How the story is being reported …
How Alan Greenspan Destroyed America
Alan Greenspan will go down in history as the person most responsible for the enormous economic damage caused by the housing bubble and the subsequent collapse of the market. The United States is still down almost 9m jobs from its trend path. We are losing close to $1tn a year in potential output, with cumulative losses to date approaching $5tn.
These numbers correspond to millions of dreams ruined. Families who struggled to save enough to buy a home lost it when house prices plunged or they lost their jobs. Many older workers lose their job with little hope of ever finding another one, even though they are ill-prepared for retirement; young people getting out of school are facing the worst job market since the Great Depression, while buried in student loan debt.
The horror story could have easily been prevented had there been intelligent life at the Federal Reserve Board in the years when the housing bubble was growing to ever more dangerous proportions (2002-2006). But the Fed did nothing to curb the bubble. Arguably, it even acted to foster its growth with Greenspan cheering the development of exotic mortgages and completely ignoring its regulatory responsibilities.
Most people who had this incredible infamy attached to their name would have the decency to find a large rock to hide behind; but not Alan Greenspan. He apparently believes that he has not punished us enough. Greenspan has a new book which he is now hawking on radio and television shows everywhere.
The author is not only short-sighted he is dead wrong. Action need to be taken prior to the Savings and Loan debacle in the 1980s, certainly taken before the dot com debacle in the late 90s. and 2000. The problem with the government and the Fed is they attempted to privatize the profits while socializing the losses. Banks should have been allowed to fail before they become behemoths that were determined to be too politically or financially important to fail. But, the corrupt politicians promoted even more regulation (Dodd-Frank) to fix the problem of Too Big To Fail banks – leading to bigger banks with more systemic impact should they fail today.
The rest of the story …
The proximate causes of the mortgage meltdown and the spread of the contagion into the broader economy can be traced back to corrupt politicians acting in concert with industry lobbyists.
- The repeal of Glass-Steagall Act in 1999 by the democrats (President Bill Clinton) and republicans (Senator Phil Gramm) removed the restrictions on separating commercial banking, investment banking and brokerages to create situations that were inherently a conflict of interest as they corruptly created and sold defective financial products to their own customers and to each other.
- The Commodities Futures Modernization Act signed into law by President Bill Clinton deregulated derivative and preempted state laws that treated derrivatives in the same way the states treated gaming (gambling).
- The corrupt progressive socialist democrats, such as Representative Barney Frank (D-MA) and Senator Christopher Dodd (D-CT), fought for legislation to make the regulation and enforcement of lending laws instruments of public policy. Demanding that financial institutions progressively lower their lending standards to the point of so-called “liar loans” where the financial institutions were not required to verify income, employment, or assets.
- The corrupt accounting practices boards legalized the methodology for hiding huge asset losses in so-called off-balance-sheet accounts, thus hiding the true conditions of some of the largest financial institutions from the auditors, the public, and most importantly, the regulators. Enron-style accounting was alive and well among the professional accountants and financial consultants.
- The corrupt politicians in both parties, as well as the Federal Reserve, shirked their regulatory responsibilities lest it be found that some of America’s largest financial institutions were so over-leveraged, that they were rendered technically insolvent and unsound when the market started declining. They simply refused to detect and deter rampant fraud.
Greenspan’s responsibility for the pending debacle occurred when the Federal Reserve (a private non-government corporation ostensibly owned by its member banks) tried to re-capitalize the largest financial institutions after they were rendered technically insolvent due to large losses during the bursting of the dot com bubble – a bubble that saw companies that were deeply in the red being valued for hundreds of millions of dollars. By promoting cheap money at 1%, Greenspan forced the global capital pool to turn elsewhere to get a decent return on their capital.
The global pool of capital turned to the mortgage markets for a historically safe, and relatively predictable, return. Unfortunately, the large banks and brokerages ran out of qualified mortgage buyers and needed the government to relax the lending requirements so they could create more product to sell to investors.
In the end, we saw the financial institutions creating synthetic products that only behaved like mortgage-backed securities and complicitly trading paper between themselves to assure paper profits leading to hundreds of millions in personal bonuses. Because nobody knew how to correctly value derivatives without computers and consultants, many derivative products were only worth what some greater fool would pay for them.
As long as real estate prices continued to climb, the shell game was a roaring success – until the day that someone noticed that the default rate for mortgages was increasing beyond theoretical limits. How could this be they asked? Of course, there was a simple answer. Monetary policy was so loose that an underwater borrower could refinance the loan they could not afford using the increased equity in their property as collateral. Speculation was rife and property values skyrocketed.
What nobody noticed, least of all Fair Isaacs, the FICO people, and the ratings agencies that rated derrivatives was that people who could not afford exponentially-growing debt were hiding their true financial condition. The FICO scoring algorithm was inadequate to the task because it was based on historic conditions prior to significant rule changes in the financial industry. Technically, a borrower who was insolvent with substantial credit card debt should have never been able to get a loan because their FICO scores were low as their credit debt level increased. Because FICO did not take income into account, the system did not see that an out-of-work borrower could erase all of their credit card debt simply by refinancing the property and paying off their credit cards. Thus, they looked like good borrowers once again. Since there was no limit on refinancing, it was a convenient way to hide your true condition.
Enter the greedy banks who looked at all of this refinancing activity and lusted for a bigger piece of the pie. So the HELOC (Home Equity Line of Credit) was born. In some cases banks allowed loans up to 125% of the appraised value in return for higher interest rates. However, due to unintended consequences, some borrowers used their HELOC loans to pay their primary mortgage, thus kicking the can further down the road and further infecting the financial institutions deep into HELOCs.
Then comes the collapse – mortgage defaults were skyrocketing and when no large financial institution will do business with anyone else because they cannot verify the true financial condition of their counterparty due to leverage and dodgy derivatives that became worthless when there were no borrowers. BOOM!
Enter the government again – more subsidies to the financial institutions (TARP – Troubled Asset Relief Program). Enter the Federal Reserve – another attempt at recapitalization of the technically insolvent banks using an even lower interest rate – ZIRP (Zero Interest Rate Policy) which allowed financial institutions to use their dodgy paper to collateralize loans and obtain “good” money in the process. Then using a loan at one-quarter of one-percent to capitalize a loan returning six percent, profits were guaranteed to recapitalize the financial institution. Screwing over depositors and investors worldwide.
Unfortunately, more people lost their jobs, more real estate went south, and we find ourselves with corrupt politicians once again serving the special interests A repeat of the cycle of government corruption.
SO HERE WE ARE – MOST AMERICANS SUFFERING – WHILE THE EXECUTIVES COUNT THEIR MONEY AND BUY ENOUGH POLITICAL POWER TO AVOID JAIL! GREENSPAN, IS THE DESIGNATED FALL GUY, BUT EVEN HE IS SELLING CONSULTING SERVICES AND HAWKING HIS NEW BOOK.
WE ARE SO SCREWED. Our economy will not recover until we have a stable, relatively honest government – something that may well be impossible under the progressive socialist democrats and their RINO counterparts in the republican party.
Bottom line …
One solution is to clean up government. The other is unthinkable. See you at the 2014 congressional election cycle voting booth.
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell “Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar “Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar
“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS