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My Sunday Business Washington Post column is out. This morning, we look at The Big Lie and the Financial Crisis.

The print and online versions had the same headlines: What caused the financial crisis? The Big Lie goes viral. (You can see the excised bits that did not make it to the final version here).

Regardless, here’s an excerpt from the column:

“A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair.

Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.”

I like the layout and art work in the dead tree version of the paper:

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click for ginormous version of print edition

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Source:
What caused the financial crisis? The Big Lie goes viral.
Barry Ritholtz
Washington Post, November 5, 2011
http://www.washingtonpost.com/business/url.html

Washington Post Sunday, November 5, 2011 page G6 (PDF)

Category: Bailouts, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

96 Responses to “The Big Lie of the Financial Crisis”

  1. MayorQuimby says:

    Part of the “Big Lie” is the concept that living beyond one’s means is the solution to having lived beyond one’s means. Austerity is both necessary and inevitable not because it will help grow the economy but because growing the economy is itself impossible (without defaulting gobs of debt both public and private).

    Tell me…what is the per capita debt load in the USA once again?

    ~~~

    BR: I believe the term you are hunting for is MASS CONSUMERISM.

    But that’s not a big lie, its a simple fact in the USA

  2. super_trooper says:

    Is that a child’s drawing of Pinocchio?
    Add WMD to the list of big lies. Thing is, just like we are debating the exonomic aspects of the great recession. We will probably hear about this Big Lie in 2090.

  3. KeithOK says:

    I thought the article was excellent on what did happen. Unfortunately, I think editing it down to the size the Post needed left out too much of the debunking of what did not happen – CRA, Fannie Mae, etc. I expect the Post will get flooded with letters/email of the “But you’re ignoring the role of [insert appropriate boogeyman here].” Maybe you’ll be able to get another article out of the edits addressing how the chronology, geography and loan data of the crisis conflict with the Big Lie narrative.

    ~~~

    BR: That is part II, coming in a few weeks

  4. Petey Wheatstraw says:

    Quimby:

    Why do you always stop short of stepping back and taking a gander at the Big Picture? Yes, “living beyond one’s means” is foolish and dishonest, but it ignores the context of the even more fundamental dishonesty at the root of our money creation and wealth distribution schemes. Default is only one of the two valid means by which our “debt” (ethereal and theoretical as it is), could be settled. The other is to conjure and distribute enough “dollars” to balance the ledger.

    It’s fiat.

    Arguing that one outcome would be worse than the other begs the question: worse for whom?

  5. MayorQuimby says:

    For those interested per capita public debt is almost $50,000 per person and well over $175,000 when accounting for private debt.

    Assuming your average person makes $45k and has to eat, pay rent etc. that leaves him with ***decades*** of paying off excessive debts IF we stopped the incursion of additional debts today (which will not happen).

    Short version: we are broke. When your debts area triple your nominal output on an annualized basis you are long past bankruptcy.

    The other reason this is so bad is that it undermines the creation of NEW capital because people already drowning in debt are not going to be applying for loans nor will banks “lend” to them.

    So…gvmt tries to find new areas which are unsaturated by excessive debt to incur more debt! Tech stocks….housing….gvmt bailouts and wages….tuition….then when the entire SYSTEM is essentially OWNED by the creditors there is nowhe to turn and we break down hard.

    Debt must match nominal output and the FEDERAL RESERVE ACT itself says so!

    “shall maintain credit aggregates commensurate with the edonomy’s ability to grow”

    The act does NOT suggest “shall incur whatever debts are needed to ENSURE low unemployment and high prosperity TODAY and to hell with tomorrow”!!!!!!

  6. MayorQuimby says:

    Peter- just saw your post.

    Please refer to my 738 posts about fiat explaining to you that fiat does not just pop out of bernankes buttox but is backed by collateral and pledges to create.

    I am STILL waiting for you to explain to me why student loans are not discharge able and credit card interest rates are in the teens or higher.

    It is because your thesis is silly, puerile and a waste of my time. Go have some gold flakes for breakfast and stop the fiat tinfoil.

  7. RW says:

    When there is a money to be made and power to be preserved the Big Lie will not only survive but metastasize into zombies.

  8. BusSchDean says:

    Barry,

    An excellent piece!

    More foolishness from MQ above. Adam Smith created competitive markets to protect buyers not sellers. The buyers of securitized mortgages were sold crap because the investment markets lacked integrity –they were not transparent enough or competitive enough to reveal the lie. If you don’t believe that markets actually require regulation to maintain integrity and competitiveness then you don’t believe in Smith’s capitalism. Now, what about the millions of greedy homeowners who grabbed those mortgages and/or ramped up debt betting on the increasing value of their homes? Some deserve what they got. Some were lied to even when they presented their financial information and asked for a fair assessment. Even with the increased liquidity, had the investment markets been transparent there would have been no financial crisis. Now we are left with the mess. Government screwed up in multiple ways but the most egregious was in not regulating the markets.

  9. MayorQuimby says:

    Busch I don’t disagree with your point.

    Please debate ideas instead of making worthless ad hominem attacks. If you have an issue with my statement, by all means debate it.

    If not I will assume you simply DO NOT LIKE what I wrote and while you might agree with me, refuse to accept these facts as truthful and will prefer to slither around insulting others points because they do have merit.

  10. MayorQuimby says:

    Let me add…the most egregious screw up was to deficit spend since the early 1980′s. I give Reagan a pass because we won’t the Cold War this way. But what both Bushes and Clinton and Obama have done is UNFORGIVABLE.

    Even more unforgivable is the sheeples sense that anything we have today is affordable.

    Just remember….gvmt deficits are supporting a huge chunk of GDP and below that one must remove excessive debt to get to a real sustainable GDP level. Nominally speaking we are probably forty to sixty percent overdone.

  11. Winston Munn says:

    To explain why the earth is not warming, why evolution is obviously wrong, why infrastructure spending is evil, and why banks were innocent bystanders victimized by greedy homeowners during the housing mania and subsequent crash, GOP scientists developed the “Theory of Everything”: It’s Obama’s fault.

    In related news, at a Delaware rally for AARP, Mitt Romney proposed that 62-year-old corporations are entitled to Social Security benefits because, after all, they contributed one-half of the payroll taxes…

  12. MayorQuimby says:

    You will find no solace nor any solutions in partisanship. Blame the GOP all you want but the Dems are just as responsible for the entire mess. In fact, the unthinking electorate ultimately is.

  13. crutcher says:

    I’m beginning to wonder if BR doesn’t have some sort of angel watching over his publishing life. If truth is winning out over vested interested in the WP, then what the hell is going on?! My cynical world view is crumbling!! Your posts re editors have been most interesting… any details on who/what magical forces are getting your perspective into one of the most important dailies on planet Earth?

  14. Tim says:

    You’re terrific Barry. This is the most important message to get out there, and you’re a relentless and true leader. Would you ever consider running for public office? We need someone like you. If not you, who?

  15. InterestedObserver says:

    @MQ – “Part of the “Big Lie” is the concept that living beyond one’s means is the solution to having lived beyond one’s means.”

    At least to me…, focusing on living beyond ones means is where the discussion first starts to derail since that allows blame to start to migrate entirely to the recipient of the credit. Hey…, sure I gave you the money, but you asked for too much.

