Mystery Men of the Financial Crisis
Posted on 02/05/2010 5:08:52 AM PST by lbryce
Now that we have pulled back sufficiently far from the near “destruction of the modern financial system” — as the former Treasury Secretary Henry Paulson described the events of 2008 in his new memoir, “On The Brink” — to focus on how to prevent such a calamity from recurring, the time has come to hear from those players in the drama who really know what happened and why.
Until people such as Warren Spector, the former co-president and head of the fixed-income division at Bear Stearns, and Dan Jester, a mysterious former Goldman Sachs banker turned Treasury official — among many others — come forward and share with us the roles they played before, during and after the crisis, there is little hope that the members of Congress working on financial reform legislation will be able to craft a bill that will succeed in its mission, and the longer they will spend dithering with the ill-conceived ideas being pushed by the former Fed Chairman Paul Volcker.
To date, these elusive but important Wall Street executives have kept an exceedingly low profile, hoping against hope that the whole thing just blows over. We can’t let that happen. There is just too much at stake now, and Wall Street has proved repeatedly over the past 40 years — since the firms went from private partnerships (where partners had their entire net worth on the line) to public companies (where bankers and traders were encouraged to take huge risks with other people’s money) — that it is incapable of regulating itself.
We need to get beyond the amusing political theater of the recent Financial Crisis Inquiry Commission hearings featuring tight-lipped Wall Street chief executives like Lloyd Blankfein of Goldman, John Mack of Morgan Stanley and Jamie Dimon of JPMorgan Chase
(Excerpt) Read more at opinionator.blogs.nytimes.com ...
When the other people come up to get a loan, you give them cash/check. You put a marker, a IOU, a ‘loan’ on your books, you then march up to your local Federal Reserve Bank and withdraw the real cash you need, in this example, say 90 dollars. They give it to you, the bank with the ‘loans’ as collateral.
So where does the Federal Reserve get the money? They print it. Sometimes more than the total value of loans and deposit, sometimes less. Usually more.
My gut feelings....
I really, really believe that AIG was a Madoff type ponzi scheme. They got as large as they were by offering prices for insurance that they knew were insufficient to cover the risk. No one could touch their prices. They were too low, hence no to low competition for them, near monopoly market control.
They bought a lot of political coverage.
I suspect the FR "too big" wall street banking disinformation cabal will nitpick you on this. (Oh, I see they've started already!) So let's explain the way it actually happens; $10 is deposited. Assuming 10% reserve requirements, $9 can be lent out. That $9 is deposited, and $8.10 can be lent out, and so on. In the end, potentially, the original $10 in deposits can become $100.
Here's a good textbook on the subject, for those interested in how fractional reserve banking works, (and can lead to booms that result in busts like the one we're experiencing now.)
If you're a poor student and can't afford the book, you can download a free PDF version.
Excellent! You only have $10 in cash, much less than $100.
You put a marker, a IOU, a ‘loan’ on your books, you then march up to your local Federal Reserve Bank and withdraw the real cash you need
Wait a minute, the bank has $10 in my deposit and they borrow $90 from the Fed to make the $100 loan?
That's a relief, I thought you were going to claim a bank can create money out of thin air and earn interest on all this imaginary money they made.
Borrowing and lending is kind of boring when you explain it properly.
Yes. They use the loan, the booking of the loan, as collateral.
I wanted to keep it as uber simple as possible.
I do have fundamental philosophical problems with the very existence of the Federal Reserve.
I prefer the notion of non government intervention in the creation of money and credit as much as possible. I would leave the Federal Government to have what I think of as money of the last resort, i.e, gold money.
I’m pretty convinced that the growth of the US before the enactment of the Federal Reserve was way way faster, better, freeer. Not without it’s own problems, but better.
Mystery Men of the Financial Crisis
I'm with you 100%!
Well that's pretty boring. Banks have to have at least as much in borrowings and deposits as they make in loans.
Money is too important to be in the hands of the government.
The government should look, beg to us for money, not the other way around.
Centralized money creation is elitist, un democratic and a threat to republican/limited government. Basically, now, we have unlimited government as it has all the money creation powers. Very convenient for large federal government and it’s political friends.
The root of the whole problem seems to have been the lending of enormous amounts of money to minorities and other people who could never be expected to pay it back resulting in the Fannie/Freddie crisis.
Of course, there are lots of other dynamics that resulted, but the main cause of the problem seems fairly clear.
All the money creation powers? I thought money was created whenever anyone borrows from a bank? That doesn't sound like something only government can do.
Thanks for the ping.
As in starting a declarative statement with a expansive generality, thus giving that qualifier literally, the first word.
M2 is about $8.5 trillion.
Basically might not be the best word.
Imagine if you are in a poker game. However there is one player that can when he wants write on a note pad a trillion dollars, or more, and by law you have to accept it. You can’t do this, nor any other player.
I’d say the player with the magic note pad controls the game.
Where did the bulk of the M1 dollars come from? Who made them, and can call them in( as it has ), and or change their value as it sees fit?
If you have something, and in a way a other party can come and repo it, or part of it, or add to it, as they see fit, I’d say they control it.
lol. This is all an absurd smear. The financial crisis has its origins in mainstreet Americans taking $2 trillion from their bankers and not paying it back. Then they try to blame those they just robbed. It is all insufferable.
If you don't like dollars, use blueberry scones as your currency. There is nothing stopping you. Just don't expect the rest of us to put ourselves out for your stupid prejudices.
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