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A short guide to the financial crisis


9:01 am - November 16th 2010

by Flying Rodent    


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In the aftermath of the financial crisis, it’d be difficult to find a finer example of modern democracy’s total inability to control the monster it’s created.

The US journalist MattTaibbi has another installment on how the major US banks’ rip-off is now crushing homeowners with the club of the state.

On the micro level, here’s how the scam worked:

– The major US banks buy politicians with campaign contributions, in exchange for rights to expand into more markets and a reduction in regulations;

– Freed from effective oversight, the banks proceeded to aggressively lend to hundreds of thousands of home-buyers, entirely aware that they were lending to people who couldn’t afford repayments;

– The banks then took all those shit mortgages, bundled them up into impenetrable finance packages, and sold them off to pension funds, trade unions etc. as top-notch, ultra-secure investments rather than the near-worthless bags of shite they actually were;

– After a few years of making out like bandits, their pockets stuffed with fraudulently-earned cash, the financial crisis finally exposed the scam, causing major financial institutions around the world to explode. Those that survived did so by robbing taxpayers at gunpoint – give us fifteen bajillion dollars, or we take the entire planet down with us.

– Engorged with taxpayers’ cash, they then refused to lend it back to citizens – theoretically the reason they were given it in the first place – and awarded themselves another round of massive bonuses instead, before enlisting the aid of the state to repossess the very homes they’d used to cause the disaster in the first place.

Result! Bonuses all round at Goldman Sachs; a lifetime of crushing debt and exploding government programmes for you and your offspring.

* * * * * * * * *

The public were sold an appealing picture of personal responsibility and individual freedom.  What they got was an all-out, militarised assault on the working class, on the promise of call centre jobs, wide-screen TVs and a fortnight a year in Greece…  And then the call centre jobs were outsourced to India, and the bailliffs showed up at the door. 

But for the great mass of the people, the new restructured economy meant one thing – debt.  Lots of debt.

And here we are in 2010, with a new breed of hairy-palmed Conservative revolutionaries making the world safe for royalty with an entirely ideological crackdown on public spending, pledging to create a bajillion jobs by hurling half a million onto the dole and forcing the unemployed to work for a bowl of rice a day.

The British public didn’t suddenly decide on its own that the financial crisis was caused by tossing too much government cheese into tower blocks;  the electorate of the United States didn’t suddenly come to the conclusion unassisted that this disaster was caused by their dark-skinned neighbours borrowing too much money.

As Keyzer Soze says in The Usual Suspects, the greatest trick the Devil ever pulled was convincing the world he didn’t exist.  Our present situation strains satire, and represents the absolute failure of our democracy to analyse and tackle its most life-threatening problems.

It shows that collectively, we’ll swallow anything so long as there’s a lazy civil servant or a black homeowner to pay for our sins; that we’re delighted to have the privilege of selling our birthright for a car boot full of snazzy electronics bought on the never-never.

BERNARD MATTHEWS: Anyone for more Christmas?
TURKEYS:  Yes please!


A longer version is at Between the Hammer and Sickle

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About the author
Flying Rodent is a regular contributor and blogs more often at: Between the Hammer and the Anvil. He is also on Twitter.
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Reader comments


1. Martin Coxall

Impressive that you could have written such a lengthy piece without even a single part being correct, if even by accident!

Get a job, Martin.

You forgot the part where the British government ably advised by their Chancellor of the Exchequer stood up to the bank and their requests for deregulation.

Oh wait…

More parsimonious explanation here: http://www.economictheories.org/2008/08/effect-of-changes-in-money.html

Bankers are filthy rich because their workplace is nearest to where the stock of money is created. There is nothing much any democratic decision can do to stop that, short of abolishing fiat currency or (at least) banning the expansion of credit by commercial banks.

1

…and your explanation of the current mess is what exactly?

It was an accident? Some big boys did it and ran away?

Surely you can do better than effectively saying “no, it’s all crap… nobody was to blame”?

Excellent analysis.
This bit at the end in particular:

It shows that collectively, we’ll swallow anything so long as there’s a lazy civil servant or a black homeowner to pay for our sins; that we’re delighted to have the privilege of selling our birthright for a car boot full of snazzy electronics bought on the never-never.

And I’m afraid I find it difficult to be optimistic.

When you see card trickster-like political parties that ask (and get) the votes of millions of people saying that they’ll do politics in a certain way ending up doing the exact opposite overnight, in the UK.

When you see the tabled so conveniently turned so you suddenly no longer read about what the banks did (with the crucial help of their mates in Westminster), but the entire political discourse is now centred around job seekers. As if the state of the eeconomy was their fault.

When you get millions with goldfish memory propping up a protoracist, uberbigoted, nasty movement, the Tea Party, turning all lippy as if the financial crisis had not happened under their mates’ watch, as if George W Bush had never happened…

[deleted]

Matt Taibbi is often entertaining but also has a habit of talking utter bollocks about things he does not have a clue about. The unregulated meme is a total myth. Even after deregulation the actual regulations could have carpeted Wall St and Broad St. Badly regulated and you are on the right track.

Will give you an example. Every investment bank has a liquidity pool. As the name suggests assets in the liquidity pool to be used in an emergency should be liquid. The convention was an asset was liquid if it could be monetised in 24 hours. However, the SEC never actually stipulated what assets could be counted in a liquidity pool. Not overregulation required but just a simple written rule. So Lehman went bust with apparently $34 billion in their liquidity pool. However, it was a load of bollocks and there was less than 2 billion in the pool. The rest of the assets in the liquidity pool would have taken weeks to monetise. All their counterparties knew they had crap and would not trade with them. Needless to say the regulators did not know. A simple rule would have sufficed.

The banking/financial crisis was a failure of regulation. However, it was bad regulation and not no regulation. Although as Geithner said any system that relies on the wisdom of regulators will fail. You need to make it idiot proof.

