By Robert E. Prasch, Department of Economics, Middlebury College. Cross posted from New Economic Perspectives
Five long years have passed since the demise of the once venerable firm of Lehman Brothers. To mark the occasion, Wall Street, the United States Treasury Department, the White House, and their several political proxies and spokespersons have taken to the mass media to instruct the public in the “lessons” to be drawn from the financial crisis of 2007-09. Regrettably, we are witnessing the propagation of several self-serving falsehoods in the hope that the public can be induced to embrace them now that the immediacy of the events in question is in the past. Some of the lessons are so flagrantly false that they demand immediate correction.
No One Saw It Coming
Of all the falsehoods being circulated, this one is in many ways the most egregious and damaging. It systemically denies the attribution of credit and thereby voice (and political power) to those who in fact did see “it” coming even as it provides blanket exoneration to those whose ignorance–or more likely–cowardice combined with self-interest prevented them from perceiving what was happening in the financial sector. Those making this latter claim can, more correctly, observe that, “no one in our close-knit circle of elites saw it coming.” Stated in this form, the statement is suggestive. Why, we might ask, was their circle exclusively made up of individuals who did not, would not, or could not, see the crisis coming? Why is it, in a nation with the diversity and talent of the United States, that all of the senior managers of our largest financial firms, and those charged with regulating them, were exclusively made up of individuals sharing the same perspective – a perspective that, I might add, was and remains so singularly and disastrously dysfunctional for the economy upon which the rest of us depend?
These are compelling questions because, as a matter of fact, many highly-informed people “did see it coming.” Indeed, by 2007 the American landscape was littered with risk managers, senior analysts, and even a few economists who “did see it coming” and who had the temerity to speak up about it. We also know that these several persons were invariably pressured to remain silent. Refusing to do so, they found themselves marginalized and their careers stalled. Not a few of them were dismissed from their positions for speaking up. Remarkably, five years after the failure of Lehman, not a single one of the many persons with an accurate assessment of what was going on has been elevated to a position of responsibility in the administration of a president who repeatedly promised the American people that he would bring about “change.” By contrast, the persons in authority who not only failed, but failed catastrophically, in their appointed roles have been retained or promoted by this administration. Am I the only one who thinks that this is a perverse outcome worthy of mention?
The Crisis was Almost Exclusively About Liquidity
Wall Street, Treasury, the White House, and the Congressional leadership of both major political parties (who came together to support the infamous bailout legislation that created TARP), desperately want you to believe that in the Fall of 2008 America’s largest and most prominent financial firms were illiquid as opposed to insolvent (for the record, insolvent financial firms have made this claim since the beginning of time). From the beginning, the story peddled by Wall Street, Treasury, and the White House is that a momentary, irrational, and essentially groundless “panic” had gripped financial markets, causing a passing, albeit catastrophic, decline in the price of otherwise good and worthy assets. As a consequence, those assets could no longer serve as collateral for the short-term lending that had become lifeblood of Wall Street financing. This perspective, one that remains unquestioned across Manhattan and Northwest Washington, was enshrined in the name given to the bailout legislation – the Troubled Asset Relief Program. Notice, these assets were described as “troubled,” not “failed,” not “garbage,” not “riddled with fraud and misrepresentation.” No, they were merely “troubled.”
To affirm their contention that the problem was one of liquidity rather than insolvency, Wall Street, Treasury, and the White House have never passed on any opportunity to tell us that taxpayers actually “made money” on the bailout. This claim, as with so much else that they have told us, is a whopping falsehood. To maintain this illusion requires a great deal of “creative accounting,” as my co-author and I demonstrated in our re-estimation of the true costs of the AIG bailout.
TARP was the Only “Responsible” Choice in 2008
Besides being self-serving, this falsehood is rendered even more audacious when Congress’ vote for TARP is described as a “difficult choice” that required “courage.” Apparently we are to believe that voting for a federal program that lends money at below market rates to major campaign supporters with effectively no accountability is “courageous.” Amazing.
Understanding the indefensibility of the program, our economic and political elites have made a substantially and touchingly bi-partisan effort to get the public to believe that “TARP was the only choice.” This initiative is now doubly important as the ostentatious and open-handed bailout of Wall Street makes a less-than-appetizing contrast with the now undeniable absence of economic recovery experienced by the overwhelming majority of Americans (according to the latest figures from the Census Bureau, the annual income of the median household remains more than 8% below where it was in 2007). But no matter what is said, the public was, and remains, correct in its belief that good options other than the bailout existed.
In reality, by the mid-2000s several decades of ideologically-driven deregulation, de-supervision, and willy-nilly mergers that transformed large Too Big To Fail (TBTF) financial firms into even larger TBTF financial firms had come to be exacerbated by systemic opacity and historically high degrees of leverage, much of which was supported by short-term borrowing. Any adult looking at this system would have been alarmed, but by that time few adults were present. Ultimately, the entire house of cards was dependent upon real estate values rising at 12-15% a year when, at best, American household incomes were rising at 2-3% a year. Everyone, except perhaps Wall Street executives, knows that mortgages are ultimately paid out of household incomes. Since the system had come to depend upon property values and the ensuing mortgage debt rising substantially faster than household incomes, it was certain to fail. What no one could know and did not know was the exact date that failure would occur. But that it would fail was a certainty.
When the system did implode, there was some good news – the United States has an extensive experience with resolving failed banks. Since the 1980s, the Federal Deposition Insurance Corporation (FDIC) has taken over literally hundreds of them (and it has taken over almost 500 more since the crisis began). However, in the Fall of 2008 there was one difference, but it turned out to be crucial – some of the banks that were being rendered insolvent in the crisis were exceptionally large and they were even more connected politically.
