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The underlying causes of the financial meltdown - a serious discussion
Original post made
by Gary, Downtown North,
on Sep 28, 2008
In the spirit of an objective debate, without inflammatory rhetoric, I would like to ask posters, from various perspectives, to peel back the skins of the onion, and suggest how they think this thing got started. Not so much who is at fault, although fault could be ascribed in a non-inflmmatory way, but mechanisms that went wrong.
I have already suggested that it started with Fannie/Freddie attempts to loosen standards (with CRA), and push low-cost housing. F/F were among the first major packagers of securitized bundles of loans. Wall Street could smell profit potential in such packages, and it went to town with various derivitizations. All of the above only works in a bubble.
What are other people's ideas/analysis?
Please keep it respectful. We can all flame out each other on other threads.
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Posted by From Barrons
a resident of Another Palo Alto neighborhood
on Sep 28, 2008 at 12:23 pm
1997: Federal Reserve Chairman Alan Greenspan's famous "irrational exuberance" speech in 1996 was somehow ignored by, um, Fed Chairman Greenspan. The Fed missed the opportunity to change margin requirements. Had the Fed acted, the bubble would not have inflated as much, and the subsequent crash would not have been as severe.
1998: Long Term Capital Management was undercapitalized, used enormous amounts of leverage to purchase all manner of thinly traded, hard-to-value paper. It failed, and under the authority of the Federal Reserve a "private-sector" rescue plan was cobbled together. Had these bankers suffered big losses from LTCM, they might have thought twice before jumping into the exact same business model of undercapitalized, overleveraged, thinly traded, hard-to-value paper. Instead, they reaffirmed Benjamin Disraeli's famous aphorism: "What we learn from history is that we do not learn from history."
1999: The Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger pools of capital.
2000: The Commodities Futures Modernization Act defined financial commodities such as "interest rates, currency prices, and stock indexes" as "excluded commodities." They could trade off the futures exchanges, with minimal oversight by the Commodity Futures Trading Commission. Neither the Securities and Exchange Commission, nor the Federal Reserve, nor any state insurance regulators had the ability to supervise or regulate the writing of credit-default swaps by hedge funds, investment banks or insurance companies.
2001-'03: Alan Greenspan's Fed dropped federal-fund rates to 1%. Lulled into a false belief that inflation was not a problem, the Fed then kept rates at 1% for more than a year. This set off an inflationary spiral in housing, and a desperate hunt for yield by fixed-income managers.
2003-'07: The Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability. The borrower's ability to repay these mortgages was replaced with the lender's ability to securitize and repackage them.
2004: The SEC waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. This 2004 exemption allowed them to exceed this leverage rule. Only five firms -- Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley -- were granted this exemption; they promptly levered up 20, 30 and even 40 to 1.
2005-'07: Unscrupulous home appraisers found that they could attract more business by inflating appraisals. Intrinsic value was ignored, so referrals kept coming in. This helped borrowers obtain financing at prices that were increasingly unsupportable. When honest appraisers petitioned both Congress and the bureaucracy to intervene in the widespread fraud, neither branch of government acted.
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Posted by My 2 cents - if you really promise not to flame it, Gary
a resident of Another Palo Alto neighborhood
on Sep 28, 2008 at 7:11 pm
If you really, truly, are interested in a discussion and aren't going to flame or diss an opinion that runs counter to your own, I'll give it this one try.
I think the issue of decoupling risk from incentives deserves more exploration. Banks had years of pushing people into the highest mortgages they thought they could get away with, PLUS (and no one seems to ever deal with this very large elephant in the room) all the incentives in the banking industry have been towards pushing people into that death spiral of punitive hidden fees. Banks have been processing loans as if borrowers had ideal lives, because it served the banks' interests. But consumers in the US economy especially have a lot of unbudgetable expenses, such as health care and hidden fees in a variety of industries, especially banking. Consumer Reports estimated that in 2004, hidden fees cost Americans over $216 billion dollars, something like $4,000 to an average family. (See MSNBC reporter Bob Sullivan's book Gotcha Capitalism for an in-depth discussion of this issue, I can't do that to your satisfaction here.)
