. But innovation, like "change," has no inherent value. It can be bad (the "liar" loans are a good example) as well as good.

No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act—the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest—toward short-term self-interest, at any rate, rather than Tocqueville’s "self interest rightly understood."

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks—the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.

As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation—a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant—and successful—in their opposition. Nothing was done.

No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease—the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil—money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.

The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly—and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending—not that American consumers needed any more encouragement.

No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals—notably the collapse of WorldCom and Enron—Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are "incentive pay" in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.

The incentive structure of the rating agencies also proved perverse. Agencies such as Moody’s and Standard & Poor’s are paid by the very people they are supposed to grade. As a result, they’ve had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy—that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.

No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008—that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues—they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely—which they hadn’t—the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.

The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems—the flawed incentive structures and the inadequate regulatory system.

Was there any single decision which, had it been reversed, would have changed the course of history? Every decision—including decisions not to do something, as many of our bad economic decisions have been—is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You’ll hear some on the right point to certain actions by the government itself—such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

Comments

[michael]

The analysis is all nice and well, but as always I wonder why these experts make no simple straight forward proposals for really better regulation.

I grew up in the country with the most complex tax regulations in the world, Germany, and I can tell you this is a very unjust system even as they add more regulations every year.
And SOX (Sarbanes-Oxley) is papering over responsibility: write it down and from then on act according to the written text - everything short of grossly negligent or fraudulent behavior is then legally covered. A perfect incentive for people to ignore goals and boost CYA.

So where are the keep-it-simple but efficient approaches to regulation!?

[Depresso]

Tha sadest result of this crisis is that it is all being blamed on capitalism and free market. Even though the US is a corporatist state, which is just another version of socialism.

[DaveInDenver]

A Clear and Present Danger

AIG is now proving out to be the financial black hole I said it would be when I looked at its SEC-filed documents back in September. Those were a complete disaster, so who knows what the real inside books look like. We know that the Fed/Treasury combined has invested a total of $153 billion in Bernanke printing press money to keep AIG from completely collapsing. Where has this money gone? We don't know exactly, but we do know that $20 billion of it was used to monetize Goldman Sachs' credit default counterparty risk (anyone troubled by the fact that taxpayer representative Hank Paulson is an ex-Goldman CEO and current Goldman CEO Lloyd Blankfein was the only non-Govt/Fed person at the meeting which approved the AIG bailout?). We also know that at least $500 million has been spent on executive compensation. This is YOUR tax money at work:

Here's another $10 billion in failed derivative trades:

American International Group Inc. owes Wall Street's biggest firms about $10 billion for speculative trades that have soured ..

http://calculatedrisk.blogspot.com/2008/12/aig-black-hole.html

It was announced on Dec 3 that the Fed has purchased another $53 billion in credit default swaps from AIG:

http://news.yahoo.com/s/nm/us_aig_cds

AIG has admitted to underwriting $400 billion in credit default swaps. But this is what can be verified from public documents and disclosures. Please recall that in the case of Enron, we did not know the sum total of the off-balance-sheet derivatives fraud committed by Enron until it was already in bankruptcy and the legal discovery process forced out the truth.

I suspect with a high degree of confidence that: 1) AIG's admitted $400 billion in credit default swaps will require $400 billion in taxpayer bailout money and 2) that the true size of AIG's financial black hole, like with Enron, will not be known until AIG is ultimately dragged through bankruptcy liquidation, but that AIG's ultimate financial exposure will exceed $1 trillion.

And one more point: We know AIG is beyond insolvent. How come AIG is not going thru the legal bankruptcy process right now? What are they hiding? This is your tax dollars going down the drain. I expect to see gold pressing $1000 before we celebrate the New Year.

[roger]

this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.agreed!
Capitalist fools (agreed) believe that control/stabilizing
the financial system is the key to success.Sorry stabilizing
a system of accumulation is as feasible as perpetual motion'

[Econophile]

Joe Stiglitz has it wrong--as usual. While he's right about the Fed, he's wrong on almost everything else. The deregulation argument is a joke. Even Bill Clinton--if you can believe him--says it didn't have anything to do with the collapse.