But what a difference! The correct choice in 2008, which was well understood at the time, was to stay with tried and true strategies. FDIC could and should have taken over the most insolvent banks independently of their size or political connections.
Now, at this point some history will be useful. When Continental Illinois Bank failed in 1984 (at the time it was the nation’s 7th largest bank), it was recognized that it was simply Too Big To Fail. As a matter of fact, that was the first time that TBTF was used to describe any financial institution. What, exactly, does it mean? It means that the firm in question is deemed to be so central to the system by which payments are made, and contracted financial commitments are cleared, that the disruption caused by its failure would in all likelihood jeopardize the health and even existence of many otherwise safe and sound banks and even non-bank business enterprises.
However, the difference between the 1980s and today is that no one said, “Hey, I have a solution to TBTF. Lets just give these demonstratively failed firms and their failed executives oodles of unbelievably cheap money with essentially no strings attached so that they can continue to pursue their failed and/or fraudulent business plans while showering favored insiders with undeserved but astonishingly lavish bonuses.” No, that was not how people thought about the TBTF problem as recently as the 1980s.
Understanding the centrality of Continental Illinois Bank to the financial system of the United States, FDIC did not immediately shut it down when they took it over. Instead, shareholders were zeroed out, senior management was sacked, and the bank continued to operate with a team made up of FDIC employees supplemented by a number of outside consultants (many of them retired bankers).
Also, while the systemically critical functions of TBTF firms continue to function under both approaches, the “old school” 1980s-style FDIC approach had several distinct advantages over the bi-partisan policy devised in the Fall of 2008 and maintained in the Spring of 2009 by Hank Paulson, Timothy Geithner, Ben Bernanke, and Lawrence Summers. First, with FDIC in full control and the bank’s failed managers on the sidewalk, the bank’s lobbyists and publicists could be immediately fired. This meant that there would be little interference with the work that had to be done going forward (had we followed this blueprint in 2008, financial reregulation would have been greatly facilitated). Second, with FDIC in full ownership of the firm, the FBI had unfettered access to all of the firm’s files so that a full and complete forensic audit could be conducted without obstruction or even prior authorization from a judge. Third, the riskiest and most insolvent (or fraudulent) segments of the firm could be closed without delay. Fourth, FDIC could wind up the affairs of the firm and sell off its several businesses piecemeal at good prices (It took about seven years to fully resolve Continental Illinois).
Now, it is true that in the case of non-bank financial firms the takeover legalities would have been a little more tricky, but in the end they could have been taken over by the Federal Reserve through its Section 13(3) authority which, by the Fall of 2008, had become something akin to a magician’s wand that enabled the Fed to do almost anything it wished. This, probably, would have resulted in the Fed effectively buying these firms for a pittance moments before they filed for bankruptcy (let us recall that the Fed took over AIG in something like this manner only a few days after Lehman failed). Creditors would have been delighted and shareholders would have had few good alternatives. Yes, the Fed would have been responsible for the liabilities of these firms, but as the government was going to be on the hook for these debts one way or the other, why not claim some authority to go along with the responsibility?
I could go on, as many other falsehoods about the fateful autumn of 2008 are being trotted about today, although they do not seem to be getting much traction with the public. An example is the often-heard assertion that the Dodd-Frank Act ended TBTF and that Americans will never again be asked to bail out Wall Street. To my knowledge, the only people who say they believe it are on payroll of Wall Street, the Treasury, or the White House. Moreover, the low interest rates that America’s largest banks pay to get buyers to purchase their bonds suggests that sophisticated players believe that the guarantee remains very much in place.
Unfortunately, the pretense that TBTF is no longer operative is more than just an amusing vanity held by our political classes and their sponsors among our nation’s largest financial firms. This is a pretense that can and does have pernicious consequences. The guarantee means, in effect, that the executives of America’s TBTF banks are overpaid civil servants who have the authority to create financial obligations fully backed by the United States government. But the pretense that there is no guarantee means that they can do this without any oversight. I don’t know about you, but given what we have seen of the judgment and ethics of these individuals, I am less than comfortable with this arrangement.
The notion that no one saw it coming is the lie that bothers me the most.
The ones who did see it coming figured that since they virtually own the nation’s political and legal processes it wouldn’t matter–not to them anyway.
Even worse, IMO, they engineered it. This is Shock Doctrine and the creative destruction of military-disaster capitalism in action. No foil hat required.
What’s more troubling is that it isn’t a lie: the folks running the system were receiving stove-piped information from people who knew that their jobs depended on telling their supervisors what they thought their supervisors wanted to hear. It’s like the Iraq War and the 9/11 attack: Nobody could have predicted that terrorists might use airplanes as weapons, because anyone reporting the possibility was disciplined or fired. Nobody could have predicted that invading Iraq would require far more resources than Donald Rumsfeld claimed because anyone making that prediction, such as General Shinseki, was immediately silenced and fired.
These days, anyone pointing out that there are still many “too big to fail” banks – is immediately silenced and/or fired for reporting an inconvenient truth. When the next obvious financial collapse occurs, be assured that we’ll hear another chorus of “nobody could have predicted it.”
The proper phrase should be: “nobody could have predicted it – and kept their job.” This is the real problem – and one that remains ignored.
“Nobody could have predicted that terrorists might use airplanes as weapons, because anyone reporting the possibility was disciplined or fired.”
That did not faze the French a year earlier when the mad terrorists wanted to dive a plane into the Eifffel Tower and tried to force the French to give them enough gas to do it. Instead, they shot out the tires, stormed the plane, and killed the terrorists. Naturally, Bubba-ville on the Potomac took no notice.
