These actions by our leaders: increased spending and lifting the last vestige of the gold standard would set the stage for the savings and loan crisis. Little did policy makers know at the time that printing money to monetize debt was addictive, and would eventually lead to inflation. This was probably because most of them had never heard of the Austrian School of Economics and because some years later Richard Nixon declared that “we are all Keynesians now”. Nonetheless, savings and loan banks through the 1970s played by the rules, paying interest on savings accounts and providing mortgages to borrowers.
The problem came in the late 1970s when, faced with high inflation from the spending binge, the Fed had to increase interest rates to 21 percent in an attempt to control rising prices. This hurt the savings and loan banks in two ways. First, a government regulation that placed a ceiling on the interest rates savings and loans could offer to their depositors caused a transfer of funds from low rate savings and loan savings accounts to new higher rate money market accounts in other banks. Second, savings and loan banks had much of their money tied up in low, fixed rate, long term mortgages. As the Fed increased interest rates, it made these mortgage-backed assets virtually worth nothing. Thus, government spending which forced the Fed to raise interest rates ultimately caused the savings and loan crisis. By 1980, before deregulation, many savings and loans were already insolvent. Politicians are disingenuous when they say the savings and loan crisis was caused by the greed of the bankers; it was caused by the misguided policies of the politicians of the time.
Now, flip the calendar forward a decade to the 1990s. Through the decade, the “Maestro” Fed chairman Alan Greenspan, had kept interest rates artificially low while continuing to pump more dollars into the economy to keep the good times rolling. By the end of the decade, we had the dot com bubble. Of course, we were told by Washington that this was the fault of greedy techies who were corrupt and had unbridled behavior. At the end of the day, I didn’t expect Washington to come clean and admit culpability, but I did expect them to learn from their mistake so it wouldn’t happen again.
Article comments
— go to most recent comments1 - Dave Nalle
Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke determined that it was within their authority to nationalize Freddie, Fannie, and AIG in the name of stabilizing the financial markets.
Too be accurate, none of these institutions were 'nationalized' in the sense in which it is normally meant. Nationalizing usually means putting the business under the direct administration of the government - turning it from a private business to an agency of government. That has not happened here.
Fannie Mae and Freddie Mac had a forced reorganization imposed on them by the government, but were placed under a conservatorship, not actually nationalized. A conservatorship implies close supervision, but does not make them part of the government. They still have stock, private investors and private management, just under closer government supervision.
As for AIG, what it got was a collateralized loan. Despite its financial problems, AIG and its subsidiaries have substantial assets, and what the government did in this case was to loan it money to keep the company liquid when it ran short of operating capital, but it was in the form of a loan against the quite substantial value of their assets and at a reasonable interest rate. It could be described as a 'bailout', but certainly not nationalization, and a bailout implies giving them money, but in this instance the money will be repaid under the terms of the loan one way or another, so it's not just giving them money.
But I absolutely agree that capitalism is not at fault here. This is just bad business management in a situation where it was easy for these companies to get overextended and screw themselves up.
IMO AIG didn't need to be helped out at all. They should have liquidated some of their assets and reorganized on their own. They had the capacity to do it.
Fannie Mae and Freddie Mac have been screwed up from the get-go. They were a bad idea when Roosevelt passed them, it was a worse idea to privatize them back in '68 and ever since then they've been horribly mismanaged. They've basically operated as a dumping ground for questionable loans to the point where they control half the mortgage value in the country. Problem is it's the BAD half.
Yet beneath it all, the root cause of this is two-fold. The unrealistic expectations of too many people in this country that they have some sort of special right to own a home even if they cannot genuinely afford it, and the government policies which indulged that delusional belief and forced mortgage companies to make loans without considering all of the legitimate criteria in which borrowers should have been rejected. Questionable lending policies and abusive mortgage terms are the direct result of government interference in the loan process, because the government imposed extra risk on lenders and they transferred that risk to the borrowers in the form of ARMs, balloon payments and other questionable practices which compensated them for the greater risk involved in lending to people who should have been disqualified.
Dave
2 - MARLOWE
Capitalism in its most basic form is "not to blame".
Greed however, and the structure of our economic world over the past 40 years especially IS.
But this "issue" goes much further back...
To quote FDR in 1936:
For out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital-all undreamed of by the fathers-the whole structure of modern life was impressed into this royal service.
There was no place among this royalty for our many thousands of small business men and merchants who sought to make a worthy use of the American system of initiative and profit. They were no more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of their obligation to their generation, could never know just where they fitted into this dynastic scheme of things.
