Our nation’s financial crisis


Tonight’s New York Times: In Frantic Day, Wall Street Banks Teeter; In one of the most dramatic days in Wall Street history, Merrill Lynch agreed to sell itself to Bank of America for about $50 billion, while Lehman Brothers headed toward bankruptcy.

Tonight’s Wall St. Journal: Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash. Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance.

Looks like a real meltdown. Let’s try to make sense of it… especially how it might impact things locally.

678 thoughts on “Our nation’s financial crisis”

  1. Mike Z.- You are inserting your own ideas between my lines, not reading some hidden agenda. Take a look at history for this period in the ’30’s. I think you’ll see that my observations are correct. The only conclusion I came to is that FDR’s government funded projects did not reverse the great depression, nor even help it all that much. There was no incentive or opportunity for capital growth during this period, and mean per capita income did not increase.

    As far as the US being the only country that was unscathed by WWII, this is not true. Europe, England and Japan suffered the greatest destruction. There is the bulk of Siberia, China, Australia and Africa that did not suffer great destruction. Also, the reconstruction of Europe, England and Japan following the war was very successful. Look at these areas today. Not only are they reconstructed, but they also are world renowned producers of goods.

    As far as a WWIII boosting our economy, I think this assertion is absurd. The weapons of mass destruction that WE have are enough to anihilate all the societies of the world if we did not produce another weapon. Also, if war was that profitable, what we have going on in the Middle East right now should have prevented the economic meltdown we are experiencing. It aparently has not, so that is not a valid conclusion. I’ll stick to my interpretation of history until someone shows me something I’m missing. You can have a different opinion of the events, but this does not negate the actual evidence that is there, unless you want to revise history to align with popular opinions of the present day(revisionism).

  2. The country needs “efficient” infrastructure but this is a dynamic concept. The real crime in Katrina was not the response but that fact that National Geographic filmed a documentary years before that spelled out clearly and logically to anyone watching that New Orleans would absolutely be flooded ~ the question was just when. Neither New Orleans, Louisiana nor the US political system was up to the task of addressing this known fact. The true crime is no special interest lobby existed to fund the political parties on behalf of a flooded New Orleans and so nothing got done. What has changed in our system? Building infrastructure is a technical and skilled undertaking. Time is required to ramp up for increased activity. Just throwing funding at infrastructure will not increase the output. The world in the 1930s was very different than today in that many tasks used unskilled labor then that today use machinery.

    All top down solutions to economic problems are subject, despite Paul’s protestations otherwise, to tremendous graft and corruption. The Internet offers a communication vehicle 1000s or 10,000s of times more powerful than what existed in the 1930s. This creates the opportunity for a bottom up injection of capital that could put the US economy into the stratosphere. Society has to be very careful that vested economic interests are not allowed to chain America to a broken system because they might lose their relative economic position in a new more advanced economy. The government has always injected money into the economy – after all it prints and distributes the money. How this is done can change, and should change, based on modern communication tools.

  3. I think the problem with the infrastructure is that the best and brightest minds go into law or business.

    Follow the money.

  4. JohnG, you write, “The only conclusion I came to is that FDR’s government funded projects did not reverse the great depression, nor even help it all that much.”

    This depends on what you view as “government funded projects.”

    I have read arguments that the New Deal made a difference, and others that claim it was not that so much as war spending (which put people to work), and others that claim a change in agriculture policy that benefitted farmers was key.

    During cold war (and now), much war spending could easily have given us more bang for the buck if spent on infrastructure instead (roads, schools, high speed internet, renewable energy, energy conservation), and we would have seen more fruits.

    If you put people to work and have a strong working class, they will be more confident consumers–and wealthy large business owners down to small businesses all benefit from more confident consumers.

    Big business owners during the depression hated the New Deal, and many preferred something like Fascist Italy, with a government that was close and friendly with business. An attempted coup against FDR failed because Smedley Butler reported on the planners.

