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Who Built the Recession? (Two guilty parties)
Weekly Standard ^ | 09/12/2012 | BY JEFFREY BELL AND RICH DANKER

Posted on 09/12/2012 4:58:06 AM PDT by SeekAndFind

Bill Clinton, who rode a recession into office and left the scene just before another one began, knows something about the blame game. Addressing the Democratic convention on Wednesday night, he made a full-throated effort to defend the Obama presidency by putting it in the context of past Republican failure.

“They want to go back to the same old policies that got us into trouble in the first place,” he warned, listing tax cuts, financial deregulation, defense spending, and domestic budget cuts as examples. Clinton’s argument was an inch deep, but it recalled the fact that the economic catastrophe that primed Obama’s 2008 victory and has dogged his incumbency remains a liability to Republicans four years later.

If Clinton and his party believe that tax cuts can cause a financial crisis, that’s a new line of attack. If they believe that financial deregulation did it, they have never made a comprehensive case for exactly how. If it was too much spending on defense rather than entitlements, then they should review the boom of the 1980s. The Democrats have never really made a coherent argument of how the GOP caused such misery—they only pointed the finger. Meanwhile, Republicans act as if life began in January 2009.

There remains one explanation that has escaped both sides’ scrutiny because they share culpability for it. Beginning in 2001, easy money from the Federal Reserve flooded the markets with cheap credit, creating asset bubbles and finally tipping the American financial system on its side. This was a period of legitimate economic success (52 consecutive months of job growth under President George W. Bush) mixed with fake wealth attached to real estate and financial assets. No Republican is eager to wade into that story, while no Democrat wants to admit that their current strategy

(Excerpt) Read more at weeklystandard.com ...


TOPICS: Business/Economy; Culture/Society; Editorial; Government; News/Current Events
KEYWORDS: recession

1 posted on 09/12/2012 4:58:11 AM PDT by SeekAndFind
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To: SeekAndFind
Who's responsible?

Clinton, Franks, Dodd, (Senator) Obama.

2 posted on 09/12/2012 5:04:56 AM PDT by Rudder
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To: Rudder

RE: Clinton, Franks, Dodd, (Senator) Obama.

What? No Bush? /s


3 posted on 09/12/2012 5:05:55 AM PDT by SeekAndFind (bOTRT)
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To: SeekAndFind

Once again, I see no mention of the repeal of the Glass-Steagull Act. This alone set the wheels ins motion. Who’s signature is on this piece of legislation?

What was it that we were hearing for two years starting in the fall of 2007? “Too Big to Fail” But no one wants to take credit for why they became “Too Big to Fail”.

Bill Clinton, Larry Summers, Alan Greenspan, Tim Geithner and any congressional and member of the Senate that voted Yay on this repeal.


4 posted on 09/12/2012 5:22:10 AM PDT by bbernard
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To: bbernard

RE: Once again, I see no mention of the repeal of the Glass-Steagull Act. This alone set the wheels ins motion. Who’s signature is on this piece of legislation?

Yes, but there’s lots of blame to go around. Senator Phil Gramm was one of the more vocal supporters of the repeal.


5 posted on 09/12/2012 5:25:07 AM PDT by SeekAndFind (bOTRT)
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To: SeekAndFind

That is why I said:

“and any congressional and member of the Senate that voted Yay on this repeal”

I remember it well.


6 posted on 09/12/2012 5:29:42 AM PDT by bbernard
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To: bbernard
Once again, I see no mention of the repeal of the Glass-Steagull Act.

Can you show me how that promoted a housing bubble with Federal Reserve promoted easy credit and government mandated subprime loans? Or point me in the right direction? I'd appreciate it. Thanks in advance.

7 posted on 09/12/2012 1:43:05 PM PDT by neverdem (Xin loi min oi)
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To: neverdem

“government mandated subprime loans”

It’s time to give up that nonsense. There is nothing to be gained by perpetuating it, other than it provides a convenient, albeit false, “history” of the bubble.

