[Previous] [Main Index] [Next]

Saturday, September 20, 2008

Who Are the Culprits in the Current Financial Crisis?

Today's (Continuing) Buggy Topic:

Well, to be candid, there are lots of people and institutions to blame the shenangigans on that have brought us the worst financial crisis since the Great Depression of the 1930s . . . so far, fortunately, contained by the actions of two or three key power-holders: Henry Paulson at the Treasury and Ben Bernanke at the Federal Reserve. 

Paulson --- unlike the first two Secretaries of the Treasury appointed by President Bush-W --- actually knows something about finance, having been, among other things, a partner in one important investment bank and the head of another.  And Ben Bernanke, unlike 99% of economists who seek to navigate through a complex, ever-changing economic, financial, and political world by means of gut-level inferences drawn from their hobby-horse theoretical bent --- including ever more convoluted statistical models to justify their inferences, all contested by those of a different bent --- actually has done decades-long study in the financia-l and credit-meltdown of the Great Depression and hence knows something very concrete and helpful as a guide to dealing with the current crisis.

The Culprits?

Start with the financial institutions themselves:

  • First and foremost, those who allowed our solid regulatory agencies and institutions --- including the Federal Reserve in the Greenspan era --- to alter in favor of ever more free-wheeling financial innovations way beyond the ability or willingness (or both) of the regulators to clamp down on those innovations:
  • Complex derivatives probably understood by less than 2% of the financial institutions involved in them;
  • The proliferation of hedge funds despite the huge collapse of Long Term Capital Management (run by two Nobel prize-winning economists) in the late 1990s that required a Federal Reserve bail-out;
  • The widespread use of "naked shorts", ostensibly banned in 2005, in which speculators in forward markets hoping to buy securities at a knock-down price and sell them for a higher price bargained for in the present; but who never actually took possession of the purcchased securities in the present or future, instead just leveraging themselves with banks and brokerage houses and others simply moving figures around on balance-sheets;
  • New independent mortgage brokers, utterly indifferent to the credit-worthiness of the home-buyers whom they sold houses to;
  • Investment banks that happily lent money to any hedge-fund group or other agent without carrying out credit-worthiness analysis and assessment of the risks;
  • And the geniuses at commercial banks --- now allowed since the late 1990s (in the Clinton erea) to have investment-subsidiaries that were outlawed from the early 1930s until then --- who lent money directly to home-buyers or mortgage brokers by worrying only about the asset involved (a house), whose price would, of course, continue to rise endlessly, and who then passed on the risk involved to the brokers and other banks and hedge funds after slicing and dicing and repackaging thousands of these loans;

Then add to the morass political agent:

  • Politicians in both parties who catered to these institutions for whatever reason, and not, let us say, out of a sense of duty tol the public interest . . . with Republicans the worst (such as those in Congress who got the scalp of a Bush-appointed SEC head who was forced out in 2005 because he actually wanted to regulate the new financial excesses);
  • And not least, the ever infallibile appointment by the Bush-W administration of people to head regulatory positions as at the SEC in 2005 who saw their main job as not regulating and curbing such excesses, but encouraging them.

Not to overlook the huge imbalances in savings and capital world-wide:

  • Yes, not to forget the huge amounts of footloose capital that flowed into the hands of utterly corupt gangster regimes' heading countries with lots of oil and natural gas, who had little or no interest in using that capital for domestic economic, educational, infra-structural, and business development --- rather, to invest the funds in the allegedly sophisticated financial markets in the EU and the US, plus a few others that looked enticing at the time. 
  • With similar huge footloose capital in neo-mercantilist countries like China, whose thoroughly corrupt Communist leadership at all levels --- engaged in an orgy of self-aggrandizement equal to that of the gangster-regimes in Russia, Iran, Saudi Arabia, the other Persian-Gulf states, and Chavez-'s Venezuela --- invested well over a trillion dollars in US Treasuries and other financial assets rather than use the largesse for dealing with their huge domestic problems and needs.

And, however much Europeans are enjoying the quasi-nationalization of our financial system --- who could blame them for some shivers of delightful schadenfreude? --- the fact is that:

  • EU banks, private and public, are extraordinarily leveraged and vulnerable compared to the US financial system . . . not least because their banks (again, private and public like their central banks) have enormous sums of dubious investments on their books as well. 

A Brief Clarification of EU Banking Vulnerabilities: the US Fed to the Rescue?

Consider this summary by two European specialists, just published today:

"Too big to fail and too big to save?

"The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain's GDP. Fortis bank, which has been in the news recently, has a leverage ratio of "only" 33, but its liabilities are several times larger than the GDP of its home country (Belgium). . . ."

However you view them, these leverage ratios are simply staggering . . . something still hard to believe even after you've read these figures two or three times.

And Now To Today's Buggy View:

As usual, it's been left at a libertarian web-site, the Marginal Revolution . . . a high-quality economic blog, even if prof bug isn't a libertarian (always concerned about de-regulation in the financial realm, as opposed to it in the real world of industry).  And needless to add, a web site --- as libertarians are bent to do ---where the causes of the current financial crisis are allegedly the fault of government and non-market initiated regulatory changes, including in legal accounting rules.

Huh? Really?

Click here for the more historical, wide-ranging buggy view of the current crisis and, so far, its containment by a tiny group of knowledgeable policymakers in Washington D.C. and New York.