My Nomination for Lie of the Year

Yes, I know we are not even done with the first quarter, but I am highly confident this whopper will withstand the test of time.

From the New York Times:

Mr. Paulson is clearly taking a stand against critics who support even stricter regulations, while rejecting any notion that the crisis in financial markets or the collapse of Bear Stearns can be laid at the administration’s doorstep. In a draft of a speech to be delivered Monday, he declares: “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

So what does Paulson think caused the credit crisis? Martians? Challenging astrological transits? Society-wide overuse of antidepressants dulling normal risk aversion? Osama bin Laden? Short sellers?

Narrowly, Paulson isn’t wrong. Former Fed chairman William McChesney Martin said the Fed’s job was to take the punchbowl away when the party started getting good. The Fed’s job description hasn’t changed since his day, and if the Fed had thrown a little cold water on the markets a few years ago, we wouldn’t be in this mess.

That means that regulatory structure isn’t the problem; the real culprit is dereliction of duty by the regulators. And fish rot from the head. If you aren’t willing to hold the regulatory framework responsible, Mr. Paulson, that means you need to take a hard look in the mirror.

The article quotes a kindred spirit:

“The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”

We gave our assessment of the misnamed reform plan yesterday in “Paulson’s Cosmetic, Cynical Financial Regulation ‘Reform’.”

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  1. Anonymous

    Is it the case under the law that the Treasury or the Justice Department can force the Federal Reserve to adopt a particular interest rate policy?

  2. Francois

    The Bush administration is NEVER, EVER wrong.

    That has been, is and shall be their Prime Directive (hat tip Star Trek) until the end of history.

    Just ask the Justice Department where is the Inspector General report on Maher Arar to get a taste of what these goons are capable of just to obey their own Prime Directive.

    I cannot fathom why anyone would want to be the next President; there is so much damage to repair it is not even funny.

  3. Anonymous

    Imposted this earlier at Calculated Risk, but it worth people seeing, reading, thinking about, because this issue should be an epic battle and Congress, with its lowest ratings ever, needs to wake up and uphold The US Constitution!

    “In United States v. Butler, the Supreme Court resolved the Hamilton-Madison dispute by finding that Hamilton’s reading of the welfare clause was the correct one. Five months later the Court applied the Hamilton construction of the welfare clause in Helvering v. Davis, a case in which the constitutionality of the old-age benefits provisions of the Social Security Act were challenged.1 The Court found that taxing one group of citizens to provide benefits for another group was within the congressional power to promote the general welfare. And the Court added: “The line must still be drawn between one welfare and another, between particular and general.” But “the discretion . . . is not confided to the courts. The discretion belongs to Congress . . .”

  4. Anonymous

    Furthermore, I agree 100% with that bastard: “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.””

    You can’t blame The Fed or corporations or an synthetic entity, but you sure as hell can blame the people that were involved and you can send people to jail for fraud, for false and misleading information!

    You can also remove people from office and Congress and The Senate need to wake up to the fact they are responsible for inaction!

    “Inaction is perhaps the greatest mistake of all.”
    Charles Schumer (pussy)

  5. Anonymous

    Related: By law, no more than three SEC commissioners may be of the same party as the president. The SEC now has no Democratic members as Campos left in September and Nazareth stepped down this year. Their departure left the commission in the hands of three Republicans, SEC Chairman Christopher Cox and Commissioners Paul Atkins and Kathleen Casey, and congressional Democrats have urged Cox to avoid controversial rulemaking until political balance is restored.

    The Senate Banking Committee, which oversees the SEC, typically holds a hearing on nominees before voting on whether to recommend their confirmation by the full Senate. Sen. Christopher Dodd, D-Conn., who chairs the committee, said in a statement Friday that he looks forward to considering the nominations “at the earliest opportunity.”

  6. Anonymous

    And another thing:

    What about this “letter”??

    Re: A letter was sent to the regulators and the top bosses of the financial institutions to explain the transaction, which would not have been a focus of the committee if it involved only the two companies and not federal regulators, Dodd said.

    “The unprecedented nature of some recent actions by the Federal Reserve, Department of the Treasury, and others merits a full and public examination by the committee,” he said.

    Dodd also wanted a “thorough accounting” of the securities assets the Fed is guaranteeing with public funds, including a chronology and rationale behind selecting those assets.

  7. Anonymous

    Rather a bold statement – lie of the year. You may have forgotten this is an election year!