5 – Distortions in the economy’s capital structure brought about by excessively low interest rates, which in turn were caused by by either (a) the supply of money exceeding the demand or (b) an increase in the supply of money on the loan markets full stop (depending on which wing of the Austrian School one subscribes to)

8 – The ‘unregulated’ meme is rather irritating. The US financial sector is unbelievably heavily regulated. And I preferred Matt Taibbi when he was an alcoholic druggie in Moscow, the copy was much better.

In reality, the collapse of an $8 trillion housing market bubble is going to knock the stuffing out of any financial system. Greenspan’s cheap money decade has a lot to answer for.

I’m missing the part where ordinary people became so utterly dumb and incapable that they simply didn’t care where their fake money was coming from. We were “sold” a false image? OK, but why should we expect – want, even – to have anything “sold” to us in the first place? How did we get to a point in society where concepts like organised religion are being steadily and rapidly debunked, yet we don’t even think to question what those evil “bankers” are telling us? The system may stink – that’s what it’s there for, in a way – but above all, the whole tale is a damning indictment of the human (in)capacity for rational analysis of its own situation.

#11
And why do you think so many fell for it? Just because they’re dumb or because…?

The financial crisis happened because the rise of China as a mercantilist export economy coincided with the creation of vast amounts of fiat money in the West. This was the cause, everything else was effect. The credit crunch is not a failure of the market, it is the market trying to correct an imbalance and the imbalance was so huge that the correction is correspondingly horrid.

To describe people as “evil bankers” hardly qualifies as rational analysis. Dumb maybe. Naive even. Reckless maybe. Evil? Making injudicious investments does not qualify as evil.

Minor point, but you do realise that part of the Tea Party populist appeal is their anti-banker stance?

Goldman partners were Obama’s biggest backers. But Wall Street isn’t backing the Tea Party.

http://www.businessinsider.com/wall-street-is-terrified-of-the-tea-party-2010-11

16. gastro george

@11, 12

They don’t have to be dumb, just misled. It reminds me of the demutualisation mania in the 80s. Who wouldn’t accept free money to demutualise their building society? Yet it ended in disaster.

17. gastro george

@8, 10

The right seem to have settled on the “bad regulation, not under regulation” meme, as it convenient puts the blame on “government”.

What this omits is the elephant question in the room – what social utility is there in most of this financial froth? Mostly it’s just devices to engineer more profit for the finance sector – at whose cost? When you have products that have no market value because there is no transparent market, then buying these products is as risky as buying tulips.

In any case, Taibbi’s article is as much about the fixing of the legal system and the fraud within the finance system, as any structural problems with the finance system – which is truly shocking.

I suppose consumers leveraging themselves up to the hilt on cheap credit (cards and from releasing equity from their houses) fuelled by low interest rates had nothing to do with it then?

I also love the way the author blames the banks for not lending now, but is perfectly happy that they lent way too much before the credit crunch….

Nothing is crushing homeowners other than the fallout of the popping of the bubble of the housing market. It was hastened along by subprime mortgages, but they were the main way banks could lend to people who could not otherwise afford to buy, given that they were now obliged to by law thanks to Bill Clinton’s community reinvestment act.

Effectively poorer people were betting on their house increasing in value, as the interest payments were low initially, and then one could easily re-mortgage before the interest rate reset higher as the house was worth more. The banks were borrowing money short term to to fund the long term lending.

This all fell apart in a double whammy when short term money become expensive and hard to borrow, and house prices started to fall.

Whilst the banks might not be angels in all this, governments are hardly guilt free eiter, given their taste for pumping up buubbles with low rates and their love of high tax/high spending, and the average consumer is hardly blameless either – the banks were providing for *their* demand by extending the credit which has now collapsed.

The right seem to have settled on the “bad regulation, not under regulation” meme, as it convenient puts the blame on “government”.

Well, what specific piece of regulation would you like introduced? The left throw around words like ‘deregulated’ and ‘unregulated’ in relation to the financial sector. But what acts of deregulation are they talking about? Did the abolition of the distinction between brokers and jobbers lead to a rise in structured financial products? How? If the repeal of Glass-Steagal was the key to it all, why were the two main failed banks Bear Sterns and Lehmanns – each of them exclusively investment banks?

What regulation would you like?

8 – The ‘unregulated’ meme is rather irritating.

Having been through a SOx audit I quite agree!

Freed from effective oversight, the banks proceeded to aggressively lend to hundreds of thousands of home-buyers, entirely aware that they were lending to people who couldn’t afford repayments

Er, no. The US mortgage banks were compelled to lend to unemployed benefit claimants, total wastrels, and gullible poor folk by Bill Clinton’s “all shall have houses” policy. See:
http://tinyurl.com/27m9euw

In the UK, despite high earnings multiples, lending was not reckless as relatively modest repo figures show.

Between the Hammer and Sickle

!!

@ 17. gastro george

I am not on the right. I blame bad regulation because that is what was to blame. I blame the last government for setting up the useless box-ticking FSA. It is easy to have scapegoats like Fred Goodwin and think the problems were caused by individuals. Remember the FSA could have said no to the RBS ABN AMRO takeover just as the credit crunch was commencing. Quite probably the same crisis would have occurred if the Tories had been in power so it is not specific to the last government. You can’t turn the clock back to before the Big Bang and nor would you want to. The banks were undercapitalised and no amount of petty rules would have changed that. The idiot proof solution is to force them to hold enough capital so that they can absorb losses and do not have to be rescued by taxpayers. Banks really are different than any other business and it is fantasy to believe any government would let even the smallest one fail. Nationalisation, takeover or bailed-out are the options. With that type of implicit guarantee they should be heavily regulated, but it must be good regulation.