That’s my point: “they had eyes, but refused to see” would be a better description than “nobody could have foreseen…”
The lie that bothers ME the most is that bailing out these criminals was the only thing that could/should be done.
I recall all the howling and screaming at the time, by Paulson and other “hair on fire” folks, running down the halls suggesting financial Armageddon, and that we MUST throw money at these folk, without any restriction or conditions.
No time to think about other possibilities, of course. And no one — least of all Obama and the Democrats — suggesting otherwise. Clearly intentionally learned nothing from this sort of “decision-making” in Iraq.
Like you, I too get bothered everytime I see this claim. It is absolutely false, but for those spouting the claim it is a balm for their conscience.
The June 18, 2005 cover of The Economist which can be seen here http://www.economist.com/printedition/2005-06-18-0 shows a brick labeled “House Prices” falling through the air and the title is AFTER THE FALL. The last line of the Leader says this, “The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.” Take a read, it was eerily prescient.
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Um. I know there were a number of people who predicted the collapse of the US housing bubble. But to claim to have “seen it coming” (where “it” is the whole GFC), you would need to have also foreseen the effect that collapse had on bank credit. As we know, the suddenly valueless CDOs pushed many banks into a situation where they were technically insolvent. Hence TARP and all the rest as panicking Govts. tried to put the pieces back where they were.
Who, exactly, predicted both parts of the story, and got the linkage right too?
Henry Maxey in April 2007. This is frigging amazing work, and this is by an equity markets guy, working at a UK money management boutique. In other words, not somebody with much of any access to the guys on fixed income desks who were cranking out CDOs:
Gillian Tett was close, she saw the tremendous leverage and lack of equity in CDOs. The FT only lets you go 5 years back but in the early days of my blog, I was bad and took way more than what is fair use, but the upside is that I have really good archives from the period before the crisis started:
If you just read the financial press in 2007 you could see it was gonna blow. I grabbed a few posts from early in that year:
http://www.nakedcapitalism.com/2007/03/collateralized-debt-obligation-market.html (FYI it took two years of chipping away and looking for experts for me to get decent info on the structures)
God I loved those early days when I found NC, just as the disaster was first beginning. I couldn’t wait to wake up and get to my computer – been reading it every day since.
AND, it’s there 7 days a week!
Hell, I remember much of this being discussed in the 90s, back when Clinton was still president. He was the author of many of the de-regulations that made much of this possible, and there were skeptics a plenty to make exactly these predictions, even if they could not yet at the time predict the exact nature of the collapse. And it didn’t take long for their predictions to be verified as the economy morphed into a bubble and bust economy. Every other month we seemed to be in a new recession.
I was blogging about this back then, and I am a friggen lay person who could barley tell the difference between a CDO and a COD.
Thank you so much for the references.
It is so, so, so, f*cking annoying to hear the excuse that no one knew, that it was inconceivable…
Actualy, as I remember, they were deying there was a problem even as the crash was underway. I recall them testifying that that a housing buble was not posible because of the new risk managment tools they had inovated. Even as housing markets were falling.
Michael Burry got it right, and he trusted his instincts enough to believe what the data was saying, rather than the message trotted by a corrupt establishment.
“I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”
No, you REALLY need to read the Henry Maxey link.
Burry most assuredly did not foresee the GFC, the constellation of the leveraged vehicles that amplified housing exposures into much bigger losses. He wasn’t looking at CDOs at all. He was just shoring subprime debt. He deserves credit for getting that right, he was on to that early, but you are giving him more credit than he deserves.
The wonders of google’s vast collection of servers. I have excerpted the heart of the article below; please read the whole item and then have a peach mimosa for breakfast-in fact have a couple.
JULY 26, 2006
Bankers Fear World Economic Meltdown
by GABRIEL KOLKO
The whole nature of the global financial system has changed radically in ways that have nothing whatsoever to do with “virtuous” national economic policies that follow IMF advice – ways the IMF cannot control. The investment managers of private equity funds and major banks have displaced national banks and international bodies such as the IMF, moving well beyond the existing regulatory structures. In many investment banks, the traders have taken over from traditional bankers because buying and selling shares, bonds, derivatives and the like now generate the greater profits, and taking more and higher risks is now the rule among what was once a fairly conservative branch of finance. They often bet with house money. Low-interest rates have given them and other players throughout the world a mandate to do new things, including a spate of dubious mergers that were once deemed foolhardy. There also fewer legal clauses to protect investors, so that lenders are less likely than ever to compel mismanaged firms to default. Aware that their bets are increasingly risky, hedge funds are making it much more difficult to withdraw money they play with. Traders have “re-intermediated” themselves between the traditional borrowers – both national and individual – and markets, deregulating the world financial structure and making it far more unpredictable and susceptible of crises. They seek to generate high investment returns – which is the key to their compensation – and they take mounting risks to do so
The article quoted above mentions a book entitled Safeguarding Financial Stability by Garry J. Schinasi. The author mentions that his motivation came about as he was looking around him in 2003.
Out by the community pool in CA back in 2004, I overheard a couple 10 year olds discussing the housing bubble. Then there was the little local problem of goofy lender Ameriquest and that other place I forgot the name of. Never could figure out where they got all their money. Guess there weren’t any bank examiner dads in the neighborhood.
But to hear 10 year olds talk about Standard & Poor rubber stamping AAA all over securitized subprime NINJA loans, I guess you need to live in a gated community in Georgetown, or certainly NYC. Visit the Hamptons if you want to hear about repo 105 and “off balance sheet vehicles”. The kids there know that has nothing to do with inventory of repossessed cars.
If I remember correctly, Steve Keen for one.
Gordon– Who got it right?