    The simple fact is that the bulk of the responsibility lies with the creditor to perform the necessary diligence in providing credit. It’s their responsibility to ascertain that the debt has a reasonable likelihood of being repaid. It’s their responsibility to guard against a borrower misrepresenting themselves. Same issue with the ratings agencies, they had a related responsibility that they objectively failed to fulfill. Think about it – if the banks had properly assessed the ability of borrowers to repay the loans, most of these loans would not have been made. ad the rating agencies properly rated the bundled securities, there either would not have been a market for them or the market would have been much much smaller.

    The obvious issue here is that when society as a whole is riding up on a financial bubble, you’re not going to be making a lot of money walking down this path of restraint. It’s like being the prudish scold at an out of control frat party. Who wants to fill that role? That’s where regulation comes in. Nobody wants to be labelled the scold, but the regulations insure that there’s always that presence at the party.

  16. BusSchDean says:

    MQ. I remind you of the basics because I find your gov’t-centric criticism unbalanced. The systemic failure over decades to regulate markets, make them more transparent, and accountable is the biggest failure of government. I find your term “worthless ad hominem” interesting, as if we already know all that stuff. Too many players conveniently adopted that attitude as they drove the economy over a cliff.

    Giving Reagan a pass is a mistake as he and Greenspan set the gears in motion. But I agree that deficit spending — with members of both parties fully complicit — is a problem. The book “This Time Is Different” makes your point about the enduring problem of governments to deficit spend. No doubt what someone saw as a reasonable deficit decision 15 years ago would think differently now. Where I disagree is with your view (or at least my interpretation of your view) is that stopping deficit spending will somehow put it all right again. For me it is the draining the swamp and alligators thing. You are worrying about the alligators (reduce/stop deficit spending); I want to drain the swamp (re-establish regulated, transparent, competitive markets where no firm is TBTF).

  17. MayorQuimby says:

    Interested and Busch…

    I agree 100 percent about the need for real regulation. And thanks for bringing the discussion back to a mature level.

    But the heart of our problem is excessive credit. If one looks at total credit vs, GDP one can see where we went off the rails:

    http://www.acting-man.com/blog/media/2011/02/Total-Credit-Market-debt-vs.GDP_.png

    “Hey…, sure I gave you the money, but you asked for too much.”

    Ahh, that is what they want you to think. But behind all of that easy credit was a mega deficit which was financed by increasing inflation and cheapening the dollar. We are now in financial repression to fund trillions in annual social spending expenditures!

    Look at that chart…the two lines should essentially be even with each other. It is okay for the top line (credit) to exceed the ottos (GDP nominally) but it should remain parallel.

    “shall maintain credit aggregates commensurate with the economy’s ability to grow”

    Think about that line.

    So…the gvmt spends say a trillion bucks. It has to get this money back plus interest over time via taxation. Why not just cheapen liquidity and get credit flowing?! At five percent inflation, that trillion bucks becomes smaller and smaller and easier to obtain overtime.

    But it isnt that simple. Reality and math get in the way. Wages remain flat into higher inflation which is financing deficits. People are then given more credit (!!!!!) to make up for their loss in purchasing power by the lowering of interest rates (0 percent down baby!!!!!). And then THEY hit the wall and are saturated in debt.

    Once all areas of the economy are saturated in debt, it becomes an exercise in trying to inflate a balloon with a hole in it. There is literally no way to keep the balloon inflating.

    The balloon then POPS.

    Right now our balloon has an expanding hole and all the kings horses and all the kings men will not put Humpty dumpy back together again.

    The fiat system IS correctable because it beautifully allows for the writing off of excessive debts so we COULD bring that top line back down to the nominal GDP line.

    But that would mean an overnight loss in forty to sixty percent of our economic activity.

    Clearly that will not work.

    So we must bring the two together meaning WE MUST WORK HARDER FOR MUCH LESS. We can only do this in the context of a MUCH smaller gvmt and MUCH lower expenditures via gvmt. Forget infrastructure. It isn’t going to happen. The gap between those lines IS DEMONSTRTIVE OF HOW MUCH PROSPERITY AND SPENDING WE HAVE ENJOYED THAT WE CANNOT AFFORD.

    Everyone will scream and tell and complain but reality IS. Unless you can figure out a way to TRIPLE our nominal output WHILE CUTTING GVMT at the same time!

  18. MayorQuimby says:

    http://www.federalreserve.gov/aboutthefed/section2a.htm

    The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

  19. Finster says:

    Congratulations on your piece, BR.

    The truth is: Unfettered credit creation created this crisis. The ability of the banks to lend and their willingness to channel liquidity is destroying price discovery in sector after sector: First housing, now higher education.

    The FED funds rate is the moderation tool in this reactor, which has gone critical since Mr. Greenspan decided to remove all the control rods, becoming the academic parallel of the hapless engineer in Chernobyl. The one person who could have controlled the system through the rather removed tool of central bank rates to control credit creation in the fractional reserve system believed his calling was not to control it.

    Now the inflation has happened in all areas of the economy targetted by inflationary credit creation (current target is funding of the Federal Government). The deflationary meltdown is to be staved off by putting on even more leverage, while money has lost its function as intermediator of scarce goods, while relative price levels break down, resulting in speculation in every scarce good from gold to oil to corn futures.

  20. Petey Wheatstraw says:

    “. . . fiat does not just pop out of bernankes buttox but is backed by collateral and pledges to create.”

    Indeed. Show me a pledge to create (and the terms for specific performance/settlement value attached to or included in it). What collateral are you referring to? Are you telling me that the dollar is backed by something more concrete than faith and credit? Hoover dam? Our oil or coal? What is the specific market value of anything? (If your answer to this question is denominated in dollars, you will see how meaningless they are as a measure of value).

    Fiat does just pop out of Bernanke’s butt. If it doesn’t, please explain QEs I and II. Were those dollars not created out of nothing, at the drop of a dime, so to speak? Who was this money “borrowed” from? It was borrowed from the future, at which time the number of dollars needed to settle the “debt” incurred MUST be available (in numbers and in the hands of the payor), to settle that debt, or the debt must be expanded and rolled over in perpetuity. As things stand now, our existing debt cannot be repaid and can only be rolled over and compounded.

    Our dilemma is synthetic and a matter of policy. With purely fiat currency, debt of any amount can be settled at any given time.

    Here is a picture of a promise to repay in dollars:

    http://3.bp.blogspot.com/-mAg6FMpNGpM/Ta9ICcEMonI/AAAAAAAABBM/UoQG8vxtBX0/s1600/U.S.%2BDollar%2BPurchasing%2BPower.jpg

    and here are a bunch relating to perpetual debt:

    http://www.usgovernmentspending.com/debt_deficit_history

    The status quo is falling apart at the seams. Our choices are default or inflate. The most fundamental reason we have a fiat currency is to avoid default (why else would Nixon have depegged the dollar from gold?). I believe a world awash in devalued dollars and no debt is better than a world with too few dollars and self-perpetuating debt.

  21. InterestedObserver says:

    @MQ – with respect to the graph….