24. gastro george

@23

Bad regulation certainly contributed. I wasn’t targeting you specifically – just pointing out how convenient it is for the right to blame bad regulation as the sole problem.

Since the Big Bang, the present regulatory framework for the finance industry has been said, by its proponents, to be “light touch” regulation. However when its negative effects become apparent it is described by the same people as “bad regulation”.

Worthless assets were repackaged as supposed high value assets. Dross was resold as gold and this was said to be “adding value”. Alchemists were praised as wealth creators. Whether this is due to light touch regulation or bad regulation is beside the point.

Since the Big Bang, the present regulatory framework for the finance industry has been said, by its proponents, to be “light touch” regulation. However when its negative effects become apparent it is described by the same people as “bad regulation”.

Could you point out what aspect of the Big Bang reform facilitated the recent crisis? Was it the abolition of the distinction between jobbers and brokers, the abolition of fixed commission charges or the introduction of electronic trading?

@8
“The banking/financial crisis was a failure of regulation. However, it was bad regulation and not no regulation.”

So blame the regulators then.

@10
“The right seem to have settled on the “bad regulation, not under regulation” meme, as it convenient puts the blame on ‘government’ ”

It’s clear you missed the first point made by this author that the banks were in collusion with the government of the day. Your implication is therefore that the author of this article is a right-winger and as it is promoted by the publishers of this site that Sunny Hundal et al are right-wingers.

Or perhaps you are confused and things aren’t quite as simplistic as all that (not helped by a confused article and the confused publishing policy of this site).

I don’t blame government, I blame one particular period of government in which the party in power consistently lied to the public in order to pad state revenues with taxes from city traders – in a way which has proved unsustainable.

Thatcher, Major, Blair, Brown. They are each representatives of the same unsound philosophy. And anyone who continues to define themselves in those terms by opposition to any of them is as guilty as those they attack.

That means everyone was guilty to a greater or lesser extent. Everyone from bankers, agents and brokers to credit card holders and mortgage-holders is guilty of trying to get ahead at the expense of others.

Go on, admit your part in the scam. I do. And I don’t trust anyone who doesn’t admit the part they played.

There’s only so long you can live on denial before drowning in the flood which comes as people realise your foundations are built on sand.

OK. FlyingRodent is writing from the point of view of an educated but angry layman, but he’s basically right. Some points raised in the discussion, addressed:

1) if you use the term “fiat money”, you’re a loony.
2) if you pretend that the GFC has anything to do with federal standards about lending to minorities, you’re a loony and a bigot.
3) if you think that the banking system is unregulated, you’re an idiot
4) if you think that the regulatory system for banking involves a great deal of box-ticking but lags several years behind what people are actually doing, and is mostly policed by people who are less knowledgeable and smart than the people at the banks trying to beat it (for obvious Daily Mail “BANKING REGULATOR PAID $10 MILLION A YEAR SHOCK!” reasons), you’re absolutely right.

When FR suggests that the banking system is inadequately regulated, he obviously means 4 not 3. That clarification aside, the article stands.

I think it’s reasonable to assume that responsible lenders won’t lend to people they think are credit risks. After all, they’re the money experts, and the customer is too bound up in his/her hopes and dreams to be trusted to make the decision.

So it’s quite misleading to then say “It’s those dozy customers taking out sub-prime mortgages! Banks can’t be to blame!” despite the fact that the customers thought that being granted a mortgage more-or-less meant they had been judged capable of paying.

If a mortgage lender isn’t taking responsibility for this judgement, then this ‘bad regulation’ is no different from ‘no regulation’ in its effect. Stop quibbling over semantics and get some perspective.

30. Luis Enrique

I agree with Tim J, Richard W and others that there are elements of this account that are incorrect, misleading and betray ignorance of how the financial system works etc.

But I think there’s a risk of seizing on small truths and making a big error*.

The big truth is that the way the financial system has worked has been an absolute scandal, bankers have acted de facto, whether they realized it or not, as snake oil salesmen and con artists, and they’ve enriched themselves enormously whilst imposing huge costs on everyone else. And it would be a big error to allow frustration with the (small) errors made by Taibbi and other ranters to prevent anyone from joining in with them. It’s quite possible to understand the minutiae of the financial system and the mechanics and true costs/benefits of the government bailouts, and still be hopping mad about the financial system has become.

FR, I’m going to have a crack and filling in some ‘small truths’ now, but I’m going to have to make it quick because as it happens I’ve got to go an take a tutorial on the financial crisis.

The easiest way to understand what bankers did is by analogy with an insurance company that offers insurance against earthquakes. Each year there isn’t an earthquake, the take the premiums and pay themselves handsomely, then when the earthquake hits, they cannot pay out. To be clear, this is an attempt to get at the essence of what they did, it’s not accurate. For a start, they managed to get themselves in a position where it didn’t take an earthquake, just a perfectly normal decline in house prices to pull the rug out from under them. The actual trigger was a bank run in the wholesale and shadow banking system.

The essence of the current banking system is that when you make a deposit in a bank or lend to a bank, it promises to pay you back come what may and when it cannot it is bankrupt. It does not say: “if some of the loans we make don’t get repaid, I’m afraid you won’t get some of your money back either”. If the loans don’t get repaid (or the value of other assets acquired by the bank with your money falls), the bank’s equity (capital) is there to cushion the loss. When the loss exceeds the size of the capital cushion, the bank is bust. And of course in addition to the value of assets falling below size of liabilities, banks are still exposed to traditional runs as in It’s A Wonderful Life.

So what? This means that the mortgage backed securities (toxic assets) don’t have to be worthless, they can turn out to be say worth only 10% less than the banks thought, and that can still bankrupt the bank if they’re highly leveraged (which they were). It also tells us that the banks didn’t palm all that crap off on to pension funds etc., but they believed their own bullshit and kept those assets on their balance sheets.