Well, dozens of random ordinary people on housing-bubble blogs. It wasn’t all that difficult. Once you saw how comprehensive (nearly the entire US) the housing bubble was, and how it tied into key industries like construction, and how it was all done on borrowed money that would never be repaid (because it could not be–NINJA loans were no longer a trade secret) then the ensuing financial crisis (GFC) was really no cogitative stretch. Everyone who was alert saw this.
A no-brainer, really.
No, you are actually incorrect.
A housing crisis alone would not have produced the GFC. Subprime was a $1.2 trillion market, it ultimately delivered about 40% losses. Inflation adjusted, that’s worse than the S&L crisis, but not by all that much.
CDS (which were packaged into largely synthetic CDOs) created exposures at least 4x, the best estimates I have seen are more like 6x, the amount of drecky housing debt.
Anyone who talked about the housing bubble and not the derivatives piece cannot claim credit for foreseeing the GFC.
And the bailout was not really about TARP, which was chump change. The bailout was the Fed doling out $20 trillion in interest bearing reserves against bank paper that would have gone up in smoke but for the Fed taking it on. Perhaps this was necessary given the scope of the problem. But what was gratuitous and indeed criminal was permitting all the bankers who created the disaster to remain in place and continue cashing in on the bailout.
Capitalism cannot work unless failure has consequences for those in command of its failed institutions. The British Parliament did a better job on this after the South Sea Bubble.
Although the arguments in the post are well taken they miss the main event. The crisis has become an opportunity for another huge transfer of money from the poor and the middle class to the rich.
After Reagan and W, Obama has continued to decimate the infrastructure, money for research, education and above all the income of everyone else except the rich. We see the real life drama of a great country being cannibalized to satisfy the greedy few.
It’s “rigged market cannibalism”, devouring the middle class and liqidating the empire.
The end of exponential growth in resources (especially energy resources) means the end of economic growth (which must be exponential to pay back debts).
We chose the No Future option in 1980. That decision stands. The end of growth means the end of the empire. There is nothing left to do but loot it out.
History is a lie commonly agreed to is an almost quote of Voltaire that is an indicator of how long the Big Lie concept has been going on.
This is just another example of its effectiveness as used by the puppets of the ruling elite.
I want to change the rules of inheritance globally to end the rule of plutocrats that continue to stifle mankind’s best intentions and efforts to create and evolve a humanistic world.
Here’s what confuses me…
Why didn’t Paulson-Bernanke make some attempt to liquidate Lehman in an orderly manner, signaling to the markets that they wwere going to separate the good from the bad assets, replace management, wipe out shareholders, give the bondholders haircuts, and backstop counterparty agreements. Wouldn’t that have stopped the panic and created a template for winding down TBTF banks?
That’s called bankruptcy. A FDIC resolution is simply bankruptcy for banks.
The only way not to have had market panic would have been NOT to resolve Lehman but to keep its trading operations going with a Fed guarantee of its trades. The deal with Barclays that didn’t get done faltered over that issue. Barclays could not legally take over Lehman for 30 days, and the head of the US ops had somewhat exceeded his authority. Hank Paulson believed the US dude (not checking his name, I’m having a memory lapse and too rushed to check my backstage, I covered this in pretty gory detail) could deliver his board. Paulson and Geithner weren’t dealing with the board or even the chairman, and the chairman and the board weren’t as hot to trot. The US side has claimed that they were blindsided by the FSA but that’s been their cover for a fuckup, of dealing with a guy who did not have the authority to deliver Barclays and not speaking directly to the real decision-makers.
Any resolution requires that all open trading positions be valued. It also would trigger payouts under credit defaults swaps written on Lehman. The valuation of open trading positions require that they be frozen. Moreover as Satyajit Das has explained, deriviatives contracts aren’t as standardized as the industry pretends (many variants of the ISDA master agreement) which creates both some optoinality in when/how positions are closed out, causing further legal fights. In any event, no trader wants to have his positions with one counterparty frozen. Those are only one piece of a complex net of a bunch of trades he has on. Freezing that means he can’t trade out of it. In the meantime, any hedges he has against that position are still changing in price.
If trading firms think a counterparty will go bankrupt or be subject to some sort of resolution, they’ll run for the hills. That will create a run on the firm and necessitate a wind-down.
Thanks for the clarification.
I do believe the next “crash” will be of the type where the monkey wrench is big enough that everything freezes up and no “available” amount of backstopping can be effective.
And I think it will be referred to as the popping of the US dollar bubble.
Plantman wrote: ‘Why didn’t Paulson-Bernanke make some attempt to liquidate Lehman in an orderly manner … separate the good from the bad assets, replace management, wipe out shareholders, give the bondholders haircuts, and backstop counterparty agreements. Wouldn’t that have stopped the panic and created a template for winding down TBTF banks?’
 Creating such a practical template for winding down TBTF banks was the last thing — well, short of full financial collapse — Paulson wanted, knowing the extent of the rot.
 As for Bernanke, his appointment to Fed chairman in February 2006 is utterly revealing — given Bernanke’s academic specialization in the Great Depression, quantitative easing, etc — of the truth.
Which is that TPTB knew very well what was coming, because they installed the specific actors that would best suit their needs in the relevant position. Similarly, for instance, to forestall a repeat of the Rooseveltian measuresenacted during the 1930s, they found an empty-shirt Chicago pol to install in the White House. Smart people do learn from history, you see.
 To address Yves’ point about the Barclays situation. While Barclays itself was prepared to accept the terms of the merger, British banking regulators specifically refused to approve the deal. One high-up Brit told Paulson directly: “We don’t want your garbage.” (At least, such is the mainstream account from the likes of Sorkin at Pravda)
Hate to tell you, you are unwittingly repeating US propaganda.
