Aug 23 2012

When the Next Crash Comes Remember Which Side You Were On and Learn

(2 pm. – promoted by ek hornbeck)

Cross posted at our new beta site Voices on the Square and The Stars Hollow Gazette

Yes, another crash is coming. I can’t predict precisely when as that would be a fool’s errand, but much closer than you think. It will probably be after our President is reelected and will care very little what you or I think once he and his treasury push for criminal TBTF banks to bailed out once again. Doctor Doom: the nickname for economist Nouriel Roubini: one of the relatively few outside the mainstream(part of the Got It Right (pdf) project) who predicted the last crash thinks 2013 is a perfect storm for another one which will be even worse and it makes sense.

Despite on theoretical fiscal policy limits with regard to the US, Roubini is absolutely right on the political deadlock with the coming crisis. We wasted our last crisis and that’s something Conservatives have not done whether we’re talking about the stagflation crisis of the 70s or 9/11. There won’t be as many political options this time to prop up the underlying economy in 2013 because Democrats have failed to change the Senate rules because most of them secretly like the way things work or don’t work in Washington. Sadly, if Republicans take over both houses again, they will change the Senate rules as they threatening to do in 2005 and 2006.

Anyway some might still want to scoff at Roubini’s prediction, but that will come back to bite them in the ass. Not even Roubini can predict the exact moment it will happen, but if one knows anything about the history of financial crashes, since the 80s when the 1933 banking reforms passed by FDR started slowly being dismantled, they started happening once again in a 5-7 year time-frame(and even closer than that if you count global stock crashes which count now more than ever since our markets turned dark with OTC derivatives and Information Asymmetry all around); some worse than others as the 2008 bust was on par with 1929 but you get the idea.

As you can see, 2013 would fit this pattern as far as major crisis are concerned even if it is in 2014 or 2015 instead. Financial History is on Roubini’s side, and it’s unfortunate that so many people, especiallay our politicians, want to deny it to our detriment. We’re still suffering the reverberations of the last bust on top of 35 years of income inequality and debt deflation. All “recoveries” have been jobless since the .com bust, and because of this jobless recovery dynamic, our underlying economy is not strong enough to withstand the reverberations of these financial panics caused by fraud propped up by our leaders in DC that perpetuate it.

Alexander Arapoglou and Jerri-Lynn Scofield at Alternet lay out 6 reasons Roubini is most likely right in this fairly long, but extremely informative piece. The system is inherently unstable and corrupt.

Uncle Sam Needs YOU for a Bailout: 6 Reasons Another Big Banking Crisis Is Coming Our Way: Rampant financial crime and poor regulation can only mean another blowup, and guess who will be holding the bag?

Failure to pursue banks, culpable management and employees for their complicity in causing the financial crisis is one of six bad policies that ensure we’re likely to see another bust-up of a big U.S. bank — sooner rather than later.

Who’s going to pay the price for such a failure?  We will, of course. Uncle Sam’s policy of allowing banks to get too big to fail means we’ll all be left holding the bag when that collapse occurs – and another banking bailout is necessary.

1. Too big to fail

Thirty years of financial deregulation have seen unprecedented concentration of the financial sector. Before, financial firms were limited both in where they could do business and the types of business they could do. This prevented a big banking blowup in the U.S. for more than 50 years.

Banks used to be limited to owning branches within individual states. When a bank got into trouble-and some did — losses stayed confined. Regulators such as the Federal Deposit Insurance Corporation (FDIC) could clean up the mess and preserve depositors’ assets, without unduly burdening taxpayers. But after changes culminating in the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994, those restrictions vanished.

So some banks got steadily bigger, while the overall number shrank.  From 1990 to 2011, the number of commercial banks halved, from about 12,000 to 6,000, according to the St. Louis Federal Reserve Bank.


2. See no evil, hear no evil

While the financial system was consolidating, another threat was looming: the “shadow banking system” was being created. Another New Deal reform, the Investment Company Act of 1940, imposed heavy restrictions on investment companies, which were intended to protect investors from excessive risks, fraud and scams.

But regulators decided that sophisticated investors, including the wealthy, pension funds and charities, had enough financial savvy to be allowed to invest in shadow banks that were either lightly regulated, or not at all. Such alternative investment vehicles, including hedge funds and private equity funds, were exempt from investment restrictions.

In the last two decades, there’s been an explosive growth in shadow banks. The size of this unregulated system has increased fivefold and today is larger than the regulated financial system.


3. Calling in the cavalry, but giving them the wrong directions

Once the U.S. decided to deregulate the financial sector, and banks got bigger, it was inevitable that the government would be called in for a rescue. Most of us were aware that in 2008, the government stepped in to bail out big banks that were destabilized by Lehman Brothers’ collapse and by the bad derivatives bets entered into by AIG Financial Products. The world financial system was at the brink, we were told, and the Troubled Asset Relief Program (TARP) was necessary to save the system.

But a decade before this bailout, U.S. financial regulators were involved in a rescue of a shadow bank, which helped set the stage for TARP.  In 1998, the Long-Term Capital Management (LTCM) hedge fund got into trouble by placing heavily-leveraged derivatives bets during the Asian financial crisis. Hedge funds are allowed to operate with scant regulatory supervision on the rationale that they cater only to sophisticated investors who could bear the risk.


Sometimes you want government intervention to quell a banking panic, and to shore up or reboot a failed banking system. Banks need to be seized, or at minimum assessed by a neutral observer, and their balance sheets cleaned up. Investors, too, must pay a price for making foolish investment choices. Typically, existing shareholders are wiped out, while bondholders see their promises of guaranteed debt payments converted to more speculative shares of stock.