2/3 of the subprime loans issued during the bubble were made by non-bank lenders. By the shadow banking system. The CRA did not apply to a single one of these loans. It applied only to depository firms. And moreover the loans issued by these firms were the most exotic and creative of subprime loans, the Option ARMS, No Docs, NINJAs. These loans were issued because they made a lot of money for those who wrote them. There was no other encouragement needed.

This has all been examined in books written by people who watched the subprime market develop and who were involved in it. But then reading takes effort and no one wants to do it, especially when it is a rather dry subject to begin with. Assuming you do wish to investigate you could start with ‘Chain of Blame’ by Muolo, ‘Fools Gold’ by Tett, and ‘ECONned’ by Smith.


8 posted on 09/12/2012 10:56:26 PM PDT by Pelham (Liberate the White House)
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To: Rudder

Lets be honest, Alan Greenspan played a huge part.

He alone had the authority to raise interest rates in a growing credit bubble and he chose not to. That one lever of power could have cooled down the whole thing and prevented the crises we’re in now and the politicians couldn’t have stopped him. He was a key player in the “ownership” scheme to provide low interest rate near zero down loans to people who wouldn’t have otherwise qualified. In addition he’s a man who should have known better - and probably did.


9 posted on 09/13/2012 1:08:48 AM PDT by DB
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To: Pelham
What really imploded the big banks was the failure of the credit default swap market when Lehman went down, and the near-instantaneous insolvency of AIG, the main issuer. Which took most of the money-center banks down, which had loaded up with trillions upon trillions of dollars' worth of these and other derivatives.

I've seen a number like $100 trillion as being the amount of bad CDS-related assets out there. I defer to the experts, but this is what the Fed is really trying to walk the big banks past. The smaller, regional banks didn't participate in this market and are solvent -- about 8000 of them in the States.

10 posted on 09/13/2012 3:45:08 AM PDT by lentulusgracchus
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To: SeekAndFind

In the last few federal budgets I’ve looked at in the news, ENTITLEMENT SPENDING is at least 70% of the federal budget. Defense spending doesn’t even come close.


11 posted on 09/13/2012 5:16:48 AM PDT by NRA1995 (I'll cling to my religion, cigars and guns till they're pried from my cold dead fingers!)
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To: lentulusgracchus

“I’ve seen a number like $100 trillion as being the amount of bad CDS-related assets out there. I defer to the experts, but this is what the Fed is really trying to walk the big banks past. The smaller, regional banks didn’t participate in this market and are solvent — about 8000 of them in the States. “

Those are the same kind of numbers I’ve seen bandied about. Startling when you first hear them, but it explains why this became a global crisis.

Yves Smith’s book ‘ECONned’ provides a look at how the derivatives market was driving the creation of subprime paper by the end of the bubble, a real tail-wags-dog process. The ‘Magnetar trade’ was the purest example of this.

Credit Default Swaps were a real mess. They are a type of insurance product that had been turned into a casino. You could, in effect, take out unlimited amounts of insurance on somebody else’s failure. Meaning that you had incentive to make them fail. So firms were able to bet against CDOs that they didn’t own... but maybe they knew how rotten the mortgage paper was inside those CDOs... in fact they knew more about the CDOs than the banks who had purchased them.


12 posted on 09/13/2012 9:42:18 PM PDT by Pelham (Liberate the White House)
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To: DB

Every thing you say there is true.


13 posted on 09/13/2012 9:43:54 PM PDT by Pelham (Liberate the White House)
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To: Pelham
It’s time to give up that nonsense. There is nothing to be gained by perpetuating it, other than it provides a convenient, albeit false, “history” of the bubble.

2/3 of the subprime loans issued during the bubble were made by non-bank lenders. By the shadow banking system. The CRA did not apply to a single one of these loans. It applied only to depository firms. And moreover the loans issued by these firms were the most exotic and creative of subprime loans, the Option ARMS, No Docs, NINJAs. These loans were issued because they made a lot of money for those who wrote them. There was no other encouragement needed.

