The cause of the financial crisis: government policies

[cjppjc]

Re: The cause of the financial crisis: government policies

Government and banks are in bed together. If we had HONEST government and HONEST bankers we wouldn't be having this discussion. The answer is not more or less regulation but rather EFFECTIVE regulation. This is Banana Republic stuff. "I pay you, you look the other way, you come work for me when you retire". Same thing is going on with big corporations, just not on the same level. The problem is not business, its the fact government can't turn down the bribes. Why? Because they are not strung up from telephone poles like Mussolini when they are caught. Same for the businessmen who do the bribing. At worst they get a few months in some resort prison, a fine, and then they retire to some private island with the money they buried in the back yard. Make the PEOPLE responsible accountable and this shit will stop.

It's a thought that many agree with, and I like the simplicity. Absolutely no disrespect intended. History shows us that man since the beginning of time will break laws. It is his nature. It's why these discussions are really pointless.

[Sharky]

Re: The cause of the financial crisis: government policies

Another tidbit to add to the OP: In the 1990s, both HUD and the Dept of Justice actually brought lawsuits against banks when a higher percentage of minority applicants than white applicants were turned down for loans. The difference was small, but based on the Community Reinvestment Act, the government wanted quotas to be imposed, and if some people didn't meet the standards, then the standards had to be changed.

History shows us that man since the beginning of time will break laws. It is his nature. It's why these discussions are really pointless.

Another way to look at this is that laws by themselves are not effective at preventing undesirable behavior. What is effective? Proper morality. I don't think much is going to change for the better on the financial or government front until the underlying morality changes.

[Sharky]

Re: The cause of the financial crisis: government policies

Edit: Sorry, after re-reading, I see you did give one sentence of mention to Basel. While admitting I'm not a major expert on the regulations, I don't agree with what you say. On capital requirements, the US banking regulatory regime is very close to Basel I, and that is no accident. Also, I don't think it matters what (if anything) Basel has to say about cash holdings. It's capitalization ratios that are important.

When I said "how much cash banks should hold" in the OP with regard to Basel, I was quoting Allison. From the context, I think that was just shorthand for the degree of capitalization. His claim is that there was a significant difference between Europe and the US in that regard, at least at the time of the crisis. Since he's an ex-CEO of a large bank, I'm going to take his word on that.

However, the underlying issue is not just Basel, it's the over-reliance on mathematical models, of which Basel is just one example.

[snacky]

Re: The cause of the financial crisis: government policies

Basel II prevails in Europe. What our countries have in common is the overwhelming favoritism toward MBSs, something that didn't used to be there a few of decades ago.. That's why both European and American banks were stuffed so full of them. That's also why the global credit bubble was so strongly focused on real estate, rather than something else.

I agree that the big European banks are probably in worse trouble than US banks. I figure they're actually a LOT worse off, and Europe poses an enormous risk to the entire global financial system.

[oddlots]

Re: The cause of the financial crisis: government policies

Hey Sharky,

Just getting to this and the take above is interesting and seems to describe accurately a lot of what's been going on. I want to read the whole thread before trying to really get down to trying to figure it out above here are a few "squinting comments":

- the claim that "Before the Fed, most banks were leveraged about 1:1. After the Fed, commercial banks were leveraged 10:1, and investment banks were 30:1" seems way, way too tidy to me. I find it hard to believe that American bankers had not succumbed to the temptation to leverage that started with the goldsmith's guild's almost at the birth of banking in Europe. That sets my antennae tingling.
- to the extent that the above deals with real-estate financing: a) it treats real-estate as a neutral topic in the sense that it doesn't see it as suspect on it's face (I would side with Hudson here who treats real-estate as a source of drag on the "real" economy insofar as its returns are dependant on i) favourable tax treatment ii) debt-pyramiding in a period of secular asset price rises (Mynsky) iii) a captive market for US denominated financial claims as evinced by the dollar standard (tenuous as it might seem.) That seems like a failure of analysis. I'd love to see an analysis of Ireland in this vein. Of course you could make the point that this is an effect of ECB favouring low rates to see Germany through re-unification - and I think that would be dead on. But that analysis does not seem to be available to the author of the above since he doesn't seem to recognise the problem with asset price inflation per se and real estate bubbles in particular.
- the comments regarding the costs of SOX / the benefits (apparently none) are interesting and I've heard them for years. It does seem a bit of a sideshow to me though. I'm sure that seems tendentious to you but I'm just not willing to accept the proposed template of analysis of regulation versus laissez-faire. I think without taking into account the dollar standard system none of this makes any sense. Without recognising real-estate as a favoured instrument (for both governments and banks particularly) for the recycling of a dollar glut, the world makes no sense. The fact that this is not addressed above is a serious deficiency.
- I heartily agree with the disgust with apparently liberal policies like home-ownership for all that results in wholesale looting of the economy at large, the incomes of labour-dependant families and finally the treasury itself. No contest. I think the the real estate idiocy has been the downfall of western economies. The government has very much played the facilitator to this and the citizenry itself has participated in their own destruction with wild enthusiasm, but I don't see any recognition of this as a problem here and that bugs me a lot

Anyway, I appreciate the thread. I think it's a great topic.

