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A Road Map to Economic Armageddon

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Posted on Jun 2, 2011

By John B. Taylor

This review is from a syndication service of The Washington Post.

In “Reckless Endangerment,” Gretchen Morgenson and Joshua Rosner argue that cozy connections between government and the financial industry were the primary cause of the financial crisis. While many economists—including this reviewer—have argued that government actions caused the crisis, Morgenson and Rosner use their investigative skills to dig down and explain why those actions were taken. The book focuses on two government agencies, Fannie Mae and the Federal Reserve.

The mutual support system is better explained and documented in the case of Fannie, the government-sponsored enterprise that supported the home mortgage market by buying mortgages and packaging them into marketable securities, which it then guaranteed and sold to investors.

 

book cover

 

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

 

By Gretchen Morgenson, Joshua Rosner

 

Times Books, 352 pages

 

Buy the book

The book gives examples of Fannie’s executives—Jim Johnson, chief executive from 1991 to 1998, is singled out most—using excess profits to support government officials in a variety of ways, with plenty left over for large bonuses. They got jobs for friends and relatives of elected officials, including Rep. Barney Frank (D-Mass.), who is tagged as “a perpetual protector of Fannie.” They made campaign contributions and charitable donations to co-opt groups such as the community action organization ACORN, which “had been agitating for tighter regulations on Fannie Mae.” They persuaded executive branch officials—such as then-Deputy Treasury Secretary Larry Summers—to ask their staffs to rewrite reports critical of Fannie.

Fannie’s lobbying efforts were resisted by some government officials, who are the heroes of the book. Congressional Budget Office Director June O’Neill is praised for refusing to stop the release of a 1995 study by CBO staffer Marvin Phaup showing that federal support increased Fannie’s profits by $2 billion. Another hero is “none other than John W. Snow, the Treasury secretary,” who in 2003 “urged the creation of a new federal agency to regulate and supervise the financial activities of the government-sponsored enterprises.” (From 1995 to 2001, I was on the CBO’s Panel of Economic Advisers but was not involved in the CBO study. From 2001 to 2005, I was undersecretary of the Treasury for international affairs, and Fannie Mae issues were not part of the international division.)

The Fed takes a beating throughout the book. Early on, the authors take on the Boston Fed, and in particular its research director, Alicia Munnell, for using a study documenting racial discrimination in mortgage lending to justify the relaxation of credit standards, even though other researchers found the study’s findings to be flawed. The book claims that “the banks knew they held all the cards” when Timothy Geithner became president of the New York Fed in 2003. It says that financier Sandy Weill “cultivated Geithner” and approached him about running Citigroup, and it reminds us that “even as Citigroup was building up its hidden off-balance sheet risks in 2006, its overseers at the New York Fed did nothing to rein the bank in.”

To see long excerpts from “Reckless Endangerment” at Google Books, click here.

The book certainly does not let the private sector off the hook, but it is very hard to imagine that heavily regulated banks could have engaged in such extreme risk-taking without the support of regulators. Nobel Prize-winning economist George Stigler warned long ago about “regulatory capture”—the tendency for regulated firms to get protection from their regulators—and the authors provide considerable evidence of it. Though they do not always give sources, it is important to take such claims and evidence seriously and to introduce government reforms as necessary. This, unfortunately, has not happened yet, as the authors emphasize in the conclusion, pointing to “the irony of having two of the nation’s most strident defenders of Fannie Mae sponsoring” the Wall Street Reform and Consumer Protection Act of 2010—which did not reform Fannie Mae.


John B. Taylor, a professor of economics at Stanford University and a senior fellow at Stanford’s Hoover Institution, is the author of “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis.” He blogs at Economics One.

(c) 2011, Washington Post Book World Service/Washington Post Writers Group


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By indocitraps, June 20, 2011 at 7:54 am Link to this comment

There will be no finanical recovery, until wall street is behind bars, things will continue to get worse.
What does the American public have to do to get Justice?

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By Anarcissie, June 8, 2011 at 3:15 pm Link to this comment

Lafayette—I think it’s odd to call a theory which gives a coherent explanation of events and makes correct predictions ‘mental masturbation’.  It was a useful theory, too, because it induced me to sell all my real estate before the crash.

However, that was then.  With interest rates at near zero, we should be observing another funny-money boom-crash cycle bigger than the last one.  That’s not happening—the economy stinks—so a further explanation is required.

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By JDmysticDJ, June 8, 2011 at 2:37 pm Link to this comment

Lafayette

You again offer - “Caveat Emptor ... or as PT Barnum put it, “There’s a sucker born every minute” - as being a natural law that should be taken into consideration. Did it ever occur to you that this Roman dictum and statement of policy by P.T. Barnum are not at all virtuous practices or natural laws that should be given credence by you or anyone else?

You go on to write:

“Extrapolating this to a massive conspiracy by a government to fleece the public is misguided nonsense. What happened in the SubPrime Mess was, yes, the lack of governmental oversight of local (but national in character) loan procedures that were both predatory and falsified by lenders.”

As far as I can tell, no one has extrapolated a “massive conspiracy by government to fleece the people,” at most; some are saying the government was corrupt[ed] which allowed for the fleecing of the people by the financial institutions. As for me, I’ve pointed out that it is John B. Taylor who is attempting to blame government for Wall Street’s nefarious activities.

“The corporate criminals lobbied for and took advantage of lax government regulation to commit their crimes, so, according to Taylor, government is the culprit. The corporate criminals were just hapless bystanders, obeying the law, and doing business as usual.”

