Who We Should Blame for This Crisis 26 comments
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Some people don’t like the concept of blame. They view it as useless because it wastes time in looking for a solution. I will tell you differently. Blame is useful because it identifies offenders, which is the first step in eliminating the problem. The trouble is that few have the stomach to get rid of the offenders.
So, as I traveled home from prayer meeting with my children last night, we listened to a radio show discussing the current credit crisis. This was a good discussion, unlike many that I hear. But the discussion (on NPR) eventually focused on “who should we blame?” Okay, here is my incomplete version of who we should blame:
1) The Federal Reserve, especially Alan Greenspan. For the past 20 years, we couldn’t let the economy have a severe, much less a moderate recession. Rates were reduced before significant pain was felt by those who had borrowed too much. The 1% Fed funds rate in 2003 was the pinnacle of that effort. It created the ultimate bubble; there is nothing left to reflate in 2008 from easy monetary policy.
2) Congress and the Presidency — they encouraged undue leverage in a variety of ways:
a) Fannie, Freddie, the FHLB, and more: Everyone has gotta live in a single family home. Gotta do that. Thomas Jefferson’s ideal was that we should encumber future generations so that marginal buyers could live in houses beyond their means. They compromised lending standards more and more, along with private lenders as the boom went on.
b) The SEC: in a fiat currency world, controlling the currency means controlling leverage of financial institutions. The SEC waived leverage restrictions on the investment banks in 2004, leading to a boom, and a bust. Big bust. Ginormous bust — how many large standalone investment banks are left?
c) Particularly the Democrats in Congress defended the GSEs as their own pet project. I am not bashing the CRA here; I am bashing the goal of having everyone live in a house beyond their means.
d) We offered a tax deduction on mortgage interest, and a limited exemption on capital gains from selling a home. There is no good reason for these measures.
e) And, the Republicans in Congress who favored deregulation in areas for which it was foolish to deregulate. Much as I favor deregulation, you can’t do it if you have fiat money (unbacked paper money). In that case you must restrain the growth of credit.
f) The Bush Jr. Administration — they did not enforce regulations over financial institutions the way that the law would demand on a fair reading. Again, I’m not crazy about regulation, but unless you have a gold standard, or something like it, you have to regulate the issuance of credit.
g) Their unfunded programs with promises to the future; the states and Federal Government always promise today, and don’t fund it. Hucksters.
3) Lenders steered borrowers to bad loans. There was often implicit fraud, and in some cases, fraud. The lenders paid their staff to do it.
4) Borrowers were lazy and greedy. What? You’re going to enter into a transaction many times your income or net worth, and you haven’t engaged helpers or friends to advise you? Regardless of the housing price mania, you should have gone slower, and done more homework. Caveat emptor — you neglected that.
5) Appraisers were slaves of the lenders who wanted to originate and sell.
6) Those that originated MBS did not check the creditworthiness adequately. They just sold it away. Investment banks did not care where a profit was coming from in the short run.
7) Servicers did not demand a high price for their services, making it hard for them to service anything but solvent borrowers.
8) Realtors steered people into buying more than they could rationally afford; I’m not saying they did that on purpose, but their nature was to sell to get the highest commissions.
9) Mortgage insurers and financial guarantee insurers — because of the laxness of accounting rules, they were able to offer guarantees significantly in excess of what they could pay in the deepest crisis.
10) Hedge funds, investment banks and their investors — they demanded returns that were higher than what was sustainable. They entered into businesses that would not survive difficult times.
11) Regulators let themselves be compromised by those following the profit motive. Many hoped to make money after joining private industry later.
12) America. We let ourselves become short-term as a culture, encouraging short-term prosperity, regardless of the cost.
13) Neomercantilists — they lent us money, because they wanted the export sectors to grow for political reasons. This made our interest rates too low, encouraging over-investment and over-consumption.
