gipa69
collegio dei patafisici
ANALYZING THE FINANCIAL COLLAPSE
Who Caused It?
[FONT=Calibri,Calibri][FONT=Calibri,Calibri]The President was pretty clear. He said the greedy bankers did it.
Is he right? A number of economists and political scientists, who have attempted to explain why financial crises develop, might disagree. Some more prominent names are Hymn Minsky, Charles Kindleberger, and Paul Kennedy. Simplistically, the first two argued that financial breakdowns are not the beginning point of crises; they are the end point.
The current financial crisis, in my view, was the result of a number of very broad underlying causes: These factors were developed over decades. They are:
Continued population explosions and the availability of underutilized labor forces in emerging nations; human capital which provides the global economy with an unending stream of cheap labor.
The ability to shift production of relatively sophisticated products, like automobiles and semiconductors, to areas characterized by low labor costs changed the prices of critical products globally.
The purchase of these goods by consumers in wealthy nations, who borrowed money to buy what they wanted, caused a shift in the trade balance and stimulated the creation of money supply globally.
Huge pools of money were created, the largest ever seen in the history of the world economy, in a limited number of nations.
Concurrently, there were major breakthroughs in technology. Fiber optics allowed billions of bits of data to be transmitted over thousands of miles, with near complete accuracy, in seconds. Increased computing power allowed the manipulation of large amounts of sophisticated data.
Driven by the need to find investments for the large pools of money and benefitting from the availability of technology which facilitated innovation; a series of new financial products were constantly being developed.
Regulatory processes broke down in an attempt to understand and monitor the emerging financial markets. These markets are now called the [FONT=Calibri,Calibri][FONT=Calibri,Calibri]Shadow Banking Market[/FONT][/FONT]. The net result was a 20 year wave of deregulation/inaction.
The markets were attempting to cope with large amounts of money, a constant flow of new products, and no regulatory guidance. In this chaotic environment, both legitimate and illegitimate means were employed to gain access to the funds and to the benefits that these funds conveyed.
Housing finance was a perfect mechanism because it utilized large amounts of money and it lent itself to financial innovation.
Debt expanded at rates three times faster than income over the five year period leading up to 2006. The bulk of this new debt was not to fund the creation of more income producing facilities; it was used for financial speculation.
The system crashed as described above. It was a classic "Minsky Moment" – i.e., a period when spiraling debt overwhelms cash flows. As described in a new book entitled [FONT=Calibri,Calibri][FONT=Calibri,Calibri]This Time is Different[/FONT][/FONT], this crash was neither new nor different.
The willingness to ignore these forces as the cause of the Crisis of 2008/2009 and supplant them with the argument that it was "greed and fraud on Wall Street" that caused the problem is due to either staggering ignorance or massive deceit. By diverting discussion from the real causes of the crisis to the politically accepted cause, the likelihood of a real solution becomes remote. The possibility of inappropriate solutions being implemented becomes an overwhelming possibility.
[FONT=Calibri,Calibri][FONT=Calibri,Calibri]Separating Fact from Fancy
[/FONT][/FONT]It is necessary to parse the claims being made by the ruling party on the first page above to determine if they represent fact, or ignorance and deceit:
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The core argument is that the moneyed class created the current crisis through greed and fraud. If the argument proposed above is correct, this claim is not true.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]It is being suggested that funds created by the Federal Reserve (Fed, FRB) and insured by the Federal Deposit Insurance Corporation (FDIC) are taxpayer funds.
– This is simply factually incorrect (see [FONT=Calibri,Calibri][FONT=Calibri,Calibri]Taxpayer Money [/FONT][/FONT]published by Rochdale Securities on January 12, 2010). The Federal Reserve is an agency set up by the government. The regional Federal Reserve Banks are owned by the banks. The Fed has as one of its functions running the nation’s money supply. The U.S. has outsourced this function to the Fed in much the same way as kings of old outsourced tax collections to private entrepreneurs. The money created by the Federal Reserve is not taxpayer money.
It is also incorrect to state that the United States government insures bank deposits. It does not. The banks’ do so through their contributions to the FDIC. The Federal government guarantees the FDIC against failure but the FDIC is not owned by the government and the funds it uses to back insured deposits come from the banks not the taxpayer.
– The question as to whether money borrowed by the Treasury, which the government will never pay back, is taxpayer money or not can be hotly debated.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The argument that the banks caused taxpayers to lose money is spurious.
– In the last banking crisis in the late 1980s, if memory is correct, taxpayers lost $150 billion in an attempt to stave off the disaster in the bank and thrift industries.