You, in your arguments, have subtly implied that Taylor is correct in his assessment, and that the real culprits are the sheeple who were shorn. While I have attempted to point out that it was those who attempted to ride the money train from the mid and upper levels of the economy who were the culprits, not those honest working people that have lost their jobs and are experiencing very real economic hardship as a result of the economic crisis.

It is you who appear to be saying that reckless wheeling and dealing is to be expected and the natural order of things, which only reinforces my opinion that you are a light-weight when it comes to issues of right and wrong, and that you demonstrate yourself to be so on each and every issue. Your flamboyant, flowery, flouncy, froggie, fallacious, flap-trap and foolishness is on display here, and I’m flabbergasted by your F…ing arrogance that has absolutely nothing to substantiate it. Do you feel that because you are in France you have picked up an aristocratic intelligence by osmosis? I fear that you are a poor ambassador to France and that you will only reinforce the stereotype the French people have of Americans.

Yes I’ll agree that the American people have made poor political decisions of late, and that they have been misguided, but I’ll proffer that observing such as you has contributed significantly to their being misguided. You are the quintessential Liberal Elitist.

If you haven’t noticed, you irk the hell out of me.

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By Lafayette, June 8, 2011 at 10:55 am Link to this comment

Anar: It might be interesting to see what you’d come up with if you tried to engage more fundamental issues

You are off on a wild-goose chase trying to prove something that is not provable. (Inflation is a VERY inexact science.) Worse, you insinuate that “manipulation” is afoot by dark forces.

I just cannot believe that it is possible to do what you think has been done - by manipulating either the money-supply or fiscal policy on any other means devised by man (short of price-fixing my government fiat).

All of which is tantamount to intellectual masturbation.

Different strokes for different folks. Nice exchange anyway, which provoked some thinking. Which is a rare occurrence.

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By Anarcissie, June 8, 2011 at 7:06 am Link to this comment

Lafayette—I am well aware of what the CPI consists of, and if I weren’t, it would be easy enough to look it up.

The question which I was trying to answer years ago was how the Fed could hold interest rates under the rate of inflation and not accelerate that inflation.  Artificially low interest rates invite inflationary speculation; the increase in the volume and velocity of money could be expected to spill over into commodities and wages and thence into the CPI.  That didn’t happen (much).  Why?  Given that situation, what could be predicted?  Since this policy has been continued and reinforced, what can we expect to see in the future?  Well, we saw what happened to real estate: instead of inflating indefinitely, credit—belief in belief—ran out, the market collapsed, and credit vanished.  Huge financial interventions by the government were required just to keep things going badly.

Like many, you seem to have been dazzled and mystified by a wealth of minor details, which is probably the reason it was provided to you.  It might be interesting to see what you’d come up with if you tried to engage more fundamental issues.  You’re not going to get this from the government or the mainstream media, because they’re in the mystification business.

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By Lafayette, June 7, 2011 at 11:40 pm Link to this comment

VICTIMIZATION MANTRA

JD: The honest working person suffered along with wheeler dealers from every level.

Caveat Emptor ... or as PT Barnum put it, “There’s a sucker born every minute”.

Extrapolating this to a massive conspiracy by a government to fleece the public is misguided nonsense. What happened in the SubPrime Mess was, yes, the lack of governmental oversight of local (but national in character) loan procedures that were both predatory and falsified by lenders.

Yes, TILA (Truth in Lending Act) should have been both enforced and reinforced, but the Lead-head Administration was lax in its market oversight responsibility.

So, the lending agents were “gaming the system” for their own profit. Because no Consumer Protection Agency was there to blow the whistle.

Is any of this the present Administration’s fault? No way, José. In fact, BO & Co battled mightily for the creation of the Consumer Protection Agency that the Replicants are trying to undermine and do away with.

And who voted them into control of the HofR. Your “honest working person” - Mr & Mrs America. We, the sheeple.

Enough of the Victimization Mantra. Americans are getting what they voted for, so why the shrill complaining?

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By Lafayette, June 7, 2011 at 11:24 pm Link to this comment

Anar: ... the period I am speaking of precedes 2005.  The interest rates were being held well under the rate of inflation, yet the CPI didn’t move (much) although the prices of real estate and equities bubbled. 

The CPI, rightly or wrongly, consists of the following market basket of goods/services:
  FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
  HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
  APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
  TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
  MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
  RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
  EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
  OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

In terms of real estate, the CPI measures only realty prices as they are indicated by their value translation into rents. This lag is both long and has an incidental impact upon the CPI. 

Real estate asset prices therefore do not specifically influence the CPI.

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By JDmysticDJ, June 7, 2011 at 7:49 am Link to this comment

Every gambler knows that the house has an advantage, but gamblers believe that they can beat the odds. In this case the house was not content with a simple advantage, they also rigged the games.

The core of this problem goes beyond the criminal activity of the financial institutions, to include those motivated by crass consumerism, and the desire to go one up on the Jones.’ It’s all about greed, at the micro level as well as the macro level.

The honest working person suffered along with wheeler dealers from every level. It’s the desire for more than what’s needed, and the desire to be more, and have more, than others that caused this economic crisis. If it weren’t for the suffering of the innocent one might say it was poetic justice.

Those who excuse these kinds of behaviors, and attribute them to natural law, are reprobates, and they should be condemned right along with the criminals. One can easily surmise what their behavior would have been if they had been hawking mortgages.

