Fluke? Credit crisis was a heist by James Jubak
Of course, just because the plan blew up on the looters, taking off a financial finger here and a portfolio hand there, you shouldn’t have any illusion that they’ve retired. In fact, in the “solutions” now being proposed — by Congress — to fix the global and U.S. financial systems, you can see the looters at work as hard as ever.
He is exactly right.
Answer: Because the federal government had forced them to back off. An aggressive interpretation of the definition of insurance could have let state insurance agencies regulate the derivatives contracts that AIG’s financial-products group was writing out of London. These were, in fact, insurance policies that guaranteed the companies taking them out (banks, other insurance companies, investment banks and the like) against losses on securities in their portfolios.
But Congress had made it very clear in the Commodity Futures Modernization Act — supported by then-Federal Reserve Chairman Alan Greenspan, steered through Congress by then-Sen. Phil Gramm, R-Texas, and signed into law by President Bill Clinton in December 2000 — that most over-the-counter derivatives contracts were outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.
With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.
Question: Wasn’t anybody worried about the risk to the financial system posed by a market that dwarfed the assets of the sellers of this insurance?
Answer: Worry about leverage? You’ve got to be kidding.
In 2004, the Securities and Exchange Commission, after hard lobbying by Wall Street, reversed its 1975 rule limiting investment banks to leverage of 15-to-1. The new limit could be as high as 40-to-1 if the investment banks’ own computer models said it was safe.
Understanding the people paid lots of money to politicians and then (after they got lots of money) those politicians enacted laws that endangered the economy to favor those giving them lots of money. Now maybe these politicians just like letting exceptionally wealthy people endanger the economy for personal gain. Maybe they think that is a good idea. I tend to think instead they do what those they give them lots of money want. But maybe I am wrong on that.
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Group of Rich Americans Sues UBS to Keep Names Secret in Tax Case
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The lawsuit, which UBS described in an internal memo late Tuesday, stems from UBS’s agreement last week to turn over to federal authorities in Washington the names of 250 wealthy Americans suspected of using secret UBS offshore accounts and entities to evade taxes.
UBS reached a $780 million deferred-prosecution agreement to settle accusations that it used undisclosed offshore private banking services to help wealthy Americans evade taxes. But the bank is still under scrutiny by the Justice Department, which is seeking to force it to disclose the names of the 52,000 American clients it suspects may have evaded taxes.
So how many of these people will be serving time in jail do you think. Lets say for example, they ended up stealing $10,000 from the US government by evading taxes. Now UBS has to worry about the Swiss laws on disclosing information. But for the Americans all they are doing is trying to cover up a crime they committed. Do you think they will be punished for the crime in the first place? What about for trying to cover up the crime after the fact? The lack of moral fiber of so many rich in the USA is disheartening. I hope those that tried to steal from all the rest of us, and then tried to cover up their crimes, are thrown in jail at least as long as an average criminal that is young and poor that steals the amount they did and then tries to prevent witnesses from providing evidence to the Justice Department. And not in some country club jail either. But I doubt they will be. More rich people act ethically than those that don’t, but the number that are outrageously unethical is far too high.
Related: Super Spoiled Brats – Why Pay Taxes or be Honest – Estate Tax Repeal – CEOs Plundering Corporate Coffers
The huge banking bailouts and stimulus bill are meant to counter-balance the huge problems the economy is suffering through. The damage caused to the economy, is largely from unwise risks that were allowed by regulators and politicians that have not panned out and are now greatly damaging the economy. It is always easy for politicians to pay out money in an attempt to buy our way out of problems. That is what the stimulus and bailout bills are doing. They are yet again heaping huge debts on our children and grandchildren.
The bailout and stimulus packages are not about preventing foolish risks to the economy by huge banks that would make the economy safer in the future. Those types of bills are very hard to pass as the politicians get great sums of money to allow people to risk the economy for their own benefit. The concept of the stimulus is not to fix the cause of the problem but do cope with the problem we are left with due to people that paid themselves huge amounts of money. Now the taxpayers get to fund the huge payouts wall street has given themselves.
This is because they never actually provided the value they claimed. They merely created false returns to claim they provided a benefit to justify obscene pay (many of them truly didn’t understand this is what they were doing so beyond failing they were so incompetent [while accepting well over a million dollars a year] they didn’t even understand that the financial games they were playing were failing. It is hard to know what is worse, being so incompetent while claiming you deserve millions or knowing you are just paying yourself money based on false claims of value.