It was natural and perhaps human that the privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man.
The hours men and women worked, the wages they received, the conditions of their labor-these had passed beyond the control of the people, and were imposed by this new industrial dictatorship. The savings of the average family, the capital of the small business man, the investments set aside for old age-other people's money-these were tools which the new economic royalty used to dig itself in.
No, Capitalism isn't to blame... The men who attempt to warp it to their own ends ARE...
Marlowe
3 - Homeless
Dave Nalle...aren't you the same guy who once said that the subprime crisis was contained?
4 - Dave Nalle
Could be, Homeless. And I still think that it basically should be. You're probably operating from the assumption that all of this was necessary. I'm not sure I share that belief.
Dave
5 - bliffle
AIG didn't need a bailout according to Hank Greenberg (interviewed by Charlie Rose) who built the company. Sounds like Greenberg thinks they could have patched things themselves, but that AIG management failed to even call him. If what he says is true, then AIG management should be thrown out. Unfortunately, the bailout may have the effect of cementing them in place.
6 - Cannonshop
#5
TRUTH! (as in, and this happens with distressing frequency on this topic) I agree, Bliffle, with your analysis, and your most pessimistic projection.
7 - Lisa Solod Warren
Of course capitalism is not to blame. I am, gasp, a democrat, and I agree with you and your analysis. But, unbridled greed is. Greenspan holds much of the responsibility. And I like the idea of holding people accountable. For example, I think the heads of Lehman and the board of directors who hired them (at those ridiculouse salaries), et al, should be sued by their shareholders and that lawyers should take the cases pro bono. The shareholders won't get anything other than the satisfaction of making the boards pay for their bad decisionmaking at offering such ridiculous contracts to men who could not fulfill them.... and the CEOS will NOT get their golden parachutes after destroying venerable companies with their bad management, specious accounting and no holds barred greed.
I think that anyone can sign a contract for a fantastic salary, but that that salary needs to be held in escrow (as some analysts have suggested) until the person DELIVERS what is spelled out in the contract.
Ms Fiorna of the big mouth destroyed HP and then walked away with 40 million bucks. I don't know of anyone who wouldn't sign up for that.
But for the government to bail out a company because the CEO fucked up? hmmmm. How many mom and pop businesses, capitalist enterprises all, can call up Uncle Sam and say, Hey! I am outta money. Please send handout?
And how do we handle questionable and illegal accounting that cooks the books year after year so that the company LOOKS good but finally tanks in one big fire sale?
8 - Cannonshop
Hmmmm...I like the idea of the Lawsuits, Lisa. Especially if you can find good lawyers who'd work them pro-bono, since our government seems unwilling and unable to prosecute these turds for Bank Fraud, Wire Fraud, and Stock Manipulation (a form of Fraud).
The Sunlight Foundation has links to some nice lists of Lawmakers and former Government Officials who've worked diligently protecting the overpaid bastards too-suing each and every one of them individually for this (regardless of current or former Party affiliation) would also be sweet, since apparently RICO only applies to street-level crooks.
(Just have to make sure that the Republican crooks are tried in the 9th District, while the Dems are tried somewhere else-there is zero chance that a Democrat will be found guilty by the 9th district court of appeals, and there are many guilty Dems that also need a good asskicking.)
Once those are sorted out (or at least bankrupted) we can turn our attentions to other corporate scumbags- Harry Stonecipher, Phil Condit, the Estate of the late Kenneth Lay, Al Mulally, John Shalikashvili...most of the Executive board of the Boeing company and former executives of McDonnell Douglas, the former board-members of GE, the retards who ran Chrysler into the ground... sigh, lovely, lovely, crushing. Maybe start looking at Hedge funds too-and Mutual funds, and junk-bond sellers... Get enough of these suit wearing sociopaths, and we could either force them to re-adopt ethics, or force congress to pass genuine tort reform, reinstate the uptick rule, and reinstate the regulations that the Market adopted after the Great Depression in response to exactly the same kinds of abuses that have occurred today.
Lisa, we need to find us a whole army of angry lawyers who actually care about our country, don'tcha think?
9 - Cindy D
"Fannie Mae, nee the Federal National Mortgage Association (FNMA), began life as a government invention. It was born 'nationalized' -- and it worked beautifully until it was privatized.
(snip)
The system worked like a fine watch. Home-ownership rates soared. Loan standards were generous but not stupid. Nobody in the home mortgage business got filthy rich, and mortgage lenders hardly ever went broke. The government's bank insurance funds regularly turned a profit. And here's a quaint, archaic concept: It operated in the public interest."
