'The Big Lie'

[midcan5]

"...If anyone asks me what has been the great American story of my lifetime, I have a ready answer."

An interesting commentary on money in America by a person who lived a bit of it as the clock turns to 2012.

'Wall Street has destroyed the wonder that was America.' by Michael Thomas

"The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault."

"...And that was back when Wall Street was basically honest, brought into line thanks in part to Ferdinand Pecora’s 1933 humiliation of the great bankers of the Jazz Age and even more so because of the communitarian exigencies forced on the nation by war. From Pearl Harbor to V-J Day, greed was definitely not good, and that proscriptive spirit lingered on right up to 1970, when everything started to change, and the traders began their long march through our great houses of finance, with the inevitable consequence that the Street’s moral bookkeeping grew more and more contorted, its corruptions more elaborate, its self-interest less and less governable. What someone has called the “Greed Wars” began." http://www.thedailybeast.com/newswe...as-destroyed-the-wonder-that-was-america.html

 

[iamwhatiseem]

Bullshit.
That is like blaming the sun for spoiling your milk when you are the one who left it out.
Wall Street and the bankers are merely drunks, however it is the government that is making the alcohol.
Wall Street is indeed a palace of greed...but what the hell do you expect it to be? It is exactly what it was and will always be.
The problem is not Wall Street. The problem is the government being like Wall Street.
Our government is thoroughly corrupt. And that absolutely includes Obama.
No one can change the greed that makes up banks and Wall Street. We can however change government. But we won't.

 

[DSGE]

"The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault."

Except it's absolutely true that it's the government's fault. There's no reason that the financial crisis should have turned into such a deep downturn. Blame should go to the Federal Reserve, who have pursued tight monetary policy.

 

[ShackledNation]

Government has created the corrupt framework these businesses operate under. Had the free market formed the framework, none of this would have happened. So yes, it is the government's fault. In the name of helping us they have crippled us.

 

[EdwardBaiamonte]

Blame should go to the Federal Reserve, who have pursued tight monetary policy.

Yes, who can say with a straight face that a liberal Federal government organized to subvert the Republican free market so that everyone could have homes the free market denied them was not responsible when everyone could not pay for the homes the free market said they would not be able to pay for.

Its so perfectly obvious that only a liberal would not see it.


________________

"Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing."
___________________-


Wall Street Journal Taylor Rule

Stamford University Professor John Taylor unequivocally claimed that had the Federal Reserve from 2003 -2005 kept short term interest rates at the level implied by his "Taylor Rule" " it would have prevented this housing boom and bust." This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.
By JOHN B. TAYLOR

__________________


" The Federal reserve having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the crisis, now wants to make a contribution to preventing the economy from sinking into a Japanese Style malaise....... - "Joseph Stiglitz"( uber liberal Noble winner)

____________________



Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

David Gothard
The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.


Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.
Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.

Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.

A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.

The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?

It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.

Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far

 

[DSGE]

Blame should go to the Federal Reserve, who have pursued tight monetary policy.

Yes, who can say with a straight face that a liberal Federal government organized to subvert the Republican free market so that everyone could have homes the free market denied them was not responsible when everyone could not pay for the homes the free market said they would not be able to pay for.

Its so perfectly obvious that only a liberal would not see it.

Gee thanks for the fucking massive copy/paste. If you're not gonna put work into actually thinking about and writing your post, don't expect me to read all of it. I read the first couple of paragraphs:

Why are you assuming that it's the sub-prime mortgage crisis causing the downturn? There's no reason at all that it should have spread to the rest of the economy; it should have been contained to the housing and banking sector.

Stanford University Professor John Taylor unequivocally claimed that had the Federal Reserve from 2003 -2005 kept short term interest rates at the level implied by his "Taylor Rule" " it would have prevented this housing boom and bust." This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.
By JOHN B. TAYLOR

A rule he just made up. Seriously, the Taylor rule is just a rule for monetary policy that John Taylor just made up.

" The Federal reserve having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the crisis, now wants to make a contribution to preventing the economy from sinking into a Japanese Style malaise....... - "Joseph Stiglitz"( uber liberal Noble winner)

Stiglitz is an excellent microeconomist, but his macro leaves much to be desired (if you'd read his new business cycle theory you'd know what I'm talking about).

David Gothard
The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust.