14) Average people who voted in Congress, and demanded perpetual prosperity — face it, we elect those that govern us, and there is the tendency in America to love the representative that brings home the pork, while hating Congress as a whole. Also, we need to bear with recessions, and let them do their work, and not force our government to deal with them.
15) Auditors that did a cursory job auditing financial entities. As the boom went on, standards got lower.
16) Academics who encouraged a naive view of diversification, and their followers who believe in ncorrelated returns. In a bad economy, everything is correlated, and your statistics from a good economy don’t matter.
17) Pension and other funds that believed the academics. It is amazing what institutional investors will fund, given the mistaken idea that correlation coefficients are stable. Capitalistic economies are unstable by nature! Why should we expect certain strategies to work all of the time?
18) Governmental entities that happily expanded government programs as the boom went on. Now they are talking about increased taxes, rather than eliminating programs that are of marginal value to society. Governments should not rely on increased taxes from capital gains, or real estate tax assessments.
19) Those that twitted “doom-and-gloomers,” and investors who only cared if markets went up. It is hard to write about what could go wrong in the markets. Many call you a wet blanket, spoiling their fun, and alleging that you are a short, or some sort of misanthrope. The system is biased in favor of happy talk. Just watch CNBC.
20) Me, and others who warned about the current crisis. Perhaps we weren’t clear enough. Maybe our financial interests made us look like we were talking our books. I know that I spent a lot of time on these issues, but in the short run, I was still an investor, trying to make money in the markets, hoping that what I feared would not occur. Now I am getting my just desserts.
This is an incomplete list. I invite you to add others to the list in your comments.
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This article has 26 comments:
How about Moody's and S&P? They certainly added much to the problem with undeserved AAA ratings.
I find it more difficult to blame sub prime borrowers. They had
professional lending officers and appraisers telling them that they were making a good investment in a home they could afford.
Thus Americans believe that every statement is as good as any other. No only do they not seek the truth; they cannot believe anyone anywhere seeks the truth.
Given this cynical laziness, there is no monetary or spiritual reward for attacking lies and crazy statements made by nuts like Greenspan. So no one ever does.
A good example is Bush 3 trillion dollar silly little adventure in Iraq. As soon a he proposed something so obviously crazy as invading Iraq, everyone should have agreed that he is either a moron, insane, lying, or all of the above.
By not paying for the war, Bush doubled the deficit and destroyed the currency. Which played a large role in causing our current problems.
Everyone who knows anything about the subject understands that the two paragraphs immediately above are 100% true. Yet the media keeps thinking there are two sides to the story. Ya gotta be "fair and balanced." But error has no rights.
Thus, unless and until parents and teachers stat rt clear to students that there is such a thing as reality and that there is only one reality at any time, this crash will be followed by another.
One thing that can be done in November is to throw out the Republicans. I have never voted for a Democrat for President before, but now we all must vote Democrat at every level.. The Republicans in Congress have know the war is crazy, but they never stopped funding it. They must be punished.
Where is the mainstream media on your list? I would say they should be close to the top. Their uncritical reporting helped convince the nation to support the tech bubble, then our Iraq misadventure, and the housing frenzy.
I grew tired of hearing how a house is an investment, houses always appreciate in value, etc. The sheeple were bombarded with these ideas from the media.
Should people be absolved of blame because they were too stupid to be critical of the housing bubble after falling for the tech bubble and Iraq? Or should they be blamed for just that reason? Fool me once, shame on you. But this is fooled three times in a row!
More blame should be placed on the media because their job used to be reporting on matters through a critical lense. Not anymore! Now they are just cheerleaders. No wonder people consider the Daily Show as a reputable news source.
- for least-common-denominat... educational policies
- for teaching American kids to be workers and not thinkers
- for teaching socialist economics and government-love
- for their pivotal role in turning Americans into idiotic sheep
"A right wing tabloid Corporate TV media operating a propaganda money machine con game for the purposes of advancing their own self serving agenda (money and power- what else?) , and that of a typically well rewarded and usually favored Republican party. " For example, does this evoke the odor of a fox swimming in a media septic tank, or is it just our weak and errant imagination?