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By prisnersdilema, June 7, 2011 at 5:08 am Link to this comment

As I said until Goldman Sacks is behind bars nothing will get better. We need a special
prosecutor to sift through ever piece of paper and data bit on every single hard drive on
every desktop, laptop, I Pad, and Blackerry, to look for violations of
Law, by Wall street.. Until that is done there will be no real recovery, the money merry
go round will continue. And if there aren’t enough honest members of congress to do
this, then maybe the military should do it. They swore an oath to protect this country
from all enemies foreign and domestic, and now there are some domestic enemies that
are destroying this country.

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By Anarcissie, June 7, 2011 at 4:52 am Link to this comment

Lafayette—the period I am speaking of precedes 2005.  The interest rates were being held well under the rate of inflation, yet the CPI didn’t move (much) although the prices of real estate and equities bubbled.  This is what needs to be explained.

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By Lafayette, June 7, 2011 at 2:13 am Link to this comment

FINANCE REGULATION IN DANGER

Very much correlative with the investigative reporting of this thread is an article from ProPublica.org: From Dodd-Frank to Dud: How Financial Reform May Be Going Wrong

If we get finance regulation wrong, we are re-opening the gates of an Economic Hell. And the Golden Boys on Wall Street are up to their old shenanigans with staid arguments like “Wall Street will lose competitiveness due to the new regulatory measures”. Which is unrefined BS.

Between American regulatory authority and Basle2, which has devised an international regulatory environment, we will have ALL bases covered - except some third-world markets in Africa. That’s competition?

We (meaning Billy-boy Clinton and Robert Rubin and Larry Summers and a Replicant Congress) made a colossal mistake in 1999 by repealing the Glass-Steagall Act of 1933, which separated Commercial from Investment Banking. Why?

Because Commercial Banking is inherently Risk Averse and Investment Banking is Risk Prone. Integrating the two houses was just asking for trouble.

Which is what we got ... in spades.

PURE IDIOCY

Just look at the scheme of what happened. In order for Investment Banks to make more profits, they had to sell more Debt Instruments (DI, aka SubPrime Toxic Waste). To sell more DI, they needed more collateral funds in reserve. Now where could they get those collateral funds, pray tell?

You betcha, Larry and Robert (boosted by Alan Greenspan at the Fed) reckoned that by merging the deposits of Commercial Banks with the funds of Investment Banks, abracadabra!, the trick was done.

Of course, to them, it did not matter that those commercial bank deposits were constituted of funds that belonged to ... Mr. & Mrs. John Q. Public. So, boys ‘n girls, if and when the banks went under ... so did you. (With the exception of FDIC insured accounts up to a level of $250K.)

Which is why it was necessary to Save the Banks - which was the purpose of TARP. The FDIC insurance would have brought a charge to the Treasury of many, many multiples of the FDIC insurance reimbursements - not to mention losses above that amount.) TARP was cheaper and got the job done.

CAVEAT

That does not mean, however, that Bankster Negligence (aka Woeful Professional Incompetence) should not be punished. We’re getting there, we’re getting there ...

CERTIFICATION

An engineering student, when designing a complex structure or mechanism (for example, a commercial airliner), is taught the equivalent of medicine’s Hippocratic Oath. Meaning that the design must be Fail-Safe and do no harm to individuals.

Our Golden Boys ‘n Girls of Financial Engineering obviously never heard of the notion of Fail-Safe.

In fact, for a commercial airliner to be certified to fly and carry passengers, it must be certified. Does certification make Boeing and Lockheed non-competitive?  Of course not, because the certification process is international in scope.

So, why does Finance think it should escape a solid regulatory requirement? Because the denizens of that profession are greedy-by-nature.

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By Lafayette, June 7, 2011 at 1:31 am Link to this comment

THE INFLATION PUMP

anar: something beyond Econ 101 is necessary to explain how the government could hold interest rates well below the rate of inflation without creating a lot of inflation in consumer prices, as for instance printing a lot of paper money would do.

Let’s remember a key factor - Americans have been saving more than ever before. They are paying off debt (accumulated during their binge-period of 2005 to 2008) and not boosting consumption since 2008 and the debut of the Great Recession. 

The most plausible explanation, thus, is that with the deconstruction of jobs, companies have been able to meet lower current Demand with a lot less input-cost. This “Productivity Factor” has allowed them to avoid price increases -  so the Inflation Pump cannot balloon prices.

Which is just pure Common Sense and wholly from any course in EC101.

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By Anarcissie, June 6, 2011 at 8:30 am Link to this comment

Lafayette—something beyond Econ 101 is necessary to explain how the government could hold interest rates well below the rate of inflation without creating a lot of inflation in consumer prices, as for instance printing a lot of paper money would do.  I believe the answer lies in W. F. Hummel’s view of the money system, which you can examine at http://wfhummel.cnchost.com/ .  It was from his work that I got the idea of credit money versus the other kinds; since credit is more available to the rich than the poor, it would explain how this money could inflate the real estate, collectibles and equities markets without raising consumer prices a lot.

You’re welcome to come up with another explanation, of course.  My theory explains events from 1987 until 2008, but I sure don’t know what’s going to happen next.  Since the same policies (production of low-interest funny money) are in place, I’d expect more bubbles followed by an even greater collapse, but except in the equities markets I don’t see the bubbles yet.

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By prisnersdilema, June 6, 2011 at 7:54 am Link to this comment

OH wonderful, that’s our choice…to be like Syria?  Americans are not fat dumb and lazy,
that’s the plutocracy’s view….Americans are consistently the most productive workers in
the world…And we don’t have 6 weeks vacation each year, and the health care they do
in France. People in this country work very hard…

On the other hand corporate crime is a high paying job, especially when those crimes
are abetted by corrupt politicians, who shamelessly argue as if selling out their country is
just good business. They have created a corporate slave state, forging chains of lies,and
manipulation. Rather it’s the greed and avarice, of the plutocracy that’s destroying this
country.