  8. Anonymous

    I disagree. Give a banker a dollar, an accountant and a lawyer, and they will figure out a way to screw the government and bypass the regulation.
    The issue is giving the banker the dollar to start with.
    Supply side economics has be proven to be a lie. Give the rich a dollar and they will figure out a new ponzi scheme to not invest in the real economy and make more for them self and their buddy’s.
    Its real simple. Tax the rich and create a separate agency to provide government backed loans to U.S. small businesses that hire U.S. workers.
    The amount you can borrow can be based on the number of U.S. workers you employ. Fraud you ask. Well we are getting ready to send out 150 billion in checks, fraud is just as good for the economy and free cash.

    Tax foreign investment. When a company moves offshore, tax them import fees.

    Hire foreign workers, tax an unemployment tax to offset the loss in U.S. employment.
    When the Chinese and Indians purchase as many U.S. products as we purchase from them, then we can talk free trade. Until them is a slow screw of America.

  9. Anonymous

    On October 4, 2004, an open letter was sent to U.S. President George W. Bush, expressing deep concern over the state of the U.S. economy signed by 169 professors, hailing from some of the best business schools in the world, or in other words, people whose business it is to actually know something about the functioning of economies and countries.

    The letter begins:

    Dear Mr. President:

    As professors of economics and business, we are concerned that U.S. economic policy has taken a dangerous turn under your stewardship. Nearly every major economic indicator has deteriorated since you took office in January 2001. Real GDP growth during your term is the lowest of any presidential term in recent memory. Total non-farm employment has contracted and the unemployment rate has increased. Bankruptcies are up sharply, as is our dependence on foreign capital to finance an exploding current account deficit. All three major stock indexes are lower now than at the time of your inauguration. The percentage of Americans in poverty has increased, real median income has declined, and income inequality has grown…..

  10. Anonymous

    Let’s not forget that Senator Chris Dodd of Connecticut and Senator Charles Schumer of New York (both key members of the Senate Banking Committee) are the LARGEST recipients in Congress of campaign contributions from hedge funds and investment banks.

    Beyond that the largest campaign contributors to both Clinton and Obama are investment banks.

    When we talk about “regulatory failure”, might this be relevant to the discussion?

  11. njdoc

    There has been a blurring between politics and economics as never before. Politics in America has always been a deferred compensation profession, with the real financial payout coming from the cronies after office (unless you get caught for payoffs during office, but these are usually much smaller). So many banks and financial institutions are inundated with former political players, and enough political players are from financial institutions, that it almost impossible to bite into the Wall Street Oligarchy. (look at Shumer’s comments about Bear). Only a grass roots movement has a chance at uprooting this Japanese style feudalistic-like structure. We can all post on blogs and complain, but we are not in a position of power. Until there are enough pissed-off voters ready to kick the bastards out of office and get real regulators, not the lackeys at the Fed, I am afraid that nothing will have been learned, and nothing will have changed.

  12. Anonymous


    That is bang on. There is institutionalized bribery in place by paying off the government officials AFTER they leave office. They get paid with speeches and director seats by corporations. This should be BANNED. We cannot be allowing people to pursue government positions in order to enrich themselves.

    Look at what Greenspan is doing for God’s sake. It’s all out there in the open and everyone just looks on admiringly and applauds.

  13. Clayton


    You’ve got your partisan days (noone’s perfect)… but this is one of the rare times when you have gone completely off the deep end.

    The fault for this economy lies with the poeple who, for the last decade, have been borrowing money to overspend their means. Incidently, they’ve been borrowing it, albeit indirectly, from the Chinese to buy Chinese goods… so the negative consequences of their choices are not limited to this particular event.

    You can try to blame the credit card companies for lending money… but it’s the people who build up the credit card debt that are responsible for their own destitution. In fact, credit card companies prove that you can profitably lend to people who will not pay the money back.

    In the same way, you can try to blame the banks… but its the people who took out variable rate loans to buy houses they couldn’t afford who are responsible for their own financial situation. That the banks happened to lose money this time doesn’t mean that it wasn’t a profitable choice on average.

    Particularly if the banks, like credit card companies, were reasonable to expect to profit *on average*, then they were doing the logically correct thing when they lent the money. Regulation doesn’t stop the average American from buying a lottery ticket that’s guarenteed to be a loser on average… the last thing regulators should be doing is preventing a bank from making a bet that’s a winner on average.

    If you want someone to step in and solve the problem, have your beloved Democrats pass a bill that forbids “Joe America” from taking out a variable rate loan… don’t blame the banks for offering them and don’t blame the regulators for allowing banks to take what was widely believed to be a reasonable amount of risk.

    … and if you seriously think anyone out there was “so smart” that they saw it coming, you’ve gotta ask yourself why all of these pundits didn’t make billions (or at least millions) betting on their perfect forsight. The one great thing about derivative markets is that you get fantastic leverage so the pundits can’t use their financial sitaution as an excuse.

