Monday, March 17, 2008

Misunderstandings About the Financial Crisis

I have heard many people say that this economic crisis is not the banks' fault; that no one forced unqualified borrowers to take loans that they couldn’t afford.

Well, the banks are in fact responsible. Under intense pressure from the bankers' lobbyists the Congress deregulated Real Estate and banking at the beginning of the Bush Presidency. The banks changed the laws with the intention of loaning money to people, many of who would never be able to afford the payments on their mortgages. The banks and broherage houses did this in order to heat up the Real Estate market. It worked; great fortunes were made in a short period of time by speculating in the housing market. The banks wrote billions of dollars in loans with variable interest rates that were much higher than the interest that they could charge to a truly qualified buyer. Then the banks bundled the mortgages and sold them as secured equities to investors around the world. The banks were going to make a fortune too, although this wild ride could not work forever. The bubble had to burst.

The domestic Real Estate markets hit the wall and the banks are now hitting the same wall. Given the expertise in the American banking industry we must assume that they had evaluated the risk of a Real Estate market collapse, but they went ahead anyway. So considering the manpower that banks employ in risk assesment, we can assume that the financial institutions went into this on purpose with their eyes open. But, then housing prices fell, and some banks found that they didn't have enough liquidity to maintain solvency in the face of so many foreclosures. Why would they do that? There seem to me to be two possibilities:

1.- The millionaire bankers are really stupid.
2.- The millionaire bankers' lobbyists assured them that they had the votes to bail out the banks when the bubble burst at the expense of today's and tomorrow's taxpayers.

Which of those two looks more likely to you?

Given the fact that the Fed just accepted 200 billion dollars of worthless paper as collateral from troubled brokerage houses and banks in order to inject some cash into the system and given that the Fed is ready with 200 billion more, it looks like answer #2 is the winner.

So we aren’t going to have socialized medicine, but we do have socialized banking. The profits go to extremely rich men that don’t pay taxes, in fact as we see in the cases of Bear Stearns and Countrywide Financial the millionaires were giving themselves BILLIONS in bonuses weeks before their companies crashed. And now the losses are going to be paid by you and the rest of the taxpayers. This all happens while politicians tell us that the foreclosed homeowners should not be bailed out, that they should be responsible for their mistakes.

I have been told that unless I am an economist or a banker I should not opine on these matters because a great deal of specialized education is needed before a person can understand the forces at play. Greenspan and Bernanke know all, Ferrell should shut up and listen the great economists.

Why is it, that during the last year, in every economic or financial discussion in which I have participated on-line there is always someone who takes the position that only economists should voice opinions in this matter. People say the following about Mr. Greenspan "I'm sure he has a much deeper understanding of this than you do. Does anything qualify your opinion, like a comparable policy-making position or multiple degrees in economics, or you're just parroting some nutjob´s talking points?"

The normal neocon response to anyone opining about economics is that Bernanke, Paulson, Greenspan etc. know more than you, so shut up. But that is not a good argument given the very bad economic situation that we are facing today. It is clear that uncontrolled lending to unqualified borrowers is one of the root causes of this disaster. The seeds of the disaster were sown on Greenspan’s watch. He was asked a number of times (by people with less degrees than he possesses) if he wasn’t concerned that:

1. - The housing market had overheated thanks to sub-prime lending and had formed a bubble? - Greenspan always pooh-poohed the questioner. "There is no bubble" As we can see he was wrong. Really, terribly wrong
2. - Our trade deficit wasn’t going to cause inflation? - No, he said, "it will just increase foreign investment. It doesn’t matter where goods are made, everything benefits America" Wrong again! Really, terribly wrong
3. - Our Federal budget deficit isn’t going to produce inflation and or recession? - He answered "No, don’t worry, market growth will take care of everything" Wrong again! Really, terribly wrong.

He is so incredibly smart that he sent us into financial meltdown, and when he finally saw it coming he slid out of the Fed and handed the bag of flaming crap to Paul Bernanke.

Economists, like many specialists often lose sight of the forest as they concentrate on the trees. Sometimes those of us who look at the broader reality that we all live in have a great deal more wisdom.

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