Money, Power and Wall Street

You can “think” that, but it isn’t true. This is more of a belief, an article of faith for you and those who share your beliefs. It is not something that is rooted in fact. It’s kind of like your belief that the price of gold isn’t really the price it trades for each day on the markets.

We have seen problems with bad loans before and since Glass-Steagall they have not resulted in anything remotely resembling The Great Recession. That last problem with bad mortgages occurred in the 80’s and 90’s. It was the Savings and Loan Crisis when S&L’s made a bunch of bad real estate loans and nearly a quarter of the nation’s savings and loans went bankrupt as a result. That bad loan debacle didn’t cause a recession much less a great recession or a global liquidity crisis.

The fact is deregulation took financial instruments (i.e. debt) and allowed banks and shadow banks to magnify the liability and potential return or losses of those instruments several fold and while not reflecting that liability on their financial statements. What differentiates this mortgage debacle from the Savings and Loan bad debt crisis is the newly legal derivative instruments which leveraged (magnified) the risk, liabilities, and potential returns and losses of the underlying securities. This isn’t rocket science, it is really pretty simple.

No the problem was the leverage derivate instruments brought to the market place. It made debt much more profitable but it also made it much more risky. It’s a fundamental rule in finance. Return is always proportional to risk. That is why derivatives were created, to make more money. And banks and shadow banks ignored the risk afforded them by the derivatives because they liked the enhanced returns. And that is why Dodd-Frank could not fully remove them from banks by reinstating Glass-Steagall.

And if you were not tar and feathering banks and Bank of America, then you should have left them out of your indictment and limited your indictment to Countrywide.

 

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It is you who are deep in belief that I am wrong when I said: Fundamentally it was the bad loans - that, and I quote:

"If the loans included in the derivative packages were good solid mortgages from people who could pay there would have been no problem."

THAT IS TRUE, even if you don't believe it.

 

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Again, no, the problem was not “fundamentally” the bad loans. The fundamental problem was the deregulation of the banking industry and legalization of gambling by big institutions (i.e. Commodity Futures Modernization Act of 2000) and resulting derivative trading.

This time it was mortgage loans. It could just as easily have been the stock market, interest rates, or other commodities like gold, silver or oil. Deregulation opened the casino. Deregulation was the cause. It just happened the gamblers went broke at the mortgage backed securities table this time. It could just as easily occur at the oil futures table or any of the other tables in the casino.

As I have pointed out to you numerous times before, we have had troubles with financial institutions making bad loans before (i.e. The Savings and Loan Crisis) and they never created a recession much less a great recession. That is the truth wither you believe it or not.

 

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Saying it's true even if we don't believe it doesn't make it true. It was the fact that mortgages could be bundled into derivatives that led lenders to make bad loans. It's true that the buyer should beware, but these lenders used shady practices and lied to people. It used to be the bank's responsibility to make sure they don't make bad loans, not the borrower's.

 

Yes. I can agree that is even more fundamental as when the banks (or other lenders) did not need to keep any of the mortgages on their book, then of course they will not care if the borrower can re-pay the loan or not. If he doesn't then some one else will eat the loss. In recent US history the first stage of that was Fanny & Freddy May and the final stage is the US ta-payer.

Again if the items (in this case mortgages) are good, then so are the derivatives. In fact when the derivatives mix good mortgages from many different areas, they are more secure than if all come from one location with a major employer than may go out of business. There is nothing wrong, and much to be desired in derivatives, but they can't turn shit mortgage into golden ones. Your focus on derivatives as the fundamental cause of the problem seems to be weakening- that's good. Shows you can learn/ change from this POV:

If you want to step back even two stages more (from "bad loans" to bad regulation to ignorant voting masses to bad local schools) you will get to my fundamental cause of ALL the US's problems - one I have dozens of posts about: I.e. local funding of elementary schools. Of course poor and even lower middle class areas can not afford to hire the well qualified teachers, put computers instead of rats in the library, attract experts to give guest lectures,* etc. The best teachers gravitate to the schools than are well funded, where parents come into assist for free, instead of beat a teacher up for holding their kid back etc.

My kids went to the best public schools in Maryland. (I moved to new town, Columbia, to make that so - one of the first 500 to do so.) My Norwegian wife, almost every year put on her native clothes (they are quite detailed , hand made, silver buckles etc. than cost even back then upwards of $2000.) and gave a lecture about Norway and several other "foreign" parents did the same. We also sold our selves less than 24 hour old fresh fruit. - An 18 wheeler fully loaded drove up all night from Florida arriving at the school about 8 AM on a Saturday each month. I was part of the crew that unloaded it, first all into the school, and then during a long day* into the arriving buyers cars. (It was all pre sold weeks earlier.) Mothers first confirmed the buyer's ID, their order, and gave buyer a colored slip of paper telling us to what to load into their car. We made about $5000 for the school each year. That school had a small zoo, but no poisonous snakes, that a small town would be proud of. A child who was working hard might get the reward of feeding a mouse to a snake (a popular reward especially for the boys, if the snake was hungry) or just holding some guinia pigs, frogs, turtles, rabbits etc. while feeding them or feeding a guppy (fish) for larger fish to chase and eat, or giving the parrots some language instructions etc. even cleaning cages was a reward.
Kids in the inner schools of Baltimore learned some about animals too - I.e. how to kill a rat and not get bitten, etc. Or how to have a friend set up a diversion while you stole a purse. etc. - things they could use after graduation if they bothered to graduate.

US has the voting mass that elect the representatives, mainly interested in their re-election, not the wealfare of the US after they are out of office. No wonder we have ~17 Trillion of unpayable debt. etc. It was all fore told in 1832 in bookDemocracy in America

* I was in the Pre-lunch shift. Four hours of moving 40 pound boxes makes one quite tired. The post lunch shift worked 8 hours. Anyone not claiming their pre-paid boxes, could get them between noon and 4pm the next day as I recall, then they were sold on first come basis and all gone by 5PM.

 

Here is the basic fundamental fact you keep ignoring, we have had bad debt problems before. They have never caused a recession or threatened the global economy as they did a few years ago with The Great Recession. The difference was deregulation and the unrestrained derivative trading which followed. It turned banks and shadow banks into gambling casinos. You can, and I am sure you will, continue to cling to your beliefs. But the facts are immutable and quite clear on this issue.