On paper, I think most people thought they could afford their mortgages. I don't think it makes any sense to believe a lot of people were getting mortgages they KNEW they couldn't afford. The trouble is that we have this whole Deception Economy where people are hit with hidden fees, and banks are at the top of the list of practitioners. I have read in more than one credible place that major banks are now making something like half of their profits from fees, many of them cooked up in back rooms as profit that basically comes from tricking or tripping up customers. When you have an environment like that, where banks have no responsibility for the long-term health of mortgages because they aren't holding the mortgages, but they are making significant profits from selling the mortgages (thus in their interest to push the most expensive mortgage possible) AND they benefit big time from getting people into these hidden-fee death spirals, it was all a train wreck waiting to happen.
The thing that worries me is that this climate hasn't changed. None of these predatory conditions have changed. When joe customer walks into a bank to get a mortgage, even though the banks are pickier about who they'll give a loan to, from my perspective as a customer it's all still about fending off unreasonable products and trying to get the bank to focus on what you can really afford, all the while keeping your guard up for the latest hidden fee tactics.
If the foundation of all of this is the default crisis, I think a better approach would be to create more stable conditions for middle class homeowners.
Free markets work best for everyone when corrections take place at the level of each interaction. When lots of people can be cheated, and the only disincentive is the possibility of (maybe) a large law suit, lots of people are going to be cheated, and maybe there will be a lawsuit that doesn't really fix anything. Intelligent regulation improves commerce - is essential to a healthy free market economy - because it allows corrections to take place in each interaction. Unfortunately, these kinds of reforms seem to have been uniformly rejected by neocons in recent years as "consumer friendly"; no one remembers how essential that balance is to the whole concept of marketplace benefits.
I think Carly Fiorina was quoted in Newsweek with her suggestion for fixing this along the lines of: when the tech sector makes a faulty product, they take it back and fix it. That's what she was suggesting for the mortgages -- only the banks can't do that because they didn't keep the mortgages.
Frankly, for the money here, I'd rather see the government, through the FHA, make lower cost mortgages available directly to the public. Not just people in foreclosure - because there's a lot of overhead involved in waiting until people are in foreclosure, both to the public and the economy - but to anyone who can qualify. People in foreclosure should be able to apply under special dispensation, especially if they can show that hidden fees and unreasonable mortgage products or clauses put them in financial crisis, and that they would be solvent with a certain amount of forgiveness of those debts and lower mortgage rates. The government would make a decent rate of interest now, and it can sell those mortgages at a profit later. A high percentage of previously deemed risky mortgages could simply be paid off this way and the securities arena stabilized. I don't think banks want this, because there's nothing in it for them, especially in this new set up where they don't see any good in holding mortgages and making interest. (And because then they would really have to pay for their bad decisions instead of getting bailed out.)
Going this route (offering low-interest mortgages directly) would ultimately be more stabilizing for the economy, and could even provide a stimulus as broad swaths of middle class families have their finances stabilized and predictable. Of course, this would have to go along with thoughtful regulation, so that those families aren't simply destabilized by other predatory practices.
Of course, this will never go, because ultimately the banks have all the PR people working full-time to point the blame at homeowners. But, the foundation of the economy is the American public. I think we keep the house from collapsing by fixing the foundation, and save the ideological rhetoric for better times.
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Posted by Mike
a resident of Mountain View
on Sep 30, 2008 at 11:28 am
FOLLOW THE MONEY
Today's problem started long before we were born.
STOP! Look at your "money!"
The top of each bill states, "Federal Reserve Note." What is the Federal Reserve?
Most Americans don't know. Understandable ... the Federal Reserve Bank (FRB) does not publish much information about their activities -- and for good reason.
Most Americans assume the FRB is a branch of Government. Not so. The FRB is a private corporation, owned by foreign interests. This bank and its stockholders control the entire wealth of America.
"Give me control of a nation's money and I care not who makes the laws." -- Mayer Amschel Bauer
To understand this FRB corporation's identity and purpose, let's review the early days of our Nation ...
After the Revolution, representatives of wealthy European banking families proposed a Central Bank for America to our Founding Fathers. This bank would provide money for our young nation to grow into a world power.