It’s not quite right to say the taxpayer gave the banks billions (at least not in the UK, in the US I think the tax payers is still wearing AIG and Frannie and Freddie’s losses) because bankrupt banks still have assets and when we buy the bank we own them, we also make loans that get repaid etc. The direct cost of the bailout isn’t where the true cost lies, the true cost is the unemployment etc. It’s also not really right to talk about banks being awash with our cash and refusing the make loans – cash is not a constraint on bank lending, if there is a constraint on credit supply it’s probably to do with them trying to rebuild their capital cushions (which is quite distinct from cash reserves, which is to do with composition of assets), private sector cash balances are high and the lack of credit is probably more to do with the demand side.

I’m really not sure about the connections with consumer debt and changing nature of jobs and international trade that you make, but won’t go into that. The “foreclosure scandal” does beggar belief, and yes it’s appalling that the buggers were able to keep paying themselves handsomely throughout, even though the reasons why they were able to do so are a bit more complicated than Taibbi might acknowledge.

I’ll resist the temptation to provide dozens of links, but the speech by Mervyn King linked to be Chris here is a great read, and shows why left wingers and right wingers ought to be united in outrage against the banks. The most promising idea for comprehensive reform is Kotlikoff’s limited purpose banking. Jimmy Stewart is Dead.

* I may sometimes be guilty of that myself, arguing with those who are on the same side, although I don’t see why mistakes ought not be corrected.

31. FlyingRodent

I think that, after the banks fought tooth and nail to have their congresscreatures eviscerate the Dodd-Frank finance reform Bill and succeeded in having anything that looked like real, stern oversight of their activities excised, you don’t have to be Columbo to work out what role regulation played in the crisis, and how the housing bubble was inflated to the point where it took out half the planet when it popped.

Sure, plenty of homeowners were dumb or naive taking on loans they couldn’t afford. This rather misses the point that the lenders were shoving loans at them as frantically as they could, without caring for a second whether the recipients could make ends meet… Then selling these worthless things off to be magically transformed into rock-solid, sure thing investments, so that the lenders could make a killing selling shit as shampoo. When I say making a killing, I mean that these jokers made millions and millions off the back of this scam. Hell, Goldman knew it was selling shite – it bet massively against its own products, for God’s sake.

If you want to blame the poor chumps who have just been thrown out of their homes on their arses, feel free – if we followed the money trail though, we discover that one class in particular was massively benefitting from this industrial bullshit machine, and it wasn’t blue collar workers.

If anyone wants to broaden the blame here, most of the deregulatory hijinks happened during the Clinton era. Ol’ Bill was the boss when they allowed commercial banks to jump into the derivatives business, and when they – ahem – “modernised” regulation of that market, i.e. let the big dawgs do whatever they liked.

Seriously, if you have a guard dog that never barks while thieves make off with your stuff night after night, you could blame the pooch, I guess. Ultimately, I’m more inclined to blame the thieves.

32. Simon Inbetweener

@22

‘Brilliant’.

29

“I think it’s reasonable to assume that responsible lenders won’t lend to people they think are credit risks. After all, they’re the money experts, and the customer is too bound up in his/her hopes and dreams to be trusted to make the decision.”

Isn’t that precisely what DID happen though?

Northern Rock was simply the first example of an institution which lent irresponsibly wasn’t it…. but why were they “allowed” to? It’s the kind of voodoo economics that got us into this mess isn’t it… self certification mortgages, multiples of salaries that were unaffordable etc, etc.

People aren’t saying that there was no regulation, they are saying it wasn’t correctly applied, and didn’t ask the right questions. It wasn’t inevitable, it was just that prudence got sacrificed on the altar of egos that said boom and bust was dead, and that the good times would never end.

“Isn’t that precisely what DID happen though?”

Absolutely. Sorry if I was unclear.

But if regulation has no effect, then it’s the same as no regulation.

Luis, as usual, is aces. The only bit I’d disagree with is:

For a start, they managed to get themselves in a position where it didn’t take an earthquake, just a perfectly normal decline in house prices to pull the rug out from under them.

This isn’t quite right. The problem is that in the context of the US, there’s no such thing as a “perfectly normal decline in house prices”. While Grapes of Wrath awfulness was going on in the west, New York property prices were still rising.

The reason why the banks’ models on property prices were so disastrously flawed was that they assumed different markets weren’t correlated, because they never had been (remember, the US isn’t much more economically congruent than the EU). So the idea of house prices declining in aggregate wasn’t even factored in.

But because of the way finance was levied and bonds were sold based on those models, they made a correlation that had previously never existed suddenly start to exist. Which was terrifying for all concerned.

People of a philosophical bent can mention Einstein and Heisenberg at this point.

37. gastro george

@33, 34

Lenders won’t lend to people they think are credit risks if they are going to have to pick up the pieces. If they just bundle up the loans and pass them on, then why should they care. Whether that’s responsible or not depends on where you’re looking from.

@30

Aren’t there a couple of things you miss here. One is valuation – how do you know how much capital you need in reserve if you don’t know the extent of your possible liabilities. These assets were always valued as AAA, so required a lower level of capital reserve.

Another is transparency. How can you value something that is not traded in an open market?

It really makes no sense to switch between what happened in the US and what happened here. The two situations were vastly different. There was no subprime in the UK. Sure the likes of Northern Rock and others gave out some too high LTV mortgages. However, it was a tiny part of the overall market. None of those losses are what sunk them. Currently around 1% of mortgages are under water and the same number for repossessions. Hardly banking crisis numbers. Low interest rates help but it is not the only story. There are no full estates with vacant new houses like Ireland, US and Spain. Most people bought a house to live in it.

The British banking system was reliant on an unstable source of funding to finance their balance sheets and when the money markets froze they were fucked. Moreover, they filled their balance sheets up with the sliced diced and packaged MBS from US subprime. The likes of HBOS has a good mortgage book. What sunk them was a reckless corporate book lending to British businessmen.

