The Financial Crisis Was Entirely Foreseeable
by Washington’s Blog
December 10th 2011
Whenever there is a disaster, those responsible claim it was “unforeseeable” so as to escape blame.
It happened with 9/11
It happened with the BP oil spill (see this, this, this, this and this)
It happened with the Japanese nuclear accident
The big boys gamble with our lives and our livelihoods, because they make a killing by taking huge risks and cutting costs. And when things inevitably go South, they aren’t held responsible (other than a slap on the wrist), and may even be bailed out by the government.
But surely the financial crisis was different. After all, Wall Street executives and politicians say that the financial crisis wasn’t foreseeable. And see this.
Actually, it might have been slightly foreseeable for a little while before the financial crisis.
We’ve Known for Thousands of Years
We’ve known for literally thousands of years that debts need to be periodically written down, or the entire economy will collapse. And see this.
We’ve known for 1,900 years that that rampant inequality destroys societies.
We’ve known for thousands of years that debasing currencies leads to economic collapse.
We’ve known for hundreds of years that the failure to punish financial fraud destroys economies.
We’ve known for hundreds of years that monopolies and the political influence which accompanies too much power in too few hands is dangerous for free markets.
We’ve known for hundreds of years that trust is vital for a healthy economy.
We’ve known since the 1930s Great Depression that separating depository banking from speculative investment banking is key to economic stability. See this, this, this and this.
We’ve known since 1988 that quantitative easing doesn’t work to rescue an ailing economy.
We’ve known since 1993 that derivatives such as credit default swaps – if not reined in – could take down the economy. And see this.
We’ve known since 1998 that crony capitalism destroys even the strongest economies, and that economies that are capitalist in name only need major reforms to create accountability and competitive markets.
We’ve known since 2007 or earlier that lax oversight of hedge funds could blow up the economy.
And we knew before the 2008 financial crash and subsequent bailouts that:
The easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, and “the use of gimmicks and palliatives” by central banks hurt the economy
Anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”
Bailouts of big banks harm the economy
The Fed and other central banks were simply transferring risk from private banks to governments, which could lead to a sovereign debt crisis
Given the insane levels of debt, rampant inequality, currency debasement, failure to punish financial fraud, growth of the too big to fails, repeal of Glass-Steagall, refusal to rein in derivatives, crony capitalism and other shenanigans … the financial crisis was entirely foreseeable.
Global Research Articles by Washington’s Blog
Debasing the Currency is Leading to Financial Collapse . . . Just As It Has for Thousands of Years
Posted on June 29, 2009 by WashingtonsBlog
In a fascinating 22-page study of money and currency, Christopher Weber shows that every government – from Athens, to pre-collapse Rome, to the Islamic countries in the Middle Ages – which stuck to the Greek standard of coins has been stable and prosperous.
Specifically, the Athenian Drachma contained 65.6 grains of silver. Even after Greece declined as a superpower, its currency remained stable.
The Roman Denarius, Byzantine Bezant, and Islamic Dinar all copied the Drachma, using around 65.6 grains of gold or silver in their coins.
For the many centuries the Romans, Byzantines, and Islamic rulers left this precious metal content alone, they had stable and prosperous money supplies and nations.
But after the Romans and Byzantines started to whittle down the precious metal content of their coins – and after the Muslims started issuing paper money – their currency went down the drain, their prosperity plummeted and their empires collapsed.
This may all sound like ancient history, except that Weber points out that:
The US dollar has been depreciating for generations. Seventy years ago it was first devalued from $20.67 a gold ounce to $35. Then 35 years ago the devaluation started gaining strength. The dollar has lost over 90% of its gold value since August 15, 1971.
History is repeating . . . Sound money is again being trashed, which is causing the collapse of the American empire.
Grading Free Market Capitalism and “The Invisible Hand”
Posted on February 28, 2010 by WashingtonsBlog
Free market capitalism is based on the idea that “the invisible hand” of the market will create the best possible outcome for the most people.
But as I noted a couple of weeks ago, the man who came up with idea of the invisible hand did not believe in unrestrained free market capitalism:
Americans have traditionally believed that the “invisible hand of the market” means that capitalism will benefit us all without requiring any oversight. However, as the New York Times notes, the real Adam Smith did not believe in a magically benevolent market which operates for the benefit of all without any checks and balances:
Smith railed against monopolies and the political influence that accompanies economic power …
Smith worried about the encroachment of government on economic activity, but his concerns were directed at least as much toward parish councils, church wardens, big corporations, guilds and religious institutions as to the national government; these institutions were part and parcel of 18th-century government…
Smith was sometimes tolerant of government intervention, ”especially when the object is to reduce poverty.” Smith passionately argued, ”When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.” He saw a tacit conspiracy on the part of employers ”always and everywhere” to keep wages as low as possible.
