We’re all to Blame

ImageThe 2008 financial crisis was felt globally.  Prior to the crisis, for years, stock prices and real estate values had climbed.  This was due because of complex investments that were backed by mortgages whose value dropped. This contributed to a plunging market, country, and the various firms involved on the edge of collapse.  This recklessness, as illustrated by S. Mitra Kalita’s Wall Street Journal article, cost American families’ wealth to fall by $11 trillion, an amount equal to Germany’s, Japan’s, and the United Kingdom’s annual output.  This collapse led to the largest extortion case in world history, a 700 billion bailout, funded by American taxpayers.  Where did the government fail?  The government failed to oversight the bank’s leverages.  Consequently, as short-term profits increase the long-term stability decayed leading to a cataclysm, the 2008 crash.

First, the cataclysm happened because banks were overleveraged.  The apex of the overleveraging was subprime mortgages and the securities and derivatives that were spun out of them, meaning that there was too little cash to cover the risk.  How bad could it be?  Bear Stearns, an investment firm, leveraged at thirty-five to one when it failed, according to Roddy Boyd’s Fortune Magazine article.  Jimmy Cayne, the CEO of Bear Stearns, was playing bridge during the meltdown and according to CNBC, smoking pot.  Traditionally, commercial bank leading is leveraged at 10 or 12 to 1, thus illustrating Bear Stearns recklessness.  This is where the government failed.  It failed to oversight and restrain the excessive leverage that was being practiced.  This lack of oversight was encouraged by the repeal of the Glass-Steagall Act that compartmentalized how certain banks can operate, such as commercial or investment bank.   These compartmentalizations allow individuals to pick their risk.  It encouraged a bottleneck affect on leveraging within commercial banking, creating more protection for accounts and the financial sector.  This act was put into law in response to the Great Depression.

There are bizarre critics about what caused the financial crisis.  Some argue government intervention within the market was the culprit.  Daniel Mitch, senior fellow at the Cato Institute, argued the problem was the government’s policy within the Federal Reserve’s “easy-money policy.”  This easy-money policy was the Federal Reserve’s decision to lower interest rates to “artificially low levels” which he argues, “set in motion the conditions for a housing bubble.”  The second part of his criticism is the Community Reinvestment Act.  He argues that the act “extorted” banks into making loans to persons that would they otherwise would not.  Third, he claims that tax deductions such as the mortgage interest deduction in the tax code contributed as well, however he stops there and does not follow through on why that is.  He is not alone in blaming the government’s Community Reinvestment Act.  Economist Stan Liebowitz, in a New York Post article, argued that the act, in the 1990s, encouraged a “loosening of lending standards throughout the banking industry.”  The language changes from Daniel Mitch’s “extortion” to Liebowitz’s loosening of standards; the latter case is the best depiction.  The banks, housing lenders, and the government were playing a non-zero game.  The private banking industry no doubt encouraged government to pass acts such as CRA along with the repel of Glass-Steagall Act, doing so created profits for decades.

The government was not going to regulate leverages in industries that seem to be working well, both monetarily and civically– yet it was all delusional.  The critics do not address what were the penalties on the lenders if they withheld loans from qualified individuals, if any penalties at all.  Second, what about the complex investment packages such as the Collateralized Debt Obligation, which is made up of hundreds of individual residential mortgages. The CDOs are largely blamed for the crisis, as Warren Buffet defined them “weapons of mass destruction.”  The government did not encourage that.  That was an industry led profit scheme.  Arguably, the CRA and the Fed’s “easy-money policy” was a deregulation.  Instead of regulating leverages, those policy gave greater mobility for investors to maneuver into positions to create profits which were unsustainable.  To say that over-regulation was the problem is wrong, it is too general.  The government did not regulate the correct area, the leverage. There is a difference. Additionally, government regulation needs to be consistent, too often regulation is subject to political winds.

Who deserves most of the blame for 2008?

Big government?  Big Banks? Lenders? Investors? Insurance companies?

Image

or

Regular Americans  who were not realistic about their budgets or their ability to pay.  If regular folks were rational and number oriented, regardless how appealing a loan may look, Americans wouldn’t have created 2008 crisis.

The real answer is all.

This is a great song to use to reflect on your new found glory.

Sum 41- Were all to Blame

Take everything left from me
ALL
TO
BLAME

How can we still succeed, taking what we don’t need?
Telling lies as alibis, selling all the hate that we breed
SUPERSIZE OUR TRAGEDIES(You can’t define me, or justify greed)
Bought in the land of the free!
(LAND, FREE)

And we’re all to blame
We’ve gone too far
From pride to shame
We’re trying so hard
We’re dying in vain
We’re hopelessly blissful and blind
to all we are
We want it all
With no sacrifice!!

Realize we spend our lives living in a culture of fear
Stand to salute, say thanks to the man of the year
How did we all come to this?(You can’t define me, or justify greed)
This greed that we just can’t resist!
(RE-SIST)

And we’re all to blame
We’ve gone too far
From pride to shame
We’re trying so hard
We’re dying in vain
We’re hopelessly blissful and blind
to all we are
We want it all
Everyone wants it all
with no
SACRIFICE!!

Tell me now, what have we done? We don’t know!
I can’t allow what has begun to tear me down,
Believe me now, we have no choice left
With our backs against the wall!!

And now we’re all to blame
We’ve gone too far
From pride to shame
We’re hopelessly blissful and blind
When all we need
Is something true
To believe
Don’t we all?
Everyone, everyone
We will fall

‘Cause we’re all to blame
We’ve gone too far
From pride to shame
We’re trying so hard
We’re dying in vain
We want it all
Everyone, don’t we all?

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About Logan

Logan lives in Arkansas
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