    You really need to use a logarithmic y-axis. Indeed, the curves have a constant offset (i.e. are “parallel”) up to about 1982 or so, they diverged substantially up to 1990, and since that time there has been a steady divergence between them. That’s the unsustainable part of the whole thing

  22. Based upon an overwhelming amount of evidence I reviewed in preparing Bailout Nation, Fannie & Freddie were just two more crappie banks chasing market share and profits.

    Prior to 2005, they could not buy subprime or Alt-A — but they had lost so much market share to Wall Street banks, that they petitioned for permission to buy junk. By the time it was granted (late 2005), it was all over for the housing boom except the crying.

    I am going to do a follow up column explaining what was NOT a cause — covering everything from the mortgage deduction, to CRA to GSEs to hedge funds.

  23. arogersb says:

    True, low interest rates caused a spiral in prices in anything priced in dollars, in the end, as Ron Paul says, it is the Fed that creates the bubbles. What you fail to address is the effect of 6 trillion dollars in subsidies to the residential housing market via Fannie and Freddie.

    Economics 101 tells you than any subsidy increases price. So how much of the housing price increase do you think is due to interest rate and how much is due to this subsidy? Not only do you fail to address this but you dismiss it as a Big Lie. Who is being simplistic?

  24. BusSchDean says:

    MQ, We disagree on priorities and the disagreement is substantial. I can reduce the deficit with a well-regulated market economy but I cannot create a well-regulated market economy by reducing the deficit.

    Your comments, to me, carry a sense of moral outrage about how our government could go so wrong on debt and monetary policy. Two quick points: 1) Not all experts agree with you regarding monetary policy (though all, like you, would want a gov’t that was held accountable) and 2) in a democracy anything can happen, it doesn’t all have to be good.

  25. louiswi says:

    VERY GOOD work Barry. Thanks and keep it up.

  26. MayorQuimby says:

    Peter, you are wrong. And every time you run your silliness about fiat I will be here to counter your tinfoil.

    1. The pledge to create is your signature when you sign a loan agreement.

    2. The collateral is your house or car which the bank can repo and sell to remain solvent.

    3. If fiat were just printed monopoly money, nothing would matter. Solvency and insolvency would cease to exist in the dictionary because they would lose meaning. Lehman and bear and wamu would still be around and bread would cost $700,000 per loaf.

    4. The loss in purchasing power is irrelevant because wages went up to account for that loss so long as we kept credit backed by GDP. Iow….the middle class saw no loss of purchasing power due to a weaker dollar UNTIL EXCESS LIQUIDITY RAMPED UP IN THE 1980′s!

    5. The problem with fiat isn’t fiat, it is humans inability to control themselves so they abuse fiat.

    6. Finally, QE was still backed by taxation and gvmt revenues (future). We have not resorted to pure printing (yet). And if you look at credit supply figures, there really isn’t as much money out there as you might think.

    ONCE AGAIN FOR THE THOUSANDTH TIME…explain to me why student loans are not discharge able.

  27. MayorQuimby says:

    Busch-

    “I can reduce the deficit with a well-regulated market economy but I cannot create a well-regulated market economy by reducing the deficit”

    No, you cannot. Show me.

  28. Raleighwood says:

    Excellent article – and I too wonder how all that “truthiness” is slipping by the editors.

    One observation – the statement concerning “cognitive dissonance” does not take into consideration individuals that knew all along that the “Big Lie” was a “Big Lie”, that for some the fraud was the primary goal from the get-go.

  29. eliz says:

    I will keep this short and sweet. Thank you, Barry!

  30. InterestedObserver says:

    @MQ – “explain to me why student loans are not discharge able”

    Never really thought about it since I never had one nor have the kids…, yet at least.

    From an objective basis, the education is an “asset”. Unfortunately, that “asset” can’t be recovered and resold or removed from the acquirer. You always have the benefit of that education. Since since you retain the asset, you retain the debt. Obviously, the analysis is simplistic.

  31. louis says:

    It truly is amazing what we will do to each other to smoke the more expensive cigar.

  32. Frilton Miedman says:

    BusSchDean Says:
    November 6th, 2011 at 10:15 am
    ” MQ. I remind you of the basics because I find your gov’t-centric criticism unbalanced. The systemic failure over decades to regulate markets, make them more transparent, and accountable is the biggest failure of government. I find your term “worthless ad hominem” interesting, as if we already know all that stuff. Too many players conveniently adopted that attitude as they drove the economy over a cliff. ”

    Indeed, as to say because we caught a police officer doing favors for a local mob boss, therefore we need to get rid of the police altogether.

    The problem, lawmakers being influenced by the highest bidders in campaign bucks, I’m a big fan of Dylan Ratigan and his effort to change that -

    http://www.getmoneyout.com/?utm_campaign=founders&utm_medium=email&utm_source=getmoneyout

  33. sublimaze says:

    You are not guilty of the big lie since everything you wrote is true. You ARE Guilty of The Big Omission. You said nothing about Fannie and Freddie and your Democrats friends who pushed the housing market to every American to buy the votes to get elected. This is a very essential part of the Big Picture which you have selected out. I think as a matter of truth you need to rewrite this paper or you will be open to the charge of political bias. By the way Evolution and Global Warming are hardly the same. The evidence for Evolution is beyond reproach to the point of fact not theory. Global warming is an open question and when the ideological blinders come off, it is still only a plausible theory, not an established fact. Any way Helicopter Ben is going to finish the job on the path to Wiemar, so it does not matter. We are sunk.

    ~~~

    BR: Based upon an overwhelming amount of evidence I reviewed in preparing Bailout Nation, Fannie & Freddie were just two more crappie banks chasing market share and profits. Prior to 2005, they were not permissioned to buy subprime or Alt-A — but they had lost so much market share to Wall Street banks, that they petitioned for permission to buy junk. By the time it was granted (late 2005), it was all over for the housing boom except the crying.

    I am a political independent, and I have no trouble trashing either party: In Bailout Nation, I lambaste Democrats — Robert Rubin, Larry Summers, Bill Clinton for repealing Glass Steagall and passing the CFMA. I also criticize the California state legislature (mostly Democrats) for protecting the subprime, non bank lenders,that were heavily concentrated in California.

    I have not omitted Fannie & Freddie, I have addressed them repeatedly over the years:

    http://www.ritholtz.com/blog/2008/10/misunderstanding-credit-and-housing-crises-blaming-the-cra-gses/
    http://www.ritholtz.com/blog/2009/06/most-subprime-lenders-werent-covered-by-cra/
    http://www.ritholtz.com/blog/2010/02/causes-of-the-crisis/
    http://www.ritholtz.com/blog/2008/10/fannie-mae-and-the-financial-crisis/
    http://www.ritholtz.com/blog/2010/05/rewriting-the-causes-of-the-credit-crisis/
    http://www.ritholtz.com/blog/2011/01/the-crisis-was-caused-by-insert-pet-peeve-here/
    http://www.ritholtz.com/blog/2010/06/fannie-freddie-chasing-profits-market-share/
    http://www.ritholtz.com/blog/2011/07/financial-crisis-denialists/
    http://www.ritholtz.com/blog/2011/07/crisis-causation-final-exam/
    http://www.ritholtz.com/blog/2009/06/cra-thought-experiment/
    http://www.ritholtz.com/blog/2011/02/fannie-freddie-market-share/

  34. Joe Friday says:

    MayorQuimby,

    Let me add…the most egregious screw up was to deficit spend since the early 1980′s. I give Reagan a pass because we won’t the Cold War this way.

