Tornado Alley (PROG)

[blackhawks]

Not so fast GS&M girl. Plenty of blame to go around, so take off the ideological blinders that led to your confirmation bias.

As you read the word 'deregulation', repeatedly, keep in mind which Party drives that and the time frame leading up to the crash.....the Dubya years.


https://www.forbes.com/sites/stevedenning/2011/11/22/5086/#1510f3a9f92f

|Nov 22, 2011, 11:28am

Lest We Forget: Why We Had A Financial Crisis

Steve Denning Senior Contributor

The driving force behind the crisis was the private sector

Looking at these events it is absurd to suggest, as Bloomberg did, that "Congress forced everybody to go and give mortgages to people who were on the cusp."

Many actors obviously played a role in this story. Some of the actors were in the public sector and some of them were in the private sector.

But the public sector agencies were acting at behest of the private sector. It’s not as though Congress woke up one morning and thought to itself, “Let’s abolish the Glass-Steagall Act!” Or the SEC spontaneously happened to have the bright idea of relaxing capital requirements on the investment banks.

Or the Office of the Comptroller of the Currency of its own accord abruptly had the idea of preempting state laws protecting borrowers. These agencies of government were being strenuously lobbied to do the very things that would benefit the financial sector and their managers and traders. And behind it all, was the drive for short-term profits.

Now which political Party do you suppose is most receptive to being 'strenuously lobbied to do the very things that would benefit the financial sector and their managers and traders.'?

GS&M!

Why didn’t anyone say anything?

As one surveys the events in this sorry tale, it is tempting to consider it like a Shakespearean tragedy, and wonder: what if things had happened differently? What would have occurred if someone in the central bank or the supervisory agencies had blown the whistle on the emerging disaster?

The answer is clear: nothing. Nothing would have been different. This is not a speculation. We know it because an interesting new book describes what did happen to the people who did speak out and try to blow the whistle on what was going on. They were ignored or sidelined in the rush for the money.

The book is Masters of Nothing: How the Crash Will Happen Again Unless We Understand Human Nature by Matthew Hancock and Nadhim Zahawi (published in 2011 in the UK by Biteback Publishing and available on pre-order in the US).

In 2004, the book explains, the deputy governor of the Bank of England (the UK central bank), Sir Andrew Large, gave a powerful and eloquent warning about the coming crash at the London School of Economics. The speech was published on the bank’s website but it received no notice. There were no seminars called.

No research was commissioned. No newspaper referred to the speech. Sir Andrew continued to make similar speeches and argue for another two years that the system was unsustainable. His speeches infuriated the then Chancellor, Gordon Brown, because they warned of the dangers of excessive borrowing. In January 2006, Sir Andrew gave up: he quietly retired before his term was up.

In 2005, the chief economist of the International Monetary Fund, Raghuram Rajan, made a speech at Jackson Hole Wyoming in front of the world’s most important bankers and financiers, including Alan Greenspan and Larry Summers.

He argued that technical change, institutional moves and deregulation had made the financial system unstable. Incentives to make short-term profits were encouraging the taking of risks, which if they materialized would have catastrophic consequences. The speech did not go down well. Among the first to speak was Larry Summers who said the speech was “largely misguided”.

In 2006, Nouriel Roubini issued a similar warning at an IMF gathering of financiers in New York. The audience reaction? Dismissive. Roubini was “non-rigorous” in his arguments. The central bankers “knew what they were doing.”

The drive for short-term profit crushed all opposition in its path, until the inevitable meltdown in 2008.

Why didn’t anyone listen?

On his blog, Barry Ritholtz puts the truth-deniers into three groups:

1) Those suffering from Cognitive Dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility.

2) The Innumerates, the people who truly disrespect a legitimate process of looking at the data and making intelligent assessments. They are mathematical illiterates who embarrassingly revel in their own ignorance.

3) The Political Manipulators, who cynically know what they peddle is nonsense, but nonetheless push the stuff because it is effective. These folks are more committed to their ideology and bonuses than the good of the nation.

He is too polite to mention:

4) The Paid Hacks, who are being paid to hold a certain view. As Upton Sinclair has noted, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Barry Ritholtz concludes: “The denying of reality has been an issue, from Galileo to Columbus to modern times. Reality always triumphs eventually, but there are very real costs to it occurring later versus sooner .”

The social utility of the financial sector

Behind all this is the reality that the massive expansion of the financial sector is not contributing to growing the real economic pie. As Gerald Epstein, an economist at the University of Massachusetts has said: “These types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.”

Yet in the expansion of the GDP, the expansion of the financial sector counts as increase in output. As Tom Friedman writes in the New York Times:

Wall Street, which was originally designed to finance “creative destruction” (the creation of new industries and products to replace old ones), fell into the habit in the last decade of financing too much “destructive creation” (inventing leveraged financial products with no more societal value than betting on whether Lindy’s sold more cheesecake than strudel). When those products blew up, they almost took the whole economy with them.

Do we want another financial crisis?

The current period of artificially low interest rates mirrors eerily the period ten years ago when Alan Greenspan held down interest rates at very low levels for an extended period of time.

It was this that set off the creative juices of the financial sector to find “creative” new ways of getting higher returns. Why should we not expect the financial sector to be dreaming up the successor to sub-prime mortgages and credit-default swaps?

What is to stop them? The regulations of the Dodd-Frank are still being written. Efforts to undermine the Volcker Rule are well advanced. Even its original author, Paul Volcker, says it has become unworkable. And now front men like Bloomberg are busily rewriting history to enable the bonuses to continue.

The question is very simple. Do we want to deny reality and go down the same path as we went down in 2008, pursuing short-term profits until we encounter yet another, even-worse financial disaster? Or are we prepared to face up to reality and undergo the phase change involved in refocusing the private sector in general, and the financial sector in particular, on providing genuine value to the economy ahead of short-term profit?