Here's how I see it:

1. The Fed created the credit cycle. Easy money flooded the system. This starts the boom part of the boom-bust cycle. All bubbles start this way.

2. Easy money set the stage for the financial community to do what they always do best: make money.

3. Their investment focus during this cycle settled on mortgage debt, and specifically, subprime debt.

4. They focused on subprime debt because that’s where the fees were. Investment bankers, commercial bankers, mortgage lenders and brokers made fortunes originating and selling this stuff.

5. They did so because they could. Now, why would anyone lend to someone who couldn’t afford to buy or finance the purchase of a house? No one in their right mind. Unless . . .

6. Enter Fannie Mae and Freddie Mac: they subsidized the risk of those loans by guaranteeing them.

7. Why would Fannie and Freddie guarantee bad loans? Political pressure. Starting in 1990 the Clinton Administration, using their powers over banks and housing through the Community Reinvestment Act (Carter,1977), instructed lenders, and Fannie and Freddie to make more loans to those who couldn’t afford them. They loosened lending standards to allow it. Then Wall Street figured away to bring tons of money into that system: mortgage-backed subprime securities. These were sold throughout the world as safe financial instruments. After all, Freddie and Fannie would guarantee these loans. This is what created the culture of loose lending standards.

9. So, banks and mortgage lenders geared up to feed the frenzy. They generated billions of dollars of subprime loans, many guaranteed by Fannie and Freddie, and underwritten according to Fannie-Freddie requirements, and sold them to investors. They got their fees and everyone got fat.

10. It worked until the merry-go-round stopped: the Fed slowed down the rate of money pumping and homes stopped appreciating. Then the cleverly named "subprime” mortgages became the “junk” mortgages that they always were, and their bonds, junk bonds.

http://subprimeforum.blogspot.com

The cure may be worse than the disease.

[InvestMoneyLab : Best Way to Invest Money]

It is sad to see financial crisis happening. Free market was supposed to be a great system by itself. However, I believe financial market are easily manipulated by small group of people for personal gain that eventually lead to this crisis.

Same thing happened on oil price? It was USD150 few months back and now back to USD40+, do you believe there isn't anyone behind this?

Surely, someone is still making lots of money manipulating the free markets.

[Peter]

Blaming this crisis on lack of regulation, tax cuts and capitalism/free markets is idiotic.

In order to have free markets we also need the rule of law. We had none. If we had then half of Wall Street would have been sent to jail after the tech boom. Analysts pushing worthless stocks that their investment banking friends took public was just outright theft. Instead of jail these bankers were rewarded with low interest rates so they could do it all over with the housing bubble.

How do S&P and Moodys still exist? Every person who worked rating these CDOs need to be put in jail. Hank Paulson who presided over this fiasco at GS did not go to jail, he was given $500 million tax free dollars and then $700 billion to gift to his friends.

We don't need regulation, we just need to enforce the current laws on the book. Stealing is illegal in every form, yet in banking it is not punished.

The only regulation we really needed was to require banks to list every single asset they have so that the public would have known what they were holding. We allowed bankers to take all the up front rewards of their actions and transferred all this risk to investors. Not that investors are free of blame, you deserve to lose your money if you invest in a company that you are clueless about. Even today it continues. How dumb do you have to be to buy C stock when you have not the slightest idea what is on their books?

Next to blame is the general American public. We continue to send complete fools to Congress to represent us. The people making our economic decisions are morons, they have absolutely no financial acumen. They are all lawyers who know nothing about economics or finance. Our newest President has never held a real job, probably can't balance his check book and has proven his lack of any understanding by appointing the same retreads to positions that got us in this mess. Rubin is his top economic dog? "No one could have saw this coming. Hold on a second while I cash by $150 million in payments from C."