Absolutely nothing that happened in US subprime should have led to the collapse in economies at the end of 2008 into Q1 2009. The blame for that lies at the feet of Mr Bernanke, Mr Trichet and Mr King.

For a start, they managed to get themselves in a position where it didn’t take an earthquake, just a perfectly normal decline in house prices to pull the rug out from under them.

Um. The house price collapse in the US really was unprecedented in scale. If you wipe $8 trillion off the value of housing stock, you’re going to see a lot of knock-on effects.

Hell, Goldman knew it was selling shite – it bet massively against its own products, for God’s sake.

This really bears repeating until it finally sinks in.

FWIW, I used to play poker with a couple of guys in banking… They’d been saying for years that the whole shebang was a massive timebomb which could go off at any moment, and was certain to go off eventually.

41. Luis Enrique

yes, sorry, word normal was misplaced. However, it only brought down the global system because of the peculiar way the banks had tied themselves in knots. A banking system should be able to survive sharp falls in house prices.

Here is another factor in the story that for some reason the mainstream press never covered. Moody’s rating models had bugs in the system going back to 2000. When they fixed the bugs some triple Aaa securities fell to junk bonds.

‘ Moody’s has avoided prosecution by SEC and others on a technicality, announced some three years after the SEC investigation began!
Sam Jones, wrote in FT’s Alphaville over two years ago about bugs in Moody’s model for rating securitization issues that mistakenly gave?top?ratings for bonds.
When re-rated after June 2007 using a model in which the bugs had been fixed tens of $billions of CDOS, RMBS, ABS bonds dropped in value by up to 17 risk grades, sometimes from Aaa straight to ‘Junk’! Moody’s between 2005 and 2007 risk rated about 10,000 Residential Mortgage Backed Securities (RMBS). ‘
http://bankingeconomics.blogspot.com/

43. FlyingRodent

It really makes no sense to switch between what happened in the US and what happened here.

Really? It makes no sense to switch between two of the countries hardest hit by the global financial crisis?

Fine, though. Luis notes above that it’s odd to wedge the financial crisis into the thirty-year wheeze that has been modern capitalism. This was my attempt to place the crisis in the context of a massive, Randroid-led reorganisation of our economy, and to suggest that this kind of disaster is the inevitable outcome when the basis of our business philosophy is that the ultra-wealthy prop up the world by virtue of their amazing super-powers.

It’s no coincidence that the story most people are reading is that a) the financial crisis is so complicated that you shouldn’t worry your pretty little heads over it and that b) it was caused by government, lazy black people and ultimately you. No word on what that arch-Communist Alan Greenspan was doing while the shit hit the fan, but the super-rich? Hey, they’re just as upset as the rest of us! They lost loads of money too!

Lefties used to be quite good at this kind of narrative building, explaining-complex-issues-to-the-man-in-the-street thing. Now, you’re stuck with dumbasses like me taking a stab at it.

In fairness to Goldman they claim to have lost money net because they were also long. Hedging both sides is what they do.

Thanks for the roundup. Couldn’t agree more on what you have to say. But what can you do about it when as you say, the masses are like turkeys voting for xmas? Absolutely nothing. That’s what!

. @ FlyingRodent

I agree with a lot that you say there. Blaming poor minorities is lame and is just part of the Republican talking points to get rich white guys off the hook. The US losses in commercial real estate dwarf subprime and that is lending to rich white guys. I just think what happened in the UK is connected to the US but vastly different.

47. Luis Enrique

another correction: when I wrote “the most promising” reform idea is LPB, I should have written the great but not a chance in hell of happening idea. The best we can probably hope for is just making existing regulations are bit tougher than they are, high capital requirements and such like, but the bank lobby is stronger than the politicians, particularly as the American voter seems to hate regulation. I have no idea how to stop the bankers making out like bandits.

FR, I see where you coming from with the whole “don’t worry, these guys know what they’re doing” thing. Hopefully one of the things that will come out of all this is much less willingness to trust systemic, strategic aspects of the economy in the hands of profit seeking free market, although having written that I do not know who else’s hands to put it in not having much faith in politicians or ability of economists when given chance to indulge in planning the economy. I am increasingly thinking about how this whole “let China make everything” trend might turn out not to have been such a great idea. I suppose there are some relatively “hands off” things that can done about that – putting tariff rules or whatever in place to act as automatic stabilizers on trade deficits / surpluses. Here’s an idea along those lines: http://www.voxeu.org/index.php?q=node/5690

Really? It makes no sense to switch between two of the countries hardest hit by the global financial crisis?

Counterintuitive though it may seem, yes.

1) USA. Currency is a reserve currency. All debt is denominated in local currency (which means “we can print as much money as you like, and you can all fuck off”). Mortgage lending was insane. Everyone’s afraid of them. Sadly, they’re demented masochists, and so have decided to vote against someone who offered them poverty without dying of cancer in the street, in favour of people who’ve promised both. The only reason this could possibly make sense is if they plan another war.

2) Ireland. Absolutely fucked in every way you could imagine (see also, other PIIGS)

3) UK. Currency isn’t the global reserve currency, but all our debt is denominated in our own currency. Mortgage lending was surprisingly sensible. Foreclosures are quite low. The only banks that are bust are the ones that actually did 120% loans. The government stepped in because of paranoia about liquidity. It’s already got its money back on paper. The main problem is that the giant tax take we used to get from pretending to be a serious country with a giant economy has disappeared because the money was never really there. [SEE: ALEX SALMOND, +1000].

4) The non-bust places in the Eurozone. They were a bit less silly than the UK in the global lending game, but not to an extent that mattered. If we’re responsible for selling rich people Beemers, then the Germans are responsible for making Beemers in the first place.