This has all been examined in books written by people who watched the subprime market develop and who were involved in it. But then reading takes effort and no one wants to do it, especially when it is a rather dry subject to begin with. Assuming you do wish to investigate you could start with ‘Chain of Blame’ by Muolo, ‘Fools Gold’ by Tett, and ‘ECONned’ by Smith.

Thanks for the references. How does that pertain to the sections of the Glass-Steagall Act that were repealed.

14 posted on 09/13/2012 9:47:32 PM PDT by neverdem ( Xin loi min oi)
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To: Pelham
Yves Smith who advocates nationalizing the Fiscal sector is hardly the sort of source any Libertarian/Conservative can take seriously. Her "analysis" is obviously based on an ideological, not fact based, world view

One unpleasant decision is recapitalizing the banking system. The financial industry has grown to an unsustainable size. It needs to shrink, but it also needs new equity, and until banks are cleaned up, private investors will not throw good money after bad. The most successful models, which actually showed a profit to taxpayers, involved wiping out shareholders of dud banks, nationalizing them, spinning off and liquidating the bad assets, and selling the banks back to the public after conditions had stabilized. But we are doing a half-baked version of this approach, instead trying to avoid losses to bank shareholders and bondholders by propping up a bloated financial services industry in place. This approach is proving to costly and ineffective, and will also lead to resistance to sounder approaches that still involve taxpayer outlay.


15 posted on 09/13/2012 9:53:53 PM PDT by MNJohnnie (Giving more money to DC to fix the Debt is like giving free drugs to addicts think it will cure them)
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To: Pelham
Goldman Sachs was in particular accused of doing that -- shorting their own stuff. I saw a PBS special on the CDS mess some months ago (last spring?), and they interviewed the crew of young investment bankers who actually invented them -- I forget where they were working at the time, but it was someplace like Citi or Morgan,Stanley. (MS was where JFK Jr.'s sister-in-law, Lauren Beschloss, worked.) They explained what they had done, almost like contrite Boy Scouts, and then went on to say that other people had come into the trade who didn't understand CDS's well enough to risk and price them properly.

Which, methinks at a great distance, would not have happened at all, unless there was some structural defect in the swaps, some dynamic imbalance, that invited ignorant strangers to rush forward to scoop up all the "free money". I'll take a wild guess and say, "front-end fees". Which the penitent Boy Scouts had to damn well know about, since they drew the template.

16 posted on 09/13/2012 10:25:37 PM PDT by lentulusgracchus
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To: DB
Alan Greenspan played a huge part.

Yep.

Bureaucracy is the enemy of freedom.

17 posted on 09/14/2012 5:42:03 AM PDT by Rudder
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To: MNJohnnie

“Yves Smith who advocates nationalizing the Fiscal sector is hardly the sort of source any Libertarian/Conservative can take seriously.”

I don’t agree, and moreover you misrepresent what she advocates by ignoring this part of what she wrote:

“and selling the banks back to the public after conditions had stabilized.”

She isn’t advocating ‘nationalizing the Fiscal sector’ (you mean the Financial sector, “fiscal” means taxes); she is discussing how to react to a major failure in the banking system. She is taking this directly from the experience of the Swedes. They had the same sort of banking crisis that we did, only about a decade earlier.

The Swedes didn’t want to bail out the executives and stockholders who had wrecked Sweden’s largest bank, but they couldn’t just let the bank fail without seriously damaging the rest of the Swedish economy.

The government took over the bankrupt bank, appointed caretakers whose job was to clean up the bank’s books, which they did, and then the bank was sold back to the private sector.


18 posted on 09/14/2012 9:52:53 PM PDT by Pelham (Liberate the White House)
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To: neverdem

“How does that pertain to the sections of the Glass-Steagall Act that were repealed. “

I don’t know that it does. And I’m not sure that any provision of Glass-Steagall directly prevented what occurred during the bubble.

I suspect that referring to the demise of Glass-Steagall is more like shorthand for the removal of, or prevention of, regulation in the financial sector. The Commodities Futures Modernization Act of 2000 is probably more responsible for opening the door to the crisis than most other legislation.