Actually it's not. The classical explanation is the creation of a new technology or financial instrument that we have no experience with. In this case, CDOs. Don't go citing Austrian garbage at me.

So was monetary policy too loose in the build up to the crisis? What is the best indicator of the position of monetary policy? NGDP. Good monetary policy should see NGDP on a relatively stable path.

So despite the very low interest rates at the time, NGDP remained reasonably stable after the reaction to the dot com bubble. If monetary policy were loose, we'd have seen a massive spike.

Now what did we see in the GFC?

A large drop in the level of nominal income. So monetary policy, despite zero interest rates and QE, is actually passively tight. An appropriate monetary policy reaction would be for the Fed to announce that it's going to return nominal income to its 2007 trend.

Bottom line: You can blame "liberal" policy (though it was Bush who did it!) for the sub-prime mortgage crisis all you like. But the Fed is to blame for where the unemployment rate is right now, not the crisis.

 

[ShackledNation]

Blame should go to the Federal Reserve, who have pursued tight monetary policy.

Yes, who can say with a straight face that a liberal Federal government organized to subvert the Republican free market so that everyone could have homes the free market denied them was not responsible when everyone could not pay for the homes the free market said they would not be able to pay for.

Its so perfectly obvious that only a liberal would not see it.


________________

"Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing."
___________________-


Wall Street Journal Taylor Rule

Stamford University Professor John Taylor unequivocally claimed that had the Federal Reserve from 2003 -2005 kept short term interest rates at the level implied by his "Taylor Rule" " it would have prevented this housing boom and bust." This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.
By JOHN B. TAYLOR

__________________


" The Federal reserve having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the crisis, now wants to make a contribution to preventing the economy from sinking into a Japanese Style malaise....... - "Joseph Stiglitz"( uber liberal Noble winner)

____________________



Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

David Gothard
The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.


Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.
Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.

Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.

A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.

The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?

It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.

Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far

Republican policy over that past few decades has been contrary to the free market. You conflate republicanism with capitalism and free markets. Republicans and democrats alike are corporatists that differ primarily in rhetoric.

 

[ShackledNation]

Anyone who does not realize the Federal Reserve is the root of all recessions is living under a rock. You have an institution with complete control over the money supply and the ability to set interest rates. Yet such an institution can't possibly affect the economy at large in a negative way? Give me a break.

 

[Dragon]

Anyone who does not realize the Federal Reserve is the root of all recessions is living under a rock.

Well, either that, or they recognize that recessions occurred before 1913.

The problem with those who say "it's the government's fault" is not that they're wrong, but that they mean it's the government's fault for existing. In this case, it's the government's fault, all right, but mainly because the government deregulated the financial industry and took itself out of the picture. So it's the government's fault not for existing but for NOT existing.

 

[ShackledNation]

Anyone who does not realize the Federal Reserve is the root of all recessions is living under a rock.

Well, either that, or they recognize that recessions occurred before 1913.

The problem with those who say "it's the government's fault" is not that they're wrong, but that they mean it's the government's fault for existing. In this case, it's the government's fault, all right, but mainly because the government deregulated the financial industry and took itself out of the picture. So it's the government's fault not for existing but for NOT existing.

And there were central banks and large expansions of the money supply before 1913 as well. Since the creation of the Federal Reserve (which was supposed to stop recessions...obviously that failed) we have had more frequent and more severe depressions than ever in US history. The Great Depression and the current one are prime examples.

In fact, all the recessions in US history have been preceded by expansions of the money supply. And if you understand supply and demand and the role of money and interest in an economy, it makes perfect sense why this is the case.

It is not the government's fault for interfering too little. It is the government's fault for interfering too much. People talk about all this deregulation, but the number of regulations over the past decades has continued to increase, and any deregulation has been insignificant. Most of these deregulations are simply government removing new regulations that had patched over previous government regulation that messed everything up. Either way, its not the free market. It is bad regulation compounded on even worse regulation. (Glass-Steagall is the example of this)

We do not have a free market, especially in banking. We have a central bank that cartelizing the banking system, controls interest rates, and controls the supply of money. Banks are subsidized by the FDIC. Government and banks are so intertwined that banks are confident that they will get bailed out, creating further moral hazard. That is the problem. Saying deregulation is the problem is ignoring the entire forest of regulations that exist and pointing to one branch of a tree falling off that represents the amount of deregulation.