Either way, the banks are left bankrupt – having worthless securities created by those paying themselves huge amounts of money. If the huge banks fail the financial system collapse creates huge problems – businesses that have operated for decades by borrowing some funds (responsibly) go bankrupt because no funds are available to lend them, etc..
The stimulus is not about fixing the problems of the past it is about countering the huge decline from the bubble economy. That bubble economy was funded largely by claiming value where none existed thereby allowing people to spend huge amounts of money based on those faulty claims. How people are shocked that playing financial games doesn’t actually make hundreds of billions of dollars appear out of thin air is beyond me.
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President Barack Obama’s Inaugural Address
That sounds nice I believe however, it is fairly irrelevant. Economic demand is what is down, not production capacity. We are “no less productive than when this crisis began.” Ok, that is probably true. So what. That implies that the crisis has something to do with productivity. If we say the color of our eyes is the same as when the crisis began it is obvious that is a non-sequitur. Well so is the quote by the new President, though that is less obvious.
Our demand was definitely over stimulated using massive federal government budget deficits, massive trade deficits, massive amounts of consumer debt, massive amounts of unjustified mortgage debt and massive amounts of leverage. None of those things has anything to do with capacity in the implied sense – capacity to produce. They have to do with the capacity to consume. And while our capacity to consume has not declined. The funding that allows that consumption (foreign lending, high leverage, junk mortgages…) has decreased.
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As I suspected those (who are not earning minimum wage you can be sure) that have lost money on the Madoff case would expect others to bail them out: well paid lawyers (I am sure) are making their case for just such a bailout of their wealthy clients.
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The SIPC has little more than $1.6bn of funds and has promised $500,000 to each Madoff victim who had an account with his firm in the past 12 months.
The debate needs to be about what is the proper role for government. Not about this instance. What type of losses do we want secured? How large of payments do we want to insure? That amount has been $500,000 if we are changing the rules after the fact for a few is that really the best course of action)? How should these payments be funded? Do we really want to raise taxes on our grand children (many of which who will earn less than the equivalent of $50,000 today)? I don’t think so. This SIPC fund should be paid for by fees on investments just like the FDIC is paid for based on fees on covered deposits (as the SIPC is now – but no taxpayer funding should occur).
If we decide we want to pay back people several million each then the fees just need to be raised to fund such a system. Just as with the FDIC if we want the government to backstop the fund by guaranteeing they will loan the fund money if it runs short of cash is fine with me. Then the SIPC fund just pays back the taxpayers with interest.
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Continuation of: USA Manufacturing is Healthy
The real problem with the USA economy is that a country cannot live beyond its means forever. Those living in USA have consumed far more than they have produced for decades. That is not sustainable. The living beyond our means is mainly due to massively increased consumption, not shrinking output (in manufacturing or service). One, of many examples, of the increased consumption is average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.
In case it isn’t totally obvious to you. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing. Personally, as this continues you reach a point where getting another credit card does not work. The same holds true for the collective health of a country. A country cannot solve the problem of having bills come due from decades of living beyond its means by charging more so that they can continue to live beyond their means.
Where the USA is in the continuum, is hard for me to judge. For the sack of illustration, lets say a consumer can get to 10 cards before they finally fail. If the consumer reaches the limit on 2 credit cards they have the choice to continue to the party by getting another credit card. Or they have the choice of addressing the situation they have gotten themselves into. If they decide to become responsible they have a challenge but one they can endure with some hardships.
If they press on to 5 credit cards and then max them out they come to the same decision. Dig themselves deeper in debt to avoid the problem today or live up their past behavior and become responsible. The work they have ahead of themselves is much more challenging than if they had started working on the problem when they only had 2 cards.
If they press on to 9 cards and now have the decision again. The effort to find a solution may be almost impossible. Borrow more to pay for past mistakes while maintaining some expenditures may be possible (but they will have to live on less than they earn). By the time you are this far down the failed path you have so much going to pay for your past bills you can’t spend even close to what you currently earn on current expenses. Letting yourself get to this point is very bad. And most likely as a person you will go bankrupt.
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In a recent article in Business Week Michael E. Porter makes some excellent points – Why America Needs an Economic Strategy:
Second, U.S. entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world. While other countries increase their spending on research and development, the U.S. remains uniquely good at coaxing innovation out of its research and translating those innovations into commercial products.
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Third, the U.S. has the world’s best institutions for higher learning, and they are getting stronger. They equip students with highly advanced skills and act as magnets for global talent, while playing a critical role in innovation and spinning off new businesses.
Fourth, America has been the country with the strongest commitment to competition and free markets.
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An inadequate rate of reinvestment in science and technology is hampering America’s feeder system for entrepreneurship. Research and development as a share of GDP has actually declined, while it has risen in many other countries.