    Nonsense.

    A) Military spending by the Soviet Union drastically plummeted PRIOR to Reagan being inaugurated, and Gorbachev told Reagan early on that they had ceased to be our enemy. He forced through a massive military build-up anyway.

    B) Reagan’s MASSIVE federal deficits & debt was overwhelmingly as a result of a MASSIVE decline in federal income tax revenue caused by the enactment of MASSIVE tax cuts for the Rich & Corporate. David Stockman, who was head of the OMB at the time, stated that federal income tax revenues plunged to 1940s levels.

    But what both Bushes and Clinton and Obama have done is UNFORGIVABLE.

    Well, certainly the Bushies, but Clinton not only turned the failed Reagan/Bush federal deficits into federal surpluses, but started paying down some of that Reagan/Bush federal debt, and only a tiny percentage of the federal deficits & debt accumulated since Obama was inaugurated can be attributed to any of his policies.

  35. MayorQuimby says:

    Joe-

    Reagans deficits and military build-up finished them off. It gave us weapons to sell to israel, Saudi Arabia, Iraq, Taiwan, etc…it helped expand the empire and created tons of jobs building up our military industrial complex. We won the board game.

    And it was possible because the expansion in credit was able to be funded later on because there was credit incursion capacity out there. Iow, we were not over levered and able to withstand the burst of excess spending which not only got us out of recessions but helped expand our economy.

    And the financial elites learned the exactly wrong lesson from this…that one MUST spend WHATEVER IT TAKES to make things work TODAY regardless of the affordability of such an endeavor! Ie…we will never have a recession again!

    Ha!

    One can only spend money he has or will have.

  36. MayorQuimby says:

    Add…what SHOULD hve happened in the early 90′s was a major adjustment. We needed to pay down debts and grow in a meaningful way.

    Instead, the powers that be out a man (Greenspan) in office who would cheape liquidity to the extent that no adjustments would EVER need to be made so instead of recessions being the adjustment for excess spending and inventory buildups, more credit would suffice.

    It’s like trying to eat yourself skinny and it cannot work.

  37. the pearl says:

    The eternal struggle. Do we blame the drug dealers, the drug users, or the cops? Everybody has blood on their hands and is busy trying to wipe it off on the next guy.

  38. sublimaze says:

    You made my point. Where were The two FFs not in you WP paper? You obviously selected them out for one reason or another. What about the Community reinvestment act and the Feds leaning on the banks to lend to everyone. While your at it, please, use your big megaphone to call out the student lending scam. If there every was a price bubble created by reckless leverage, College tuition has to qualify. One more thing. If all the banks, brokers, and their equity holders had been allowed to fail, the depositors under $100,000 been paid off, and the markets allowed to clear, we would be on the other side of this by now. As Bill Fleckenstein says, “In a social democracy with a fiat currency all roads lead to inflation”.

  39. sublimaze

    I have addressed repeatedly why F&F may have been disasters (we were short them) but they were not the cause.

    The follow up to this piece are the specific factors that DID NOT CAUSE but got blamed for the crisis. F&F and the CRA will be part of that piece.

    I believe the data on this is OVERWHELMING. I challenge you to supply FACTS and FIGURES proving otherwise

  40. paulie46 says:

    “In a social democracy with a fiat currency all roads lead to inflation”.

    Inflation has always been with us – what does a fiat currency in particular have to do with it?

  41. Winston Munn says:

    Fractional reserve banking is not a conspiracy to produce inflation. It is the result over time of the understanding that not all deposits will be removed at once, so going above a 1:1 ratio of lending to deposits has a high degree of safety, and fractional reserve banking allows banks to recoup costs +make profts without the need to charge depositors capital storage fees.

  42. MayorQuimby says:

    Winston…ONLY if sound lending is practiced.

  43. blackjaquekerouac says:

    Why does objective history matter–whereas the perversion of history dooms civilizations to failure and collapse? part is intuitive: we all know Mayor Bloomberg is clueless as opposed to merely thinking that before. Another part however is “the history lesson.” The irony that the Greeks have successfully taken it to the EU is not lost on me since they invented objectivity and fact based history. One need only compare Polybius (the Greek historian) to Livy (the Roman one) to see the difference. One wrote what the Romans actually did (he was there as well)…the other hundreds of years later “couldn’t imagine the Romans doing such things” and simply changed the story. Simply put it’s not that our society is ignorant of history…it’s willfully ignorant of facts…and it literally kills those who simply point this out. And people wonder why a major metropolitian area (or ten) in the US is/are going to collapse imminently! “They have to kill to keep the blame squarely where they want it to be” instead of simply acknowledging the ridiculousness of the situation. That’s how insane the Mayor of New York City is! People are pulling their money out of “the insane asylum” because the situation is NOT TENABLE. The government will collapse…sooner not later…eh, big deal. “It’s happened before” morons. (JP Morgan the man had to bail out our Treasury Department back in the day!) And that’s why we study objectivity in our past: we lose huge amounts of wealth by the same stupidy…all until there is money to lose anymore. of course gold is “money”–but an interest rate is “far more money” than gold could ever imagine. And were “gold” objective in “his voice” he would agree to that fact.

  44. sublimaze says:

    Its quite simple. Politicians get elected in social democracy primarily by buying votes and using the so called class struggle to advance the agenda of distribution. When they can not get enough money for transfers from taxes they resort to fiat money creation. If there some check, either a gold standard or a general consensus in the society that deficit spending for transfers was a bad thing there would be no need to inflate. We have neither here in the USA. Therefore the debtor class which has the overwhelming number of votes will opt to have there debt forgiven by debasement of the currency. It has been going on since the Gracchi brothers in Rome and it is just human nature.

  45. sublimaze says:

    Barry I read the posts that you highlighted. I see your argument. However, it is clear that the political class used FF to push mortgage money out the door, and leaned on the Federally chartered banks to make housing affordable so they could bask in the political glow of home ownership. The first sin was and the biggest one we agree on. The Greenspan inspired credit bubble. The second sin allowing the banks to speculate and letting them know that there was no downside. If I knew you would pick up my margin calls, I could have a really good time, instead of busting my rear end doing labor epidurals at 3AM on 150 kg pregnant ladies.

  46. paulie46 says:

    Fractional Reserve Banking is a myth and does not explain the mechanics of how money is created through the banking system. The Fed agrees with me on that as do other central banks and I will gladly hunt down the paper if need be.

    Banks are never constrained by their deposits in whether or not they can make a loan. A loan can always be made to a credit-worthy borrower (requirement #1) and will be made if the bank can earn a profit on the transaction (requirement #2).

    Reserve requirements are settled after-the-fact and can always be met either by borrowing reserves through inter-bank operations or from the Fed.

    The Canadian banking system has no reserve requirement, and the sky has not fallen for them.

  47. RW says:

    @InterestedObserver,

    Don’t think your analysis is simplistic, in fact it’s probably too complex.

    Non-dischargability of student loans even in bankruptcy — “undue hardship” can lead to relief in some cases if the court approves — is a straightforward result of large credit corporations effectively lobbying for the necessary laws and regulation.

