Burning down the house: What caused the economic crisis?

[lhopp77]

Dan--much of what you say IS true but there are some differences in opinions as to what placed the LAST straw. The issue as far as I am concerned is that the last straw should never had been placed if actions had been taken as proposed by the republicans starting in 2001 and then in 2005 and poo pooed by democrats such as Barney Franks.

Also, I see that you are spouting the deregulation line currently popular by some democrats. It was not deregulation that caused most of the problem. Here is what Bill Clinton had to say about it.

http://www.volokh.com/posts/1222997189.shtml

Lee

[shotgunslade]

It wasn't necessarily deregulation that caused the banking crisis portion of this economic storm, it was the failure of regulation to adapt to a shifting financial business. The flood of worthless paper was caused the securitization of inappropriately evaluated assets. Regulation of the basis of these securities would have avoided this problem and, by tempering the mortgage resale market, would have avoided the creation of vast numbers of worthless mortgages. The lack of regulation of hedge fund and financial house activities allowed these institutions to operate with enormous leverage, seeking huge short term profits to fuel the vast executive bonus mechanism that they had created.


The unfortunate thing is that the creation of these huge on-balance sheet profits led to huge bonuses. In fact, however, no real wealth had been created. The huge on-balance-sheet profits were in actuality offset by off-balance-sheet or hidden liabilities. Many of the liabilities were not even recognized as such off-balance-sheet, because no one wanted to look too carefully at the basis of these securities. It is only when the off-balance sheet debts and liabilities are identified as such that the big accounting occurs, and those of us who thought our 401K's were going through the roof get to see how much they are really worth.

This crisis is very similar to the Enron debacle. The motivations and techniques of the people in charge were very similar. Create huge balance sheet profits with high off-balance sheet leveraging and concealed liabilities.

In a way, it is a lot like counterfeiting. The huge financial houses were creating vast numbers of securities that had no real basis (they were counterfeit). These securities circulate around, more money is flowing, everybody seems to have a share of the profits, everybody is happy. Then someone discovers that a bill is bogus. The person who gets screwed is the person holding the bill when it is discovered. Then there is a market-wide examination of bills. Once again, if you get caught holding you get screwed. By now the guys who made the bills, the guys who created the mortgage backed securities and derivatives, and who sold homeowners on refinancing, have taken their profit and retired to Gstaad.

The big financial houses have a lot of political clout. That is why the fees that hedge fund operatives charge private equity for handling their assets are classified as captial gains, instead of regular income. They pulled strings. Us poor b@st@rds who work for a living pay taxes on it all as regular income. The big financial houses and hedge funds had very lax limitations on leverage and there was no regulatory oversight of the securities they created. The government failed to adapt its regulation to the evolution of the financial markets. Was Barney Frank involved in that negligence. Maybe. But, I'm sure there is a lot of blame for that on both sides of the aisle. A lot of money was being spread around. Another regulatory issue was the change made by the SEC in 2004 to the net capital rule that allowed these 5 large brokerage houses to more than double their debt/capital ratio from 12 to 1 to 40 to 1, and redefined how assets were evaluated. Gotta believe some money changed hands under the table to make that happen. With that degree of leverage, any major disturbance in the value of their security assets could lead to bankruptcy. But with that amount of leverage, a lot of people oculd make a lot of money in the short term. These guys skim off the top. When the risk comes home to roost, they are gone. The average top hedge fund executive has an income in the high 8 figures. There were a lot of these guys in NYC. Not so much now.

It all comes around in the end:

Bear Stearns - gone
Lehman Brothers - gone
Merrill Lynch - hanging by a thread
Godlman Sachs - converting to a regulated bank
Morgan Stanley - shares down 68%, about to be refinanced by a Japanese bank

Unfortunately, a lot of the top guys who brought this about have absconded with their bags of cash.

[ensteele]

And they will never be held accountable!

[shotgunslade]

The last time I saw the invisble hand of the marketplace, it was picking my pocket.

[lhopp77]

Here is another must see video on timelines of Bush administration warnings of possible financial meltdown.

http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1

It is an interesting sidelight that 2 former CEOs of the FMs are currently Obama economic advisors.

Lee

[Royal Tiger]

Originally Posted by lhopp77

It is an interesting sidelight that 2 former CEOs of the FMs are currently Obama economic advisors.

Lee

Truth, and totally irrelevent to the Obama-nots.

[lhopp77]

Here's another good vid to review to see who was at fault and who tried to take actions to preclude a crisis---BEFORE THE CRISIS!!!

http://www.youtube.com/watch?v=_MGT_cSi7Rs&NR=1

Lee

[LarryIII]

In her 1957 novel "Atlas Shrugged" Ayn Rand foresaw an America where corrupt businessmen and politicians allied to loot the country for all they could get. They got away with it because most people either believed that a bit more hard work, a bit more struggling, would see things turnaround eventually, or that everything was beyond their ability to control anyway. Many people disagree with Rand's conclusions and philosophy, but on this she was truly clairvoyant.

In the last 35 years America has given away manufaturing and been on a spending spree. The bailout bill now makes us a 3rd - 4th world country.

Welcome to poverty my friends.

[SilverSpear]

Download this:
http://www.2shared.com/file/4120138/...Sub_Prime.html

[bwb3]

This explaination from across the pond was quite good http://haha.nu/interesting/how-the-markets-really-work/
Gene

[lhopp77]

Originally Posted by bwb3

This explaination from across the pond was quite good http://haha.nu/interesting/how-the-markets-really-work/
Gene

I think they really nailed it.

Lee

[Myetball]

http://www.cbsnews.com/stories/2008/...n4546199.shtml

[Hondasucks]

being too concerned with

and

being too concerned with


and

[RoughSilver92]

Don't forget the FED.
Oh, you don't know about the fed, it.
Google Andrew Jackson and the Central Bank, same thing, some of the same families, new era.

[sicksubie]

wow, I forgot how fugly she was.....