Myths of the Collapse
Here it is, one year later, and we continue to hear an enormous amount of misinformation about the Credit Crisis: What were the actual causes, what could have been done, what should have been done.
Lets consider the most widely held myths as the the cause of the crisis (skipping discredited nonsense).
Here is a quick overview of the key points many folks seem to be getting wrong:
• The Crisis was a confluence of rare events, a “Perfect Storm”: To the contrary, the crisis was inevitable. It was the end result of too much liquidity, bad central banking, special legislation, regulatory exemptions, too much risk, misaligned compensation systems, regulatory capture, and a unwavering belief that markets are efficient and humans are rational.
• Lehman should have been saved: This was not a yes/no decision. The best option would have been a more Bear Stearns approach (w/o the Fed $29B) — a prepackaged, orderly bankruptcy sale/liquidation.
• Regulation was the cause of the collapse: It was not regulation, but specific exemptions from regulation that allowed bankers to run wild. Glass Steagall repeal, CFMA, Net Cap exemptions, ignoring the lack of non-bank lending standards, excess stock option comp, all contributed to the collapse.
• Lehman’s collapse us what killed AIG: The same riptide that drowned Lehman also swept AIG out to sea: Too much leverage, too much exposure to subprime loans, too many derivatives, too little risk management, with costs borne by shareholders and taxpayers. A classic correlation/causation error.
• Housing’s special status caused the collapse: Housing has long had a special status in America. But the mortgage interest rate deduction has been around for a century. It did not cause the collapse — the abdication of lending standards is at the heart of this crisis.
That’s 5 of the big ones; there are obviously many more.
A greatly expanded version of this list is in Bailout Nation . . .
Tweet
Facebook
Reddit
Digg this!
September 14th, 2009 at 7:33 am
BR @ Regulation was the cause of the collapse: It was not regulation, but specific exemptions from regulation that allowed bankers to run wild. Glass Steagall repeal, CFMA, Net Cap exemptions, ignoring the lack of non-bank lending standards, excess stock option comp, all contributed to the collapse.
Barry — thank you for clarifying that it was not blanket “Radical Deregulation” but specific exemptions. Your pet phrase “Radical Deregulation” has a dangerous connotation that less regulation is harmful; whereas in many sectors of the economy, over regulation is the problem stifling and perverting otherwise productive economic behavior.
September 14th, 2009 at 8:40 am
the “perfect storm” argument – a way for the banks to shrug off blame for their greedy excessive risk taking ways-
the argument then turns into the “see- it was unavoidable- it wasn’t us- it was everybody”-
bogus-
also- Jim Rogers says-
‘I Expect a Currency Crisis or Semi-Crisis’
September 14th, 2009 at 8:44 am
” the abdication of lending standards is at the heart of this crisis” … and… if you believe there are people who knew better… this.. not Bernie Madoff.. was the crime of the century.
September 14th, 2009 at 8:50 am
interesting:
“The Double Dip Recession, or the “W” shaped recovery that a minority of economists, such as Joseph Stiglitz, is now stating as a strong possible outcome of this current rally, should not be discussed in the realm of economics but rather in the more apropos realm of financial fraud. The fact that the upleg of the “W” shaped recovery that is occurring now will inevitably crumble in spectacular fashion will not be a result of any free market principle, but rather the direct consequence of a fraudulent scheme executed by an elite global financial oligarchy, otherwise known as Central Banks. If the mission of this current manufactured leg-up in Western stock markets was to fool the world into believing that global economies are recovering, then clearly, up until this point, the mission has been a resounding success. For those unfamiliar with the term “blowback”, it’s a CIA term that was first used in March 1954 to describe the unintended consequences of US government international activities kept secret from the American people…”
http://cryptogon.com/?p=10941
http://cryptogon.com/?paged=2
September 14th, 2009 at 9:10 am
MEH-
another quote from your link-
“In fact, I predict that the blowback of these activities will not only exceed, but far exceed, the fallout the world experienced in 2008 at the prior apex of this current crisis. Most people today can not even fathom how bad the situation will become primarily because of all the secrecy that the banksters have engaged in – in US Treasury markets, the gold markets, the US dollar markets, agriculture commodities, stock markets, and financial markets – in hiding reality from the people.”
good stuff
September 14th, 2009 at 9:35 am
http://finance.yahoo.com/news/An-Economy-Only-a-Mother-usnews-90956713.html?x=0
An Economy Only a Mother Could Love
“Except that an awful lot is still going wrong. Even if the economy is growing again, the number of jobs isn’t, and most economists expect the unemployment rate, now 9.7 percent, to keep rising until the middle of 2010. So we’re having a “jobless” recovery. Home sales have picked up, but prices are still falling and foreclosures keep hitting new records. So we’re also having a homeless recovery. The commercial real estate market has only begun to collapse. Bad loans on real estate and consumer purchases could bring down another 400 banks before the financial meltdown is over. Anybody who wants to start or expand a business is more likely to get swine flu than a loan.
We’re having a jobless, homeless, loanless, and maybe a recoveryless recovery. This is the kind of recovery that makes you wish you were still in the downward-spiral phase, like the first moment when you open your eyes after a wild, boozy night.”
September 14th, 2009 at 9:50 am
BR – bravo. Keep hammerring on all this. This was, imho, both a systemic problem and a collection of malfeasant behaviors by many….many participants substituting short-term greed and personal gain for long-term profitability and sustainable performance. The last is the working definition of a 4 yr old who requires adult supervision.