– To date, as expressed by the Secretary of the Treasury, the government has made a profit on its investments in banks through the TARP funding mechanism. This profit is expected to grow measurably as the government sells the warrants it owns in American banks.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The statement that big banks must pay back every dime they have received from the Treasury is open to question. It must first be determined who the big banks are. The biggest banks in the country have all paid the government back. It is the auto companies, an insurance giant, and finance companies that have lost the government money. This is a critical distinction because the government is now demanding the imposition of a tax to make the healthy banks pay for the sins of the unhealthy firms in other industries. This could cripple the healthy banks.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]It is being argued that the banks took money from the government and used it to generate big profits and then to pay their executives huge bonuses and their shareholders large dividends.
– A review of the fund flow between the banking system and the Federal Reserve indicates that virtually all of the funds provided to the banks under the TARP program were deposited at the Fed. The banks paid 5% after tax on these funds and received 0.25% pretax back from their deposits with the Fed. The banks lost money on the TARP funds; the taxpayers made money.
– Executive bonuses on "Wall Street" have been cut, claw back provisions have been introduced, and long-term compensation plans have been put in place to more properly institute accountability into the compensation systems of these companies. There is now accountability in banking compensation that exists nowhere else in the United States economy (Conan O’Brien just received $45 million from NBC because his program failed to attract viewers).
– Stockholders have lost literal fortunes by investing in bank stocks and their dividends have been eliminated.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]Stockholders are in the main the American public. Their greed did not cause the financial crisis. They do not deserve to be punished. They have been punished by the removal of their dividends and the decline in the capital value of their banking investments..
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The argument that the "too big to fail doctrine" creates systemic crises is open to question. The collapse of the savings and loan industry and the payments by taxpayers to resolve this problem was not a too big to fail issue. However, it was a systemic crisis. The taxpayer attempted to keep thousands of very small companies with failed business models in operation.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]Another broader question, which is also open to debate, is whether by saving the banking system the government only saved the banks, or whether it saved the American economy and, therefore, all Americans.
A different point of contention is whether Americans have the right to dissent. The President says they do not when they disagree with his financial policies. The history of the nation and its Constitution argue that they do have this right. This is not Venezuela as yet.
[/FONT][/FONT]
Who Caused It?
[FONT=Calibri,Calibri][FONT=Calibri,Calibri]The President was pretty clear. He said the greedy bankers did it.
Is he right? A number of economists and political scientists, who have attempted to explain why financial crises develop, might disagree. Some more prominent names are Hymn Minsky, Charles Kindleberger, and Paul Kennedy. Simplistically, the first two argued that financial breakdowns are not the beginning point of crises; they are the end point.
The current financial crisis, in my view, was the result of a number of very broad underlying causes: These factors were developed over decades. They are:
Continued population explosions and the availability of underutilized labor forces in emerging nations; human capital which provides the global economy with an unending stream of cheap labor.
The ability to shift production of relatively sophisticated products, like automobiles and semiconductors, to areas characterized by low labor costs changed the prices of critical products globally.
The purchase of these goods by consumers in wealthy nations, who borrowed money to buy what they wanted, caused a shift in the trade balance and stimulated the creation of money supply globally.
Huge pools of money were created, the largest ever seen in the history of the world economy, in a limited number of nations.
Concurrently, there were major breakthroughs in technology. Fiber optics allowed billions of bits of data to be transmitted over thousands of miles, with near complete accuracy, in seconds. Increased computing power allowed the manipulation of large amounts of sophisticated data.
Driven by the need to find investments for the large pools of money and benefitting from the availability of technology which facilitated innovation; a series of new financial products were constantly being developed.
Regulatory processes broke down in an attempt to understand and monitor the emerging financial markets. These markets are now called the [FONT=Calibri,Calibri][FONT=Calibri,Calibri]Shadow Banking Market[/FONT][/FONT]. The net result was a 20 year wave of deregulation/inaction.
The markets were attempting to cope with large amounts of money, a constant flow of new products, and no regulatory guidance. In this chaotic environment, both legitimate and illegitimate means were employed to gain access to the funds and to the benefits that these funds conveyed.
Housing finance was a perfect mechanism because it utilized large amounts of money and it lent itself to financial innovation.
Debt expanded at rates three times faster than income over the five year period leading up to 2006. The bulk of this new debt was not to fund the creation of more income producing facilities; it was used for financial speculation.