    Business leaders today (on average) tend to be far more savy about the value of economic stimulus and infrastructure investment as necessary to economic recovery.

  5. Paul- I specifically refered to FDR’s projects as opposed to government funded projects in general. The industry that was built for the war effort was government funded, so there is example of this type of spending increasing the wealth of individuals. But, the government got the money they invested in the war effort from the private sector, through sales of war bonds and taxes. It just didn’t appear out of thin air. The war effort expanded business, not infrastructure. This is the difference, in my opinion, between then and the present calls to invest in infrastructure. Even the light rail system and the bus system in the Cities are not self sufficient without injection of government dollars. If they tried to be, the cost would pretty much eliminate those users the systems were established to serve. That is why I opine that government spending does not increase the GDP unless it somehow is plowed back into business ventures. We are living in different days, now, than the 30’s. I don’t think we can resurect these 30’s ideas and have them work. We need to come up with some plan corresponding to our time that will work. I think it is interesting that President Elect Obama’s government financial plans seem very similar to the last 8 years of the Bush presidency. I opine from this that government systems do not necessarily drive economic principles unless they are imposed by a totalitarian government, and I don’t think either one of us desires that. What I am looking for is that centrist balance that allows businesses and individuals to prosper and be able to support a government that will provide the necessary services that cannot be economically provided by the private sector.

  6. Anyone remember the headlines about the bailout and how urgent it was?
    Unless I am missing something the bailout hasn’t done much in the way of stemming off the economic crisis.

    The only beneficiaries so far are the banks and AIG. We have approved $ 700 billion in the bailout, this doesn’t account for the money we already spent before the official bailout on AIG , Bears and Stearns, Fannie Mae and Freddie Mac.
    Add to this the proposed $ 35 billion of the UAW bailout (insert carmaker here), which btw by all estimates won’t be nearly enough.

    Now we will be adding close to one trillion dollars on an economic stimulus package., that will benefit who???

    In case you forgot, we really don’t have that money and we are already $ 5 Trillion in debt and a budget deficit in 2009 that will be $ 1 Trillion dollars.

    Have we lost our minds???

    Yes, you can go on and blame Bush and the Republicans if it makes you feel better. Once it is out of your system think about the reality of it.

    This is a collective debt caused by irresponsible politicians that now try to make us believe that they can remedy the situation??
    Dodd, Frank and Pelosi will appoint a car czar that will decide which cars we should built? Are you kidding me?
    The same people will also fix the mortgage crisis? OMG are we really that gullible?

    Let’s continue the partisan bickering while in the meantime our elected officials are “fixing the country”.

    For “we the people” it doesn’t matter who caused the debt, because we all be paying it back, including our grand children.

  7. John, you wrote, “But, the government got the money they invested in the war effort from the private sector, through sales of war bonds and taxes. It just didn’t appear out of thin air. ”

    I read an article recently that talked about how banks do this: they make money appear out of thin air. They give a loan for a mortgage, and they don’t go and borrow money to lend it to you to buy a house. They just write down that they’ve loaned you this money, and they consider their loan to you an asset, just like your savings account. Your mortgage will pay them money in the long haul. So they just make up money, and they don’t have to print it.

    So here’s my proposal:
    1. The government should temporarily buy up all the banks that go bankrupt. Then instead of those poorly managed, bankrupt banks making money off mortgages and loans and credit card fees, the government will compete with private banks. The government could, through these banks whose ownership they would assume, lower interest rates directly, competing with private banks. They could lower finance charges, and lower the fees charged when a consumer buys a product using a credit card, competing with private banks. All these fees and interest fees could replace many taxes. The article I read described how North Dakota has such a bank with an agricultural focus, and it can, if it wants to, reduce loan interest rates to 1%. That’s economic stimulus power.