One major aspect of Glass Steagall was to wall off investment banks (Wall Street firms) from the world of retail banking, what we all think of by the word “banks”.

The G-S Act was repealed over time, not all at once. And as G-S was repealed investment banks began moving into retail finance. One sector they were eager to cultivate was the subprime mortgage market. And unlike traditional lenders, investment banks had much shorter time horizons and no interest in holding any of the paper they created. This short term focus is a big reason that investment banks were walled off from retail banking in the first place. But I doubt that Glass Steagall ever applied to mortgages. No one in the 1930s was likely to have foreseen the innovations that occurred in mortgage lending in the late 1990s.


19 posted on 09/14/2012 10:10:05 PM PDT by Pelham (Liberate the White House)
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To: Pelham
2/3 of the subprime loans issued during the bubble were made by non-bank lenders. By the shadow banking system.

Who are these "shadow bankers" you speak of? Mortgage bankers; mortgage brokers???

After reading through you posts it looks to me like you're unwilling to place ANY blame at the feet of government who IMHO played a large part in setting the machinery in motion for the sub prime mess. CRA was certainly a contributing factor after slick willie "enhanced" its mandate on his way out the door. At the "urging" of Dodd and Frank, Fannie and Freddie went off the rails with underwriting standards shortly thereafter. If they didn't create the sub prime market they absolutely gave it a kick in the pants.

The "private" sector knows how to play the game and they went all in on the new standards, which essentially were no standards at all. Better marketing, higher yields, pool insurance and other enhancements allowed them to beat the government at its own game. By ~2006, too late really to stop the wreck, congress began to rein in Fannie and Freddie which allowed the private market to increase their share of mortgage backed securities into the secondary markets even more. Not without some sweeteners. Enter credit default swaps/derivatives. This was the U.S. housing market; what could go wrong? Well, plenty.

Just my take on it...

20 posted on 09/14/2012 11:44:19 PM PDT by ForGod'sSake (You have only two choices: SUBMIT or RESIST with everything you've got!!!)
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To: ForGod'sSake

“Who are these “shadow bankers” you speak of?”

The wikipedia entry has a decent description:

“The shadow banking system is the collection of financial entities, infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds, money market funds and structured investment vehicles (SIV). Investment banks may conduct much of their business in the shadow banking system (SBS), but most are not SBS institutions themselves.”

“After reading through you posts it looks to me like you’re unwilling to place ANY blame at the feet of government who IMHO played a large part in setting the machinery in motion for the sub prime mess.”

That’s because the government didn’t play the major role despite your belief that they did. The government did plenty of stupid things but that didn’t happen to be one of them. Maybe simply because they didn’t think of it first, whereas Wall Street did. Or more correctly Wall Street blundered into it when no one was pushing them to do so.

But it’s no surprise that you would hold your opinion that the government is the root of the mortgage bubble, because the idea gets endlessly repeated by Rush and Hannity and other similar ‘experts’ on the mortgage bubble; the same ‘experts’ who were insisting that no bubble existed until well after it had blown up. It was all a plot to derail the 2008 election in their most entertaining tale. Except that it wasn’t, it was the predictable result of years of bad financial practice.

But since you like to research my old posts you will find that I was one of the few here on FR warning about the mortgage bubble as it was growing. I was doing my own research on what was driving it long before the bubble blew up. That was easy to do because I live at ground zero of the subprime lending market and I knew a lot of people involved in it. The only thing that surprised me was that its size was in the trillions and that it was global.

But to return to your belief that the CRA is the root of the crisis: if you added together every CRA loan ever made and assumed that every single one failed you wouldn’t get numbers large enough to produce the mortgage bubble (and this ignores that fact that CRA loans aren’t necessarily mortgage loans in the first place, a fact unknown to the ‘CRA is the boogie man faction’, not that facts often intrude in their story).

But if you look at the size of the paper issued by the shadow banking system during the bubble the numbers are large enough. And unlike the boring low-yield paper issued by the conventional banking system, the shadow bank paper was non-conforming, exotic, high-yield, risky, and ultimately a time bomb for borrowers, investors, lenders, and virtually everybody.