    Interest rates and regulatory constraints on other forms of credit available via large-scale, multi-state or international entities, from mortgages to credit cards, are a consequence of the same lobbying muscle.

    None of them have any causal connection to the macroeconomy nor is there any necessary logic aside from that application.

  48. MayorQuimby says:

    Pauline that is nonsense.

    1. Insolvency is proof of fractional lending.

    2. Even with zero reserves banks can be insolvent. In fact, reserves are irrelevant to the discussion of solvency.

    3. Resrve requirements are necessary to constrain lending and mitigate the proclivity of banks to max out their leverage at all times. The BIS has increased capital requirements because the banking system went too far. There would be no need to do so if fractional lending were a myth.

    Reserve requirements cannot be met after the fact. Banks are either solvent or they are insolvent. It is really a very simple black or white issue. The grays masking the distinctions at present is a mist of fog perpetrated by the .gov fog machine.

  49. paulie46 says:

    @ sublimaze

    Fannie/Freddie is the only bank of the 25 that got TARP money subject to the CRA. The percentage of F/F loans that went bad was small compared to the rest. Finally, F/F didn’t package ANY “sub-prime” loans per the definition of sub-prime.

    By ignoring these facts your argument is very weak and unlikely to convince anyone that isn’t wearing ideological blinders.

  50. sublimaze says:

    Think about Canada. Although they are a Social Democracy the path to inflation is blocked because the Canadian electorate accepts the need for balanced budgets and is willing to pay high taxes to fund their social welfare. They also have the natural resources that the Chinese need which does not hurt. You can not deduct mortgage interest in Canada and you generally have to have 20% down. Canadian banks do not generally lend to deadbeats. As far as I know they all stayed open in the 1930′s.

  51. sublimaze says:

    If FF were so sound why did they have to be bailed out?

  52. emaij says:

    Excellent summary of what led up to the crisis. But you chose not to tie it back to crony capitalism for this article. Don’t you think it’s important to include that when you are addressing the big lie? Your “when a dog bites you in the ass” analog y really sticks with people, for example:

    I have libertarian friends who are always bitching about government. I always say to them, when a dog bites you in the ass… that’s what dogs do – don’t blame the dog. Look up the leash and see who is holding the handle. When you look at Congress – Congress is the snapping dog. But they are somebody’s bitch. You have to see who is holding the leash. Very often it is banks and Wall Street and the financial sector having Congress do its bidding. Most of the things that got us into trouble have been done at the bequest of the banks.

    http://www.capitalismwithoutfailure.com/2011/10/ritholtz-interview-with-jonathan-miller.html

    ~~~

    BR: Crony Capitalism is a theme throughout Bailout Nation.

    That was a book, this was a short column — 1000 words limits you.

  53. wunsacon says:

    >> I give Reagan a pass because we won the Cold War this way.

    MayorQuimby, the CIA told Carter/Reagan the USSR would collapse on its own in a couple of decades because it was unsustainable. In hastening the USSR’s demise, Reagan contributed to our own.

    China turned away from communism with far less antagonism.

    The USSR was unsustainable not just because of communism but because — like the Mongolian Empire (another flash-in-the-pan) — it was too damn big:

    (a) HUNDREDS OF LANGUAGES: http://en.wikipedia.org/wiki/Languages_of_the_Soviet_Union

    (b) It spanned over 10,000 kilometres (6,200 mi) east to west across 11 time zones, and almost 7,200 kilometres (4,500 mi) north to south.

    (c) Much more diversity of religion (practiced in private even during times when religious institutions were not allowed to assemble in public): http://en.wikipedia.org/wiki/Religion_in_the_Soviet_Union

    The idea that we had to spend ourselves into bankruptcy to defeat an unstable entity is incorrect.

  54. AlexM says:

    Quimby,

    First of all your comments don’t make much sense, are filled with misspellings, and are generally incomprehensible. Before you pop off claiming ad hominen, I remind you to notice that I am talking about your comments, not you. And you wonder why your comments get so little respect!

    It goes something like this, banks who extended (and made lots of money doing so) student loans paid their lobbyists to push through the Bankruptcy Reform Bill, so that dead beat students and other debtors would have to be debt slaves the rest of their lives regardless of their financial circumstances. A virtual debt prison was created that 18th century bankers would have surely been envious of as they had to provide room and board for the debt prisoners. The answer to your question of why student loans are not discharged in bankruptcy has been answered.

    From the wiki:

    After the passage of the bankruptcy reform bill of 2005, even private student loans are not discharged during bankruptcy. This provided a credit risk free loan for the lender, averaging 7 percent a year.

    It was passed by the 109th United States Congress on April 14, 2005 and signed into law by President George W. Bush on April 20, 2005. Most provisions of the act apply to cases filed on or after October 17, 2005. It was hailed at the time as the banking lobby’s greatest all-time victory.

    It was widely claimed by advocates of BAPCPA that its passage would reduce losses to creditors such as credit card companies, and that those creditors would then pass on the savings to other borrowers in the form of lower interest rates. These claims turned out to be false. After BAPCPA passed, although credit card company losses decreased, prices charged to customers increased, and credit card company profits soared.[1]

    I repeat, it was hailed at the time as the banking lobby’s greatest all time victory.

    I presume that your repeated bleating about this topic has been answered by the many astute contributors here on TBP, but like a petulant child or an Alzheimer’s patient, you keep repeating the same question, over and over. Perhaps you need to make an appointment with your physician?

  55. paulie46 says:

    “If FF were so sound why did they have to be bailed out?”

    Didn’t say they were sound – they were a poorly run business guilty of accounting fraud just like the majority of big banks that are effectively insolvent.

    F/F just didn’t take part in the big casino among the investment banks selling worthless derivatives back and forth amongst themselves using the people’s money.

    F/F is guilty of helping people that normally couldn’t own a house to own one – whether or not this was/is good policy is debatable but it didn’t cause the entire world economy to collapse. F/F’s bad loans didn’t fail at a higher rate than normal (through poor underwriting), unlike the investment banks, which ignored prudent underwriting as part of their business plan – this was fraud and purposeful criminal behavior.

    The first trailer in a mobile home park hit by a tornado didn’t cause all the other mobile homes to be destroyed.

  56. troubled times says:

    CNBC holds the Repub debate this week. Some of thier blowhards will be questioning. I would certainly enjoy a Ritholtz review of both the answers and questions.

  57. James Cameron says:

    @ sublimaze -You said nothing about Fannie and Freddie and your Democrats friends who pushed the housing market to every American to buy the votes to get elected.

    Democratic friends? If nothing else, you need to follow BP a little more carefully. If nothing else, you may be revealing your own bias . . .

  58. wunsacon says:

    MayorQuimby, in addition to my “comment awaiting moderation” @ 1pm, I would like to add that “defeating communism” is just a long line of excuses we make for expanding the American Empire. (Many nations have tried. So, we’re not worse in that regard. But, since we’re running out of room on Earth, we better start behaving differently.) Look at our history and you’ll see we don’t need reasons to expand:

    - stealing the West (genocide against native Americans)
    - stealing Texas
    - stealing Hawaii
    - stealing Spanish colonies (Cuba, Philippines)
    - romping around Central America and supporting banana republic dictators
    - lucky in WWII to be clearly the good guys!
    - coups in ME and South America
    - invading former allies in ME

    Sure, a 50% centrally-planned plutocracy (UFSA) is better than a 95% centrally-planned beaurocracy (USSR). But, is that really why we fought the cold war? Seems like we’re a war-like people and look for excuses.

