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Home > Politics
The 9/22/08 Economic Crisis
by Bob Powell, 9/24/08
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Jump to main article on the roots of The 9/22/08 Economic Crisis.

Relevant links added directly below after writing this article. Many of the links are on the financial fraud and speculation that have precipitated economic collapse, but offshoring has caused the economy to become increasingly unstable as U.S. wages have been systematically undermined. Can't make money "the old-fashioned way"? Fraud, over-leveraging, and market manipulation will do.

Added 10/18/15

What Really Spurred the Great Recession?
Globalization and the U.S. dollar are as much to blame as banks.

Technological advances and globalization sparked “a huge and rapid increase” in the labor supply from workers in the developing world, especially in China. But without any domestic financial markets capable of absorbing the new wealth these workers generated, large amounts of money flowed into the U.S. For its part, the U.S. had no controls in place to prevent financial institutions from finding creative new ways to accommodate the influx of cash. ...

For Jagannathan, the analysis shows that in an interconnected world with an open economy, ... "[For] any policy that stimulates demand, the benefit will be to other countries in the world, so the effect will be dissipated," he says. "That’s an implication of the fact that we’ve become more of an open economy."

Added 5/16/05:

On a Majority Report podcast, 9/26/13, journalist Laura Gottesdiener was interviewed on her book, A Dream Foreclosed, that explains how communities of color were targeted by predatory housing loans, what "redlining" and why its toxic legacy matters, how inter generational wealth was destroyed in the African American community, how the financial services industry writes loans that no one including legal experts can understand, the inspiring grassroots movement against corporate foreclosure abuse and new models of home ownership.

She notes, as does a reference below, that the Community Reinvestment Act had nothing to do with subprime crisis.

On the publisher's site about the book: Gottesdiener's "page-turning testimony" reminds us that not a single Wall Street banker has been arrested for the countless predatory loans, acts of fraud and foreclosure abuse that have contributed to the more than ten million people being evicted from their foreclosed homes since 2007—with millions more foreclosures in progress. That ten million people have been thrown out of their homes (the equivalent of the entire population of Michigan) with almost no coverage of their stories or perspectives is itself a testament to corporate influence over public education, mass media and national debate.

Added 5/8/05:

I just became aware of this article on Wells Fargo and Baltimore on "ghetto loans" for "mud people". Incredible. Loan officers pushed customers who could have qualified for prime loans into subprime mortgages. Lawsuit followed by a settlement.

This corporate behavior exacerbated the economic problems in Baltimore and is one of the roots of the current civil unrest in Baltimore: Peaceful Rally of Thousands in Baltimore Is Followed by Unrest After Curfew 5/3/15, Mayor Wants Justice Dept. to Investigate in Baltimore 5/7/15.

Bank Accused of Pushing Mortgage Deals on Blacks By MICHAEL POWELL, June 6, 2009

"... loan officers at Wells Fargo Bank “rode the stagecoach from hell” for a decade, systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.

These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services.

Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as "mud people" and to subprime lending as "ghetto loans. ...

The New York Times, in a recent analysis of mortgage lending in New York City, found that black households making more than $68,000 a year were nearly five times as likely to hold high-interest subprime mortgages as whites of similar or even lower incomes. (The disparity was greater for Wells Fargo borrowers, as 2 percent of whites in that income group hold subprime loans and 16.1 percent of blacks.)"

Wells Fargo settlement: An important victory for minority homeowners, communities, June 28, 2012

Last month, the parties settled: the bank committed to investing more than $400 million in loans to spur economic development in a region hard hit by the recession. ...

Former bank officials revealed in written testimony that employees at the bank referred to minority customers as “mud people” and subprime loans as “ghetto loans.

Added 10/20/10:

Ratings agencies played a major role in making possible bad loans. There was great financial incentive to overrate complex bonds backed by U.S. mortgages.

Moody's executives say they regret bad mortgage ratings By Kevin G. Hall, McClatchy Newspapers, June 2, 2010

E-mails made public in a late April hearing by the Senate Permanent Subcommittee on Investigations showed how Moody's and its chief competitor Standard & Poor's raced to the bottom to win ratings business from Wall Street investment banks. During the housing boom when the complex bonds were widely sought after, Moody's share prices ran up from about $13 a share to a high of $72 a share.

A Sin and a Shame By BOB HERBERT, 7/30/10

The treatment of workers by American corporations has been worse — far more treacherous — than most of the population realizes. There was no need for so many men and women to be forced out of their jobs in the downturn known as the great recession.

Many of those workers were cashiered for no reason other than outright greed by corporate managers. And that cruel, irresponsible, shortsighted policy has resulted in widespread human suffering and is doing great harm to the economy.

“I’ve never seen anything like this,” said Andrew Sum, an economics professor and director of the Center for Labor Market Studies at Northeastern University in Boston. “Not only did they throw all these people off the payrolls, they also cut back on the hours of the people who stayed on the job.”

As Professor Sum studied the data coming in from the recession, he realized that the carnage that occurred in the workplace was out of proportion to the economic hit that corporations were taking. While no one questions the severity of the downturn — the worst of the entire post-World War II period — the economic data show that workers to a great extent were shamefully exploited.

[China Prepares for the Rise of the yuan posted 4/5/09, Source: LAT-WP
China Prepares for the Rise of the yuan 4/6/09 TWN, By Don Lee, Los Angeles Times

SHANGHAI: Could the world’s currency of choice have the face of Mao Tse-tung on it, not George Washington’s? Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalise the yuan and promote its influence overseas, with Shanghai designated as command central.

Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to make payments for Chinese exports in yuan, bypassing the dollar—the currency that dominates international trade and finance, including foreign exchange reserves. ... (cont'd)]

Major media outlets yet to report IG testimony implicating Bush administration in AIG bonuses Mar 20, 2009:

"... the TARP contract between AIG and Treasury that was entered into back in November specifically contemplated the payment of bonuses and retention payments to AIG employees, including AIG's Senior Partners."