5) Slavery places where cheap stuff is made. And yes, they suffered the most from the GFC – if you’re on a starvation wage and you’re fired, then your entry into Mr Marx’s Reserve Army is much less hypothetical than in the west.

Good comment Luis

OMG Luis Enrique I can’t believe British universities are turning out protectionists.

You will never succeed in regulating banks totally safe other than nationalising them. No matter what you do with rules they will always find a way to use money substitutes. They always have and there is no reason to suppose they will not do it in the future. Higher capital requirements- an insurance levy for the risk they pose- financial penalties if they are overleveraged seems the best way to proceed to me.

51. Luis Enrique

Richard W never mind turning them out – hiring them to poison impressionable young minds!

(don’t worry, I’m only flirting with the possibility of a bit of gentle trade intervention … what’s the harm?)

talking of young minds, you would all be amazed and dismayed how uninterested the average 20 year old econ undergrad is in the financial crisis, the austerity debate etc. (although you can never tell because the imperative not to appear like a swot)

Maybe they are better being apathetic. Michael Lewis wrote Liar’s Poker hoping to show bright kids how shallow it all was and only succeeded in motivating them to follow him.

‘ I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual. ‘
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/index.html

53. Luis Enrique

yes, we just covered limited purpose banking and I suggested that one attractive aspect of the idea was that it’s hard to see how bankers could pay themselves £million bonuses under the system, and I wondered how many were thinking, well I oppose that then.

Question:

I’m really not sure about the connections with consumer debt and changing nature of jobs and international trade that you make, but won’t go into that.

Answer:

I suppose consumers leveraging themselves up to the hilt on cheap credit (cards and from releasing equity from their houses) fuelled by low interest rates had nothing to do with it then?

There had to be some way of reconciling the cognitive dissonance between what was actually happening (wage erosion, lack of job security, reduction in opportunities, whole sectors being decimated by outsourcing and deindustrialisation etc.) and the Reaganite (Thatcherite) dogma that all was well with the economy. And it’s a positive feedback loop, too – the more people heard about GDP growth and stock markets rising, the more they thought, on the one hand “well that means I should see some of the benefits of that too” and “I’m sure I can repay this loan because the economy is obviously booming”.

The 80’s started this identification between individuals and the economy – the middleman, society, having been declared to not exist – so it would have been a Herculean feat of counterintuitive idiocy to declare in 2002 or even 1997, “actually no, it’s all bollocks; despite the fact that I had 3 holidays last year I’m tremendously badly off, and my future, stock gains on my pension fund notwithstanding, is vastly endangered”. You just couldn’t reach that conclusion from the individual-eye’s view – it was a feature (probably an emergent rather than a designed one) of the whole system.

People kept borrowing to maintain the illusion that they had the lifestyle they were being told they had, it’s as simple as that.

Luis “Voice of the Masses” has spoken! He think the right is right again!! We bow down before his superior anaylsis!!

The neo-liberals, the right wing free marketeers can’t blame the left for this one, lads and lasses, they did it all by themselves.

As for the right wiing meme “CLINTON’S FAULT!” in repealing the Glass Steagall Act (like good ol’ Dubya had nothing to do with this at all).

Let’s have a look at the repeal of Glass Steagall:

‘The banking industry had been seeking the repeal of Glass–Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the cases for and against preserving the Glass–Steagall act.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (Republican – Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate.

@13

The credit crunch is not a failure of the market, it is the market trying to correct an imbalance and the imbalance was so huge that the correction is correspondingly horrid.

Correct. This was not market failure or failure of regulation, the problems were caused by government interventions.

Firstly, Clinton encouraged/compelled US financial institutions to lend to anyone with a string vest and a shed for collateral. See Freddie and Fannie. OK, the financial institutions found a way to make money out of doing it but why is that surprising?

Secondly, governments should not have intervened to prevent the failing banks from going bust. They should have been allowed to fail and, because they weren’t, they are only going to get worse from here on in.

Now they believe they can take any risk because they have proved they are effectively indestructible.

@55,

Captain Swing,

Could you do me a favour and not associate free marketeers and neo-liberals thanks – I am very much one and very anti the other.

Yes, there were right-wing neo-liberals who wanted to see big banks do well, and the late 90s Republican party had lots of them (and a lot of them are now victims of the Tea Party). But this is not a free market situation – it is a change in a regulated market situation.

58. FlyingRodent

The neo-liberals, the right wing free marketeers can’t blame the left for this one, lads and lasses, they did it all by themselves.

Pretty much our entire political and economic elite was complicit, so far as I’m concerned. There’s plenty of blame to go round and great piles of it accrue to Labour and the Democratic Party, for example.

That said, we should be clear that an economic system that hands that much power to a crazed Randian cultist like Alan Greenspan is unlikely to be hampered by incipient Soviet-style communism. Left and right may have joined in the frenzied fuckfest with equal enthusiasm, but I’d have thought it’d be difficult to deny that western monetary policy has been on a rocket-propelled rightward trajectory for decades. That should tell us something about whose bullshit blew up the universe, I think.

@Pagar: the problems were caused by government interventions. Insofar as the government “intervened” to give bankers more or less everything they asked for, yes. Otherwise, your analysis is basically that a few thousand poor black people who couldn’t pay their bills destroyed half the planet. In the context of a massive corporate disaster in which more or less everyone was complicit, this is whiffy in the extreme.

@MarinaS: Excellent. I’d have written something like that myself, if I was capable of it.

Let’s have a look at the repeal of Glass Steagall

Why? What did the repeal of Glass Steagal (the compulsory separation of commercial and investment banking activities) have to do with the collapse of Bear Sterns and Lehmanns (both exclusively investment banks)?