The Founding Fathers refused. The United States, a sovereign nation, could create its own money by Congressional power "to coin money and regulate the value thereof."
The Founding Fathers knew that European bankers would siphon off the wealth and natural resources through currency manipulation. They had done it in every major European country.
Thomas Jefferson warned us ...
"If the American People ever allow private banks to control the issue of their currency...the banks and the corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.
"I believe that banking institutions are more dangerous to our liberties that standing armies. Already they have raised up a moneyed aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs." -- Thomas Jefferson
The private European banking families, failing to gain control of our currency, did not give up. During the next 100 years, they tried many times to establish a Central Bank for America. But Americans, mindful of Jefferson's warning, caught on to their paper money "tricks." Public sentiment remained against them.
Then, in 1907, a banking panic shifted public opinion against the American banking industry. The European families saw their chance to take control of America's banking system.
To magnify public outrage toward the existing banking system, the European bankers promulgated "full banking reform."
(They used newspapers they owned and lobby groups they funded.) They clamored for Congressional investigations. They offered their expertise in drafting reforms to protect the public against future bank failures.
By 1912, there was widespread public concern over banking reform. Presidential candidates from each political party offered their own versions of a national monetary reform bill.
What the public didn't know ...
The public had no way of knowing that the two main "competing" reform bills were virtually identical.
German banker, Paul Warburg, wrote both bills.
The public had no way of knowing that Warburg's firm (Kuhn, Loeb Company), one of Europe's wealthiest and oldest banking houses, financed the election campaigns of the three 1912 Presidential candidates.
Thus, foreign bankers controlled the reform bill's wording, AND results of the 1912 Presidential election
Thus, they were guaranteed establishment of America's Central Bank -- and total control America's currency.
In 1913, new President Woodrow Wilson, signed into law the foreign banker's Central Bank plan, deliberately mis-titled, "THE FEDERAL RESERVE ACT."
This bill officially transferred Congress's Constitutional duty to issue America's currency to a private corporation: The Federal Reserve Bank of New York.
Moreover, ONLY powerful banking families could buy this private corporation's stock (NOT available to the public)!
"This [Federal Reserve Act] establishes the most gigantic trust on earth. ... the worst legislative crime of the ages is perpetrated by this banking and currency bill." -- Congressman Charles A. Lindberg, Sr. (1913)
From the beginning, the President and Congress were supposed to monitor FRB activities ...
Meanwhile, through subtle law changes, this corporation has become INDEPENDENT OF ALL CONGRESSIONAL CONTROL. This corporation, secretive in its operation, even REFUSES TO BE AUDITED BY THE UNITED STATES GOVERNMENT.
"The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class." -- Rothschild Brothers of London (1863)
How the FRB steals our wealth ...
Let's examine how the FRB creates our currency (so-called "money").
When FRB management proclaims that one billion dollars should be created for use by the American people, they simply write a check for one billion dollars!
The FRB, is not required to have any funds of its own to cover this check! (It's backed by nothing -- no gold, no silver -- NOTHING!)
They create new money out of THIN AIR! Is this counterfeit or what! Read on!
With this check, they buy one billion dollars' worth of US Treasury Bonds from major banks and brokerage houses. The banks and brokerage houses now have one billion "new dollars" in their accounts. These they loan, LOAN, into the economy.
In exchange for their check (backed by nothing), the FRB now owns one billion dollars' worth of US Treasury Bonds!
How would YOU like to open your zero-balance checkbook, write a check for one billion dollars, then have one billion dollars' worth of interest-bearing Treasury Bonds placed into your account?
No wonder the European banking families lobbied for the "right" to issue America's currency!
When the FRB takes possession of US Treasury Bonds, it takes possession and control of the real wealth of America: the labor and property of millions of citizens, TRANSFERRED TO THE TREASURY THROUGH TAXES, to back up these Treasury obligations.
In other words, whenever this private, corporate, Federal Reserve Bank of New York "buys" (with counterfeit money) a billion dollars worth of Bonds, THE TREASURY MUST EVENTUALLY CONFISCATE A BILLION DOLLARS' WORTH OF AMERICAN LABOR AND PROPERTY TO "COVER THE CHECK."