As Paul Krugman writes:
Adam Smith … may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime.
Moreover, as I pointed out in September:
One of the leaders of the new science of financial modeling – Rama Cont – points out that Adam Smith was wrong about the “Invisible Hand”.
Specifically, investors in financial markets rationally pursuing individual profit can produce outcomes that are bad for almost everyone.
As an article in City Journal notes:
Simple forecasts can also be mistaken if they fail to account for the actions of market participants themselves: investor strategies can influence prices, which in turn influence future strategies in a feedback loop that can cause considerable instability. Cont recalls the severe stock-market crash of October 1987, which seemed to strike out of the blue, since nothing significant was happening in the real economy. Subsequent research, though, blamed the crash in part on a new investment strategy, “portfolio insurance,” which a large number of fund managers had simultaneously adopted. Based on the famous Black-Scholes options-pricing model, this strategy recommended that fund managers reduce their risks by automatically selling shares whenever their values fell. But the approach didn’t take into account what would happen if many investors followed it simultaneously: a massive sell-off that could send the market plummeting. The 1987 crash was thus not provoked by events in the real economy but by a supposedly smart risk-management strategy—and the current downturn, of course, also derives at least partly from a global craze for a seemingly foolproof financial innovation…
Investors in financial markets rationally pursuing individual profit, then, can produce outcomes that are globally negative. Doesn’t that contradict classical economic theory? “Both theory and empirical facts do tend to show that, on the financial markets, the Invisible Hand does not always lead to welfare-improving general outcomes,” Cont replies.
Does this mean that free market capitalism is dead?
No. And I’m not sure that there is any better alternative.
But capitalism has to grow up and become less naive, relying less on a blind faith in “the invisible hand” and more on an understanding of human nature, including insights from the field of behavioral economics.
It must include sophisticated checks and balances to make sure that the system is not gamed, instead of childish ideas about the “inherent stability” of the market.
And it must make sure that the poker game doesn’t suddenly end when one of the players gets all of the chips.
Of course, with high-frequency trading dominating the market (and see this), frontrunning, permanent bailouts (and see this), government-sponsored credit rating scams and enterprises, the creation and maintenance by the government of banks so big that their very size warps the entire system, socialism for the big boys, and all of the other shenanigans going on, we don’t currently have free market capitalism.
EXACTLY…..BUT THE COMMUNISTS WANT SERFS TO BELIEVE IT’S CAPITALISMS FREE MARKET CAUSING THE COLLAPSE!
Bernanke Knew Back in 1988 that Quantitative Easing Doesn’t Work
Posted on October 2, 2010 by WashingtonsBlog
Ed Yardley notes:
Two economists, Seth B. Carpenter and Selva Demiralp, recently posted a discussion paper on the Federal Reserve Board’s website, titled “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” [Here’s the link.]
[The study states:] “In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level. Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found. The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding. The appendix illustrates these relationships with a simple model. This paper provides institutional and empirical evidence that the money multiplier and the associated narrow bank lending channel are not relevant for analyzing the United States.”
Did you catch that? Bernanke knew back in 1988 that quantitative easing doesn’t work. Yet, in recent years, he has been one of the biggest proponents of the notion that if all else fails to revive economic growth and avert deflation, QE will work.
Yardley is right. But he’s only got half the story.
On a deeper level – as I pointed out in some detail in March – the Fed is intentionally locking up “excess bank reserves” so that they will not be loaned out into the economy. Specifically, in an ill-conceived attempt to prevent inflation, the Fed has been paying sufficiently high rates of interest on reserves deposited at the Fed by the big banks to encourage banks to lock up their reserves at the Fed instead of lending that money out to borrowers who need it.
So on this level, all the quantitative easing in the world won’t increase lending, because the banks will just continue to stockpile their money.
(On the deepest level, banks actually create credit out of thin air. See this, this and this. In other words, the commonly-accepted process for money creation is false, and banks don’t need any reserves to create credit).
Indeed, multiple lines of evidence demonstrate that quantitative easing helps the biggest companies, but not the little guy or the American economy as a whole.
More links within the main article…
That prove the shysters know exactly what they are doing!!