Thursday, March 23, 2017

Fact Check - the Crash

The Great Recession wasn't all that great for most of us.  Which of the following facts are true?
  • the stock market crashed (9/2008), 
    Continued into 2016 for most states; jobs recovered were,
    on average, less hours, pay, benefits than the ones lost.
  • the auto industry was in chaos and bankruptcy (bailouts for Ford, GM, Chrysler), 
  • the real estate market collapsed and home equity dropped, foreclosures rose immediately,
  • the banks were collapsing ($4.6 trillion bailout)(The FDIC closed 465 failed banks in the five years following the crash compared with just 10 in the preceding five year period.), 
  • unemployment was on its way to 10%, 
  • retirement plans lost 25% on average, 
  • oil went from $25 to $130+ per barrel, 
  • As the recession effects circled the globe, hundreds of thousands of economically vulnerable folks were pushed below the survival line and died.
All true.  These were not momentary events, not hiccups in our daily routine.  These were long-path decision results, emplaced by political maneuvering and unbalanced influence.

“That economic wreckage can still be seen from coast to coast in unemployment, foreclosed and underwater homes, lost retirements and educations and so much more.” ~Dennis Kelleher, CEO of Better Markets

Update: The industry is not afraid to do it again.  They know no one goes to jail, and the government will bail them out.  Those we had to bail out because they were too big to fail, those are bigger now.  The total cost of the recession in the U.S. alone exceeds $22 TRILLION according to the Government Accountability Office (gao.gov) report.

It all happened from failure of government regulation and oversight of a known high-risk, unconstrained industry. Government fell prey to monied influence, and the bottom 90% of the world bore the extraordinary financial loss, lost years, and lost lives.

So, let's blame someone.  If we mark the spot of the crash, we might blame just President G. W. Bush. Things go farther back and farther afield, though.  So do we blame the Republicans or the Democrats, the President(s) or Congress? Check the timeline ...

1 • 1978, Supreme Court allows banks to export the usury laws of their home state nationwide and sets off a competitive wave of deregulation, resulting in the complete elimination of usury rate ceilings in South Dakota and Delaware, among others.
2• 1980, Depository Institutions Deregulation and Monetary Control Act – Legislation increases deposit insurance from $40,000 to $100,000, authorizes new authority to thrift institutions, and calls for the complete phase-out of interest rate ceilings on deposit accounts.
3• 1982, Garn-St. Germain Depository Institutions Act – Bill deregulates thrifts almost entirely, allowing commercial lending and providing for a new account to compete with money market mutual funds. This was a Reagan administration initiative that passed with strong bi-partisan support.
• 1987, FSLIC Insolvency – GAO declares the deposit insurance fund of the savings and loan industry to be insolvent as a result of mounting institutional failures.
4• 1989, Financial Institutions Reform and Recovery Act – Act abolishes the Federal Home Loan Bank Board and FSLIC, transferring them to OTS and the FDIC, respectively. The plan also creates the Resolution Trust Corporation to resolve failed thrifts.
5• 1994, Riegle-Neal Interstate Banking and Branching Efficiency Act – This bill eliminated previous restrictions on interstate banking and branching. It passed with broad bipartisan support.
6• 1996, Fed Reinterprets Glass-Steagall – Federal Reserve reinterprets the Glass-Steagall Act several times, eventually allowing bank holding companies to earn up to 25 percent of their revenues in investment banking.
1998, Citicorp-Travelers Merger – Citigroup, Inc. merges a commercial bank with an insurance company that owns an investment bank to form the world’s largest financial services company.
7• 1999, Gramm-Leach-Bliley Act – With support from Fed Chairman Greenspan, Treasury Secretary Rubin and his successor Lawrence Summers, the bill repeals the Glass-Steagall Act completely.
8• 2000, Commodity Futures Modernization Act – Passed with support from the Clinton Administration, including Treasury Secretary Lawrence Summers, and bi-partisan support in Congress. The bill prevented the Commodity Futures Trading Commission from regulating most over-the-counter derivative contracts, including credit default swaps.
2004, Voluntary Regulation – The SEC proposes a system of voluntary regulation under the Consolidated Supervised Entities program, allowing investment banks to hold less capital in reserve and increase leverage.
2007, Subprime Mortgage Crisis – Defaults on subprime loans send shockwaves throughout the secondary mortgage market and the entire financial system.
December 2007, Term Auction Facility – Special liquidity facility of the Federal Reserve lends to depository institutions. Unlike lending through the discount window, there is no public disclosure on loans made through this facility.
March 2008, Bear Stearns Collapse – The investment bank is sold to JP Morgan Chase with assistance from the Federal Reserve.
March 2008, Primary Dealer Facilities – Special lending facilities open the discount window to investment banks, accepting a broad range of asset-backed securities as collateral.
July 2008, Housing and Economic Recovery Act – Provides guarantees on new mortgages to subprime borrowers and authorizes a new federal agency, the FHFA, which eventually places Fannie Mae and Freddie Mac into conservatorship.
September 2008, Lehman Brothers Collapse – Investment bank files for Chapter 11 bankruptcy.
October 2008, Emergency Economic Stabilization Act – Bill authorizes the Treasury to establish the Troubled Asset Relief Program to purchase distressed mortgage-backed securities and inject capital into the nation’s banking system. Also increases deposit insurance from $100,000 to $250,000.
Late 2008, Money Market Liquidity Facilities – Federal Reserve facilities created to facilitate the purchase of various money market instruments.
March 2009, Public-Private Investment Program – Treasury Secretary Timothy Geithner introduces his plan to subsidize the purchase of toxic assets with government guarantees.

There has been plenty of involvement on both sides of the aisle, and plenty of opportunity to correct the errors. Republicans have perhaps encouraged the laissez-faire policy of letting business run unfettered, but there were democrats in the process as well.  
Over-regulation does, in fact, inhibit successful business.  Ideally, a business will succeed or fail on its own in a competitive market, and it needn't have other constraints. That's fine for small businesses, perhaps.  But when corporations are bigger than countries, economic warfare emerges and actual civilian casualties escallate. 
Do we still face risks, unethical practices, and criminal behaviors in the finance industry?  Of course. Do we now have good governance to preclude another catastrophe?

Side note: through it all, HSBC bank was laundering money for Mexican drug cartels to the tune of $881 billion according to the Justice Department. The penalty for this criminal activity was $1.9 billion, a small fraction of their profits (and the New York Times laments that HSBC was too big to indict). HSBC was just one of many out-of-control organizations, yet nobody went to jail at a time when an unemployed person gets 10 years for robbing a minute mart. Barclays and Swiss UBS were among the banks identified in the Libor rate manipulation scandal. Wells Fargo was recently discovered to have opened millions of accounts without customer permission.  Deutsche Bank was later discovered to be a participant in the Libor scandal; they agreed to a combined US$2.5 billion in fines.  What kind of leadership do we need in business and government to rein in the unethical behavior and reduce the risk to our national economic health?

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