This of course goes directly to our two party political system that has rigged it so that only they can be elected. While the uneducated American public (thanks to our teachers unions) continues to fight over right and left, not realizing they are one in the same.

Our bankers, politicians and elites will keep this going until they have ruined this country. They don't care about this country, they only care about themselves. To think there is one honorable man in Washington or NY is foolish.

The saddest part of this entire fiasco is that we have a parade of dummies denouncing capitalism and free markets based on the result. The problem is we never had free markets. Free markets rely on the honesty of the counterparties, that is supported by the government punishing those who are dishonest.

Until we see thousands of rich bankers and politicians doing perp walks we are doomed. To make matters worse if we are lucky we still have a small window to save this country, but these elites are doing whatever they can to save themselves and hide reality from the public, and fixing this mess first takes understanding its root cause.

[roger]

Reading commentaries is always fun & educational...it exposes
the tremendous amount of folks with a concrete/set mode of
thinking & their refusal to face reality.The system as been
sold to them lock stock & barrel and they will insist & believe
til the day they die that this is the best of all possible worlds.

[farang]

Well now, this is interesting: We have Depresso telling us that socialism is fascism. I'd better write the dictionaries of the world so they can change the definitions to fit his fantasies. And here I was thinking bailing out these crooked corporations by government officials straight from the corporations themselves was the essence of fascism. Perhaps my dictionary is "outdated."

And we have econophile telling us that deregulation "had nothing to do with it" even when it is illustrated in the article that the regulator, Brooksley Born, warned about derivatives (as did Warren Buffet), only to be ignored by those pushing through deregulation (Rubin, Greenspan and Summers.)

Econophile continues illustrating he didn't read the article (or maybe has comprehension impairment?) by blaming Carter for the CRA being the underlying problem, yet the article states quite clearly that those loans are not defaulting at a rate as high as the rest of the bad loans. And in addition, this genius econophile has Clinton in the White House two years before he was elected, and three years before he took office: Quite a feat, econophile, wouldn't you say? Wonder what "beautiful mind Barb" said when Bill slipped into bed?

Your hero Ayn Rand and Sir Greenspan fell flat on their faces, yet you wish to prop up the corpse of "free market" with lies and false innuendo.

Nice try.

And Peter, I agree with almost everything you say, except this: "Free markets rely on the honesty of the counterparties, that is supported by the government punishing those who are dishonest."

A WELL REGULATED capitalist market is what you describe, not a "free market."

Now, if by "Free market" you mean you agreed with giving tax breaks to corporations to ship manufacturing jobs overseas, we part ways there. No one I know is denouncing capitalism. They are denouncing the theft by those posing as capitalists, but practicing fascism. Government run by corporations, along with belligerent nationalism and militarism. They would be the ones on Wall Street and their paid-for whores in D.C.

Personally, I believe they WANT to destroy the dollar, have since Greenspan lowered the interest rates when Bush took office (after raising it eight times in the 2000 election year) because they will never be able to service the obscene debt load they have placed on America. Call me a "dummy", but there you are. At least I never thought we could all sell hamburgers to each other in a "service" economy.

I knew this was coming, when Clinton picked up G.H.W. Bush's NAFTA torch, and proclaimed it would "level the playing field" of workers in Mexico, Canada and the US.

Like Clinton or Bush cared a whit about the Mexican worker: They wanted to bring the US Middle Class to it's knees, and here we are. It is still being implemented in the "automakers" bailout, where the Republicans are whining and moaning about giving them $38 billion, while pouring trillions into con artist's banks and insurance companies. No, giving the automakers won't create ONE consumer, but the motive is to break the backs of well paid union workers and Democratic voting base.

But in actuality, debasing the consumer base further, the dummies.

Find a rope, I know a tall tree.......