Excerpt:

Despite jumping on -- and in some cases advancing -- false Republican claims that congressional Democrats are responsible for AIG executive bonuses, major media outlets have yet to report that Neil Barofsky, a Bush-appointed special inspector general for the Troubled Asset Relief Program (TARP), confirmed in March 19 congressional testimony that the Bush administration Treasury Department knew about the AIG bonus contracts and did not insist on their abrogation as a condition of AIG's receiving bailout money through a stock purchase agreement signed by AIG and the Bush Treasury Department.

In prepared testimony for a March 19 House Ways and Means Committee hearing, Barofsky stated, "Preliminary information we have seen indicates that the TARP contract between AIG and Treasury that was entered into back in November specifically contemplated the payment of bonuses and retention payments to AIG employees, including AIG's Senior Partners."

Directly from Barofsky's testimony:

Finally, I would like to make a couple of comments about the controversy surrounding the bonus payments that AIG has recently made to its executives. First, both in my role as the Special Inspector General, and as an individual taxpayer concerned with stabilizing the financial system in a manner that does not reward those who caused the crisis in the first instance, I too am frustrated with these very substantial bonuses given at a time when AIG would have by now been in bankruptcy proceedings but for huge, repeated infusions of government money.

... We also plan to launch an audit examining Federal monitoring and enforcement of executive compensation restrictions imposed as a condition of Federal financial assistance to organizations such as AIG. As part of this audit, we will be looking closely to ensure bonuses to AIG employees are not inconsistent with AIG's legal or contractual obligations, and if there are any inconsistencies, we will act aggressively to recover the taxpayer's money. Preliminary information we have seen indicates that the TARP contract between AIG and Treasury that was entered into back in November specifically contemplated the payment of bonuses and retention payments to AIG employees, including AIG's Senior Partners. SIGTARP will be reviewing the process at Treasury with respect to Treasury's decision to authorize and approve such payments, both at the time it entered into the contract with AIG and since that time.

Dems Investigating Bush Administration Role In AIG Collapse, April 1, 2009

The Bush administration's preferred way of dealing with corporate scandal was to defer prosecution. The Wall Street Journal reported last week that Bush prosecutors made 103 deferred and nonprosecution agreements with U.S. companies between 2002 and 2009. While Clinton was president, meanwhile, only 11 such pacts were entered into.

The Quiet Coup by Simon Johnson, May 2009, The Atlantic

Introduction to the article: The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.]

From The Times, March 28, 2009
George Soros, the man who broke the Bank, sees a global meltdown by Alice Thomson and Rachel Sylvester

... He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. "I have always understood how normal rules may not apply at all times," he says. In recent years he has been arguing against "market fundamentalism" -- "the accepted theory was that markets tend to equilibrium". He believes that the credit crunch has proved him right. "It reminds me of the collapse of the Soviet system, events are always exceeding people's understanding. The situation is out of control. There's a shortage of time to adjust to the change. Change is accelerating."

Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. "Everybody who realised that this was unsustainable expected it to collapse much sooner," he says. "It is so devastating exactly because it took so long."

The urgent task now, he says, is to realise that the system that collapsed was flawed. "Therefore you can't restore it. You have to reform it." He worries that politicians have not yet accepted the need for fundamental change and that "a lot of bankers have their head in the sand". ...

The G20 summit in London next week is, he says, the last chance to avert disaster. "The odds would favour that it fails because there are such differences of opinion. It's difficult enough to get it right in your own country let alone with 20 governments coming together, but if it's a failure I think then the global financial and trading system falls apart."

If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. "That could push the world into depression. It's really a make-or-break occasion. That's why it's so important." The chances of a depression are, he says, "quite high" -- even if that is averted, the recession will last a long time. "Look, we are not going back to where we came from. In that sense it's going to last for ever."

Bernanke admits that the global trade imbalance is a fundamental cause of the economic crisis. Amen.

Financial Reform to Address Systemic Risk by Federal Reserve Board Chairman Ben S. Bernanke, March 10, 2009 at the Council on Foreign Relations, Washington, D.C.

The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy. Its fundamental causes remain in dispute. In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations. ... we collectively did not do enough to reduce those imbalances. ...

... the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that the inrush of capital was prudently invested, a failure that has led to a powerful reversal in investor sentiment and a seizing up of credit markets. In certain respects, our experience parallels that of some emerging-market countries in the 1990s, whose financial sectors and regulatory regimes likewise proved inadequate for efficiently investing large inflows of saving from abroad. When those failures became evident, investors lost confidence and crises ensued. A clear and highly consequential difference, however, is that the crises of the 1990s were regional, whereas the current crisis has become global. ... (cont'd)

My Note: Bernanke is correct about the problem is the "global imbalances in trade and capital flows", but the imbalances began in 1991 (not in the "latter half of the 1990s" as Bernanke says). Actually, the rise in 1982 would have begun the trend, but it was interrupted by Reagan's Plaza Accord devaluing of the dollar (a theft of value from all Americans and others who held dollars). See my Graph showing Trade Deficit & Trade Agreement History.

And why has there been "a chronic lack of saving relative to investment in the United States"? Because wages have been systematically undermined as described below in this post.

And of course there's been a lack of "government oversight of the financial sector in the United States ... failed to ensure that the inrush of capital was prudently invested ... ". But never mind that the deregulation pushed by libertarians and other economic conservatives has led to high-leverage speculation and financial fraud.

 

An excellent commentary on Bernanke's admission citingthe need for Buffett's Import Certificates mechanism to balance trade:

Bernanke Fires a Shot Across Lawrence Summers' Bow
by Howard Richman and Raymond Richman, March 11, 2009

... If Bernanke’s view wins out, then the United States will address the global imbalances, resulting in a resurgence of American manufacturing. If Summers’ view wins out, then the United States will continue to borrow money from abroad to pay for wasteful government give-aways and environmental foolishness, which will cause American manufacturing to lose market share to global competition and could lead to an eventual dollar collapse.