That greed is no more apparent, than in their rule by secrecy. Greedy people are always
secretive, because secrecy is just another form of greed.

Those that keep the secrets are as responsible as those that make them. Until Wall
Street is behind bars this country will not recover, and she will continue to lose her
freedoms.

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By Lafayette, June 6, 2011 at 3:40 am Link to this comment

CAVEAT EMPTOR

pd: No the young coupe, the new college graduate, are not to blame that is disinformation.. It’s the criminal bankers who design credit card contacts that a team of layers couldn’t understand, that created false paper with fictitious loans, then bought insurance on those loans knowing they would default.

Oh, yes, of course. Ordinary consumers are as stupid as beeswax so it is OBVIOUSLY the fault of the wicked smart-guys. Look at the sucker-loan enticements in the predatory lending publicity here.

I’ll go half-way nonetheless. Let’s presume the blame was put upon both Naïve Buyers and Far-Too-Clever Banksters. 

Here’s then what should have happened:
•  The banksters should never have entered into the territory of sub-prime loans. They knew full well who was a Prime, Alt-A or SubPrime borrower.
•  But they decided to go after the juicy subprime loan margins because they knew that at default they could confiscate the property.
•  But, what did they care? The loan had already been “sold-forward” (that is “securitized”). The debt belonged to someone else and had become Toxic Waste.
•  Presume the Toxic Waste perhaps remained on the credit institution’s books but that mostly sold forward to some investor who was attracted to the juicy returns. So the debt was non-productive of interest. What to do?
•  Having understood the calamity, TARP was necessary in the emergency to restore bank balance sheets. That saved the banks, but not the foreclosed families.
•  For foreclosed families an arrangement should have been found to allow them to pay “market rents”, thus remaining in their homes until they could find another option. After all, without any down-payment, they had no real out-of-pocket expense in purchasing the property.
•  Those who did make a down-payment, but were foreclosed as well, could pay the “market rent” remaining in the property – then negotiate a settlement with the bank to recuperate their down-payment but leave the property. Or even negotiate to re-purchase the property with another mortgage, when they could.

MEANING THIS

The Moral Lesson of this tale is that one cannot blame consumers entirely for being fools. Federal laws regarding commerce are very lax compared to what I see here in Europe. But laws here do not constrain commerce, just regulate it. The Federal Consumer Agency established by legislation is an oversight authority much overdue.  (Watch the Replicants try to shut it down.)

So, this administration should have found a way to keep people in their homes employing A “market rent” far below mortgage payment schedules. This should have applied particularly to Predatory Balloon Payments, where the market rent was the original mortgage payment before “ballooning”.

The banks should have been made to pay for their contractual negligence and predatory lending. In this manner, they would think twice about repeating such scandalous behaviour in the future

POST SCRIPTUM

Nonetheless, sucker deals are all over the marketplace. Caveat Emptor. (Let the buyer beware – a saying as old as Ancient Rome.)

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By Lafayette, June 6, 2011 at 12:53 am Link to this comment

FAT, DUMB AND COMPLACENT

sp: Our fake two party corporate controlled system is brilliant at stealing your money and then throwing so much mud in the water that there are no facts.

You’ve got this notion dead wrong.

The facts are there in broad daylight. There is No Hidden Conspiracy, dammit. People in power game the system as it is. Change the system and they will still game it but the outcome will be far less to their advantage.

They are gaming the system because it is WORTHWHILE. The rules need changing, that’s all. But to change the rules, we need another class of politicians.

I keep saying, we voted into office over a great many years the present political structure in America. We can also change that structure in the very same manner.

But bitching-in-a-blog will do nothing to reform the system. And complaining that Nothing-Can-Be-Done! is even worse.

MY POINT

That process is long and painstaking. Which is why people like to bitch-in-a-blog because they are too lazy to militate for political action that produces results at the ballot-box.

As I’ve said many a time, the American public has become Fat, Dumb and Complacent.

Yes, we can ... change the political/economic rules of the game. That’s the beauty of democracy.

Would you rather be living in Libya or Syria today?

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By prisnersdilema, June 6, 2011 at 12:35 am Link to this comment

No the young coupe, the new college graduate, are not to blame that is disinformation..

It’s the criminal bankers who design credit card contacts that a team of layers couldn’t
understand, that created false paper with fictitious loans, then bought insurance on those
loans knowing they would default.

The people are not to blame thats conservative disinformation. The people didn’t send
the jobs over seas, or reform bankruptcy laws to make it more difficult to get out of debt,
or create student loans that can’t be discharged through bankruptcy.  No the people
didn’t create the hundreds of tricks and traps to screw the consumer, or deregulate the
banking industry by getting rid of glass steagal. It was the bankers and the politicians
they own.

The economy is not that complex, Matt Tabbi understands it, Rogert Scheer
understands it, so does Paul Krugman. That’s Republican disinformation, the economy
will run fine without Goldman Sacks, put them all in jail, or they will destroy this country.

Until Wall street goes to jail, this country will continue to crash. It’s the only way to
restore this country, a complete purge of the Fed, Treasury, USDA, FDA, NSA, of
anyone who has ever worked for Goldman Sacks.

Congress needs to appoint a special prosecutor to go after Wall Street, to sift through
every single piece of paper and bit of data on their hard drives, looking for violations of
law. Then a special court needs to try all of them and sentence them to jail at the
county level, no Federal country clubs for these criminals. It’s either that or the people
will create a committee for public safety, and Robspierre will be born again.