[Sharky]

Re: The cause of the financial crisis: government policies

the claim that "Before the Fed, most banks were leveraged about 1:1. After the Fed, commercial banks were leveraged 10:1, and investment banks were 30:1" seems way, way too tidy to me.

I suspect the 1:1 claim is an over-generalization. Fractional Reserve Banking (FRB) certainly existed before the Fed. However, I think the point is that any banks that were over-leveraged back then tended to rapidly go bust. If you read about the history of the Fed and other central banks, it's clear that they were created because FRB is inherently unstable.

to the extent that the above deals with real-estate financing: a) it treats real-estate as a neutral topic in the sense that it doesn't see it as suspect on it's face (I would side with Hudson here who treats real-estate as a source of drag on the "real" economy insofar as its returns are dependant on i) favourable tax treatment ii) debt-pyramiding in a period of secular asset price rises (Mynsky) iii) a captive market for US denominated financial claims as evinced by the dollar standard (tenuous as it might seem.) That seems like a failure of analysis.

One of the challenges here is to differentiate cause from effect. My claim, and Allison's, is that government policies are responsible for causing the FIRE economy. As you said yourself, favorable tax policies -- which are established by government -- were one of the factors involved. Interest rate manipulation is another.

the comments regarding the costs of SOX / the benefits (apparently none) are interesting and I've heard them for years. It does seem a bit of a sideshow to me though.

SOX is really a symptom of a larger problem, which is that many recent government-imposed regulations are a drain on honest companies, in terms of not just financial cost, but also as a distraction of management effort. In the same way that FIRE is not part of the productive economy, labor that is forced to be spent on regulatory compliance also is not productive.

Imagine how your life would be impacted if you had to spend most of the year filling out government forms and keeping an army of auditors happy... How is any company supposed to maintain top-notch operational standards when it's management is heavily distracted, including what amounts to constant threats of being closed down or worse.

I think the the real estate idiocy has been the downfall of western economies. The government has very much played the facilitator to this and the citizenry itself has participated in their own destruction with wild enthusiasm, but I don't see any recognition of this as a problem here and that bugs me a lot.

That's really the main point I'm trying to make.

[marvenger]

Re: The cause of the financial crisis: government policies

I think the the real estate idiocy has been the downfall of western economies. The government has very much played the facilitator to this and the citizenry itself has participated in their own destruction with wild enthusiasm, but I don't see any recognition of this as a problem here and that bugs me a lot.

I'm pretty sure the world doesn't work by the citizenry forcing their wild enthusiasm on the oligarchs. At least 99.9% of the time and this isn't the exception that proves the rule. It happened because the oligarchs allowed it and encouraged it along with the government, because powerful capitalists always need the state to improve and maintain their power. Nothing new there. Where would economic growth be without these wild bubbles? You don't need to look much beyond that. The capitalist system is highly biased against purchasing power finding its way into the hands of most of the population. High productivity gains that workers participate in has worked in the past but this is not one of those periods and globalsim is a large contributor to that along with the constant that most high powered capitalists are self entitled pricks that the rest of the smaller pricks try to emmulate. Thats the system.

[Slimprofits]

Re: The cause of the financial crisis: government policies

Government and banks are in bed together. If we had HONEST government and HONEST bankers we wouldn't be having this discussion. The answer is not more or less regulation but rather EFFECTIVE regulation. This is Banana Republic stuff. "I pay you, you look the other way, you come work for me when you retire". Same thing is going on with big corporations, just not on the same level. The problem is not business, its the fact government can't turn down the bribes. Why? Because they are not strung up from telephone poles like Mussolini when they are caught. Same for the businessmen who do the bribing. At worst they get a few months in some resort prison, a fine, and then they retire to some private island with the money they buried in the back yard. Make the PEOPLE responsible accountable and this shit will stop.

^ this guy ^ gets IT.

[ThePythonicCow]

Re: The cause of the financial crisis: government policies

Government and banks are in bed together. If we had HONEST government and HONEST bankers we wouldn't be having this discussion. ... Make the PEOPLE responsible accountable and this shit will stop.

Part of the "cost of doing business" for sufficiently large crimes is paying for sufficient propaganda, deception and lies, throughout a society's news media, schools, universities, and research centers, to ensure that the HONEST truth never sees the light of day.

Once crime becomes sufficiently profitable to afford that ongoing cost, it becomes immune from public accountability.

Our job, on the Internet here and now, is to raise the cost of truth suppression so high that the lying bastards in power can no longer afford the cost of keeping the truth hidden. So far, we're actually doing a pretty good job of it.

