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United States News Title: What caused the financial crisis? The Big Lie goes viral. But then, I’m an investor focused on preserving capital and managing risk. I’m not out to win the next election or drive the debate. For those who are, facts and data matter much less than a narrative that supports their interests. One group has been especially vocal about shaping a new narrative of the credit crisis and economic collapse: those whose bad judgment and failed philosophy helped cause the crisis. Rather than admit the error of their ways — Repent! — these people are engaged in an active campaign to rewrite history. They are not, of course, exonerated in doing so. And beyond that, they damage the process of repairing what was broken. They muddy the waters when it comes to holding guilty parties responsible. They prevent measures from being put into place to prevent another crisis. Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie. A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair. Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault. Indeed, the arguments these folks make fail to withstand even casual scrutiny. But that has not stopped people who should know better from repeating them. The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.” What made his comments so stunning is that he built Bloomberg Data Services on the notion that data are what matter most to investors. The terminals are found on nearly 400,000 trading desks around the world, at a cost of $1,500 a month. (Do the math — that’s over half a billion dollars a month.) Perhaps the fact that Wall Street was the source of his vast wealth biased him. But the key principle of the business that made the mayor a billionaire is that fund managers, economists, researchers and traders should ignore the squishy narrative and, instead, focus on facts. Yet he ignored his own principles to repeat statements he should have known were false. Why are people trying to rewrite the history of the crisis? Some are simply trying to save face. Interest groups who advocate for deregulation of the finance sector would prefer that deregulation not receive any blame for the crisis. Some stand to profit from the status quo: Banks present a systemic risk to the economy, and reducing that risk by lowering their leverage and increasing capital requirements also lowers profitability. Others are hired guns, doing the bidding of bosses on Wall Street. They all suffer cognitive dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility. And what about those facts? To be clear, no single issue was the cause. Our economy is a complex and intricate system. What caused the crisis? Look: ●Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks). ●Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys. Instead, they turned to high-yield mortgage-backed securities. Nearly all of them failed to do adequate due diligence before buying them, did not understand these instruments or the risk involved. They violated one of the most important rules of investing: Know what you own. ●Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch. They had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasurys. 4 Derivatives had become a uniquely unregulated financial instrument. They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims. 5 The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very little room for error. 6Wall Street’s compensation system was skewed toward short-term performance. It gives traders lots of upside and none of the downside. This creates incentives to take excessive risks. 7 The demand for higher-yielding paper led Wall Street to begin bundling mortgages. The highest yielding were subprime mortgages. This market was dominated by non-bank originators exempt from most regulations. The Fed could have supervised them, but Greenspan did not. 8 These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to get creative with underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value. 9 “Innovative” mortgage products were developed to reach more subprime borrowers. These include 2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages. ●To keep up with these newfangled originators, traditional banks developed automated underwriting systems. The software was gamed by employees paid on loan volume, not quality. ●Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998. This allowed FDIC-insured banks, whose deposits were guaranteed by the government, to engage in highly risky business. It also allowed the banks to bulk up, becoming bigger, more complex and unwieldy. ●Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks. Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates skyrocketed. Bloomberg was partially correct: Congress did radically deregulate the financial sector, doing away with many of the protections that had worked for decades. Congress allowed Wall Street to self-regulate, and the Fed the turned a blind eye to bank abuses. The previous Big Lie — the discredited belief that free markets require no adult supervision — is the reason people have created a new false narrative. Now it’s time for the Big Truth. The REAL ESTATE "BUBBLE" was all caused by government interference in America. It was based on, The Community Reinvestment Act (CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Furthermore, through time, this CRA program required more and more local banks to increase their loans within CRA. In 1977 it was around 5% until 2005 arounf d 50%. Furthermore, this increased the market competition to lower standards ensuring that the banks met CRA requirements. Notice how many banks went BELLY-UP for the last six years as unqualified buyers lost their homes? It was the federal government pushing SHIT on America.
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#1. To: buckeroo (#0)
I would like to see a citation for that claim. Plus the WP seems to forget that the CRA was the result of intense lobbying by the bankers who would later directly profit, home building, real estate and other industries.
Doesn't that VERY POINT suggest that something is wrong with Washington DC? WHAT THE FUCK IS GOVERNMENT DOING GETTING INVOLVED WITH BUSINESS ANYWAY? Ever hear of John Stuart Mill and concepts of Laissez-faire? Just read your Marx/Engels, "Communist Manifesto" and Mao Tse Tung's, "Little Red Book," eh?
To mitigate harm. Regulation follows abuse, not the other way around.
So you agree with a TRILLION DOLLAR US DEFENSE INDUSTRY that has done nothing for America but create the essence of WW3? Government doesn't know or understand anything about the world around us anymore than you or anyone. Those bureaucrats/elected leaders are just little stupid humans, perhaps a notch up the evolution ladder than yourself BUT THEY AREN'T GODS.
No, they are not Gods. The government is people either hired or elected to do a job. Government reflects us, it is not separate from us.
Fuck your trust of government; it reflects the lowest common denominator of invasive primordial slime; it reflects nothing about myself or family.
Where did I say I trust government? ...it reflects the lowest common denominator of invasive primordial slime; it reflects nothing about myself or family. Hogwash!
Your entire premise on this chit-chat channel irrespective of the topic being discussed is the FACT that government lowers the standards of society through it's ensnaring reach into the citizenry because of benevolence and "the good" that government performs within a democracy. You are just a PUFFED-UPPED BLOW-DOLL for your daughter who should be poking your eyes out with her voo-doo pins and needles. Governments are overthrown in a moment's notice. All over the ME, we see it. Today, the rumblings are in America; unlike yourself wherein you believe that People reflect an honest opinion within their voting decisions, I think they are the worst common denominator to plague an otherwise just and noble society. Go choke on your chad puncher which has caused America to lose its otherwise preeminent position of and about the world.
It is? News to me. Governments are overthrown in a moment's notice. All over the ME, we see it. Today, the rumblings are in America; unlike yourself wherein you believe that People reflect an honest opinion within their voting decisions, I think they are the worst common denominator to plague an otherwise just and noble society. Go choke on your chad puncher which has caused America to lose its otherwise preeminent position of and about the world. Yeah, that's right, governments exist only by consent of the governed. Governments are not separate from the people but reflect the people governed. When a government is no longer acceptable to the people, it's on the way out. Go choke on your chad puncher which has caused America to lose its otherwise preeminent position of and about the world. My goodness I have a lot of power.
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