The FSA released detailed notes of conversations with the US officials and with Barclay’s board to debunk the US efforts to blame the failure of the Barclays rescue on them.
Barclays board was willing to buy but only on VERY specific terms, and that included a 30 day liquidity backstop from the Fed. They’d made that clear. The Fed was not gonna give that and Paulson seemed to think he could somehow bully Barclays into going ahead without it. The board wouldn’t approve it and neither would the FSA, but the board had indicated its terms before the FSA chimed in.
Ah. Fair enough and thanks for the notice. I did observe that it was “the mainstream account from the likes of Sorkin at Pravda.”
This is an excellent refutation of official beltway propaganda that points to rampant corruption, and it deserves a follow-up analysis of the root causes of the skyrocketing of financial speculation that spawned the mortgage fraud. Aside from unbridled greed and bad governance, the most significant cause is global peak oil, which is limiting economic growth. Speculative financial instruments have increasingly supplanted real productivity because of constraints imposed by peak oil. New red flags are being waved as new bubbles (ponzi schemes) are being promoted (and supported by government) with the false expectation that non-conventional fossil fuels will fill the void and neo-liberal policies will control debt, while the extreme environmental and climate impacts are being ignored at the peril of all life on earth. In other words, the financial elites and their operatives in government are running us over the cliff, and most of us are acquiescent and complicit like proverbial sheep.
…Americans will never again be asked to bail out Wall Street…sophisticated players believe that the guarantee remains very much in place.
I believe that the possibility of ‘bailouts’ is badly misunderstood. Its much less likely that we see an outright bailout like TARP in the future. What has been put into place is a system of back-door bailouts that include ‘bail-ins’.
Furthermore, its not just Banks anymore. Insurance companies and others can also be deemed “systemically important’.
‘What has been put into place is a system of back-door bailouts that include ‘bail-ins’.’
Yup. And you are astute in pointing to the insurance industry as a probably site for the next financial collapse.
When the goal is to get ‘something for nothing’ at a systemic level, lying, cheating and stealing is but the first course in a ten course meal.
Of all the nonsense and contradictions imbedded in capitalism the most dangerous is “productivity.” I’m sure productivity has been the last mantra of 20c century capitalism because modern society could not be exploited enough to make old fashioned capitalism work – on a large scale. If productivity doesn’t work for a big and powerful nation state like the US, or for the EU, or for China, how on earth is it ever going to work globally? It isn’t. That’s why we need secret banking and secret trade agreements. We need to wake up. Productivity is not just unproductive, it is very dangerous. To people, society and the planet.
Productivity should be great, if it’s advantages were more evenly distributed. We would then all be working 25 hour weeks, or something like that. It’s a distribution problem.
Yes, it’s a distribution problem.
Private money can be created as Liabilities or as shares in Equity. Guess which method is subsidized by the US Government?
And that’s why we have a distribution problem.
Never thought I’d be lecturing Progressives on the need to share but that’s where the logic has taken me. Meanwhile, Progressives seem to have forgotten what they were taught in kindergarten.
Don’t always agree with you, Frank. I suspect few do.
But “Private money can be created as Liabilities or as shares in Equity” could be the first and last sentence of every macro-economics text.
Thanks for the detailed answer, Yves.
So there was nothing that could have been done to minimize the fallout? I mean, the Fed has backstopped parts of the system before, and that’s always ratcheted down the tension.
I just can’t believe that there’s not more than two solutions to this problem 1–Default or 2—Bailout
Where’s the middle ground?
they already lost the war…
Energy Generation & Distribution
Power is a derivative of energy, which is a derivative of battery. Labor is concerned with the battery. You have to form a circuit between where you want to go and where you are. It helps to know where you are. If you are going into the unknown, and you are, you have to focus on the ability to adapt to the resources available, which are unknown.
Worrying about derivatives is a waste if time, which creates greater space between you and your objective. What the power brokers, their crony Land Lords, and their subjects do can be of no concern. They are all prisoners of their own false assumptions, always at the end of a branch with no fruit, incapable of computing sunk cost, and nothing you do is going to change that.
In their world, learning is penalized and replication is rewarded. Empires confirm selfishness; they do not grow self. That does not mean that you cannot care or be of some assistance to subsystems, down to the individual. What it means is that you are wasting timeeneregy attempting to alter the basic operation of an empire system. It can only ‘compute’ with brute force.
An empire is just a ground, with circuits shorted into themselves over time, to form a return terminal. To the extent you feed its business practices across transformer bridges built for the purpose, it is energized. The empire control circuit is all busy work, as you are now observing. As you divert energy, it is going to become increasingly arbitrary, capricious and malicious by nature, as the environment changes and it increasingly resists change, in a positive feedback loop it calls economic activity and measures as GDP.
“The question is whether the public welfare is best served by popping the bubble and allowing Austro-liquidation to purge the toxins, or whether this would be ruinously destructive [always choose C]. Many readers think it is past time to dynamite this edifice. I have much sympathy with this view. Yet in the end, I prefer magic.”
“Takahashi turned the bank of Japan into an arm of the Treasury – ‘fiscal domination’ – and ordered it to finance the budget deficit.”
“The Chicago Plan…,” blah, blah, blah.
The middle class controls itself, with peer pressure, ignorance, right back to the churn pool. Capital capitalizes middle class behavior with a political lottery system of increasing complexity to separate reward from risk over time, pulling reward forward and pushing risk back, as far as it can, maximizing rent to labor and defining both for the purpose, until it can’t, exhausting itself with process, same as it ever was, never again, always again.