... Bernanke did not suggest a plan for how to achieve trade balances. There are two alternatives: (1) a new international institution to achieve balanced trade and (2) unilateral action to achieve balanced trade. We will discuss each in turn. ...

Unilateral American Action to Achieve Balanced Trade

If the rest of the world is not cooperative. The United States could take unilateral action to balance trade. Warren Buffett’s Import Certificates plan would do so. American exporters would earn marketable Import Certificates which would allow a proportional value of imports into the United States. Those who wished to import into the United States would be required to have their imports accompanied by Import Certificates.

When Senators Dorgan and Feingold fleshed out Buffett’s plan as the Balanced Trade Act of 2006, they had the amount of imports permitted by a certificate change over time in order to gradually balance non-petroleum trade over a period of 5 years.

If the United States imposed Import Certificates to balance trade, then other trade deficit countries would soon follow suit. The result would be balanced world trade without the need of any international regulatory agency. If trade were balanced, countries would be hurting themselves when they subsidized exports or put up barriers to imports. Import Certificates would end the current era of predatory trade and begin a new era of balanced free trade.

Lawrence Summers now knows that he was wrong when he claimed "Nobody thinks that [addressing global imbalances] is the right agenda now." In fact, there is someone quite important who thinks exactly that. Bernanke just fired a shot across Summers bow. Summers would be wise to change course.

Capitalist Fools by Joseph E. Stiglitz January 2009, Vanity Fair

Stiglitz reviews the five key mistakes — under Reagan, Clinton, and Bush II — and one national delusion. Their delusion? A Greenspan, "conservative", libertarian "flawed economic philosophy [that] made it inevitable that we would eventually arrive at the place we are today."

The five key mistakes:

1. Appointing Greenspan, a "devotee of the objectivist philosopher and free-market zealot Ayn Rand."

2. A "deregulation philosophy would pay unwelcome dividends for years .... In November 1999, Congress repealed the Glass-Steagall Act— [that] had long separated commercial banks (which lend money) and investment banks."

3. "Bush tax cuts, ... especially for upper-income Americans and corporations ...".

4. "stock options ... that ... provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices." And the "perverse" "incentive structure of the rating agencies".

5. A "bailout package [doing] nothing ... about the source of the problem, namely all those foreclosures.

Stiglitz: "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."

Stieglitz: "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."

Actually, I don't believe that Greenspan is a "fool" or that he "found a flaw." He and the Bush administration purely want to bail out and reward their supporters. It's those who really do believe them and in that so-called "free market", laissez-faire worldview who are the fools.

Obama's dependence on China By The Christian Science Monitor's Editorial Board, Tue 12/9/08 (italics mine)

... During recent good times, China churned out inexpensive products that Americans eagerly bought, helping to keep inflation low. But that flood of goods also destroyed entire US industries. And with $2 trillion in reserves, China recycled its export dollars back into US credit markets. It is now the largest holder of US Treasuries, beating out Japan in September.

That flood of money helped to lower the price of US mortgages, pushing up home prices until the bubble burst in 2006-07. Even now, China's trade surplus with the US is at a record high – a sure signal that trade ties are still out of whack. ...

... part of its [China's] economic stimulus includes an increase in tax rebates for exporters.

Beijing may be worried that economic growth may soon fall below a level that can sustain the need to create 1 million jobs a month for China's 1.3 billion people. ... Protests in rural areas are rising, and the Communist Party fears for its rule. Last month, China marked the 30th anniversary of its embrace of capitalism after decades of Mao Zedong's mistakes.

So this editorial cites the "Communist Party", but admits it's "embraced capitalism" ... China has shifted from being a communist dictatorship on the "left" to being a fascist dictatorship of the "right" (see the chart).

Community Reinvestment Act had nothing to do with subprime crisis by Aaron Pressman, 9/29/08

Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here). ...

Bush Administration Weakened Lending Rules Before Crash, 12/1/08.

The administration's blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s. ... Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.]

Bush: "I'm Sorry" About The Economic Crisis, 12/1/08.

Bush said he felt responsible for the economic downturn because it's occurring on his watch, but he added: "I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so" before he became president.

U.S. Jobless Rate Hits 14-Year High By PETER S. GOODMAN, 11/7/08

... 240,000 American jobs disappeared in October, the 10th consecutive month of retrenchment. It brought the toll of lost jobs to 1.2 million for the year — more than half in the last three months alone — while the unemployment rate climbed to 6.5 percent. Worse was the sense that little could be done near term to alter this now-accelerating trajectory. ... Andrew Stettner, deputy director of the National Employment Law Project in New York, which has been advocating an extension of unemployment benefits: “We need to be helping these families avert financial disaster, and help make up for the loss of consumer demand ...

Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington: “There’s almost no economic activity out there that’s going to generate jobs right now. This is the front edge of the deeper trough of the recession. It’s going to get worse before it gets better.” ... “Part of what I fear is a more entrenched insufficiency of demand,” said Alan D. Levenson, chief economist at T. Rowe Price Associates in Baltimore.

[The Reckoning: How the Thundering Herd Faltered and Fell By GRETCHEN MORGENSON, 11/8/08. While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives — like those that Merrill used — transformed a financial brush fire into a conflagration.]

[Can Obama Stop the Bush Administration's Final Economic Heist? By Naomi Klein, NaomiKlein.com. 11/6/08. The first order of business -- and one that cannot wait until inauguration -- must be halting the robbery-in-progress known as the "economic bailout." ... the $700-billion "rescue plan" should be regarded as the Bush Administration's final heist.]