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By Lafayette, June 6, 2011 at 12:22 am Link to this comment

Anar: Since the credit money is mostly confined to dealings between rich people

You need badly a course in EC101. If you’ve had one, then shame on you.

The above is pathetic nonsense. Go look at the definitions of M1 and M2 that constitute the Money Supply.

Your supposition that credit money (obtained by banks by either obtaining deposits or the money market or borrowing at the Fed window) has nothing to do with “dealings between rich people”.

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By Lafayette, June 5, 2011 at 10:19 pm Link to this comment

WALL STREET OR MAIN STREET?

mp: Please tell me, who is to blame? The young couple with masters in chemical engineering, the postman, the hairdresser????

I did: . We have met the enemy and he is us. (Pogo by Walt Kelly)

You are in denial. The finger of blame MUST be pointed at someone else, you think. We ben had!

No one forced anyone to take out a subprime mortgage that would become Toxic Waste. We, the sheeple, went on a cheap credit binge.

Read the threads by prisnersdilema   and you’ll have your answer. “There will be no financial recovery, until Wall Street is behind bars, things will continue to get worse”.

OK, we put them all the Banksters behind bars. And your banking systems comes to a halt.We return to a barter system of exchange.

In your misguided naiveness you have no idea of the complexity of our economy. But you are willing to flush it down the toilet just for revenge.

I repeat: If you want reform, then stop listening to the Replicant Sirens and their idiot nostrums for maintaining the status quo. Who voted them into office?  Wall Street or Main Street?

We, the sheeple put them there ... and shot ourselves in the foot out of blind revenge.

We, the sheeple, can put them away. Think about it, instead of ranting-in-a-blog.

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By diamond, June 5, 2011 at 3:36 pm Link to this comment

There’s no mystery as to what caused the crash. It’s the same thing that caused the crash in 1929 - banks speculating on debt. That’s what the Glass Stegall Act was put in place to prevent, by forcing banks to be either trading banks or investment banks but not both. Of course the Glass Stegall Act was abolished by the usual suspects and this led to open slather speculation on debt which spread as far as Iceland. The only country, so far, that has had the balls to refuse to pay back the debt and refused a bailout. The bankers and stockbrokers responsible for Iceland’s financial collapse are now living lives of luxury in London beyond the reach of the law and the furious citizens of Iceland. Which is certainly fortunate for them because the people of Iceland probably had plans for them that involved ropes and lamp posts. In short, the global financial crisis was caused by greed, de-regulation and immense stupidity and corruption.

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By marco polo, June 5, 2011 at 2:38 pm Link to this comment
(Unregistered commenter)

Response to Lafayette!
You are a pseudo intellectual and very misguided. I hope you do not have any children so you can’t perpetuate the flawed thinking that you subscribe to.
You remind me of a young, ambitious salesman I once knew, that subscribed to the thinking that “there is a line of hundred people waiting around to screw you, so, it mines well be me”. He wasn’t a bad person, just misguided by mentors like you.
When you have a young educated couple that just graduated from college with a combined income of $120.000 year with a $500 a month car payment ea. and very little street smarts, or people that have been bombarded all their life starting with credit card peddlers in college campuses and with the organized corporate marketing of BUY, BUY, BUY, a whole generation that confuses the word “want” with “need”, or that of families that live in gang infested neighborhoods with drive by shootings that want to move to a safe area, and a fast talking 30 year old punk mortgage broker (that drives a $250.000 car and thinks he deserves it) most of them are unemployed today) that had someone like you as a mentor says things like “don’t worry” , “I can make it happen for you and get your dream home, just sign here bla bla bla”. “I know you can’t afford it, we’ll misstate the facts in the application and in six months we’ll refinance. DONT WORRY, I HAVE DONE THIS HUNDREDS OF TIMES, I CAN MAKE IT HAPPEN FOR YOU”!

You say: “If something is too good to be true, maybe, just maybe, it’s because it is false? And if you were suckered into the deal, who’s to blame?
Please tell me, who is to blame? The young couple with masters in chemical engineering, the postman, the hairdresser????
Read the threads by prisnersdilema   and you’ll have your answer. “There will be no financial recovery, until Wall Street is behind bars, things will continue to get worse”.

Your “survival of the fittest” theory belongs in the animal kingdom and should not be part of an advanced species like that of humans.

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By omygodnotagain, June 5, 2011 at 2:15 pm Link to this comment

The problem was that monetarists were running the capital markets. They were interested in driving up the price of stock, this can only be done with cheap money. It was true of the Internet bubble of the 90s and the mortgage crisis in 2000s.
The con is the stock market. The price is determined by what investors think a stock will be worth, all they need to do is engineer a rally, this can only be done with cheap money. Brokers to get the returns they want will not get it through low interest rates, so they are forced to invest those massive pension portfolios in the stock market based not on the true value but because values are rising. It is giant ponzi scheme run by insiders who draw off enormous bonuses. After the collapse in 2000 of the Internet bubble one Wall Street executive was quoted as saying, “people shouldn’t confused brains for a bull market”  That’s a polite way of saying it was all a scam

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By Anarcissie, June 5, 2011 at 12:26 pm Link to this comment

Lafayette: If you hold interest rates under the rate of real currency inflation, you’re inflating a very specific kind of money, credit money.  No one knows how much, because private parties can create and give credit based on the availability of government money.  Since the credit money is mostly confined to dealings between rich people, it doesn’t show up (much) in consumer price inflation, at least not at first.  Instead, it drives up the price of collectibles, equities, and real estate—the stuff rich people trade.  When it leaks into the realm of working people, trouble ensues. 