Money represents the past. It’s a trade-off, selling an option to place a put. You are the future, which is why you are surrounded by an empire that desperately wants to brand you with a label of labels. This empire is on life support because you will not accept its behavior models or form another political event horizon, and because it does not have the heart to start over. It is the least dirty shirt among dirty shirts, of which all are on life support, searching for a scapegoat, you.
Without you, the empire is lost in spacetime. Adjust your private potential relative to your public profile to build whatever counterweight you need to go wherever you want to go. This planet has never failed humanity. Only humanity has failed humanity. Clean up your dishes after dinner, rethink your priorities, and go to bed, instead of partying, leaving the mess for others, and waking to the mess of others everyday. It’s not rocket science.
You are not going to win any popularity contests as a parent. No parent with half a brain cell wants to sit in judgment of any other parent. In the real world, control is an illusion.
The first time your children offer to help you wash the dishes, set them up to be successful, and ignore any dishes broken on the floor. Don’t enable/disable your children by failing to provide them with life skills and be surprised when your teenagers contemplate suicide when they hit the wall of reality. America is a 4-yr-old sucking on a binky in a stroller, pushed by a maid bred for the purpose.
The US Navy is a bigger bully than all the other bullies put together as the counter, the least common denominator, a product of consensus, but it is no match for a parent, because a parent is always two steps ahead, and an admiral always needs a bridge.
Do you really think there is any substantive difference between peer pressure, gossip, spying and tyranny, other than time, which is an event horizon perception? Welcome to the machine. All roads lead to world war, except one, through distilled out labor.
I spent my life building bridges for admirals. I chose my admiral from among the commanders. And Navy in Virginia can go f- itself, because it is sitting on a bomb from which it cannot escape. Don’t hunt labor with financial derivatives of its own technology and expect a happy outcome.
My grandpa didn’t show me how to be a fool and chase bad soil with bad seed. My pa didn’t raise me to be a fool and chase money with labor. And the admirals did not train me to be a fool and chase power with DC control. They all taught me to do whatever needed to be done, whenever it needed to be done, however it needed to be done, and I haven’t failed my family yet.
Of course our Government is bought and paid for by the Wealthy.
Who else could afford it?
Mish , Karl D., got it right and continue to get it right. Everyone else, just about, were late. These guys were talking about this in 2005.
Housingpanic was also well ahead of the housing collapse. Daneric got the 08 collapse right. These guys continue to be ahead of the coming collapse.
Thanks Fed, government.
Were the banks REALY too big to fail?
I am told that the whole thing fell apart when Lehman collapsed, and that there was no choice but to bail them out. But I haven’t been presented with any thing but assertions that this was the case. I haven’t been introduced to arguments as to why Congress had no choice but to bail them out, and even less evidence why this is the case. The only REAL crisis as near as I can see was that old money was at risk of losing money, which was absolutely unacceptable.
To make maters even worse, this is not the first time I saw this argument. Too-big-to-fail was also trotted out during the Enron Collapse. Congress was told that Enron was too important for California’s energy system, and that letting Enron implode was not an option.
And keep in mind that earlier that year there was the California Electrical Crises which saw rolling blackouts across the state and causing all manager of calamity. Enron-defenders were arguing that if Enron imploded, it wouldn’t be rolling blackouts, but a total shut down of two thirds of the grid.
Congress didn’t buy it.
As Enron was being unwound, it turned out that there was zero impact on California’s grid. This was because Enron had already sold off its entire actual infrastructure holdings into satellite companies. In fact their bottom line actually improved, much of their debt load actually belong to Enron as a hold-over from the original spin-off. If Enron folded, they could write off that debt. In fact, this was how Enron managed to appear solvent to regulators, as debts magically became revenue streams.
And making maters even worse, as regulators poured over internal documents for the unwinding, they uncovered a conspiracy that Enron actual manufactured the California Electric Crises in order to engineer a massive windfall needed to absorb losses from other ill-conceived projects. Documents that never would have seen the light of day had there not been an unwinding.
Enron’s implosion proved to have a negligible effect on the economy. The only people who took a hit were its investors and its employees. Even the employees mostly saw this coming and already had their résumés updated when the shit hit the fan. The smartest man in the room – proved to be the last one to know.
I can’t help but draw a parallel between Lehman and Enron. First, exactly just what did the too-big-to-fail banks do that the economy couldn’t do without? My guess is – nothing. They were, and still are, little more than a gambling casino.
In fact, I have to wonder if saving these banks may have done more harm than good. There is this thing called creative destruction. If too-big-too-fail was allowed to fail, the smaller banks that didn’t play these games probably would have stepped up to take over any legitimate financing issues that industry may have needed.
I don’t know any of this for sure, and want to be corrected if I am wrong here. But… am I wrong at all? And if I am wrong, what is the correct argument, and where is the evidence that supports it? Is there really such a thing as “too-big-to-fail?”
They were bigger than they should have been. You see, this is not the first time the government bails them out. The government bailed them out in the mid 80s and 90s as well. Those bailouts set a precedent, banks knew that they would get government help when they ran into issues.
So as banks became larger, they ignored risky behavior because they knew bailouts would be there for them, and more so if they were even larger. That behavior continues to today.
In essence, regulation is meaningless. Letting the banks eat their losses in the 80s and 90s would have avoided the 2008 fiasco. But, the majority of people have been con’ed into thinking that we can avoid all this if we can only make regulations better. You can create millions of regulations, non are going to stop this if we keep bailing out the banks.
‘Letting the banks eat their losses in the 80s and 90s would have avoided the 2008 fiasco.’
But letting the banks eat their losses in the 1980s and ’90s would have meant their one-percenter shareholders eating their losses, wouldn’t it?