    2. Make universal, single-payer health care a reality. This would go a long way toward saving the automakers.

    3. Temporarily buy up the big three automakers, and refocus them. Make cars with better mileage, and refocus the whole industry more toward retrofitting existing cars and vehicles with hybrid engines (takes less money, and creates less carbon, to retrofit an existing car than to make a brand new one). Give tax breaks or rebates to people, depending on income as incentive, to upgrade and retrofit.

    4. Nationalize the oil industry as a public utility, so that oil companies can’t get in the way of conversion to renewables. Then, once we’ve converted, and once oil companies are downsized and refocused, either let them be private again, or keep them nationalized.

    5. Nationalize defense industries, to take the private profit out of national defense.

    6. Keep a capitalist system for other aspects of the marketplace, but not for national defense, health care, oil/transportation, or perhaps even banks. We know capitalism works well in some areas, not others. This is not about capitalism vs socialism, but vs pragmatism. The financial collapse is proof that deregulation doesn’t work, and that capitalism doesn’t police itself. Left to its own devices, it creates huge balloons of greed, debt and trouble.

  8. David, of course it was a Republican — retired Marine General Smedley Butler, author of “War is a Racket” — who proposed #5, “5. Nationalize defense industries, to take the private profit out of national defense.”

    Republicans and Democrats both would have a hard time stomaching that one, given all the pork in the military-industrial complex that provides jobs and votes.

  9. So Griff, what’s it…like eighteen months later?

    Bank of America bought Merrill Lynch, or “rescued” the brokerage with the help of $45 billion in TARP funds, Lehman Brothers went bankrupt, or at least the pieces of the business that Barcleys didn’t want to buy, AIG got $85 billion of government funds in exchange for warrants for future equity purchase, and the financial system was saved…or at least Wall Street was bailed out.

    Your brief summary of news stories doesn’t even touch upon Fannie Mae and Freddie Mac, which had been propped up a week earlier. Despite my determined search, I can’t even figure out how much of that $200 billion “backstop” to these institutions of the government’s home ownership program has actually been paid out.

    There was also the sale of WaMu to J P Morgan (with $25 billion of TARP support), and the sale of Wachovia to Wells Fargo (with another $25 billion of TARP support). Prior to the Merrill Lynch sale, Bear Stearns had been sold to J P Morgan ($25 billion of TARP) and during the final stages of the crisis, both Goldman Sachs and Morgan Stanley ($10 billion each from TARP) were given access to the Fed’s discount window, previously only available to commercial banks.

    So after about $700 billion in TARP money (or Troubled Asset Relief Program) for the private sector as well as $700 billion in Stimulus money (or America Recovery and Reinvestment Act) for the public sector, the politicians are proclaiming “never again” and legislation seems to be moving forward. There might even be a vote to begin discussion this week.

    There are many reasons cited for the financial crisis. These include the deregulation of the banks in 1990, the push to increase home ownership among low and moderate households, lower (or more creative) underwriting standards, historically low interest rates, and the rich rewards for short-term risk-taking on Wall Street.

    There are also many ideas offered for reform. These include a new consumer financial protection agency, higher capital and liquidity requirements, a privately-financed liquidation fund, new regulations for securitizations and derivatives, the so-called Volcker Rule (restricting banks from making speculative investments except on behalf of their customers), and limitations on the size of financial institutions.

    I’m not sure about some of these reforms. Some people argue that the privately-financed liquidation fund will put $50 billion between Wall Street speculators and Main Street taxpayers; others argue that it’s just starter fluid for the next bailout bonfire. Some people suggest that a new consumer financial protection agency will prevent residential borrowers from taking on mortgages that can’t repay; others are skeptical that bureaucrat-produced brochures and videos will be the key information necessary to dissuade people from taking on interest-only, adjustable rate, or NINJA mortgages. Some people believe that unless there are no longer firms that are “too big too fail” financial speculation will continue to offer great rewards without real risks; I’m just not optimistic about the possibility of an efficient and effective implementation of this idea within our global financial system.