A good example of the trouble was the granting of numerous cheap adjustable-rate mortgages to relatively marginal buyers, which drove up real estate in general.  Banks could give low rates because they could obtain the money at even lower rates; the market bubble made them think they could always trade up on foreclosures.  When the Chinese made unpleasant noises about the flow of credit money in the U.S., Bernanke tried to raise the Fed rate, upon which all those ARMs were based directly or indirectly, and the mortgagors rapidly hit the wall.  Unlike rich recipients of funny money, they couldn’t get the additional bundles of it they needed to stay afloat.  They went down along with a good many of the banks, funds, etc. that had bet on them.  That was in fact the beginning of the present crisis.

I take it the reliance of funny money bespeaks a deeper problem with the economy, something like we’ve all been living on the tab and the bill is coming due.  This is not the phony Republican-Democrat ‘deficit’ and ‘government versus corporation’ controversies; it’s real, and it’s been brewing for a long time.

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By Cliff Carson, June 5, 2011 at 11:46 am Link to this comment

Yes Scottpot

“Our fake two party corporate controlled system is brilliant at stealing your money
and then throwing so much mud in the water that there are no facts.”

This is so true.  An example could be the McCain campaign.  He was doing the Palin shuffle/dance all the time knowing that while he was in Congress decrying the excesses of Freddie and Fannie and calling for more regulation one of his campaign managers was receiving $4 million dollars to get 17 Republican Congresspersons to help get rid of all regulations.

Don’t forget McCain was one of the Keating Five.  We have been severely damaged by our Uni-Party (known as the Republican plus Democrat )corruption over the last 24 to 36 years.

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By Lafayette, June 5, 2011 at 9:58 am Link to this comment

JUST THE FACTS, MA’AM

Anar: It was this burgeoning supply of funny money which inflated the real estate bubble, and is still inflating the equities and commodities markets.  So why is this rather signal activity being ignored by establishment pundits and ruling-class flacks?  Because they’re still doing it?

The money supply was growing but not “burgeoning” (which means rapidly, like “ballooning”). The increase in Money Supply had been continuously gradual, as seen here.

The cheap-credit binge was caused by Consumer Frenzy not by any sharp increase in the money supply. People wanted badly to get into an exploding realty market that they thought was “printing money”.

It was a conventional Asset Bubble that burst. Personal Greed was the principle motivating factor.

If we are looking for the “culprit”, let’s look in the mirror. No consumer frenzy, no frenetic purchasing and quick for-profit reselling of realty - and no asset price bubble.

The bubble burst due to its underpinning of Toxic Waste - that is, Debt Instruments (and their derivatives) of a non-creditworthy nature.

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By scotttpot, June 5, 2011 at 8:56 am Link to this comment

Sarah Palin has been making the same case that “Fannie and Freddie and also
there,Barney Frank led to this meltdown.”’
Our fake two party corporate controlled system is brilliant at stealing your money
and then throwing so much mud in the water that there are no facts. Then all we can finally agree it*s “complicated’’ and
that ‘‘there is enough blame to go around’‘.

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By prisnersdilema, June 5, 2011 at 7:55 am Link to this comment

let’s see now, the FBI was reporting record numbers of fraudulent mortgages, that were
paper only, long before the bubble burst. In other words the home and the buyer were
made up out of thin air,  by the lender. The FBI was investigating, but after 911 those
agents were pulled to investigate 911.  That phony paper was bundled and sold to
investors, then they invested in insurance too protect themselves if the loans went bad,
which of course they did. The taxpayer picked up the tab when we bailed out AIG.

Of course conservatives like to tell us it was the consumers fault. Greedy people did it.

People have been trying to use their home equity for decades to make up for the fact
that the value of their wages keeps falling. Now that’s gone. Home ownership and home
equity was about the only thing people could use to survive economically as the work
they did was devalued by the plutocracy.

Now those days are gone, because wages no longer support high mortgage values. This
is why housing will never retrun, and keep heading toward 1970 levels.

States, like California that depened on property taxes for Revenue are
going to keep spiraling downward. We are not in a recession, we are witnessing a
decline in the standard of living to third world levels. The plutocracy wants cash, from
the people so they will continue to criminalize the people’s financial problems, look for
the return of work houses and debtors prisons. 

The first step in this process is to justify their view that this crisis happened Becuase the
people are greedy.

Until we put Wall street behind bars this country will decline.

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By Anarcissie, June 5, 2011 at 7:12 am Link to this comment

I gather from a hasty reading of the review and from the comments under it that, once again, the role of the Federal government in vastly increasing the supply of credit in recent years is once again being ignored.  It was this burgeoning supply of funny money which inflated the real estate bubble, and is still inflating the equities and commodities markets.  So why is this rather signal activity being ignored by establishment pundits and ruling-class flacks?  Because they’re still doing it?

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By Lafayette, June 5, 2011 at 4:00 am Link to this comment

THE TRUTH IN LENDING ACT

DZ3: We know that if left to their own devices, they will grow out of control, and overtake everything they are allowed to.

Who, pray tell, are “they” (the private enterprise).  Or is this comment more self-indulging victimization at the hands of “wicked and unseen forces”?

Private enterprise is both a credit agency trying to do business or an enterprising private person who is trying to make quick hundred-thou by buying and reselling quickly in a bubble. They are both participating in a Free Market.

The soul of private enterprise is risk-taking.  Consider this scenario: You purchase a mortgage, with nothing down and no substantiating documentation or, worse, fraudulently with documentation that is falsified. Then, suddenly, all hell breaks loose, the bubble bursts and you are swept away financially in the wreckage. Whose to blame? “Them”?