If you’re really intent on identifying one boogie man, a good place to start is with David X Li’s Gaussian Copula Function. This little gem of financial engineering was used like a magic wand to convert trash mortgage paper into AAA paper, worthy of being sold to the most conservative of investors. Not that those who used Li’s function understood what it did, because mostly they didn’t. The math involved was too complex. But they believed that it worked and they used it to value CDOs and tranches and CDOs Squared, all of the confusing alphabet soup of derivatives that actually turned out to be ‘weapons of mass financial destruction.’

” Fannie and Freddie went off the rails with underwriting standards shortly thereafter. If they didn’t create the sub prime market they absolutely gave it a kick in the pants”

No, they didn’t give the subprime market a kick in the pants. In fact they were late to the party and were having their market share taken away by their private market rivals. F&F dealt in conforming paper even when it was subprime, and that’s not where the dramatic growth occurred. And more to the point the shadow banking system was in the subprime market because they wanted to be there, they weren’t subject to regulation.

“By ~2006, too late really to stop the wreck, congress began to rein in Fannie and Freddie which allowed the private market to increase their share of mortgage backed securities into the secondary markets even more. “

A useful argument for your case. Too bad it’s not accurate. The private market lenders were taking market share away from F&F long before 2006, and they didn’t use Congress to do it. They did it by creating high-yield paper from the exotic loans they were financing and peddling the resulting CDOs and CMOs as AAA paper. The basics are all included in a research paper issued by Lazard Investment some years ago.

“Not without some sweeteners. Enter credit default swaps/derivatives. “

‘Enter derivatives’? By this do you mean Rush Limbaugh’s explanation that derivatives and swaps were developed “to protect the banks” from the risks of the loans “they were forced to make”?

Well, sadly, the arrow of time doesn’t go backwards. And modern derivatives were developed in London in the 1990s in a process totally unrelated to the American mortgage market of the 2000s. Moreover derivatives weren’t developed as protection, they were developed as a means of generating income for the issuing banks. Rush’s explanation is a good story. But it’s a story that has no basis in fact. To learn the facts of the origin of modern derivatives you can always read the opening chapters of Gillian Tett’s “Fools Gold” which describes them in detail.


21 posted on 09/15/2012 10:42:42 PM PDT by Pelham (Liberate the White House)
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To: Pelham
The wikipedia entry has a decent description:

I'm guessing an entry written by someone unfamiliar with the back end of the business. Like it was some sort of revelation or something.

That’s because the government didn’t play the major role despite your belief that they did. The government did plenty of stupid things but that didn’t happen to be one of them.

A straw man and word parsing in addition to replying to something ("the major role"); I never said. If you can still deny the government did not contribute in a significant way to the subprime mess, as in "a kick in the pants", I don't think there's any hope for continued dialog.

To say that no one but you saw this coming is complete and utter nonsense. I've been out of the business for 15 years and I saw it coming, an THAT from just a passing curiousity with the "state of the business". If memory serves, even the feeble minded McCain saw the warning signs and tried to sound an alarm. To no avail; Frank 'n Dodd wouldn't be denied.

In the rest of your reply you mostly addresses things I never said so I can't see any point is responding -- again.

22 posted on 09/16/2012 12:07:30 AM PDT by ForGod'sSake (You have only two choices: SUBMIT or RESIST with everything you've got!!!)
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To: ForGod'sSake

“To say that no one but you saw this coming is complete and utter nonsense”

And you posted that after you claimed that I criticized you for something you never said?

Lol! Thanks for the irony, pal.


23 posted on 09/23/2012 1:11:19 PM PDT by Pelham (Liberate the White House)
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To: ForGod'sSake

“To say that no one but you saw this coming is complete and utter nonsense”

And you posted that after you claimed that I criticized you for something you never said?

Lol! Thanks for the irony, pal.


24 posted on 09/23/2012 1:11:36 PM PDT by Pelham (Liberate the White House)
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