    I do believe that new regulations for securitizations and derivatives makes a lot of sense. The CDOs (collateralized debt obligations), a package of millions of dollars of anonymous mortgages, and the CDSs (credit default swaps), insurance in the event that those anonymous mortgages go bad, seem a few too many steps removed from the actual process of financing home ownership. As I learned about these financial “products”, I began to finally understand how if two-thirds of the bad mortgages were located in four states (California, Arizona, Michigan, and Florida), how the sub-prime crisis could rattle our whole financial system. The CDOs were on viagra and the CDSs were taking steroids.

    We’ll see what happens with the proposals for financial reforms, perhaps as early as Monday. Maybe I’m all too fond of “It’s a Wonderful Life” but I believe banks are supposed to make loans to families buying homes and entrepreneurs building businesses. Beyond the generation of multi-million dollar bonuses, I don’t see the benefits of these increasingly exotic financial creations.

    It’s a free country, and allegedly a free market. I would hesitate to ban these products. However, I don’t think it’s unreasonable to limit the leverage used to finance such speculation to something along the lines of traditional bank products. The alternative would be something similar to Vocker’s suggestion, protect traditional banking activites, lending to home-buyers and business builders, by separating them from the more speculative activities.

    We’ll see how it all plays out in the coming days. There are few engaged voices against many vested interests…many, many interests if you measure them in dollars.

    When I found your post, I was surprised that it was only 18 months. A little disturbingly, it seems like a long time ago.

  10. Frustration abounds: for all the reasons stated by Ross in the preceeding comment, but the sickening feeling you get from watching the “best and the brightest” from Goldman Sachs testifying in front of the Senate last Tuesday (4.27)
    Reportedly , they had been coached as to how to use up the senators questioning time by feigning confusion, lack of understanding of the questions, etc. If this is true, it is about the sickest abdication of responsibility I can imagine in the aftermath of the economic ‘collapse’.

    While these big time Wall Streeters are exhibiting their lack of interest in responding to the Senate’s questions, our small town banks are terrified to ‘move’, hesitant to lend $$ to those they have supportively and successfully lent money to previously, as their books are constantly monitored by regulators.

    Send all the regulators in the country to Wall Street !
    To the headquarters of those who in search of more and ever growing $$$/profits developed financial instruments guaranteed to make everyone lose but them.

    Their final insult to the rest of the country was their behavior at the Senate hearings, 4.27. 2010. Put that infamous date in economic textbooks.

  11. Kiffi…Goldman is being sued by the federal government. While G.S. execs could have appeared less arrogant at the senate hearing, I don’t think that they can be faulted for refusing to admit guilt for that which they are being sued. This seemed to be at the heart of the senate inquiry- to get them to admit guilt in advance of the legal process…or at the very least to give testimony that would promote the government’s case. And that was unlikely to happen in what could easily be a billion dollar civil case. And now, just after the hearing, criminal charges are being ‘considered’ as well.

    So I’ll ask…In a case that involved millions, and the possibility of jail…If your attorneys advised you to avoid admitting guilt in sworn testimony, would you follow that advice? If they advised a strategy that involved delay (‘taking up the time’)as one method of avoiding such an admission, would you follow it or consider it ‘sickening’?

    1. William, you give the right legal answer: admit nothing, make the gov’t prove its case.

      I take Kiffi’s comment to be a societal criticism. Our society is way past the time when open honesty was a virtue. Is it too much to ask G.S. execs to simply explain what happened, and have them accept whatever restitution is fair? Have our gov’t react fairly, whether by legislation or censure. I realize that our society isn’t built that way. Everyone seems to do what they think they can get away with. Such a societal norm is sickening.

      1. Jerry- Just a question, here. Because G. S. ended up making a bunch of money on this whole debacle, does that make them guilty until proven innocent? Or, does that legal position only apply to those people who are not successful? Just wondering. By the way, I miss having coffee with you occasionally.