They weren’t going to allow that to happen.
I believe so. See the recent Bill Black post here. He pointed out that capital ratios here and in euroland can legally be as low as 3%. Then there is “off balance sheet vehicles” – which must be the legal way to go below the legal minimum. Then coming up with a valuation for capital is non-trivial to impossible. (recall mark to market, then think suddenly exposed NINJA bonds)
So there is no buffer to absorb losses – then “contagion” causes a domino effect of failing banks – because they are all borrowing short term from each other to invest wisely in clever financial products, or whatever it is they do.
And it is big bucks. JPM alone has $90 Trillion in notational derivative positions – all expertly hedged so it looks great on paper with solid counterparties and all…
A link, or at least the name of Bill Black’s post would be appreciated.
The $90T JPM was from other news reports. Can’t remember where, but I think I saw the number a few different places.
Another huge issue was bills of exchange, and secondarily business loans for operational purposes. It seems that all key commodities are shipped on credit, and if the credit system fails, global trade would have collapsed. Also, many businesses take out loans not for R&D, plant, equipment, and inventories, but for regular operating expenses.
11 of the 12 largest banks in this country found themselves with mountains of debt coming due and a molehill of reserves to meet those demands. How the bailout happened was screwed up and a scam, but that a bailout was necessary I do not doubt.
I am not in disagreement that global trade would have taken a hit, however, I’m not so sure it would have collapsed.
If, as a business, you are running your daily operations on credit – you are not far away from bankruptcy anyway. Don’t get me wrong, I know that corporations use letters of credit to fund global supply chain flows while keeping themselves save from thieves. So yes, flows would have been impacted in 2008.
However, I disagree that the bailouts were required for a simple reason. Did we really fix anything by bailing out the banks or did we just simply buy additional time? I think we just bought and soon enough we will find ourselves in a bigger crisis built on top of the S&L crisis (bad), the Tech bubble(worst), the housing bubble(terrible), and the government debt bubble (collapse).
The issue is the issuance of credit on limited actual cash. We patched all these crisis by issuing more credit/debt. By definition, more debt cannot resolve a debt issue. Meaning, we are not done with this crisis until there is either large bankruptcies that wipes out a good chunk of the debt or the government goes berserk and starts printing actual cash. I personally prefer the collapse because at least things will impact people on a more even level. If the government prints, there will be a few lucky souls attached to the government teat, while a larger % of the population starves (output collapses when this happens).
So think again if you think the 2009 bailouts fixed us, another one is coming up very soon.
If the government prints, there will be a few lucky souls attached to the government teat, while a larger % of the population starves (output collapses when this happens). Bapoy
Not necessarily. A metered, universal bailout of the entire POPULATION plus a ban on further credit creation could fix nearly everyone from the bottom up except perhaps some ambulance chasers and misery merchants.
The problem is too much credit and not enough fiat money. So ban further credit creation and “print” more fiat.
In theory it could work, in practice, things will likely turn otherwise. With the way things are going now days, I don’t see how anything coming from politicians will be “metered” in any way. The majority of politicians and economists are either socialists or Keynesians or both, and there is never a good time to lay off the pedal.
Actually, your approach is what will occur eventually. When nothing else works, they will pull the trigger on the real printing presses. Since Japan is pretty much embarking on that now, we can probably get a glimpse of how well that will work here. We’ll see.
Don’t call Japan’s approach mine; I’d simply give away new fiat to the entire population similar to what GW Bush did with his “stimulus checks.”
You see, the victims should not have to work for their restitution. It’s called justice.
You see it, but you don’t.
If you send every single American 1 million bucks, do you really think they will be better off? Will there be more cars, more clothing, more food, more housing – or will prices just shoot up eating up that new fiat? I know you know the answer.
It’s kind of like a check mate situation. You are more damned if you, than if you don’t…
No it’s you who don’t see though you gave me hope for a second.
The bailout could be metered to just replace existing credit debt as it is repaid for NO net change in existing purchasing power. If P = MV/Q then that leaves only an increase in V or a decrease in Q to cause price rises. Neither are likely to change much though I concede some may take a well deserved break with a resulting drop in Q.
You really are conditioned by the Austrians, aren’t you? Try using your own brain more.
I missed it there a bit. Yes, in theory, it should work – in practice, it may be a bit more difficult to manage.
The bigger component you have to deal with is politicians, unethical people, fraudsters, the wealthy, the bankers. Me? Let the market decide, I am definitely not smarter than the market.
“Liquidate! Liquidate! Liquidate!” Huh?
That’s not justice nor is it even smart.
Global trade already took a hit, despite the bail-out. I don’t even think that was the intent or function of the bailout any way. I don’t recall this issue being brought up with the fear-mongering (all though I could stand to be corrected here.) Indeed, the fear-mongering that took place in advance of the TARP votes were about investment portfolios and money markets collapsing, impacting daily operations and pay-checks.
I continue to see a significant divorce here between the fiscal economy, and the real material economy. I repeat my Enron observation here that it had already divested itself of all real-world activities when it imploded. The only thing it continued to operate was the grand casino.
Trade operations do operate on credit – every thing does. But this is not credit that is financed by hot money. A shipping company would likely take a hit during the credit collapse, but goods are already in the pipe line and don’t just disappear. When they hit the market, funds needed to offset the credit will be recouped.
But as I noted before, it already took a hit any way because of the massive losses absorbed by the consumers. Consumers suddenly found themselves unemployed, their homes worth a fraction of their previous value, and ARMs posed to reset and send interest rates skyrocketing. This despite the bail-outs.