Uh, uh. Not according to the law. I have asked countless times why the Truth in Lending Act   (TILA) is not invoked in cases of credit-fraud. Countless times I am told it does not apply to SubPrime Loans, which is hard to believe.

We have a choice between regulated and non-regulated markets. America seems to prefer the latter. This means it is Darwinian – survival of the fittest.

If real estate markets were “regulated” there would be a market oversight authority enforcing regulations as specified by law. In the case of consumers, the agency would be protecting the interests of the consumer and not just the seller or the lending institution. Just like speed-limits on highways, there would be contractual obligations that protect the consumer from the accidents of fraudulent credit-contracts.

I thought that was the purpose of TILA. If it was, somebody was asleep at the switch. Providing, that is, there even was a switch and a regulator responsible for it.

POST SCRIPTUM

Pointing the finger of blame at just “private enterprise” or “the authorities”  is necessary, certainly, but it is not sufficient.

Consumers must also demonstrate personal responsibility for the contracts they sign – but those contracts should be written in a manner to make all its conditions perfectly understandable to the borrower. Such that they sign them with full knowledge of the commitments for which they are engaging themselves.

This was clearly not the case during the SubPrime Time of realty loans.

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By Lafayette, June 5, 2011 at 2:54 am Link to this comment

THE WELL-PAID BIG MISTAKE

This is first-rate reporting and as good as it gets. Morgenson and Rosner did the digging and Taylor presents some excellent economic anthropology of the findings.

The only point of any real consequence in this tale is the Why? behind what they did.

Fannie, in particular, bore the brunt of much credit-worthy mortgaging. Its level of mortgagor credit-worthiness was very high. One needed some good documentation to get a loan - nothing like the days of “flipping a condo” with a dime in your pocket.

Then the Board of this semi-public company decided it would plunge down-market into the juicy-margin SubPrime customer base that it had previously wisely eschewed. Big Mistake. Big, Big Mistake.

SECURITIZATION

Securitization is financial engineering at the heart of our credit system. A bank’s credit offered to you is also your debt, since you are paying it off. Debt is a commodity, bought and sold. So, why not securitize that debt, that is:
•  Bundle helter-skelter all the mortgages into one humongous Debt Instrument,
•  Have your cronies at the Credit Rating Agencies bless it with a Triple-A rating (without even analyzing it, since investigating the source of the debt would have been like looking into a black-hole),
•  Then sell it the world as “bona-fide real estate backed” Debt Instruments,
* And with the proceeds of the deal lend more money thus restarting the cycle -
•  And make also a bundle of profit on the deal.

“Yes!” They said drooling at Fannie Mae, “We’ll have some of that too! Look at the juicy margins!”

And off they went merrily raking in the profits and sharing it out as bonuses. Members of the Board of Fannie Mae took home million dollar bonuses, by using semi-public money to buy mortgage debt, securitize it and resell it via Wall Street investment banks.

Really ‘n truly, this is Management Excellence – is it not? What brilliant financial engineering! Until, of course, the fit-hit-the-shan and mortgagors (borrowers) got swept away in the bubble’s burst - they started defaulting on their payments because they were either unemployed or earning one helluva lot less than when they had asked for the credit to “flip a condo” or just get into a brand, spanking new home.

Condos weren’t flipping and some people had a huge albatross of debt around their necks. Ditto home-buyers who found themselves in a Negative Net Worth situation and were ultimately foreclosed out of house and home.

Thus creating Toxic Waste.

MY POINT

Who’s to blame? Well, when Jack ‘n Jill America do not have the smarts to see clearly that a deal of nothing down and no substantiating documentation to secure a loan is ‘too good to be true”, who’s to blame?  Barack Obama? Tim Geithner? Ben Bernanke?

If something is too good to be true, maybe, just maybe, it’s because it is false? And if you were suckered into the deal, who’s to blame?

Who? - I ask.

We have met the enemy and he is us.

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By DaveZx3, June 5, 2011 at 2:02 am Link to this comment

The flaw in most of the arguments here is that we absolutely already know beyond a doubt that private enterprise is mostly about making profit from a completely selfish point of view.  We know that if left to their own devices, they will grow out of control, and overtake everything they are allowed to. 

They are like the yard around your house, in that if you don’t get out the lawn mower and the hedge clippers every now and then and trim it up, it will totally engulf and choke out everything.  That doesn’t mean that grass and shrubs don’t serve a valid purpose.  But they absolutely require the lawn mower and clippers regularly.

The grass does what it does naturally.  It is not a secret or some big conspiracy, it just grows out of control.  It is a natural phenomenon that living things will attempt to overtake their environment.  Enterprises growing out of control is a result of this phenomenon in human nature, where we call it greed.  But it is really natural, and is checked by a predator, competition or law. 

Who is to blame for aggressive, greedy human nature?  If private enterprise pays and corrupts an elected official, who is more to blame, the enterprise or the official?  I say the official, because he/she takes a specific oath.     

So the argument of the progressives and the left that corporations and free markets are the major problem is not valid. 

The real issue is human nature and how, if unchecked, it corrupts virtually everything it participates in.  Putting people in jail for being naturally greedy, would require about 20,000 more prisons immediately. 

The fact that we cannot elect ethical, moral, and honest public officials very often is evidence that we are basically a lawless society where the natural law of survival of the fittest/strongest is the only real law of any stature, and the acquisition of money is the primary evidence of fitness and power.  All the other laws are just for the little people, who think nature includes justice.