      2. John, “Guilty until proven innocent” is not a legal concept in the U.S., but it is used by the public. Defense lawyers often lament that a truly innocent person can be convicted simply because jurors sometimes think that only guilty people get arrested. Since I’ve served on a jury before, I can confirm that. My jury story does not imbue me with faith in juries.

        If G.S. made a whole lotta’ money within the boundaries of the law, I hope that justice is served and they are found not guilty (criminal) and not liable (civil). If society and Congress later find that G.S. made money legally but unethically, I hope that they change the laws.

        I will be in Northfield mid-June. Maybe there will be time for coffee then.

      3. Jerry- Yep, innocent until proven guilty is the foundation of our system of criminal laws. If I remember correctly, our country is in a minority in the world in embracing that concept.
        Looking forward to June. Let me know when you are in town.

  12. re: #’s 663 and 663.1…
    So do we bemoan our greedy litigious society on one hand and then excuse it on another, William? If we keep excusing it, how does it ever get corrected?

    Being self defensive in a legal situation, and being honest about what has been caused by your your business practices do not necessarily have to conflict… unless you think you have caused no problems with your business practices.

    I say, ‘fess up’ and don’t do it next time…

  13. I’m not sure what all the objection is to a company protecting itself against failure. As long as the actions do not violate price fixing laws and anti-trust laws, what is the crime? I admit, on the surface it looks like a lot of under the table slight-of-hand accounting proceedures, of which I am certainly no expert. But, the idea that G. S. was somehow acting immorally in hedging their bets seems a little idealistic.

  14. Hey, Barry? Are you lurking in the shadows? I have post 666 again. Must be some kind of omen, or at least a portent of one!

  15. Since GS is facing civil and criminal penalties, I’d say that yes, it was too much to expect them to ‘fess up’, ‘explain what happened’ and ‘accept whatever restitution’ the government thinks is fair during the senate hearing. They have a right to defend their position in the civil case in court or, more likely, in settlement negotiations with the SEC, rather than in front of a panel of(mostly)grandstanding senators who were running more of an inquisition than a information gathering proceeding.

    Whether the case has merits remains to be seen (40% of the SEC panel voted not to pursue the case). Maybe they are guilty, maybe not guilty but unethical, maybe just not guilty. My point is simply that they have a right to present their best defense in the proper legal venue.

    1. William, trust me: I know what legal rights G.S. has.

      Some countries have very different legal systems. I heard that in Zaire, courts are more geared toward 50/50 compromise than 100/0 right vs. wrong. I can’t say that their system is better, but one advantage of theirs is that they have fewer cases. People generally know the outcome of a case so they are less likely to go to court.

      I have to wonder if there is a better way to solve the greed that caused Enron and (probably) Goldman Sachs. I have heard plenty of people talk about how and why these problems happened, and that’s all interesting in a reactive way, but what I’d like to know is what psychological changes brought us here and what is needed to return to more civility in making money.

      I have heard that most Americans oppose a heavy tax burden on the super-wealthy because most Americans hope to become super-wealthy some day. I’m not commenting on tax policy, but on worshiping wealth. I’ve heard that Enron executives, among many, were immensely wealthy and they broke laws to become more wealthy.

      Sure, I understand G.S.’s rights. I think that’s the easy part. I’d really like to know what they were thinking to gamble in such a way that if they win, the world loses, and if they lose, they may have needed the bailout. It’s really messed up however you look at it, or at least it is however I look at it.

      As Kiffi said, it’s disgusting.

      1. Jerry…What do you mean by “what is needed is a return to more civility in making money”? When was that era of civility in making money?

        As to your main point the “disgusting” nature of greed and of ‘worshiping’ wealth. I guess I am among that majority of Americans that has a desire to be ‘super-wealthy’. Of course, that’s simply because I want to do super-good works 🙂 . So maybe I’m not disgusting? In any case I don’t think I have an ‘excessive’ desire for super-wealth. ‘Excessive’ being the key component in the definition of greed. Also, I do not worship super-wealth, but, like most Americans, I do tend to admire those who have been able to produce it. I think it would be a sad state of affairs for the country if that sentiment was replaced by another of the seven deadly sins: Envy.