[xqqme]

http://www.americanthinker.com/2008/12/blame_me_for_job_losses.html

December 11, 2008
Blame me for job losses
By C. Edmund Wright
When the jobs report for November came out last week, many so-called "experts" were shocked at the massive loss of an estimated 533 thousand jobs. Even a Time /CNN organization called "The Curious Capitalists" were at a loss to explain it.

Let me attempt to help out these "curious capitalists" (though I am still skeptical that anyone working for CNN or Time is either curious or a capitalist). I caused part of this job loss and I know precisely why; the election. The results portend big trouble for small business.

The job destruction process has started. We are about 20% of the way through our ramp down process and on schedule to complete the shut down by spring 2009. Watch the financial news and you will see continued job cuts each month. We are not alone in our strategy. Far from it. Atlas has shrugged all over the country.

[roger]

Reagan removed Volcker...Why? because putting the brakes
on inflation was slowing the economy,Greenspan this great
opportunist would do anything to please his master,one way
or another the economy was already headed for disaster,just
a matter of time,individual mistakes?yes plenty of them,but
depressions are in this type of economy are unavoidable,
individual action can retard or accelerate the process
but it can do no more.

[ron]

Good recap of events and I am sure millions of pages will be written in the coming years with many economist PHD'spending years nit picking over every detail.
While its a good idea to get the cause right my guess is that we will have to look beyond the economist for answers and better direction in the future. The financial sector has become the modern religion of choice with all the institutional protection along with widespread media and university praise. Clearly economist havn't learned anything of longterm value if the current world economic conditions are a reflection of their ability to be a light at the end of the tunnel in modern life. Science on the other hand, medical,physics etc have all provided real life solutions to life on this planet so I think its time to look away from the narrow vision provided by the financial elite and their paid University/media/political connections and broaden our search for solutions.

[Michael Haltman]

Great piece. Keep up the good work.

Mike Haltman
The Political and Financial Markets Commentator
http://politicsandfinance.blogspot.com

[Steven Higgins]

No analysis is correct that misses the CORE of the problem: the existence of a private banking cartel known deceptively as the "Federal" Reserve.
Volcker is being made a hero, but all the Private Reserve governors are responsible for sucking the life out of the US economy systematically. Don't let another day go past without understanding the real CAUSE:
1) Debt = Money Link: http://video.google.com/videoplay?docid=-9050474362583451279
(the link above shows is full size, but sometimes it cuts out halfway thru the video due to size. If it does, you can continue it with the link below)(same video, just smaller size)
http://theobvious.typepad.com/blog/2008/10/money-as-debt.html

2) Fed Scam, er, System http://video.google.com/videoplay?docid=6507136891691870450

Steven B. Higgins
The Loan Ranger
www.BoulderLoanRanger.com
www.AmericanNationalFinancial.com

[Steven Higgins]

No analysis is correct that misses the CORE of the problem: the existence of a private banking cartel known deceptively as the "Federal" Reserve.
Volcker is being made a hero, but all the Private Reserve governors are responsible for sucking the life out of the US economy systematically. Don't let another day go past without understanding the real CAUSE:
1) Debt = Money Link: http://video.google.com/videoplay?docid=-9050474362583451279
(the link above shows is full size, but sometimes it cuts out halfway thru the video due to size. If it does, you can continue it with the link below)(same video, just smaller size)
http://theobvious.typepad.com/blog/2008/10/money-as-debt.html

2) Fed Scam, er, System http://video.google.com/videoplay?docid=6507136891691870450

Steven B. Higgins
The Loan Ranger
http://www.BoulderLoanRanger.com
http://www.AmericanNationalFinancial.com

[Steven Higgins]

No analysis is correct that misses the CORE of the problem: the existence of a private banking cartel known deceptively as the "Federal" Reserve.
Volcker is being made a hero, but all the Private Reserve governors are responsible for sucking the life out of the US economy systematically. Don't let another day go past without understanding the real CAUSE:
1) Debt = Money Link: http://video.google.com/videoplay?docid=-9050474362583451279
(the link above shows is full size, but sometimes it cuts out halfway thru the video due to size. If it does, you can continue it with the link below)(same video, just smaller size)
http://theobvious.typepad.com/blog/2008/10/money-as-debt.html