There’s a fascinating review of Minsky and some of the re-thinkings in economic concepts that are just beginning in the Globe:
http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails/
On the questions of adult supervisions and why it’s required let me offer up this essay collection on re-thinking the finance industry – The Corporation vs Society: Performance, Social Responsibility and the Win-Win:
http://www.scribd.com/doc/18645321
September 14th, 2009 at 10:47 am
where are we again?
http://baselinescenario.com/2009/09/14/where-are-we-again-pre-g20-pittsburgh-summit/
if we have to bail out some bank/insurance/etc that if they fail because of the actions/stupidity, they need to be taken over lock stock and barrel, and maybe in a few years sold off.
and i am not convinced that the financial oligarchy isn’t the root of this problem abetted by their collaborators at the Fed (GS ) and the SEC, and of course their real partners in crime, the rating agencies, without whom the banks might not have ever bought much of the MBS since they wouldn’t have qualified as good quality capital. and that might have slowed down the rush to failure that happened starting 2007. but it wouldn’t have stopped it as the collapse of incomes would have lead to a failure any way.
September 14th, 2009 at 11:11 am
willid3,
along that line: “You’ve heard the phrase “zombie banks”.
The guy who coined that phrase – Ed Kane, professor of finance at Boston College, past president of the American Finance Association, and co-founder of the Shadow Financial Regulatory Committee – explained in an interview in June what that term really means:
Kane: Another point is that these so-called “hard-to-price assets” have much more value to “zombie banks” than to anyone else, which is why there is no liquidity in that market. The deeply insolvent institutions want what everyone else calls “toxic assets” because it gives them a chance to climb back if the economy recovers well into solvency.
[Senior Morningstar equity analyst, and former Chicago Federal Reserve economist William] Bergman: Ed, you coined the term “zombie banks” in the S&L crisis. What inspired you?
Kane: It was just an attempt to make clear to people the dangers of keeping an institution that was deeply insolvent alive, or at least walking. The notion of the zombie is that it would be put in its grave by its creditors if it weren’t for the black magic of government credit support guarantees and loans. These institutions have very distorted incentives, just as the zombies do in the horror movies. They’re looking for things that even might have negative present value but have a possibility of producing good results. It’s a long shot bet to plug a hole in their balance sheet.
The trouble with the zombies is that they ruin the market for everyone else. They’re not looking for solid investments but something that has a chance of a big payoff. They’re willing to pay more for deposits or funding generally than other institutions, so they spread “zombieness.” They make other institutions have trouble earning a living.
Not only have the Bush and Obama administrations kept the zombie banks out of the grave with bailouts, guarantees and loans, letting them keep their toxic assets off their balance sheets in structured investment vehicles, and other shenanigans, but they have made actually allowed them to become bigger than ever.”
http://georgewashington2.blogspot.com/2009/09/what-are-zombie-banks.html
http://www.bloomberg.com/apps/news?pid=20601039&sid=acPs3f5Wlny0
September 14th, 2009 at 11:29 am
There’s a tacit conspiracy of sorts between different parties who want the historical consensus to be that this could not have been foreseen, that so many strange and unpredictable things came together (the Perfect Storm) that nobody could have seen it coming. This way they can’t be blamed for not seeing it, nor held accountable. So the status quo will hold. Just the way they want it.
Most of the worlds’ economists, the financial sector, the personal finance “profession”, the politicians, etc.
September 14th, 2009 at 1:09 pm
Housing construction and sales also are a big sector of the economy, currently about 6 percent of GDP. As this housing wealth disappeared, people cut spending. We already have seen an enormous drop in the amount that people borrow on their homes, from $600 billion in 2005 to about $350 billion for 2006. It was this borrowing, enabled by soaring house prices that allowed people to borrow more against the value of their homes, that fueled the U.S. economic recovery since 2001.
Read More: http://www.housingnewslive.com/housing-market-crash-in-us.php
September 14th, 2009 at 7:50 pm
I am unsophisticated in finance but I read a lot. I assume your “myths” are the words printed in boldface.
1. I missed the “Perfect Storm” argument. Seemed to me a lot of stuff happened over time and that a lot of stuff was written prior to the shit hitting the fan. That’s not a “myth” and it’s not a “Perfect Storm”.
2.” Lehman should have been saved” is not a myth. It was considered gospel by many, many, many of your colleagues(?) Whether Lehman should have been saved is an argument that continues. That’s not a myth.
3. As far as “regulation was the cause…” being a “myth”: let’s parse that: you say it was the lack of and/or ineffective regulation that made the problem bigger than it should have been. I don’t hear/read any arguments disputing that. Why is that statement a “myth”?
4. Never heard or read any correlation argument about Lehman/AIG. Got me there.
5. Housing “special” status. I’ve read a lot of negative stuff about housing, securitization of mortgages, CDOs, CDS’s, Fannies, Freddies, et freaking et cetera. Never read or heard about housing being “special”. Can you cite some sources?
Stop “mythizing” and star “factualizing”.
Thanks.
September 14th, 2009 at 10:07 pm
[...] comment from Barry Ritholtz: Here is a quick overview of the key points many folks seem to be getting [...]
September 14th, 2009 at 10:20 pm
[...] Ritholtz provides a quick overview of the key points many folks seem to be getting wrong about the credit [...]