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A creeping relaxation of antitrust enforcement has allowed mergers to dominate markets. Ironically, these mergers are often justified by “free market” rhetoric. The U.S. is seeing more intervention in competition, with protectionism and favoritism on the rise. Few Americans know that the U.S. ranks only 20th among countries in openness to capital flows, 21st on low trade barriers, and 35th on absence of distortions from taxes and subsidies
I have discussed similar idea in this blog and the Curious Cat Science and Engineering Blog: The Future is Engineering – Engineering the Future Economy – Science Gap – Not Understanding Capitalism
Farmer in Chief by Michael Pollan
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Spending on health care has risen from 5 percent of national income in 1960 to 16 percent today, putting a significant drag on the economy. The goal of ensuring the health of all Americans depends on getting those costs under control. There are several reasons health care has gotten so expensive, but one of the biggest, and perhaps most tractable, is the cost to the system of preventable chronic diseases. Four of the top 10 killers in America today are chronic diseases linked to diet: heart disease, stroke, Type 2 diabetes and cancer.
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You cannot expect to reform the health care system, much less expand coverage, without confronting the public-health catastrophe that is the modern American diet.
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It must be recognized that the current food system — characterized by monocultures of corn and soy in the field and cheap calories of fat, sugar and feedlot meat on the table — is not simply the product of the free market. Rather, it is the product of a specific set of government policies that sponsored a shift from solar (and human) energy on the farm to fossil-fuel energy.
Read the full, long, interesting article. I have discussed both the failed special interest focused federal spending on farmers and the failed health care system.
Related: Farming Without Subsidies in New Zealand – Eat food. Not too much. Mostly plants. – International Health Care System Performance – USA Paying More for Health Care –
Cost of U.S. Crisis Action Grows, Along With Debt
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The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.
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The financial health and earnings prospects of Fannie Mae and Freddie Mac — seized by the government on Sept. 7 to prevent them from failing — worsened in the second and third quarters, the companies’ government regulator said this week.
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On top of all that, budget watchdogs say the sheer size of the interventions is making Washington more profligate than usual. To attract votes in Congress, leaders added several costly items to the $700 billion rescue, including extensions of some tax credits and tax breaks for makers of wooden arrows and stock- car racetrack owners.
Under normal circumstances, there would have been more resistance to such expenses, said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog.
The news sure is not yet getting better. And our failure to act responsibly in good times now seriously increase risk. Just as someone that lived far beyond their means, with excessive debt, debt on multiple credit cards… we have continually elected politicians that had our government live beyond our means for decades. And that means we don’t have the resources to pay for the measures we are talking. For now the world markets are willing to give the USA government more credit cards to finance more spending. But at some point that stops.
At some point the loans have to be paid back. The only options are large reductions in spending, large increases in taxes or just printing more and more money people don’t want to pay off loans (which will cause massive inflation). There is also the possibility of growing our way out of the problems (the equivalent of yes, I have $40,000 in credit card debt but when I make $150,000 a year paying that off will be easy). To some extent this will happen (unless things get very very bad) but the level of economic growth needed is unlikely to fix the problem we make worse every year (as we fall further and further behind). We are now spending huge amounts to money we didn’t save in the good times. That means we are mortgaging even more of our future than we already had before this mess.
Related: Financial Market Meltdown – Warren Buffett Webcast on the Credit Crisis – FDIC Limit Raised to $250,000 – Financial Markets Continue Panicky Behavior – USA Federal Debt Now $516,348 Per Household
Plan Pushed for Government to Buy Bank Stocks
The FDIC limit has been raised to $250,000 which is a good thing. The increased limit is only a temporary measure (through Dec 31, 2009) but hopefully it will be extended before it expires. I don’t see anything magical about $250,000 but something like $200,000 (or more) seems reasonable to me. The coverage level was increased to $100,000 in 1980.
What does federal deposit insurance cover?
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.
Joint accounts are covered for $250,000 per co-owner. The limit is per person, per institution, so all your accounts at one institution are added together. If you have $200,000 in CDs and $100,000 in savings you would have $50,000 that is not covered.
FDIC is an excellent example of good government in action. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 and serves to stabilize banking by eliminating the need to get ahead of any panic about whether the bank you have funds in is in trouble (which then leads to people creating a run on the bank…)
From an FDIC September 25 2008 news release: the current FDIC balance is $45 billion (that is after a decrease of $7.6 billion in the second quarter). The FDIC is 100% paid for by fees on banks. The FDIC can raise the fees charged banks if the insurance fund needs to get increased funds.
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