      2. William, I understand wealth enough to pay one’s mortgage, enough to provide for one’s family, enough to have an occasional vacation, enough to own one’s home and maybe a second. There are grades of wealth and methods of receiving even more wealth (as Ray just commented) that are founded upon honest work and goodwill others.

        There is a class of people who always want more wealth and it doesn’t seem to matter to them how they get it. These aren’t the robbers who are desperate to steal bread for their family, but the robbers whose friends have 8 cars so they want 10 cars. Perhaps this is a better example: A few years ago in California, the state attorney general prosecuted a company that had its subsidiary corporations employ the same workers for 5 hours or more, each. So subsidiary A would employ William Jr. for 5 hours per day and subsidiary B would do the same. The effect? The subsidiaries would get 10 hours of work and not pay William Jr. any overtime.

        If someone makes a crazy profit clearly within the law and with goodwill toward others, I have no laments. What I find disgusting are those who keep grabbing more wealth while disregarding reasonably predictable harmful consequences.

        I am certainly no expert on the G.S. matter, but I’ve heard that their approach was to bet with other people’s money (which is normal investing) in a way that if the investment works, the Europeans (e.g. Greece) will be harmed, and if the investment fails, either the investors are harmed or G.S. would need a federal bailout. I could even approve of this approach on a micro-scale, but G.S. is not a micro-participant.

        It’s not just the great banks who do this, or the great energy companies, the great communications company’s etc. It’s sometimes the smaller businesses who exploit workers in a way that they don’t pay overtime. Making money is fine, but doing so in a way that exploits or ruins others must be stopped. Ideally, it would stop through ethically-minded business owners. As a last resort, society should protect itself through legislation.

  16. William, I agree with you wholeheartedly about views on wealth. If we create a country where wealth is redistributed by a few select people then we will in short order have no wealth to distribute. There is a reason why in my growing up years we viewed the Soviet Union with distrust. They tried to implement a Socialist/Communist form of government and it worked about as should be expected: they couldn’t even feed their population and in rather short order collapsed.

    There will always be individuals that are willing to take advantage of other individuals, be they small investors or owners of public stock. Bernie Madoff could not have done what he did if there were not individuals that were interested in receiving unrealistic rewards for their investments. We will also have bank robbers and liquor store robbers.

    Our country was founded on the premise of hard work and appropriate actions allowing you to succeed as high as you can. That is what we need to keep reinforcing.

  17. Jerry…As to GS…I also am not an expert on their ABACUS investment but I don’t think it had anything to do with Greece. True some European banks participated but that participation had little, if anything, to do with the current economic situation in Europe. Nor was ABACUS, by itself, the cause of a need for a bailout.

    It’s important to remember that this was one CDO offering. There were thousand of similar (perfectly legitimate) offerings during the housing bubble. People with their eyes open were buying packages of mortgages and, if smart, hedging that investment with other investments that shorted the mortgage market. Risky investments sell at a discount to underlying value, but there are always buyers for risk if priced right. And that’s one of the reasons why people with no jobs and no down payment were able to buy houses…the assumption of the ‘longs’ (from homeowner to investment banker) being that home values would continue to increase so the investments, though risky, were relatively safe. Others saw a bubble and an unsustainable market and took a view the long positions would become worth less. How much less surprised everyone. But I don’t think the near collapse of our economy was caused by the ‘shorts’, as much as by the loss in value of the long position as the housing market crashed and, ultimately, took the stock market with it. A panic ensued and liquidity left the markets. Some major players failed, some were purchased at pennies on the dollar. Before the banking system failed completely (and there’s no economy without the banks), the government stepped in with the ‘bailout’. And so it goes.

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