  59. ToNYC says:

    There can be no remission to this toxic debt incorporation throughout the body politic until there is a chemo-like purge of Gold men Sackers from all parts of our Governments. What more proof of pyromania is needed to awaken the AG place Holder? Plan B is defining Corporations as the Founding Fathers clearly intended but failed to make clear, as entitled to no inalienable rights of human, natural-born persons.

  60. TacomaHighlands says:

    Fabulous. Printing for archival memory box for my kids.

  61. sublimaze says:

    The federal reserve and the American Government clearly created the bubble by first creating the credit and then letting the banks know that they would be bailed when they speculated with the credit. If the banks had been told that only the depositors under $100,000 would have been made whole and that if their books failed they would loose all the equity they never would have speculated at such high leverage. Give a person or an entity the chance to speculate without down side what do you expect them to do. Remember they have been bailing the banks for years. The earliest I remember was Franklin National in the 1970s.

    ~~~

    BR: I doubt that FDIC insurance is to blame, seeing as how it was around for 70 years prior without creating a bubble

    True moral hazard was created when Bear & Citi & AIG & Bank of America were bailed out, but that was AFTER, and not a cause. LTCM was a bank funded bailout, although the Fed pushed the other primary dealers to do so.

  62. RW says:

    @BR

    Your article is spot on; looking forward to your next one.

    Semi-OT but Paul Krugman’s book, Return of Depression Economics, should be on the BP Bookshelf it is isn’t already (couldn’t find it but didn’t search to the end). I recommend the latest paperback edition with the new introduction relating the most recent crisis to the main themes the book covers up to year 2000; e.g., http://tinyurl.com/7w7mcw

    Speaking personally, this text is what led me to Hick’s IS-LM model and a much better understanding of the turn of the century macroeconomic picture. Like many, including folks far more knowledgeable about macroeconomics than I’ll ever be (e.g., http://tinyurl.com/6b7tz28), I would have been persuaded we were quickly headed for higher interest rates four years ago otherwise.

    FWIW

  63. ToNYC says:

    Franklin National in 1974 bailout worked rather well for us. The bonds were selling for $1 a bond or 1,000 bonds (! Million) to establish a tax loss. Nice pickup, but didn’t sweep the Street well enough when they paid off in the fullness of time at way over Par.

  64. Bill777 says:

    Interesting Action – Reaction discussion on how this unfolded. Any insight to the broader context of why we moved into this Action – Reaction behavior in the first place? Is there any contextual (Big Picture) connection with Pearlstein’s premise (WP 11/6/2011) – sans pointing a finger at one party or another? Perhaps the new context is obvious to most, but not to me. Thanks.

  65. herewegoagain says:

    Cause of collapse: Inadequate regulatory legislation and supervision.

    Republican solution: LESS regulatory legislation and supervision.

    Cause of obesity: Too many calories/not enough exercise.

    Republican solution: MORE calories/LESS exercise.

  66. paulie46 says:

    “…the American Government clearly created the bubble by first creating the credit and then letting the banks know that they would be bailed when they speculated with the credit…”

    Or, maybe the banks let the government know that they would be bailed out when they speculated with the credit.

  67. willid3 says:

    why do some think credit was a new invention????
    its been around a very long long time. at least a 1000 years?
    and have those who grip about fiat money ever really looked at the history of what economies were like before fiat money?
    and those who don’t like the Federal reserve. have you looked at the history before it existed?
    at how bad the US economy was? and what happened to the economy after each of the predecessors was shut down? and consider this. these economies were the least regulated ever. and we had had the biggest percentage of poor.
    who got nothing from the economy at all. but subsisted because they grew their own food. some thing we can’t do today. care to guess how going back to those economies would turn out today? as it was, capitalism just barely escaped being scrapped after the great depression . because it did nothing for the majority. it was ‘saved’ by the regulators.

    and now if we could just reduce the number of wall street trolls

  68. Congress is in part responsible — but bot for what Bloomberg claims.

    They deregulated derivatives with the Commodity Futures Modernization Act of 2000 — passed by a GOP congress, signed into law by a Democrat President (Clinton). And the same combo repealed Glass Steagall the prior year!

  69. Frilton Miedman says:

    MayorQuimby Says:
    November 6th, 2011 at 11:36 am

    “…. Reagans deficits and military build-up finished them off. It gave us weapons to sell to israel, Saudi Arabia, Iraq, Taiwan, etc…it helped expand the empire and created tons of jobs building up our military industrial complex. We won the board game. ”

    Not that this is relevant to topic, but you have a point, all that debt did contribute to economic growth.

    You fail to acknowledge the obvious though -

    That debt has finally come to a head, during the exact same time we incurred all that debt, middle class salaries have not kept pace with GDP, inflation & costs of living, the middle class has also incurred an equal rate of massive debt growth. (look up Marriner Eccles “Poker chip” theory)

    At some point, you have to ask where all that “wealth creation” of the last 30 years is? (Hence the 99%/ OWS movement)

    All that spending created wealth for the top 1%, while creating debt for both the government and the middle class as a result of lack of wage growth and shared gains.

    The solution is glaringly obvious when you observe that during Clinton’s admin we started to pay down the debt, once Bush decided to reverse Clinton’s tax policies, that debt once again exploded.

    Even Greenspan is saying he never intended for Bush’s tax cuts to be permanent, they were supposed to expire once the surplus was gone.

    Now we just wait for our systemically bribed politicians to realize that it’s completely obvious to enough voters…I for one am mystified as to how Norquist has been allowed to force politicians to sign anything beyond they’re sworn oath of office.

    To me, that’s treason.

  70. Frilton Miedman says:

    Barry Ritholtz Says:
    November 6th, 2011 at 4:38 pm
    ” Congress is in part responsible — but bot for what Bloomberg claims.

    They deregulated derivatives with the Commodity Futures Modernization Act of 2000 — passed by a GOP congress, signed into law by a Democrat President (Clinton). And the same combo repealed Glass Steagall the prior year! ”

    EXACTLY,

    I decided to finally join this forum after seeing you on DR, for someone in your line of work, as high profile as you are, to stand up and say what;s right takes balls, as with DR, who risked his career to do the same when he was the Fast Money host.

  71. Dear Barry,

    The other myth which keeps getting repeated by David Brooks, Dick Bove, and most recently Erin Burnett that I’d love to see you tackle is the myopic notion that the bank bailouts (TARP) were profitable. More on this here:

    http://www.polycapitalist.com/2011/10/no-no-no-erin-burnett-government.html

  72. sublimaze says:

    Barry missed the point. I did not state that FDIC insurance created the moral hazard. If only the FDIC insurance was honored and everybody else lost their money, depositors, creditors, and equity holders,there would be no moral hazard for 100 years. Still all the debt that is not marked to market on the books of the banks will come due and be inflated away. You can be sure of that.

  73. Futuredome says:

    lol, to market liberalism. I guess the 1873 panic wasn’t Wall Street’s fault either or the 1892 or 1907.