We used to know how to do this. The Depression-era Reconstruction Finance Corporation seized failing banks, cleaned up their balance sheets, and later transferred these institutions back to private ownership. The Resolution Trust Corporation followed similar policies in cleaning up the savings and loan crisis of the 1980s and early 1990s. More recently, the Swedish government nationalized failing banks in the 1990s. Managers were penalized, and shareholders and sometimes bondholders took losses.

But the U.S. forgot all these sound policies in the 2008 TARP. The government provided cash to stabilize shaky financial institutions, guarantees to bondholders, and tax breaks. It also purchased some risky assets. But it didn’t get much in exchange. Regulators didn’t demand that banks open their books and clean up their balance sheets. The big banks continued as going concerns.

Bank managers paid no price and mostly kept their jobs. They paid themselves bonuses rather than using capital to shore up their banks. Bottom line: Managers, shareholders, and bondholders didn’t fully pay for their folly.


4. Creating financial weapons of mass destruction

The need to bail out AIG Financial Products in 2008 arose from huge losses in unregulated derivatives trading. We should have seen that coming, because derivatives had caused LTCM to fail back in 1998. In fact, plenty of people saw that derivatives were problematic. Warren Buffett called them “financial weapons of destruction” back in 2003.

So, why wasn’t anything done to defuse these weapons?

Well, in 1998, one very prescient regulator, Brooksley Born, chairman of the Commodity Futures Trading Commission, tried, and failed, to initiate a unilateral disarmament policy.


But folks like Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his successor, Lawrence Summers, and SEC chairman Arthur Levitt, ganged up on Born to preserve the status quo. They saw derivatives users as sophisticated financial players who should not be regulated.

Congress first passed a temporary provision forbidding any change in regulating derivatives. Born resigned in 1999. Congress then passed the Commodity Futures Modernization Act of 2000, which specifically excluded OTC derivatives from regulation. This same state of play remained in 2008 when these weapons of mass destruction nearly destroyed the world financial system.


6. Perps get off scot-free

These are the facts. No partisan financial cheerleaders can state otherwise with any credibility but they once tried. They scoffed when criminologist economist at the best economic school(because it doesn’t teach the orthodox garbage in most econ departments and in our government) in the country UKMC S&L regulator with a record Bill Black warned us about this. And yet still, they smugly dug up online balance sheets they didn’t understand, pretended this is a liquidity crisis instead of an insolvency crisis forgetting none of the assets were marked to market; this means that they believe a magical market in the future will make the books solvent again, so let the betting begin.

It didn’t happen that way of course as fake assets turned into crushing liabilities so we should condenser their purported knowledge or excuses for whatever politician to be a fraudulent asset as well. This of course goes to most economic departments that were infiltrated by the men who ruined the world and their followers(and people that excuse the politicians that excuse them. Yes. That’s right). If this delusion of markets in the future making fraudulent assets whole as they were marked and still are on banks balance sheets now ha any credibility, then states would have all the revenue they need. There would be no need for aid to the states but there is still a massive need. Some scoff that the focus on market to market is relying all on the market, but it’s the opposite. Efficient market hypothesis states that markets will balance out all investments even if they are Ponzi investments in the future even with no accurate accounting or transaction info.

This is RW absolute historical and analytically garbage. People who call themselves progressives because they are (technically third way) Democrats shilling for this type of propaganda to protect a politician’s image have no shame or knowledge. It’s best that they just say sorry when the next crash and bailout comes, because they have indirect blood on their hands from the fallout. This kind of smug elitist finance geek crap found among Democratic voters looking to excuse everything the President does or those in Congress need to self reflect when it comes. It’s really a shame that so many people in our party have such disdain for the damage these financial machinations cause real people whether blinded by herd mentality or cognitive dissonance.

They should just be glad they got theirs jack and go hang out with the Rubinites they truly admire on the right while pretending they are on the left because of the party label they support. Some of us were advocating for a better Swedish style bank rescue with some accountability and accounting access when the time was ripe for those real solutions. However, remember that we were shouted down by the chorus that were so sure that what really led to the 2010 mid term losses “wasn’t real” because the President is always right and he’s got this.” Unlike fake stress tests that have been shown worthless in the past used for PPIP by the failure named Tim Geithner looking to “foam the runway for the banks,” these solutions had a wide consensus and history of effectiveness.

If there was to be a bailout at all, it should have been done this was as it had been done in the past, because in the long run, it would have been better if there was no bailout than what happened. When you say that people start talking about stopping a great depression(as if the same dynamics and some worse haven’t happened) but there’s not a lot of substance to this claim. The lie about the commercial paper market the Fed already had plans to make purchases of does not excuse just handing the financial sector trillions upon trillions more in loan guarantees. It perpetuated a system that is no use to anyone except the Oligarchs that run and control it.

The pain is going to much greater next time because people are probably not going to ever fully recover from the last one. So if you consider yourself one of those “savvy” financial bloggers or anyone else who denied what truly needed to be done in 2008 and today for a functioning financial system, then do us and the world a favor and STFU next time. I’d rather you just thank us for laying out the danger of your ineptitude so you can learn, but you don’t have to be a soulless, money worshiping, power worshiping hypocrite forever. You can change, and I hope you do.

1 comment

  1. priceman

    I guess two dissections doesn’t hurt, but you are hard to keep up with. 😛

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