  14. Anonymous

    Right on anon 10:16!

    Re: Beyond that the largest campaign contributors to both Clinton and Obama are investment banks.

    The Senate Banking hearing will be riff with fraud and collusion from all these crooks that are spinning away their inability to uphold The Constitution!

  15. Anonymous

    Bush and Paulson and all these crooks should burn the flag and Constitution and just tell us what they want. Who are these people anyway and what illusions are left?

  16. ssquared


    People are not simply autonomous, rational decisionmakers. An easy example: Do we have an obesity epidemic because millions of people simultaneously decided to overeat, or did they simultaneously lose their character and will, or are there larger social forces that guided their behavior? You don’t have to reject free will to understand that behavior is not independent of societal influences. When millions of people start doing the same stupid thing, it’s not random. I suggest some reading in sociology.

  17. Yves Smith

    I don’t like deleting comments, but the one expunged was an excessively long rant (the substance wasn’t terrible, truth be told) that was made on six separate posts. I haven’t published a formal policy re comments, but if in doubt, look here and here to get an idea of what will get your comment deleted. Multiple listings of the same content is one of them.

  18. jest


    you’re missing the point.

    the problem was widespread fraud throughout the entire financial system. massive amounts of over leveraging exacerbated it.

    a bank that makes a loan knowing full well the borrower can’t repay it is predatory.

    taking that junk and peddling it as a AAA security was fraudulent.

    sticking this trash in an enron-esque SIV should have been illegal.

    then having this self-described “toxic waste” insured by under capitalized bond insurers was just plain dumb.

    now add 30:1 leverage.

    yeah, this was *really* destined to work, “on average.”

  19. Anonymous

    Paulson is simply a clever white collar criminal, a seller of bogus securities. He should be doing a stint at Leavanworth for financial fraud. And exactly how did he get out of serving in Vietnam?

  20. Yves Smith


    While it is clear a lot of borrowers were imprudent, banking over the last 500 minus the last ten years took that as a fundamental assumption and acted accordingly. Borrowers can be dishonest, fools, overly optimistic, or just plain unlucky. And for lenders, it’s never will be any better than what you were promised at the time the loan was made. So lending used to be a high stress affair, with the onus on the borrower to prove he was good for the dough.

    Thus as far as I am concerned, the banks bear primary responsibility because it was their money that was being put at risk, and they unilaterally changed the procedures so as to take on more risk.

    But as Tanta has said repeatedly, lenders started going for efficiency at the expense of proper procedures. And she also noted, that streamlining also made it easy (“user friendly”) to the borrower, to their detriment. When borrowing was a drawn out process, you had time to question the wisdom of your actions and worry whether this was such a good move.

    To give one illustration of how lenders enable borrower imprudence: my father was going to get a home equity loan. After he qualified but before the closing, he asked the bank for a copy of the loan agreement. The bank did everything they could to avoid giving it to him, including telling him he was unreasonable, no one had ever asked to read it. My father read it, concluded it was terribly one sided, and didn’t proceed with the loan. This is a small example, but here the bank took aggressive steps to discourage a consumer from doing what he ought to do.

    Similarly, have you every tried reading your credit card terms? They are deliberately printed so small as to require a magnifying glass to read them. Some mortgages are now being challenged for being in similarly small type so as to impede borrowers from reviewing the documentation.

    However, the banks managed to shift some risk back on to consumers. In the old days, when there were usury ceiling, banks charged minimum annual fees. This was useful. It discouraged people from getting too many cards, and enabled them to profit from users who paid their balances in full every month. But now their most profitable customers are ones who are on the verge of bankruptcy, on a debt treadmill, paying penalty rates and unable to pay down the balances. And they seek to create these customers by sending out low initial interest rate offers to people with less than stellar credit scores. A lot of research shows that most people are overly optimistic, particularly about their own odds of success and their self discipline. Many of us are suckers in the making.

    And then you have aggressive telemarketers from Countrywide calling homeowners telling them to “put your home equity to work for you.” Their pitch is well honed to suggest you are a financial fool if you don’t tap your piggybank, um, house.

    This was all in clear view for the regulators to see. We even had signs of systemic imbalances, in the form of chronically low savings rates (6-7%) declining to zero, and debt to GDP rising by 60% since 2001, when the economy was hardly overleveraged (oh, and during this period, business was a net saver! The rest of the economy became even more levereaged).

    So the inaction was criminal, and I hold the regulators primarily at fault for letting an ideological attachment to non-intervention go so far as to imperil the entire economy.

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