  74. MayorQuimby says:

    @Alex-

    Let’s address your emotional rantings:

    “First of all your comments don’t make much sense, are filled with misspellings, and are generally incomprehensible. Before you pop off claiming ad hominen, I remind you to notice that I am talking about your comments, not you. And you wonder why your comments get so little respect!”

    My comments get more respect than most here in the form of people actually addressing them!

    1. They all make sense. If you do not understand any single thing I wrote (apologies for typos I’m on an iPad), BY ALL MEANS lay it out and I will help you ‘get it’. If not, then be quiet because you are just bullshitting us.

    2. ONCE AGAIN we have a person who clearly DOES NOT LIKE what I write but it is unwilling or unable to debate any issue presented.

    Now to your rantings:

    “It goes something like this, banks who extended (and made lots of money doing so) student loans paid their lobbyists to push through the Bankruptcy Reform Bill, so that dead beat students and other debtors would have to be debt slaves the rest of their lives regardless of their financial circumstances. A virtual debt prison was created that 18th century bankers would have surely been envious of as they had to provide room and board for the debt prisoners. The answer to your question of why student loans are not discharged in bankruptcy has been answered.”

    Baloney. Student loans were not discharge able prior to the passage of this act for all intents and purposes.

    Why?

    BECAUSE SOLVENCY is the heart of our entire monetary system. And banks are forced to sell assets to make up for a lack of cash flow. Tis is banking 101, no … this is INTRO TO BANKING stuff and any of you who disagree are not only wrong but are embarrassing yourselves. Go audit an Eco 101 class somewhere.

    The frequency with which consumers go bankrupt combined with the lack of sellable collateral in case of default is also why credit card rates are in the teens. The bank can’t repo your hd DVD player which was bought for $400 and is now worth $4 and expect to fill the hole on its balance sheet created when you went bk!

    Now, if you have anything useful to add, go ahead but the above is not a particularly extreme opinion or stance but rather the presentation of the very basics of the fractional lending system that is behind our entire way of life.

  75. Futuredome says:

    Sublimaze, capitalism is a moral hazard. Either you get that or you don’t. The truth is the US has had some dilly credit contractions well before the “FDIC” your worshipping a ideology that is a facade, which is why the New Deal coalition put strict controls on credit and put public investment into a higher government priority more than ever as a replacement.

  76. sublimaze says:

    lol to those who do not understand mass behavior and are looking to blame someone. Look out for yourself.

  77. Frilton Miedman says:

    sublimaze Says:
    November 6th, 2011 at 6:19 pm
    ” lol to those who do not understand mass behavior and are looking to blame someone. Look out for yourself. ”

    Complete agreement, intelligent discussion breaks down once it reverts to the partisan bullshit….at that point I might as well be watching Monday night Football and root for the home team regardless of what’s right or wrong or who’s playing the most skilled game because my ultimate opinion is based on emotional ties instead of reality.

  78. JerseyCynic says:

    Fannie/Freddie Motto: “It’s much easier to ask for forgivenes­s, than to ask for permission­”

    All the warnings about F/F were out in plenty of time to have prevented this train wreck. YEARS before the shtf. All involved knew F/F had their hands in 70% of mtgs. How obvious does GOLDMAN, I mean Government Sponsored Enterprise have to be??? They all knew they would all be rescuing each other.

    (How convenient the bankruptcy laws were nicely tightened up around this time)

    This “Big Lie” — living beyond one’s means?

    None of the outrageous amounts of money that these bankers made would have been possible without the commoners living beyond their means

    Same with everyone else out there pointing out the fact that we worker bees are living beyond our means.

    If we stopped living beyond our means, the 1% surely wouldn’t recognize their worlds anymore.

  79. Frilton Miedman says:

    JerseyCynic Says:
    November 6th, 2011 at 7:08 pm

    ” This “Big Lie” — living beyond one’s means? ”

    Holy f-cking Toledo!

    Id this a joke?…or am I having a nightmare like that movie “Groundhog day” where the same mistakes are repeated over and over?

  80. Irwin Fletcher says:

    BR: “Based upon an overwhelming amount of evidence I reviewed in preparing Bailout Nation, Fannie & Freddie were just two more crappie banks chasing market share and profits. Prior to 2005, they were not permissioned to buy subprime or Alt-A — but they had lost so much market share to Wall Street banks, that they petitioned for permission to buy junk. By the time it was granted (late 2005), it was all over for the housing boom except the crying.”

    BR,
    Sublimaze has good points.
    The GSE’s did not cause the financial crisis. I will give you that.
    But here are some facts I challenge you with. I challenge two of your points.

    Point #1 (GSE’s didn’t buy before 2005)
    Saying that F&F were not allowed to buy subprime loans prior to 2005 is misleading. They faced no limits on the amount of subprime MBS they could buy from private issuers that they then kept on their books. In fact, F&F bought between $340 and $660 BILLION in private-label subprime and Alt-A MBS from 2002-2007. The GSE’s actually began investing in private-label MBS in 2000. In 2002-2003 they began rapidly increasing this.

    Point #2 (F&F were just two more crappy banks)
    Hardly. When the bubble burst, they faced much higher default rates than expected, because their “government sponsored” status allowed them to skirt around capital requirements. Their leverage ratio in 2007 was estimated to be over twice that of commercial banks. They were the 2,000 lb. gorilla in the mortgage space, had cheaper funds, and artificially drove down interest rates to less qualified borrowers as they moved down the food chain.
    They enhanced their Automated Underwriting Systems to capture more borrowers who did not qualify for prime loans. Lastly, how much money has F&F cost the taxpayers? Compare this to any other “crappy bank”.

  81. flocktard says:

    First, thanks for a great piece. It must give you enormous satisfaction to set the record straight on such a large stage. Me, I’m still bitch slapping stupid palookas on anonymous forums, to little avail.
    Hopefully this OpEd will change things, but let me tell you- its one mind at a time when it comes to issues like this.

    Those looking for an excellent piece on the defanging of the CFTC by Summers and Rubin, et.al, can view the excellent “Frontline” piece on-line. Arthur Levitt seemed to be the only one who showed at least some contrition.

    Rubin remains, as Nasim Taleb labeled him, “The Greatest Thief In History.”

  82. Bomber Girl says:

    not surprisingly, i agree with Irwin. As much as I appreciate the rigor of BR data analysis of details, I think he has missed the forest for the trees on the specific point of fannie and freddie since his data points seem to have a hard time capturing the 2,000 lb gorilla factor in the market in terms of setting the terms of market structure and pricing of credit due to their weight in the overall market and the free rider/moral hazard factor of the implicit gov’t backing. as others have mentioned, there is plenty of greed and associated blame for the crisis all around, and the bankers/non bank participants were plenty at fault, but the insistence on “just another crappy” bank consideration of fannie/freddie belies logic. 70% share of the overall market at certain points (granted, not of the lowest quality sector) indicates impact on pricing, standards, market size/capacity, and warps risk considerations, even if in a role as liquidity provider (or other non originator) role. Regulatory oversight was clearly lacking but in different ways depending on whether the sector was GSE or ahem, so called banking. The former were supposed to create access to home ownership for those who could afford it – but who somehow couldn’t get it otherwise – 70% of the market, really?….Right. And the latter, well, easy to rip off the nation with no skin in the game and riding on the massive wave of derivatives on the former.