Yet Clinton left office in 2001 and the burst bubble in 2007 was mortgages taken out in 2003-05. Not that I disagree with partially blaming Fannie and Freddie. However, it does not explain the US bubble only 20% of it can be explained by things like cheap credit.
http://www.economics.harvard.edu/faculty/glaeser/files/Glaeser_Cheap_Credit.pdf

Just letting the banks fail is an easy thing to say Pagar, but completely unrealistic. An RBS failure would have seen immediately 25% of the British workforce get no salary. Tens of thousands of firms who bank with them would have gone bust too. If you are going to intervene to stop that happening you are not letting them fail, are you? Every other bank with the exception of HSBC and Stan Ch. would have gone down with them. Banks do not die alone they take everyone else with them. So for the sake of ideological purity the majority of British firms would be out of business and unemployment over 10 million. That is no exaggeration. The one lesson they did learn from the 1930s is although it might be undesirable bank failures are even more costly.

Rand cultist?? Eh???

I think you’ll find that the Rand cultists – eg Texas Congressman Ron Paul and his newly elected son Kentucky Congressman Rand Paul (the clue is in the name) – consider Greenspan an absolute traitor to Rand-ism.

Paul Sr. (and poss Jr. I don’t know) blames the Greenspan Fed for blowing up the bubble and wants to see it abolished.

Greenspan is the ultimate interventionist.

@61: “Greenspan is the ultimate interventionist.”

In testimony on 24 October 2008 to the US House of Representatives Oversight Committee, Greenspan said:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

The mounting evidence from history that unregulated finance markets are subject to periodic crises is a pretty persuasive rationale for intervention IMO. Try this interview in the FT of Prof Carmen Reinhart on recurring patterns in 800 years of financial crises:
http://video.ft.com/v/82349517001/May-3-800-years-of-financial-crises

She is co-author of a book with Kenneth Rogoff: This Time Is Different – 8oo years of financial crises (Princeton UP, 2009)
http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

Rogoff, now at Harvard, was previously chief economist at the IMF. He is a Grand Master at chess as well.

If only we had taken heed in 2003 of this timely warning about derivatives:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

63. FlyingRodent

Rand cultist?? Eh???

From the fifties onwards. Google will help here, but as a taster… http://tinyurl.com/34baqqd

Greenspan credits Rand as “a stabilizing force in my life” and was “a regular at the weekly gatherings at her apartment” through the early 1960s. She stood at his side when he was sworn in as chairman of the Council of Economic Advisers in 1974, and they “remained close until she died in 1982.”

I’m not surprised in the least that the Pauls regard Greenspan as a heretic to Randian dogma – every time some mad conservative crank makes it to the White House and blows up the economy, the Republicans magically discover that said crank wasn’t actually a conservative after all.

The only other alternative is to admit that Greenspan pulled as much crazy objectivist bullshit as he could, thus demonstrating that her entire philosophy is an utterly unworkable mixture of paranoid snobbery, wild elitism and crazed entitlement..

If I were a Randroid, I’d be disowning everything her acolytes ever did and urging everyone to go back to a purer version of her lunatic politics.

Well, I bow to your obvious expertise, but I think you’ll find that the whole idea of regulatory control of monetary policy is anti-Randian.

PS you should probably also curb the hyperbole.
US GDP fell peak-trough by 4.1% and has now recovered to within 1% of the peak (Q2 2008).

I’m not sure that counts as “blowing up”.

61. cjcjc

Rand cultist?? Eh???

‘ I think you’ll find that the Rand cultists – eg Texas Congressman Ron Paul and his newly elected son Kentucky Congressman Rand Paul (the clue is in the name) – ‘

He is named after a Canadian singer. Not the crazy author Rand

Thanks for the correction. I just assumed…

I can see a copy of Paul Sr.’s “End the Fed” right now!

67. the a&e charge nurse

I have heard it said that Britain’s national debt now tops 4,000 billion (which sounds even scarier than 4 trillion ….. I think).
http://www.independent.co.uk/news/uk/politics/britainrsquos-debt-the-untold-story-2025979.html

While the banks are far from blameless this extraordinary figure is driven by the fact the size of the state has outgrown the private sector (so that ‘none producers’ exceed ‘producers’ if we put it in very crude terms) while a combination of borrowing and burgeoning public expenditure only fuels the figure (4 trillion) – a sum that grows exponentially once interest rates are factored into the equation.

At least this was the analysis offered in this here – am I fool for thinking that our economy is on the brink of a dreadful meltdown?
http://www.channel4.com/programmes/britains-trillion-pound-horror-story

In the film ‘Hong Kong’ was offered as a potential model as to how we might reinvigorate our economy but that’s when my attention started to wane slightly.

MarinaS
“People kept borrowing to maintain the illusion that they had the lifestyle they were being told they had, it’s as simple as that.”

Indeed, and if you get through the door an offer of an extra credit card just about every day, the means to do it are within easy reach. I have always stuck to the principle of never being in debt but it’s amazing how much criticism you got for the opinion between 1990 and 2008.

Although it might be comforting to think a bunch of crazy traders and bankers just decided to go on a mad bender and nearly blow up the world. Where do you think those floods of money were coming from? There were trillions flowing from Asia and the Middle East into the US and Europe. When Asians were banking their savings the money was flowing back to the West and it still does. There was so much that the banks did not know what to with it. Well apart from lose a whole load of it. There was such an inflow of funds the US Treasury yield curve was inverted and it was cheaper to borrow long term than short term. Everyone was in search of yield and it was that which blew up the subprime and derivative bubble. Overall, it is pretty shameful that more of the money was not put to more productive uses. As much as it is good fun to blame the 1980s Tories for everything. None of the 2007/08 meltdown was down to 1980s deregulation. There was a distinct change of culture in the noughties and the idea of risk management went clean out the window.