2) Fed Scam, er, System http://video.google.com/videoplay?docid=6507136891691870450

Steven B. Higgins
The Loan Ranger
http://www.BoulderLoanRanger.com
http://www.AmericanNationalFinancial.com

[joebhed]

Steven B.
We get the message.
But it is just as weak as the entire stigpost.
The question is really NOT, what is the problem?.
The question to you and Stig is, what is the solution?
Do away with the FED and replace it with what?
The Chicago Plan.
Trasury-issuance of debt-free money?
100 percent reserve banking?
What's the solution?
Where do we go from here?
How do we get there?

[jammer]

Capital gains tax cuts contributed to the financial crisis, has got to be the stupidist idea I have seen in years. Clearly, he is a socialist. Investment is managing risk. People need incentive to take risk. Does he think all the trillions currently in cash, will be invested without a very good risk/reward ratio in this environment or any environment?

[Econophile]

Roger:

I am the “genius” Econophile. Thank you for your comments. Let me respond.

"And we have econophile telling us that deregulation "had nothing to do with it" even when it is illustrated in the article that the regulator, Brooksley Born, warned about derivatives (as did Warren Buffet), only to be ignored by those pushing through deregulation (Rubin, Greenspan and Summers.)"

Please read carefully, Roger. “Deregulation” is the word, not “regulation.” The current false argument, by Stiglitz and others, asserts that Glass-Steagall’s repeal caused the problem and therefore deregulation is the culprit for our crisis. Stiglitz likes to rewrite history as does Greenspan. You will note he presents no evidence of this assertion other than it indirectly created a risky lending culture. Even a brilliant man such as Stiglitz’s boss, Bill Clinton says the repeal of G-S didn’t have anything to do with it. If you wish more information: http://subprimeforum.blogspot.com/2008/11/john-stossel-on-bailout.html.

The other comments Stiglitz makes about deregulation are actually about regulation and the interpretation and application of existing rules about banking and reserve requirements. So, to turn his argument around, I would say the failure was not of deregulation but of regulation and the government control over banking.

"Econophile continues illustrating he didn't read the article (or maybe has comprehension impairment?) by blaming Carter for the CRA being the underlying problem, yet the article states quite clearly that those loans are not defaulting at a rate as high as the rest of the bad loans."

The point that people criticizing the CRA are making is that it allowed politics to enter into the loan market controlled by Fannie and Freddie. To take a page from Stiglitz, it created an atmosphere that encouraged risk taking and CRA gave Fan-Fred the power to punish banks that didn’t do their bidding for public spirited loans.

"And in addition, this genius econophile has Clinton in the White House two years before he was elected, and three years before he took office: Quite a feat, econophile, wouldn't you say? Wonder what "beautiful mind Barb" said when Bill slipped into bed?"

You got me Roger! I committed a typo. Sorry. It’s 1992 when the Clinton liberals flexed their housing muscles. As Bernanke said: The [1992 law] “required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals.”

"Your hero Ayn Rand and Sir Greenspan fell flat on their faces, yet you wish to prop up the corpse of "free market" with lies and false innuendo."

I say that the Fed and Mr. Greenspan were probably the chief culprits for creating the credit bubble that kicked off the housing bubble. I guess you didn’t read my comment clearly.

If you want more information: http://subprimeforum.blogspot.com

[RN]

I second everything farang and Roger say about Econophile.

It's mind-blowing that these people still live in their "deregulate everything, the govt. is pure evil" dreamworld given the facts on the ground out there.

[roger]

Econophile,greetings (You got me Roger! I committed a typo.)
you also got your " posted by " mixed up.but that is OK since
I agree with most of what Farand has to say.
I usually regard posted comments as a way to learn,not as an attack
on personality (nasty words I usually reserved for the hierarchy.
have a nice day