    ~~~

    BR:The GSEs have had the majority share of the mortgage securitization market for 75 years. If they were the cause, why did nothing happen all that time? Why did market’s suddenly explode in the 2000′s ?

    Too many people do not seem to understand the concept of causality; correlation gets them even more confused.

  83. Joe Friday says:

    MayorQuimby,

    Reagans deficits and military build-up finished them off.

    Merely a RightWing fantasy.

    There was nothing to “finish” “off”. The Soviet Union had already unilaterally drastically cut military spending before Reagan, and his MASSIVE federal deficits & debt were overwhelmingly from the tax cuts for the Rich & Corporate.

    We won the board game.

    No, Americans got MASSIVE federal deficits & debt, higher unemployment, higher Poverty, lower real wages, and a declining Standard of Living.

  84. RW says:

    Not that it probably matters but I gave an older link to the Krugman text I referenced above. The updated title should have been The Return to Depression Economics and the Crisis of 2008

    Oh well.

  85. Tim says:

    BR for President. C’mon BR!!!!!!!!!!!!! Seriously.

  86. JerseyCynic says:

    ok Frilton — Strike up – the music — the band has begun – * – * – * – *

    2004????

    http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/

    probably should back up to 2001 when we realtors held our tues am mtgs. downtown, protesting “The Big Grab”
    http://realtytimes.com/rtpages/20010119_grab.htm (TURN THE MUSIC UP LOUDER HERE!!) GASP – the absurdity of mixing Banking & Commerce — can you imagine!!

    http://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act#Controversy
    (Sen. Gramm – - how are things working out in europe?)

    does the NAR really think they kept the banks out of the real estate brokerage and management bidness??

    Omnibus Appropriations Act, 2009

    OMNIBUS — banker translation: I’m a drivin’ this bus

  87. Bomber Girl says:

    Saying something has been around 75 years doesn’t offer evidence of anything. Things change. The market changed in the 80s and 90s with rules and risk appetites that allowed subprime and its securitization to emerge and take off. Additionally, the concentration of the subprime originators increased significantly in the late 90s and early 2000s due to mergers and failures, thus concentrating risk in fewer hands which should have been a red flag. Standards declined, greed accelerated. Yet concerns about “predatory lending” emerged periodically, causing for instance F&F to change their policies regarding loans with prepayment penalties (2002) thus shifting what the market would “produce” for them. I agree with you that they were a “crappy bank”(s) but I don’t think you go far enough on that point given their role in market structure in a market that morphed from one thing to another, growing significantly in size, changing its risk profile and with increased concentration, of course coupled with political wishes to extend lending so everyone could have the chance to be in the bubble, making it more democratic.

    ~~~

    BR: If you are claiming something is a causation of a larger event, and it has been around for many decades without incident, you need to show more.

    Example: I blamed the Fed for being the spark. They may have been around for nearly a century, but i specifically blamed the ultra low rates and the specific unprecedented long period they were kept there.

    PS: Subprime originators mostly disappeared in the 1990s. The new batch came about n the 2000s. Again, check the data

  88. Revert2Mean says:

    Great article! Lies and more lies, a major problem today is that the media and the blogosphere are dominated by the 1 percent.

    The 1 percent control everything, and they control the news that they drip fed to the masses, to the 99 percent.

    It was revealed recently that the Australian real estate industry actually pays shills and spruikers to ‘talk up’ property on forums and blogs (yes even blogs like this one) to plant positive spin, to post as if they are one of the 99 percent when in fact they are the 1% pretending to be a normal blogger.

    Watch this for evidence, it includes a video that Bernard Salt probably wishes was never recorded:

    http://www.differenthere.com/2011/08/on-internet-nobody-knows-youre-dog-or.html

    Are your eyes open yet people? Don’t believe what you read, anywhere. The problem is the 99 percent don’t read blogs like this. They don’t find out the truth. So pass this on, pass the message on to everyone. Tell your friends what’s happening. Make them read this article. Make then watch the Bernard Salt video (he’s a public figure, they might have heard of him, they might listen to his scheme and revolt against it).

    Above all, remember, the 99 percent are fed lies by the 1 percent and this is a huge obstacle we must overcome.

    But in time, the truth must come out. It always does.

    We are the 99 percent.

  89. Bomber Girl says:

    BR – re: your PS…I am not sure which aspect of my data you are questioning. There were a bunch of players in the market in 1995, for example, if you look at market share figures. Most of those folks disappeared (through failure or merger, or just were elbowed out of the game). In 2003, the top 25 firms (Household, CitiFinancial and the like) pretty much accounted for the totality of this end of the market.

  90. Frilton Miedman says:

    JerseyCynic , just remember, “if you ain’t rich – it’s your own fault”.

    Your last comment was about the profoundly obvious, we all know and polls show it, We may not be perfectly pleased with the current admin, but we know he didn’t do this.

    Yet they continue to pump misinformation and ridiculous distortion as if one day we’ll change our minds and simply agree it was irresponsible borrowers fault, and we settle for the third world life Paul Ryan’s “path to poverty” offers…. “Groundhog Day”, at some before this movie’s over they might get the fact that fewer and fewer Americans buy it .

  91. swmnguy says:

    Why are student loans now non-dischargeable? Well, I don’t really know. But I’m guessing it fits the overall pattern of socializing risk and privatizing gain that we see throughout our economy as it becomes increasingly over-financialized and we see growing regulatory capture.

    Everything American have to have, which costs more money than they have left over in a single pay cycle, is fair game to Finance. Health Care, Home Finance, Education, Auto Finance; all have been financialized beyond what would seem reasonable, with the same results. Explosive price inflation, leading to over-indebtedness, leading to an actual or eventual collapse.

    Making student loan debt was a brilliant coup for the lenders, as it convinced the Federal Government to backstop all loans at 100% face value. No risk at all to the lender. And surprise, surprise, any semblance of prudent lending practices went right out the window, and for-profit diploma mills proliferated to soak up all that sweet, sweet guaranteed cash.

  92. Jim67545 says:

    @sublimaze:
    Maybe in the top dozen banks the FDIC whispered “don’t worry we won’t let you fail” but at the “go ahead and fail” bank where I worked, they did not. As for secondary market mortgages (prime or subprime) all the FDIC cared, when they came in to do an examination, was how quickly we moved the mortgages on to someone else and how small our warehouse exposure was. They cared not at all whether we were originating gold or sh-t as long as we were getting it off of our books asap. This tunnel vision, of course, reveals that they too did not foresee the ramifications of the house of cards collapsing in the form of allegations of fraud, buy-backs, serious damage to the mortgage market, collapse in the homebuilding and construction industries, etc.

  93. Jim67545 says:

    I should add, if they did not foresee the ramifications of the house of cards collapsing they probably did not whisper to the big banks that they would be treated as TBTF.

  94. JohnnyVee says:

    Bravo

  95. sublimaze says:

    My main point still stands. Whatever the cause, had only the depositors under $100,000 been bailed by the FDIC and everybody else made to eat their losses, we would now be through this. However, instead of a market driven adjustment and liquidation the debts and losses will be inflated away and the legitimate creditors and savers will get hosed.