[The Not-So-Invisible Hand: How the Plunge Protection Team Killed the Free Market by Ellen Brown, 10/25/08. This article shows examples of dramatic market moves that have no discernable origin in reality. Market manipulation at its best ... other articles at The Plunge Protection Team]

From: From 2 Rivals, 2 Prescriptions By JACKIE CALMES, 10/14/08

Economist Robert D. Reischauer, president of the Urban Institute and a former director of the Congressional Budget Office: “Now one really doesn’t know how it’s going to be because we seem to have blown away any notion of fiscal limitations. ... At some point,” Mr. Reischauer added, “we as a nation are going to have to ask, ‘Where are we going to get the money to do all this, and at what price?’ That’s the question no one can answer.”

For now, both parties have taken the position that action is more important than short-term budget discipline.

McCain's plan: ... an overall economic program that hews to the Republican playbook: tax cuts geared especially to individuals and businesses at the top of the income scale, in the belief that they will stimulate the economy and create jobs that benefit everyone. ... McCain stands by his vow to extend the Bush tax cuts and to layer on several more, including a big reduction in corporate income taxes. And he still insists he would balance the budget by the end of his first term in 2013, though few analysts, if any, believe that is possible. ... McCain would halve to 7.5 percent the current 15 percent tax on investors’ capital gains (... naturally, the Richest One Percent Would Receive Three Fourths of the Benefits, Citizens for Tax Justice, 10/15/08. See also: Again With the Trickle Down!?! by Jared Bernstein, 10/15/08).

Obama's plan: ... a $60 billion stimulus package ... announced Monday, combined with his longstanding economic agenda, reflect Democratic emphasis on tax cuts intended for middle-class and low-wage workers and for the smallest businesses, as well as spending increases for public works to create jobs. ... Obama vows to reduce deficits, while keeping his early promises for near-universal health care coverage and more. Because oil prices have been falling, he has shelved a proposal to offset the estimated $65 billion cost of his proposed tax rebates to the middle class with a windfall-profits tax on oil companies, leaving himself an even bigger budget gap.

... “It’s not clear that either of these plans would do much good,” said Leonard Burman, director of the nonpartisan Tax Policy Center. “But the benefits of Obama’s plan would be more widely distributed. McCain’s tax proposals would help most those with pretty high incomes — the group least in need of assistance.”]

[My Interview with George Soros: End of Financial Crisis Could Be in Sight by Nathan Gardels, 10/12/08

This article describes the feedbacks that create boom and bust cycles. In systems with delays, cycles are generated by the structure of the system. This is just like a weighted spring; once displaced, the weight bounces up and down. The author observes:

"Thanks to low interest rates, global liquidity and deregulation, we have had a 25-year, self-reinforcing credit expansion bubble, leading to "irrational exuberance," as it was once said, in financial markets. Now we have the self-reinforcing crash of the stock and credit markets --"irrational despair" -- not justified by the economic fundamentals in the real economy."

I'd note that though both the exuberance and despair may be irrational, that's because what's happening is not understood. If it were, the current despair would be quite rational indeed. I'm surprised Soros thinks "the end of the crisis is in sight."

Excerpts of Soros' comments:

What we are witnessing is not the result of some exogenous shock that knocked things off balance, as the prevailing paradigm, which believes markets are self-correcting, would suggest. The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium. ...

The key to understanding this crisis -- the worst since the 1930s -- is to see that it was generated within the financial system itself. What we are witnessing is not the result of some exogenous shock that knocked things off balance, as the prevailing paradigm, which believes markets are self-correcting, would suggest. The reality is that financial markets are self-destabilizing; occasionally they tend toward disequilibrium, not equilibrium.

The paradigm I'm proposing differs from the conventional wisdom in two respects. First, financial markets don't reflect the actual economic fundamentals. Expectations by traders and investors are always distorting them. Second, these distortions in the financial markets can affect the fundamentals -- as we see in both bubbles and crashes. Euphoria can lift housing and dot.com prices; panic can send sound banks tumbling.

That two-way connection -- that you affect what you reflect -- is what I call "reflexivity." That is how financial markets really work. Their instability is now spreading to the real economy, not the other way around. In short, the boom-bust sequences, the bubbles, are endemic to the financial system.

The current situation is not just about the housing bubble. The housing bubble was merely the trigger that detonated a much larger bubble. That super-bubble, created by the ever-increasing use of credit and debt leverage, combined with the conviction that markets are self-correcting, took more than 25 years to grow. Now it is exploding. ...

If bubbles are endemic in the system, then government regulators have to intervene to prevent bubbles from getting too big. Governments have to recognize that markets are not self-correcting. It is not enough to pick up the pieces after the crisis. ...

The U.S. authorities bought into market fundamentalist ideology. They thought that the markets would ultimately correct themselves. U.S. Treasury Secretary Henry Paulson epitomized this. He thought that six months after the Bear Stearns crisis the market would have adjusted and, "Well, if Lehman (Brothers) goes bust, the system can take it." Instead, everything fell apart.

Since they did not understand the nature of the problem -- that the market would not correct itself -- they did not see the need for government intervention. ...

At this point, repairing the financial system will not stop a severe worldwide recession. Since, under this circumstance the U.S. consumer can no longer serve as the motor of the world economy, the U.S. government must stimulate demand. Because we face the menacing challenges of global warming and energy dependence, the next administration should direct any stimulus plan toward energy savings, developing alternative energy sources and building green infrastructure. This stimulus can be the new motor for the world economy.

[Financial Bailout will Lead to Demise of the Dollar as Hyperinflation Saps Savings by Mike Adams, 9/27/08]

[Web of Debt by Ellen Brown. This book describes the exploding U.S. debt and the highly-leveraged derivatives markets that are bringing the U.S. economy down. It relates to the comments from Dennis Kucinich, which can be found below. From the website:

Our money system is not what we have been led to believe. The creation of money has been "privatized," or taken over by a private money cartel. Except for coins, all of our money is now created as loans advanced by private banking institutions — including the private Federal Reserve. Banks create the principal but not the interest to service their loans. To find the interest, new loans must continually be taken out, expanding the money supply, inflating prices — and robbing you of the value of your money.