70. Luis Enrique

… but, this recession isn’t about a consumer debt bubble having burst. At least I don’t think so. It’s certainly not what killed the banks. I’m sure many households have got themselves (or pushy lenders + consumer ideology, if you prefer, has gotten them) into trouble by borrowing too much, and of course when a recession hits and jobs are lost, debt immediately becomes a bigger problem, but I don’t see that consumer debt is what’s wrong with the economy. I know lots of debt is being written off, so ex-post bad loans have been made. I don’t know to what extent expansion of consumer debt contributed to reported economic growth over the past few decades.

in the case of a poor household, would you prefer for them to be:

1. structurally excluded from borrowing. that is, the rules say, sorry you cannot borrow
2. offered credit at low rates “encouraging borrowing”
3. offered credit at high rates (profiteering and loan sharking)

I’m just asking. this isn’t a topic I feel well informed about, nor one where I have strong pre-existing views.

Does anybody know where to get data on non-mortgage consumer debt as proportion of wages, over time?

I just don’t like stories about people being brainwashed by capitalist wizards, but I could just be wrong about that.

captain swing you mentalist, I certainly have not been saying the right was right.

For an interesting and amusing take on how the credit crunch was brought about Check out this video on YouTube:

http://www.youtube.com/watch?v=qOP2V_np2c0&feature=youtube_gdata_player

Sent from my iPhone

“The only other alternative is to admit that Greenspan pulled as much crazy objectivist bullshit as he could, thus demonstrating that her entire philosophy is an utterly unworkable mixture of paranoid snobbery, wild elitism and crazed entitlement..”

Her philosophy required adoption of a 100% reserve gold standard. Greenspan did nothing of the sort. The sort of monetary policy advocated by genuine libertarians (whether it’s a 100% reserve gold standard or free banking) has not been tried and libertarians have been very critical of the current “neoliberal” monetary system and economic structure.

“1) if you use the term “fiat money”, you’re a loony.”

Only if you’re a monetary crank who believes all problems can be solved by printing money, such as the social creditors. There are plenty of critics of fiat money who predicted the crisis (see this article from 2006 http://mises.org/daily/2111) and stick to an analysis of boom-bust cycles which was mainstream until the rise of Keynesianism.

“… but, this recession isn’t about a consumer debt bubble having burst. At least I don’t think so.”

Artificially low interest rates encouraged investment in various capital goods industries e.g. the US housing market. However there was not sufficient genuine demand for the products of these industries hence the unwinding. http://mises.org/daily/3130

The argument made by some on the Right re Clinton administration compelling banks to lend to poor families is irrelevant, any impact of this legislation was limited.

73. FlyingRodent

The sort of monetary policy advocated by genuine libertarians (whether it’s a 100% reserve gold standard or free banking) has not been tried…

well, yes – he might have liked to pull all kinds of hilarious nutttiness, but even Greenspan had to work within the framework of democratic elections and with politicians. Making a case to voters and winning elections isn’t something that much troubles libertarians, as a rule, which is probably why yer Greenspans don’t go into their hobbies full time.

@71 Yes, that’s very good.

Well, here is Taibbi on Greenspan:

“Greenspan’s rise to the top is one of the great scams of our time… [he] pompously preached ruthless free-market orthodoxy every chance he got while simultaneously using all the powers of the state to protect his wealthy patrons from those same market forces… if you can see through him, the rest of it is easy.”

Precisely. Which is why Paul and co. hate him.

I tend to think here, that the right is in a state of complete denial about the undermining of one of their key beliefs that they have been peddaling for the last 30+ years; namely that free deregulated capitalism is self regulating and will inevitably produce the most efficient outcome.

How right you are.

I mean, how much better off are we than 30 years ago?

Graham,
do you think increases in wages makes any positive difference whatsoever to your wealth if you continue to spend more than you earn?

Capitalism is a system in which success is measured by increases in capital, not income (and capital can be measured in more terms than simple finance).

It is perverse to say society as a whole is not richer than it was 30 years ago (at a basic level average life expectancy is increasing at the fastest rate in history, at a higher level we have new powerful technologies like the interwebs etc).

However it is also clear the gains have been distributed unequally precisely because poorer members of society have used their means less wellm(at same the basic level the poor suffer higher rates of treatable disease and at the higher level there is a preponderance of access to electronic media in developed economies).

So criticise the way capitalism has functioned if you will, but criticising captialism itself is a demonstration of petty-minded selfishness and ignorance – which your choice of uniformly one-sided and biased sources exudes.

Oh I see, so it’s all the poor’s fault is it! I love listening to you guys you’re like self parodies. Any self delusion to avoid the truth.

So obviously it has nothing to do with the fact that the proportion of wealth going to top earners has grown dramaticly at the expense of wages for the rest of the population.
If people have taken on lots of debt, to maintain living standards that wages can no longer support then it is because they have been encouraged to do so by governments and business. As this has been the only thing propping up our economy for the last 20 years.
The dysfunctional result of decades of quack neoliberal policies.

No, I don’t think you do see.

You can’t see, or you would’ve been able to read the whole of my comment before the red mist came down!

The financial crisis at state level and individual level is not exclusively the fault of the poor or the rich. Each is responsible for their own part.

If a loan application is made without security that is the applicants fault. If it is accepted then that is the lenders fault.

When things go wrong both sides habitually blame others for ‘the system’, but systems don’t look at the facts or make decisions – people do.

Anyone can tell themself they are blameless all they want, but that’s simple self-deception and self-flattery. And it is pure arrogance of the highest order to try to shift responsibilities for your own actions onto others.

With such deliberate and irresponsible idiocy running rampant on each side it’s no wonder problems were caused – by trying to undermine a system in the hope of making relative gains why should you be angry when it does get into trouble?

The right and the left are actually secretly happy with the financial crisis as it’s given them both the chance for their long hoped-for revolutions!

Be careful though, it may not turn out the way you want it to.


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