(Enter the IRS, asset forfeiture -- and the Police State.)
Now you know why Thomas Jefferson passionately fought the issuance of America's currency by a private bank.
But wait, there's more ...
To amplify citizens' burden of this money system, THE FRB COLLECTS INTEREST ON ITS TREASURY BONDS! This further increases American citizens' debt to the Treasury.
Federal Reserve Notes are "debt money." In other words, every "note" issued by this corporation adds corresponding debt onto the backs of Americans - in perpetuity.
(Folks, their so-called "notes" are not even lawful notes!)
The result of FRB plunder ...
The effect of the FRB on our Nation and its citizens has been devastating. Since 1913, the value of the American Dollar has fallen to 11 cents! (Probably 1-2 cents today.) Our gold reserves have vanished. The continuously inflated money supply wipes out the value of life-long savings.
Within as few as five years, INTEREST PAYMENTS ON THE NATIONAL DEBT (see Do the Math! below) WILL EXCEED ANNUAL REVENUES COLLECTED BY THE TREASURY.
Sadly, not one in 100,000 Americans could identify the group responsible for these tragic statistics.
Federal Reserve Notes are not Constitutional money!
FRB "notes" cost only 2-3 cents to print (regardless of denomination). Then, they're "loaned" to We-the-People at FULL FACE VALUE PLUS INTEREST! These pieces of paper confirm America's ever-growing debt to shrewd, wealthy FRB stockholders.
Thus, the "Federal Reserve Bank" is NOT Federal, there's NOTHING on reserve, and is NOT A BANK. It puts NOTHING in and takes EVERYTHING out!
"The Federal Reserve Banks are one of the most corrupt institutions the world has ever seen. ... this Nation is run by International Bankers." -- Congressman Louis T. McFadden
Google THE DEATH OF CONGRESSMAN LOUIS T. McFADDEN, OCT '36 and An Astounding Exposure
Is this the American Dream ... or, an American Nightmare?
Now you know why the entire "Federal Reserve" banking system, along with the IRS, must be abolished.
(In case you didn't know, the IRS, another outlaw private organization, is the "collection agent" for the Federal Reserve Bank). Oh well, ... that's a topic for another report.
That's the truth about your money. Isn't it time for a change?
Do the Math!
A few years ago, I (a non-economist) did this simple arithmetic exercise. I have not updated the numbers.
(Back then) The fraud known as the "National Debt" is more than $5 trillion.
ALL the Federal Reserve Notes (FRNs) on this planet would not equal $5,000,000,000,000.00!
NOT EVEN CLOSE -- about $4.6 trillion short! There are perhaps 350 billion FRNs in circulation! In other words, if We-the-People collected ALL our so-called "dollars" (FRNs), we couldn't even pay 10% of this ALLEGED debt! Got the idea?
OK, suppose we decided to pay this phony debt at $1 million per day. How long would it take? (Using round numbers and NO interest.) Let's see ...
$5,000,000,000,000.00 / $1,000,000.00 per day
= 5 million days
= 13,698 YEARS!
That's about 685 GENERATIONS OF GRAND KIDS -- who must continue to pay the debt at $1,000,000 every day!
I don't think so! NOW YOU KNOW WHY THE FRAUDULENT "NATIONAL DEBT" CAN NEVER BE PAID!!!
Can you say, "ECONOMIC SLAVERY?"
For more information about money, get "THE MONEY MASTERS," video (a 2-volume, 3 1/2 hour, non-fiction, historical documentary) by John Train. Book by the same name available at Amazon.com
This video reveals the origins and operations of the corrupt banking plutocracy that owns and rules America - and how it is gradually and clandestinely imposing a worldwide tyranny. This will help you understand how international bankers gain control of America.
Also, read "The Creature from Jekyll Island." (also at Amazon.com)
This book answers the question: Where does money come from? Where does it go? Who makes it? The money magicians' secrets are unveiled.
We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You'll be hooked in five minutes. Reads like a detective story -- which it really is.
But it's all true. This book is about the most blatant scam of all history. It's all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity.
Creature from Jekyll Island is a "must read." Your world view will definitely change. You'll NEVER trust a politician -- or a banker -- again.