Not only is virtually the entire money supply created privately by banks, but a mere handful of very big banks is responsible for a massive investment scheme known as "derivatives," which now tallies in at hundreds of trillions of dollars. The banking system has been contrived so that these big banks always get bailed out by the taxpayers from their risky ventures, but the scheme has reached its mathematical limits. There isn't enough money in the entire global economy to bail out the banks from a massive derivatives default today. When the investors realize that the "insurance" against catastrophe that they have purchased in the form of derivatives is worthless, they are liable to jump ship and bring the whole shaky edifice crashing down.

Web of Debt unravels the deceptions in our money scheme and presents a crystal clear picture of the financial abyss towards which we are heading. ...

[Brazil, Argentina abandon US dollar, 10/07/08 Brazil and Argentina have launched a new payment system in their bilateral trade, doing away with the US dollar as a medium of exchange.

This "deepens the integration between Brazil and Argentina and hope it will serve as an example to be adopted by other countries of the Mercosur, like Paraguay and Uruguay."]

[Representatives Were Threatened with "Martial Law" if Bailout Bill Did Not Pass, October 4, 2008

Congressman Brad Sherman of California's 27th congressional district told the House in a speech on Thurs evening that several fellow Congressional representatives have said they were threatened with the prospect 'Martial Law' should they vote in opposition to the $700 billion bailout. ...

On none of the pages I've found does it indicate "who was doing the threatening."]

[The Real State of the US Economy
Henry Paulson has lost the control over US finance
by William F. Engdahl, Global Research, August 2, 2008 with sections on:

  • Henry Paulson's recent declaration that "our banking system is a safe and sound one." It's not and neither is our economy.
  • The real economy is contracting rapidly. Lists "store closings across America in recent weeks ... ." His list adds to 2272 stores! I added the numbers in Excel, filling in those he didn't include. His list seems to include more than those from "recent weeks."
  • A personal account from an unemployed Arizona homebuilder: "We went from affluent and comfortable to nervous and broke with diminished opportunities in just three years. We used to be the middle class."

Pro-"free trade" corporate retailers that love the offshoring of jobs, and the corporate media that lives on their advertising, have finally sufficiently undermined wages and U.S. purchasing power that it has sucked the life blood out of the U.S. economy. This is "killing the goose that laid the golden egg" by starvation. See The Death of the Middle Class, 11/3/07, and Denver Post 'Trade' Deception, 3/3/08]

[We Won't Escape the Worst Recession in 40 Years, Interview with Nouriel Roubini, 9/24/08

There's a sector of the economy that is overindebted; that's real estate. So, we must either reduce the debt or increase income.

... pooling the rotten assets in a sequestration structure is totally useless unless we reduce individuals' debts. Because if they can't pay, we'll have a foreclosure tsunami and banks will go under. And if they go under, the economy will go with them. So, we must avoid liquidation as allowed for in Chapter 7 of the bankruptcy law and restructure the debt as though individuals were placed under Chapter 11. ...

We're in the process of emerging from eight years of a fanatical administration, free market zealots who opposed any financial regulation. Because of their stupidity, we've been plunged into the most serious financial crisis since that of 1929. And now, they're falling into the opposite excess. ... all this interventionism, .. is the result of a laissez-faire policy. ...

... if you want to blame the regulator, you have to look first to the administration that didn't believe in market supervision. Do you realize?! People gave mortgage loans to people without asking for their pay stubs, with the least documentation possible, without requiring a down payment, drawing them in with highly attractive initial interest rates. This administration supposedly believed in self-regulation. In fact, it really wanted no regulation at all. It believed in market discipline; we've seen that that's meaningless. It talked about risk management, but managers took great care to ignore risks ... We mustn't blame the regulator. The one really responsible is the Bush administration; that's who encouraged this laissez-faire.

Question: McCain demanded the head of Securities and Exchange Commission (SEC) president, Christopher Cox. A simple scapegoat?
Response: He should attack Bush, Paulson, Greenspan, Bernanke. They're all responsible.

Question: Finally, how do you judge the Fed's and the Treasury's efforts to resolve this crisis?
Response: First of all, they were wrong. A year and a half ago, they said there was a minor problem in the real estate market. You can find their statements on Google. In reality, this "minor problem" turned into the worst recession ever seen since 1929. Then, they assured everyone that the "subprime" crisis was a niche problem and would be limited. We've already seen that everything has been affected: municipalities' debt, student loans ... we've never seen a comparable credit crisis! Finally, they alleged that the collapse of the real estate market - which had contributed a third of new jobs created the last six years - would have no impact on the rest of the economy! Last summer, they were overcome by panic and began reducing the Fed funds rate like crazy. They adopted an ad hoc approach without taking a full measure of the systemic risk. We've never been so close to a complete collapse of the financial system.]

Oops.

[S.E.C. Concedes Oversight Flaws Fueled Collapse By STEPHEN LABATON 9/26/08

“The last six months have made it abundantly clear that voluntary regulation does not work,” he [Christopher Cox, chairman of the Securities and Exchange Commission, a longtime proponent of deregulation] said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.]

[10/4/08] Bush's speech at the Conference on Minority Homeownership at George Washington University in Washington, D.C. on October 15, 2002. Go to this whitehouse.gov link for audio, video and full transcript. Bush and Republicans branded this initiative as building an "ownership society."

Here are excerpts (edited audio of these Bush remarks):

More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a homeownership gap. It's a gap that we've got to work together to close ...

... by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families. (Applause.)

And, of course, one of the larger obstacles to minority homeownership is financing ...