The system crashed as described above. It was a classic "Minsky Moment" – i.e., a period when spiraling debt overwhelms cash flows. As described in a new book entitled [FONT=Calibri,Calibri][FONT=Calibri,Calibri]This Time is Different[/FONT][/FONT], this crash was neither new nor different.
The willingness to ignore these forces as the cause of the Crisis of 2008/2009 and supplant them with the argument that it was "greed and fraud on Wall Street" that caused the problem is due to either staggering ignorance or massive deceit. By diverting discussion from the real causes of the crisis to the politically accepted cause, the likelihood of a real solution becomes remote. The possibility of inappropriate solutions being implemented becomes an overwhelming possibility.
[FONT=Calibri,Calibri][FONT=Calibri,Calibri]Separating Fact from Fancy
[/FONT][/FONT]It is necessary to parse the claims being made by the ruling party on the first page above to determine if they represent fact, or ignorance and deceit:
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The core argument is that the moneyed class created the current crisis through greed and fraud. If the argument proposed above is correct, this claim is not true.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]It is being suggested that funds created by the Federal Reserve (Fed, FRB) and insured by the Federal Deposit Insurance Corporation (FDIC) are taxpayer funds.
– This is simply factually incorrect (see [FONT=Calibri,Calibri][FONT=Calibri,Calibri]Taxpayer Money [/FONT][/FONT]published by Rochdale Securities on January 12, 2010). The Federal Reserve is an agency set up by the government. The regional Federal Reserve Banks are owned by the banks. The Fed has as one of its functions running the nation’s money supply. The U.S. has outsourced this function to the Fed in much the same way as kings of old outsourced tax collections to private entrepreneurs. The money created by the Federal Reserve is not taxpayer money.
It is also incorrect to state that the United States government insures bank deposits. It does not. The banks’ do so through their contributions to the FDIC. The Federal government guarantees the FDIC against failure but the FDIC is not owned by the government and the funds it uses to back insured deposits come from the banks not the taxpayer.
– The question as to whether money borrowed by the Treasury, which the government will never pay back, is taxpayer money or not can be hotly debated.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The argument that the banks caused taxpayers to lose money is spurious.
– In the last banking crisis in the late 1980s, if memory is correct, taxpayers lost $150 billion in an attempt to stave off the disaster in the bank and thrift industries.
– To date, as expressed by the Secretary of the Treasury, the government has made a profit on its investments in banks through the TARP funding mechanism. This profit is expected to grow measurably as the government sells the warrants it owns in American banks.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The statement that big banks must pay back every dime they have received from the Treasury is open to question. It must first be determined who the big banks are. The biggest banks in the country have all paid the government back. It is the auto companies, an insurance giant, and finance companies that have lost the government money. This is a critical distinction because the government is now demanding the imposition of a tax to make the healthy banks pay for the sins of the unhealthy firms in other industries. This could cripple the healthy banks.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]It is being argued that the banks took money from the government and used it to generate big profits and then to pay their executives huge bonuses and their shareholders large dividends.
– A review of the fund flow between the banking system and the Federal Reserve indicates that virtually all of the funds provided to the banks under the TARP program were deposited at the Fed. The banks paid 5% after tax on these funds and received 0.25% pretax back from their deposits with the Fed. The banks lost money on the TARP funds; the taxpayers made money.
– Executive bonuses on "Wall Street" have been cut, claw back provisions have been introduced, and long-term compensation plans have been put in place to more properly institute accountability into the compensation systems of these companies. There is now accountability in banking compensation that exists nowhere else in the United States economy (Conan O’Brien just received $45 million from NBC because his program failed to attract viewers).
– Stockholders have lost literal fortunes by investing in bank stocks and their dividends have been eliminated.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]Stockholders are in the main the American public. Their greed did not cause the financial crisis. They do not deserve to be punished. They have been punished by the removal of their dividends and the decline in the capital value of their banking investments..
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]The argument that the "too big to fail doctrine" creates systemic crises is open to question. The collapse of the savings and loan industry and the payments by taxpayers to resolve this problem was not a too big to fail issue. However, it was a systemic crisis. The taxpayer attempted to keep thousands of very small companies with failed business models in operation.
[FONT=Wingdings,Wingdings][FONT=Wingdings,Wingdings] [/FONT][/FONT]Another broader question, which is also open to debate, is whether by saving the banking system the government only saved the banks, or whether it saved the American economy and, therefore, all Americans.
A different point of contention is whether Americans have the right to dissent. The President says they do not when they disagree with his financial policies. The history of the nation and its Constitution argue that they do have this right. This is not Venezuela as yet.
[/FONT][/FONT]
a -6% -7% lo storno s'è fatto 