[oddlots]

Re: The cause of the financial crisis: government policies

Here's a test of your thesis I think Sharky: CDS (Credit Default Swaps.)

Here's a financial innovation that was protected very effectively against any oversight at all over the period of it's blossoming until it became a 60 trillion dollar market. The result was it became both, to my mind, the key vector of contagion across financial entities and the fulcrom over which financial interests were able to lever their control over the "real" economy (commercial paper markets for instance.)

Where's the market discipline in this story?

[Sharky]

Re: The cause of the financial crisis: government policies

Here's a test of your thesis I think Sharky: CDS (Credit Default Swaps.)

Here's a financial innovation that was protected very effectively against any oversight at all over the period of it's blossoming until it became a 60 trillion dollar market. The result was it became both, to my mind, the key vector of contagion across financial entities and the fulcrom over which financial interests were able to lever their control over the "real" economy (commercial paper markets for instance.)

Where's the market discipline in this story?

Market discipline requires a free market.

The problem with CDS seems to me to have originated with a failure of the rating agencies -- a government-sanctioned monopoly, which, in turn, prevented a free market from operating. On top of that, when a major CDS-based failures was about to happen, at AIG, the government stepped in and rescued them.

On top of that, we have financial fraud on a nearly unimaginable scale. It seems obvious to me that the only way that level of fraud is possible is with explicit government collusion.

An important backdrop to the financial fraud is that the people behind it have always believed that if things went terribly wrong, that the Fed would be there to step in and save them, with "TBTF" and so on. If a government backstop hadn't existed, and the people involved had been forced to accept the risk of failure as well as the potential gain, the market would have established the discipline it needs. If AIG had been allowed to fail, I suspect the market for CDS today would be much different.

[flintlock]

Re: The cause of the financial crisis: government policies

It's never been too hard to lead a fool astray. Americans are proof of this.

[Sharky]

Re: The cause of the financial crisis: government policies

It's never been too hard to lead a fool astray. Americans are proof of this.

Perhaps, but intentionally leading someone astray through deception for personal or financial gain is a crime. It's called fraud. Why do we need reams of regulations when a few simple ones should do? And when even those simple ones aren't enforced effectively, what makes anyone think that more complex regs would be any better?

In the absence of fraud, force or coercion, people should be free to make mistakes. If I make a bad choice, I'm willing to pay the price. Why shouldn't the same be true at all levels of society? I don't want a government that tries to protect me from myself.

[Verrocchio]

Re: The cause of the financial crisis: government policies

Market discipline requires a free market.

The problem with CDS seems to me to have originated with a failure of the rating agencies -- a government-sanctioned monopoly, which, in turn, prevented a free market from operating. On top of that, when a major CDS-based failures was about to happen, at AIG, the government stepped in and rescued them.

On top of that, we have financial fraud on a nearly unimaginable scale. It seems obvious to me that the only way that level of fraud is possible is with explicit government collusion.

An important backdrop to the financial fraud is that the people behind it have always believed that if things went terribly wrong, that the Fed would be there to step in and save them, with "TBTF" and so on. If a government backstop hadn't existed, and the people involved had been forced to accept the risk of failure as well as the potential gain, the market would have established the discipline it needs. If AIG had been allowed to fail, I suspect the market for CDS today would be much different.

Sharky, I don't think anyone would argue that government bears no share of the blame for the disastrous situation we're in today. But your argument depends too much on guilt by association. Merely pointing out that government attempted to regulate in some form is far from convincing. I would find ineffective, weak regulation and, in some cases, corrupt regulators much more plausible as culprits. That would, however, lead us to ask who lobbied government for weaker regulation and who corrupted the regulators, perhaps resulting in a focus of inquiry that conflicts with your ideology or political interests.

On the other hand, it's silly to suggest that government

[Mashuri]

Re: The cause of the financial crisis: government policies

Sharky, I don't think anyone would argue that government bears no share of the blame for the disastrous situation we're in today. But your argument depends too much on guilt by association. Merely pointing out that government attempted to regulate in some form is far from convincing. I would find ineffective, weak regulation and, in some cases, corrupt regulators much more plausible as culprits. That would, however, lead us to ask who lobbied government for weaker regulation and who corrupted the regulators, perhaps resulting in a focus of inquiry that conflicts with your ideology or political interests.

The point Sharky's making is that CDS, among other things, could never have become such a large problem without government intervention. Socializing bank losses (FDIC insurance, bailouts, etc) create a moral hazard for banks to take huge risks. Forcing interests rates too low creates boom/bust cycles. Asking for regulations to control these is asking to treat symptoms and not root causes. I always like to illustrate Panama's financial system because it was founded, along with the country, just a few years before the U.S. Federal Reserve. Panama has no legal tender (it is forbidden in their constitution), no central bank, no socialized safety net like FDIC and no capital controls. Guess how many systemic financial / banking crises Panama has had since its inception in 1903? ZERO.