... Fannie Mae and Freddie Mac ... have committed to provide more money for lenders. They've committed to help meet the shortage of capital available for minority home buyers.

Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans. ...

... you don't have to have a lousy home for first-time home buyers. If you put your mind to it, the first-time home buyer, the low-income home buyer can have just as nice a house as anybody else.

A previous, June 18, 2002, speech: President Reiterates Goal on Homeownership including the "American Dream down payment fund which will help a low-income family to qualify to buy, to buy," his "single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America," and address "the fact that the rules are too complex. People get discouraged by the fine print on the contracts. ... So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership."

Naturally, this initiative was popular with Republicans, many of whom are developers enabled to build more homes (and, by the way, externalize costs onto the public by way of implicit subsidies ... see the Growth Facts of Life).

And of course it found support from Democrats wanting to help minorities. So it is true (see Fannie Mae Eases Credit To Aid Mortgage Lending, NYTimes, 9/30/99) that Fannie Mae was

... under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans. ...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Unfortunately, too many were encouraged to buy fixed rate, balloon mortages requiring refinancing, refinancing too expensive to afford when the housing bubble (blown up by the Fed's low, low interest rates) burst. The relaxing of leverage requirements (see the 3X increase in leverage allowed in 2004 below), and the resulting high-leverage speculation in these sub-prime loans, turned a bad situation into a disaster.

By the way, anyone who thinks Clinton was an economic liberal does not agree with far-right economic conservative, Alan Greenspan, who replied to the question, ""About how much would you say you agreed with him [Clinton]? ALAN GREENSPAN: "On economic issues, I would say probably 80%."

It is also true, see New Agency Proposed to Oversee Freddie Mac and Fannie Mae 9/11/03, that

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. ...

Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

The administration's proposal, which was endorsed in large part today by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors. Nor would it remove the companies' exemptions from taxes and antifraud provisions of federal securities laws. ...

It strains credibility to think that the Bush administration, given its deregulatory bent and given its push to provide mortgages to less credit-worthy borrowers, would be effective in imposing stricter regulations. And who opposed this?

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

Disappointing behavior on the part of Democrats and expected behavior of the home builders. I suspect that home builder lobby opposition was quite effective with both Republicans and Democrats.

[Barney Frank defends himself against Bill O'Reilly over Fannie Mae and Freddie Mac 10/3/08 Video & Transcript]

[See also, The Republican Roots of the Subprime Crisis... 10/2/08]

[Review of VIVA SIVA SISA NINA mortgage history found at Too bad Senate Dems didn't listen to McCain in 2006

Re: Too bad Senate Dems didn't listen to McCain in 2006
Posted by: BobC September 29, 2008 01:32PM

In late 2002 the SEC changed ALL regulations of Fannie, Freddie and the banking inductry to be VOLUNTARY. The financial markets, Wall Street brokers, mortgage sellers, etc. were going to police themselves. Yeah, right.

In 2002 during the Congressional election campaign season and in early 2003, Pres. Bush made several speeches about the fact that 2/3 of all Americans own a home. Unfortunatly, he said, home ownership was lowest among Hispanics and African-Americans. The biggest obstacle to these groups owning homes was questionable credit history. He proposed easing loan requirement standards further to improve those numbers.

After that, the establishment of "credit worthiness" went through a series of down grades beginning with changing from a process called VIVA (verify income, verify assets) where both income and assets had to be verified by the lending bank, to SIVA. This down grade allowed for one to simply (S)tate one's (I)ncome, but still required (A)sset )Verification.

At the same time, the bundling of these mortgages into larger packages and selling shares of the bundled mortgages went into high gear. Previous to 2003 when a mortgage broker sold a conforming loan they'd get about a $1000 comminssion. Since Wall Street was repackaging these securities at a rapid rate all over the world, they needed more and more to fuel the pipeline. Consequently, the lenders began paying far higher commissions (as much as $20,000 on a $400,000 loan) to help generate volume.

We now know that 62% of those receiving sub-prime loans were eleigible for conforming loans (the ones that paid the lower commission), but were never told that. keep in mind that millions of these loans were being sold by folks who had previously been bartenders or, in my own sister's case, a cosmetics salesperson. Remember, regulation of this industry had just been changed to VOLUNTARY.

By late 2003, the requirements for a loan were further dengrated to SISA. In 2004, this changed again to NINA. You didn't even have to state an income or assets, just a decent credit rating number.

Alan Greenspan helped make it worse by keeping the interest rates artificially low.]

[10/3/08 ... From a 9/30 e-mail from OH Representative Dennis Kucinich on "The Bailout and What's Next"

This is a perfect time to open a broader discussion about our financial system, especially our monetary system. ...

Here is a very quick explanation of the $700 billion bailout within the context of the mechanics of our monetary and banking system:

The taxpayers loan money to the banks. But the taxpayers do not have the money. So we have to borrow it from the banks to give it back to the banks. But the banks do not have the money to loan to the government. So they create it into existence (through a mechanism called fractional reserve [banking]) and then loan it to us, at interest, so we can then give it back to them.

Confused?

This is the system. This is the standard mechanism used to expand the money supply on a daily basis not a special one designed only for the "$700 billion" transaction. ...

The banks needed Congress' approval. Of course in this topsy turvy world, it is the banks which set the terms of the money they are borrowing from the taxpayers. And what do we get for this transaction? Long term debt enslavement of our country. We get to pay back to the banks trillions of dollars ($700 billion with compounded interest) and the banks give us their bad debt which they cull from everywhere in the world.

Who could turn down a deal like this? I did.

The globalization of the debt puts the United States in the position that in order to repay the money that we borrow from the banks (for the banks) we could be forced to accept International Monetary Fund dictates which involve cutting health, social security benefits and all other social spending in addition to reducing wages and exploiting our natural resources. This inevitably leads to a loss of economic, social and political freedom.