Another mode of argument is that the wrong people were bailed out. If the banks were sitting on mountains of bad mortgages, then perhaps the mortgage holders should have been the ones that needed to be bailed out. But as it was, the banks were bailed out, and the common debtor was STILL left with their mountain of debt that they couldn’t pay off.
The whole thing is reminiscent to Hitch Hikers Guide to the Galaxy. Magrathia, the planet that made planets for the wealthy patrons of the universe, was forced to close up shop when the galactic economy crashed, and a vast sum of money had disappeared. So much money had disappeared that an unemployed economist/astrophysicists concluded that if all of that money had been brought to one place, that the mass of the money would be so great that its gravity would have collapsed itself into a black-hole.
Oddly enough, a black hole was discovered where the 1st inter-galactic banks used to be.
If the banks were sitting on mountains of bad mortgages, then perhaps the mortgage holders should have been the ones that needed to be bailed out. But as it was, the banks were bailed out, and the common debtor was STILL left with their mountain of debt that they couldn’t pay off. Code Name D
Yes. Succinctly said.
Of course non-debtors would complain hence the need for a universal bailout including non-debtors.
Of course inflation-phobes would complain hence the need to ban or limit further credit creation and meter the bailout to just replace existing credit debt as it is repaid.
There was a small city with few men in it and a great king came to it, surrounded it and constructed large siegeworks against it. But there was found in it a poor wise man and he delivered the city by his wisdom. Yet no one remembered that poor man. So I said, “Wisdom is better than strength.” But the wisdom of the poor man is despised and his words are not heeded. Ecclesiastes 9:14-16 New American Standard Bible (NASB)
I know that various producers, including farmers, rely on futures which are a type of derivative to hedge against price fluctuations. I bet that the fraction of derivatives that are required to hedge and would impact economic activity is tiny in comparison to the tons of junk that has no economic benefit at all.
The Fed pushes credit, and the credit will go somewhere – including stupid bets on who will win the Miss America pageant.
My question is, what are any of the people who got it right before saying about our economy now? I know I read an economic analysis by the firm Oliver Wyman about 2.5 years ago that called for a massive debt and commodities crisis by 2015 and if you read that analysis things seem quite eerily on point for their projection. You can read it here:
But what are the others saying about where we’re going? What does Steve Keen or Henry Maxey or Michael Burry or anyone else say about what is going on now?
Think it depends on their view.
Keen is in line with what Beard preaches, but the man is right on point on where we are headed. Most Austrians have it right, but fail to see the impact of credit on inflation and deflation.
The majority of people think that printing cannot cause inflation because the Fed has been doing it for 4 years and it hasn’t caused any. Most Keynesians and even socialists lean on this as proof that the government can send people checks and it would be the same. However, that view conveniently misses the fact that there were trillions in write down from the housing collapse offsetting the Fed’s issuance of credit. That, my friends, were trillions of credit removed from the money supply, yet nobody mentions it. If the Fed was issuing paper currency, the story would be quite different.
Where are we headed, well, in a fractional reserve system – the credit/debt grows while the actual cash does not. Simple math says the system will collapse on it’s own if left as is. Given all the confidence being placed on the Fed (the Fed supposedly saved the world), I would say we just started falling from the cliff. This collapse will make 2008 look like a walk in the park, especially for regular Joes.
Keen and I reached about the same conclusion independently, me around 2009 (or maybe 2008). I was pondering how to make the fractional reserve looting process work BACKWARDS to reverse the injustice when I woke up one morning with the solution.
So a mathematical and an ethical approach converged to the same conclusion independently.
I have to admit, although I do not follow his solutions, Keen is pretty awesome in understanding the roll of credit in the economy. I can see that you are also awesome.
I think the only piece we diverge is on the solution. I know I am biased as I have always followed the Austrian mindset.
Fortunately, I think your solution is what will eventually come to fruition – so we will have a chance of looking at this first hand. And you know what, looking at the stairs of humanity, every step has made the lives of earth’s citizens better. So perhaps, there is something to this that I can’t yet see. ;-)
The view of those mentioned in the title to this article is that they really don’t NEED the People to believe anything. All they perceive they really need is “Plausible Deniability”, which is a much lower hurdle: http://en.wikipedia.org/wiki/Plausible_deniability
They have little credibility anymore. IMO many people have become disgusted, frustrated and angry. These ongoing Big Lie efforts merely compound the level of public cynicism. Trust, once lost, is very difficult to regain.
I believe you are right and I sincerely believe that these elites lie to themselves and each other so much that they really believe the lies after a while. And the biggest lie they keep telling themselves is that the people will let them get away with the same excuse again. You only really get one time in each situation to say “how could anyone have known?” We’ve had so many in the past 12 years: 9/11, Iraq, Katrina, Sub-prime/Financial Crisis,Fukushima, that they’ve used all of their one-time instances in each area up. The next crisis that comes, and I do believe that will be soon, will lead to the destruction of many elites as nothing will stop the people from setting up the gibbets and guillotines and running them night and day. You can’t have so thoroughly screwed everything up, in every arena, and still be allowed to hold power. The next time, the center will not hold.
Slouching towards Bethlehem
Okay. I just read Maxey and my head is about to explode.
You’re right. It’s a fantastic and prescient piece.
I wonder what his take is on today’s situation, where the Fed has taken on all kinds of risk and bumped its balance sheet up by a cool $3 tril.
Y’know, I’m starting to wonder if investors had their collective “Ah ha” moment on Friday when stocks hit the skids. It took a day of head scratching to figure out that shitty earnings and below 2% GDP is going to drag down equities prices regardless of the beaucoup funny-money the Fed is stuffing into MBS and USTs.
Then again, I’m probably wrong. That happens a lot.