If elected officials are unwilling or too corrupted to check private enterprise, then the electorate needs to check both enterprise and government.  And this does not require a revolution, as it is all anticipated within the constitutional framework.  JUST DO IT!!!  Otherwise, quit whining about it.

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By Alan Lunn, June 4, 2011 at 12:11 pm Link to this comment

We could put the Wall Street wolves behind bars and
even start busting some monopolies again; but it
wouldn’t be goin far enough. We did jail many in the
Savings and Loan fiasco at the end of the Reagan Era:
but the march toward financial Armageddon continued
apace.

To actually have a democracy, in the Jeffersonian
sense,there would have to be as clean a break between
business and state as possible. Jefferson wanted a
statement in the Bill of Rights that would make it
incumbent on the state to bust monopolies.

“Jefferson complained to Madison that the
Constitution omitted ‘a bill of rights….providing
clearly….for freedom of religion, freedom of the
press, protection against standing armies, and
restriction against monopolies.’”—Yahoo Answers

It is to our continual grief and peril that Jefferson
was ignored. But what would it actually take to end
the corporate-state in America and turn the country
over to the “people” instead of the “corporate
persons?” I don’t think many Americans, including
those who work in government, actually realize we
have a corporate state. Or they don’t recognize the
extent of it.

http://www.youtube.com/watch?v=Ar0_zA6xTco

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By Cliff Carson, June 4, 2011 at 11:16 am Link to this comment

I agree with Prisnersdilema

Up to a point.

I do call the placing of the Money Changers in the position of Regulating their Industry a Government action.  It is something that a moral, ethical, Constitutional abiding Government could and should have stopped before it started good.  But they just couldn’t resist the under the table payoffs and favors.  In other words our elected Republicans and Democrats sold out the peoples American Dream to the plunderers. 

This makes our elected officials the hirelings of the Money Changers, the International Financial Group that really runs the World.

Many would disagree stating that there is no International Financial Crime Syndicate but they would either be saying that in ignorance or as a good Republican or Democrat.

There is no good reason to let Foreign Financial concerns run our Nations Money Policy but that is exactly what both the Republican and Democrat Parties have done while in office.

Some day America will have its “American Spring” but the cost of gaining back our freedom will be protracted and bloody.  It will not be a good time for the common man until victory is achieved.

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By Bri, June 4, 2011 at 10:49 am Link to this comment

So John Taylor, like many others, blames government for the financial meltdown because of lax regulation.  Then, with the other fork of his tongue, argues for de-regulation.  Talk about cherry-picking!

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By prisnersdilema, June 4, 2011 at 9:20 am Link to this comment

OH, well… once again, someone, who didn’t see the meltdown coming, engages in analyzing the disaster after the fact….

However, the premise “that government actions caused the crisis”, is a self serving fantasy.

No, what caused the crisis, was the dismembering of government regulations, put in place during the depression to prevent another depression from happening… A process that is still happening today. 

It was this dismemeberment via deregulation, that was put into place by the financial elite, who were given jobs, running government agencies. Those financial agencies were supposed to protect the peoples interests, but instead, found ways of making vast fortunes, by deregulation, for wall street.

It wasn’t that coroporate America got too cozy with regulators at all, it was because corporate America became the regulators, after the financial elite was appointed by both Democrats and Republicans, to run the financial apparatus of this country. 

Even, now those same finanical interests, continue to block finanical, and banking reform, and regulations that would restore at least part of the rule of law to this country. Their continued slanders, and verbal aggression toward Elizabeth warren, continue to demonstrate, that the plunder of this country goes on.

whats’ really happened is that the financial sector in this country has become a criminal class abetted and aided by the politicians, and bought and paid for disinformation experts, who attempt to continue their larcenies.

Obama, continues to do his part, by failing to prosecute anyone on wall street for what happened, and by continuing to appoint wall street toadies, to head government agencies.  Those toadies continue to put our nation at risk.

There will be no finanical recovery, until wall street is behind bars, things will continue to get worse.

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By Cliff Carson, June 3, 2011 at 5:16 pm Link to this comment

Not only are they too big to regulate, they are too big to allow to exist.  You know we do have laws on the books to stop this.

What does the American public have to do to get Justice?

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By Bill Wofe, June 3, 2011 at 3:13 pm Link to this comment
(Unregistered commenter)

What about the role of Wall Street and private sector greed in agency capture and driving deregulation in Congress and neutering enforcement in the agencies?

How does that elephant escape scrutiny?

One throw away line in this review?

Were those isues not even addressed in the book?

Acorn adn low income housing caused the bubble?

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By MaxShields, June 3, 2011 at 12:37 pm Link to this comment
(Unregistered commenter)

The problem with regulators getting “too cozy” with those they are suppose to regulate, cannot…well…be regulated away.

The best solutions is small enterprises, scaled to allow for easy, regulation, even, self-regulation through public intimacy - transparency that is built into a human-scale commercial and financial system.

Regulations as used today, are meant to handle those enterprises, so large that the government becomes the public’s agent to oversee them. The problem is the size of these enterprises leads over time, to the same fundamental crisis. Call it too big to fail, but these are really too big to regulate. And more regulation will not provide the safety the public needs because regulations are just policies without implementation.

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By JDmysticDJ, June 3, 2011 at 7:55 am Link to this comment

John B. Taylor was an economist in the George W., George H.W., and Ford Administrations, so naturally he is blaming government, specifically the Democratic wing of government for corporate crimes.

The corporate criminals lobbied for and took advantage of lax government regulation to commit their crimes, so, according to Taylor, government is the culprit. The corporate criminals were just hapless bystanders, obeying the law, and doing business as usual.

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