Under the failed $700 billion bailout plan, Wall Street's profits are Wall Street's profits and Wall Street's losses are the taxpayers' losses. Profits are capitalized. Losses are socialized. ...

This is a prime example of what I call the "cost-side socialism" built into laissez-faire capitalism: the redistribution of costs & risks as opposed to the redistribution of income.

[10/2/08 ... Nothing Proposed Will Solve the Credit Crisis by Hale "Bonddad" Stewart]

[10/2/08 ... Nobel Laureate Joseph Stiglitz: Bail Out Wall Street Now, Change Terms Later on Democracy Now!

Though he admits "... it remains a very bad bill ... based on trickle-down economics ... it doesn’t do anything about the basic source of the hemorrhaging, the foreclosure problem," he still says " it is better than doing nothing, and hopefully after the election, we can repair the very many mistakes in it." Good luck with that.]

[10/1/08 ... Fed continuing the debt explosion:

Treasury and the Fed Looking at Options By EDMUND L. ANDREWS and MARK LANDLER, 9/29/08

... Without the broad bailout plan they invented and lobbied hard for, the two agencies are once again forced to careen from one desperate path to another, and to dig deep into their toolkits to rescue the global financial system. Even before the House stunned the world on Monday by rejecting the Bush administration’s bailout bill, the Fed was already resorting to the oldest action in its book: printing money.

With money markets around the world seizing in fear, the Fed on Monday announced that it would provide an extra $150 billion through an emergency lending program for banks, and an additional $330 billion through so-called swap lines with foreign central banks to help money markets from Europe to Asia.

It was an extraordinary display of financial power, and it reflected acute new anxiety at the Fed and central banks around the world that the crisis of confidence in American financial markets had metastasized to money markets everywhere.

That was on top of the $230 billion the Fed borrowed last week so it could finance its previous efforts to prop up the American International Group and other institutions. But these are only the latest in a long series of jaw-dropping departures from normal policy that the Fed has undertaken this year as it seeks to inject vast amounts of capital into the financial system. And they are unlikely to be the last.

Even if Congress refuses to pass the bailout measure, there is more money where that came from. The Treasury Department has already created a series of “supplemental” Treasury securities to finance the Fed’s activities, and there is no limit to how many more it can issue and sell. ...]

[10/1/08 ... the explosive charge was enormous debt; the SEC lit the fuse in 2004 by allowing an over 3X increase in leverage:

Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers
'They constructed a mechanism that simply didn't work'
, New York Sun, 9/18/08

Summary: In 2004 the SEC changed the "net capital rule." created in 1975, from requiring that broker dealers limit their debt-to-net capital ratio to 12-to-1 to allowing the "broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1." ]

[10/1/08 Bailout: The Crisis Profiteering By Ravi Batra 9/29/08

... deregulation has spawned a culture of speculation. Once the dust settles a bit, speculation will surge again .... In any case, the bailout should be limited to troubled banks, which are the lenders. Why should we bailout Wall Street firms like Goldman Sachs or Morgan Stanley that are the borrowers? The government wants to unfreeze the credit system; so then rescue the banks, i.e. the lenders. Why rescue the reckless borrowers like Goldman Sachs and others? ...

This bailout is a colossal mistake and I think will come back to haunt us.

What should we do? The current problem is not with banks and financial institutions, but in the housing market. So the remedy should be applied there and nowhere else. There should be a partial bailout of harried homeowners who cannot pay their mortgages. They should be penalized somewhat for their reckless borrowing but still rescued for the sake of the economy. If homeowners are able to make timely payments for their home loans, the banks will be paid and their loans will be secure. ...

Whenever a crisis appears, Wall Street jumps to the front row to profit from it. America, wake up and say no to the worst plan yet devised for crisis profiteering.]

 

[9/27/08 ... addt'l links added below at "On the mortgage fraud" and at "Words of Wisdom"]


Article:
The 9/22/08 Economic Crisis

 

What's at the root of the 9/22/08 economic crisis? An explosion of "trade", fiscal, and personal debt encouraged by government and Federal Reserve policies. Why? Compensation growth has fallen far behind productivity growth. Why? Five factors.

It's been called a "credit crisis," intimating that credit is now insufficiently available. Actually, the problem is that there has been a build up of too much credit. Debt, debt everywhere: trade, fiscal, personal, infrastructure backlogs (another form of debt). Personal debt rises because debt "trickles down" a lot more effectively than wealth trickles down (see Wealth Happens).

This debt has been encouraged by

1. "Free trade" (updated 7/28/10): Government "free trade" policies that undermine the economy and wages. See other policies that undermine wages at Data on Income & Tax Distributions. Undermined wages are the most important factor, because without demand there will be, obviously, no consumer spending and no investment.

Without those two and with a cumulative trade deficit (trade debt) of $5.8 trillion reducing GDP from 2000 through May 2010, the only thing left is government spending; but it's not possible to have enough government spending to make up for that (see On stimulus, "trade" anti-stimulus, and the GDP equation). Insane trade policies have reduced GDP by $7.7 trillion from 1980 through May 2010. That's accumulated debt to other nations.

On the economic devastation, see Jobs & 'Trade' Data Update Jun10.

2. Deregulation: Inadequate government regulation & oversight. Read The Bitter Fruits of Deregulation by Paul Craig Roberts 9/24/08: "... in the 21st century, economic growth has resulted from debt expansion."

A chilling note in Roberts' commentary:

A less appreciated feature of Paulson’s bailout plan is his demand for freedom from accountability. ... The control over the financial system that the bailout would give to the executive branch would mean, in effect, state capitalism or fascism.

If we add state capitalism to the Bush administration’s success in eroding both the US Constitution and the power of Congress, we may be witnessing the final death of accountable constitutional government.