At no time is the stated agenda more apparent than prior to elections or before major ill advised policy decisions as huskerbob so aptly pointed out to us. Temporarily their agenda may be somewhat hampered due to to the current financial meltdown and fiasco, but it shall robustly resume soon- guaranteed.
If this view is serioulsy flawed, any and all are welcome to lay into it and describe where it is false or misleading.
Ran up a big credit card balance? Not to worry, just take out a home equity loan to pay it off. Lower interest rates and it's tax deductible.
So the standard lifestyle became "pile as much debt on your inflated house value as you possibly can, then run up the credit card again".
Wooo Hoooo! Ain't that fun?
Until ....
> jack
"The Republicans in Congress have know the war is crazy, but they never stopped funding it. They must be punished."
His resume is outstanding. His logic is poor. Doesn't he know the Democrats have the majority in Congress? !
But am I missing something. What about the foreign countries - both governments and foreign banks and foreign investors = who loaded up on mortgages that were going to go to 13 percent and make them richer. They were not the lenders but the ones who bought up the originators' toxic waste.
All following the path of the wise man, Milton Friedman. Cut taxes, end regulation and get out of the way so the market can do its job.
Fast forward to the last time we actually diverged from this Friedmanesque, neo-con, IMF and World Bank led fiasco. Clinton had the audactity to return tax rates back to Reagan's level and invest in (Horrors!) government infrastructure programs. The result stimulated the economy and led to a budget surplus.
Pre-1929 it was laizzez-faire attitudes towards regulation, tax-cut mentality and ever-greater disparity between the haves and have-nots that were major contributors to the depression era. Sound familiar?
The Current Mess in fact did start with the 1999 repeal of a depression-era law (Glass-Steagall) that served to keep a check on commercial lending and re-packaging financial products into incomprehnsible paper that was constantly re-sold. Sound familiar?
In the waining hours of the 1999 Congress, that little weasal Phil Gramm literally stuck the final nail in the Glass-Steagall repeal that eliminated any oversight of the derivatives market.
If you really want to look at who was repackaging the clean mortgage paper into CSE's look no further than the same investment company that was the key reason for the passage of Glass-Steagall -- JP Morgan and the rest of the Investment Banking community.
Now for some shocking realities:
1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.
2. In terms of inherited wealth only 1.6% inherit moe than $100,000. 91.9% receive nothing. Yet the "death tax" is the highest priority on the ultra-conservative agenda.
Now for some sobering reminders:
Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $700 Billion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.
It wasn't because Clinton was an economic genious. He simply chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).
Where was FDR when we needed him 28 years ago, when this Milton Friedmanesque, neo-conservative insanity began?
Consider the verifiable facts that show for every dollar a Demo has raised the National Debt in the past 63 years Republican Presidents have raised the Debt by $2.84 (Approx. 3 to 1 ratio).
Furthermore, at no time since 1945 when Republicans have been in total control of congress have they ever reduced spending, or submitted or achieved a balanced budget. Only Demo Presidents have done this. All Republican Presidents have had NEGATIVE revenue to spending ratio's during this 63 year period, and NONE have ever even "submitted" a balanced budget much less ever achieved one during this period. (See US National Debt by Steve McGourty.)
Your suggestion, Ron Paul, is a Republican, and he could not successfully countertrend his own party. If he were a true Independent, I could possibly vote for him as he has many admirable qualities, and honest and fair ideas relative to the US Government.
Causation: is based on incorrect CPI figures and hence incorrect rates.
Solution: include housing prices and stock market valuation in the CPI,with central banks ADHERING to adjusting rates to reflect inflation. Maybe boom bust will be reduced and the result a linear growth cycle with a comfortable gradient..
In addition globalisation needed to be controlled, just like they are trying a global co-operation strategy at the moment.
If these rescue plans don't address these issues, mmmm.