3. Federal Reserve policies: The Federal Reserve dropped real interest rates to below zero after 9/11 to encourage people to "go shopping." Those low rates created the mortgage and housing bubbles.

 

Paul Krugman, in his 9/22/08 column appended below, Cash for Trash, explains a "four-step view of the financial crisis" starting with:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities ­ assets whose value ultimately comes from mortgage payments.

But why is it that so many people haven't been able to make mortgage payments?

Compensation has not kept pace with productivity. In 2004, compensation would have been 68% higher had compensation growth kept up with productivity growth. It's not so much that people are overtaxed (some are, see Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) by David Cay Johnston, 2007), but that they're underpaid. See also: Data on Income & Tax Distributions, 7/17/09.

Figure Productivity Up, Compensation Lagging. Analysis by Jared Bernstein of U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis data. Compensation of the bottom 80 percent of the U.S. workforce has lagged productivity since the mid-1970s.

Ravi Batra explains in Greenspan's Fraud that productivity is a measure of supply and income is a measure of demand. By far most consumption is by those with lower incomes, say the lowest 80% of incomes.

When demand does not keep up with supply because income does not keep pace with productivity, the only way to meet demand is by increasing debt. That has been done at a national level because of the "trade deficit" as I explain in How a Regional Economy Works, 8/24/06 (more on this below).

Five Factors - There are five factors for why income has not kept up:

1. Theft: Think Enron executives walking away with millions, Exxon chairman Lee Raymond's $400M retirement packageWilliam McGuire's $1.6 billion stock options, and Fury at $2.5bn bonus for Lehman's New York staff.

2. "Free trade" undermining wages: The Death of the Middle Class.

3. Fed policy undermining wages & unions: There's no 'free market' for Labor. I document that the Fed promotes worker insecurity to hold down inflation ... note the Fed is not government ... it's owned and run by private banks ... and about half the stockholders that own the Fed are foreign.

4. Increased regressive taxation, decreased progressive taxation:

- Reagan doubled the SS tax in 1983 so those working then would pay not only for those retired then, but also for their own future retirement. But now they say that money is gone because the government has borrowed and spent the money to pay for government operations.

- Republicans cut income taxes in Bush's first term mainly for the top 1%.

5. Fraud: Mortgage brokers pushing people into unsustainable fixed-rate balloon loans to pump up fees with promises they'd be refinanced ... to get even more refinancing fees. (Those bad mortgages were packaged and sold as high grade securities, which they weren't.)

On the mortgage fraud:

Predatory Lenders' Partner in Crime
How the Bush Administration Stopped the States From Stepping In to Help Consumers
By Eliot Spitzer, 2/14/08

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
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Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. ... (cont'd)

Bush Faults Easy Money for Volatility By STEVEN R. WEISMAN
Published: August 9, 2007

WASHINGTON, Aug. 8 — President Bush, seeking to reassure Americans about the economy and combat Democratic criticism of his policies, said on Wednesday that recent financial market turbulence was not a cause for worry but a natural adjustment from the improvident lending of recent years. ...

Mr. Bush’s suggestion that the recent housing declines should be seen as a normal market correction from past excesses and that the government should avoid interfering with the process carries political risks at a time when some people are losing their homes, lending institutions are shaky and Democrats are demanding action.

We're in for a world of hurt as described in John Williams' HYPERINFLATION SPECIAL REPORT and, as I wrote two years ago, ...

How a Regional Economy Works, 8/24/06
The purpose of this short paper is to illustrate how an economy works, from a regional economy within the U.S. to the U.S. economy is a whole. Then “how it works” is linked to the U.S. trade deficit and its associated threat to the U.S. economy. The threat is serious; the U.S. faces economic collapse within 2 – 3 years. It also describes why Wal-Marts hurt local economies.

I've been ridiculed for pointing to the coming collapse.

Gee, and now, after years of saying "the fundamentals of our economy are strong" and repeating this only last week, they say rapid action is necessary to avoid economic collapse. Go figure.

However, it turns out this wasn't a surprise at all to those who said "the fundamentals of our economy are strong." From White House Dispatches Team to Push Economic Bill, 9/23/08:

Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.

Yeah, right. This push for quick action typical behavior for Disaster Capitalism.

Words of Wisdom:

Bush 8/6/08: "the fundamentals of our economy are strong ..."

McCain 9/15/08: "the fundamentals of our economy are strong ..."

McCain 9/15/08: "America is in a crisis today ... "
"McCain declared in a new TV ad, 'Our economy is in crisis.'"

Bush 9/24/08: “Our entire economy is in danger ...”

Also of interest:
Now is the Time to Resist Wall Street's Shock Doctrine by Naomi Klein
Naomi Klein on Democracy Now! on the bailout
Fannie's and Freddie's free lunch By Joseph Stiglitz, 7/24/08

This last is referenced in: The Bailout Can Be Stopped -- Concerted Citizen Action is Having a Critical Impact by Kevin Zeese, 9/24/08 [includes suggestions for action]. Excerpt:

... And, Nobel laureate Joseph Stiglitz, an economics professor at Columbia University, is describing the plan as a raw deal for taxpayers. What's needed most, Stiglitz argues [in Fannie's and Freddie's free lunch], is to assist struggling homeowners. "We should begin with the core of the problem, the fact that millions of Americans were made loans beyond their ability to pay. We need to help them stay in their homes, including by converting the home mortgage deduction into a cashable tax credit and creating a homeowners' Chapter 11, an expedited way to restructure their liabilities." If these mortgages are fixed so the debts are paid, will that not make the banks solvent? It is time to build the economy from the base, rather than the top. Trickle down does not work -- especially when it is debts that trickle down. ... [my bolding]

September 22, 2008
Op-Ed Columnist
Cash for Trash By PAUL KRUGMAN

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

 

 


URL: http://www.exponentialimprovement.com/cms/econcrisis922.shtml

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