FYI
10 - troll
...no loans - no housing purchases
no housing purchases - no housing construction
no housing construction - no jobs
no jobs - no profit
the problem is with capitalism
Ken - have you considered what 'main street' would have looked like in each of the historical examples that you cite had the government not stepped in to bolster the house of cards and its profit machine - ?
by the time unemployment reached 24% in the 30s the country was on the verge of open and violent class conflict - if unemployment approaches those levels again all bets are off
Dave - The unrealistic expectations of too many people in this country that they have some sort of special right to
own a homea job....fixed it for ya11 - Clavos
CEO's and other executives found guilty of illegal activities shouldn't merely be sued, they should be tried in criminal court, and if convicted, judges should impose maximum sentences under the law. These sentences should NOT be served in minimum security facilities. I would recommend death penalties for the lot, but you squeamish liberals won't go for that, I know. Still, it's a tempting thought...
The government should NOT be bailing out these banks. As bliffle pointed out above, the bailout will serve only to reinforce the illegal propensities of these assholes, and a few years down the line we taxpayers will once again be footing the bill for these pirates' activities.
Identify and compensate the victims directly, jail the perps, and let the banks go under; the best form of regulation is failure allowed to be carried to its inevitable conclusion.
12 - Lisa Solod Warren
Cannon, I do. Go find those guys.
Clav: I don't think we should have bailed out Bear Sterns... et al. But Fannie Mae and Freddie Mac; we had to or the small home owners would have lost everything.... that would have made it all far worse. I spent an hour watching Meet the Press this morning and I remain convinced of that. Not AIG, not the investment banks...but at this point Fannie Mae and Freddie, yes... as long as their CEOs receive NO compensation, which, I understand, they won't.
As for all the "bad" guys going to prison, that works for me.
The death penalty? No, this isn't murder, after all. But a good maximum security jail with some bad ass bad guys,hmmmm, that does sound interesting.
13 - troll
yup - it would be interesting to watch 'the system' eat its best and brightest
14 - Clavos
But Fannie Mae and Freddie Mac; we had to or the small home owners would have lost everything
That's why I suggest direct compensation (aid, if you will) to the victims, bypassing the "institutions." Let the government take over the victims' mortgages, review them, close out those held by obviously unqualified buyers (compensating them, of course), and re-sell them to more solvent banks.
Allow the "bad" institutions to fail.
15 - Homeless
What Nalle actually said was..The dollar has been deliberately deflated as part of an economic strategy which thus far seems to have been pretty successful. As for the 'housing bubble', it's not bursting. Every expert seems to agree that the adjustments are short-term, and the impact of artifically low interest rates wore off quite a while ago. You can bleat about economic doom and gloom all you want, but the evidence just isn't there to support it, so long as the deficits continue to go down at an accelerated rate and the value of the dollar starts to rebound correspondingly as we ought to see in the next few months.
This was on May 7 2007
16 - Joanne Huspek
This is truly a mess, and has started every business with their hands out. The Big Three are next in line. It must be nice to assume that if you make a mistake, the government can throw you a line.
Meanwhile, little business owners like me have to suffer with the consequences of our decisions, which may be a reason why we don't make such blunders in the first place.
I'm extremely worried about where the "money" is coming from in the first place. Supposedly, the country has no money. Are we going to manufacture more at the mint? Isn't this how the Depression started? (I know that is a generalization.)
17 - bliffle
Tha article is wrong:
"Quite frankly, the crisis that caused those bailouts to happen in the first place would not have happened if we were a pure capitalist country."
Nonsense. Capitalism is, by nature prone to crisis. It depends on crisis. Whether it's the crisis of new product development or financial manipulation.
Capital markets are the battlegrounds of wolves fighting for alpha dominance. Warfare consists of creating a crisis for your enemy that he cannot meet.
The result is monopoly and ever-larger aggregated organizations. They must be broken up routinely before their crisis becomes a national crisis, just as IBM was broken up in 1956. TJ Watson was misunderstood the point when he said "we did nothing wrong. it isn't a crime to be big". It doesn't have to be criminal to be broken up.
Capitalism is good for all kinds of good projects, most of them small. Especially starting up new industries. But it doesn't scale-up. It's value diminshes with size and increasing power.
18 - Joanne Huspek
This is truly a mess, and has started every failing business to put their hands out. The Big Three are next in line. It must be nice to assume that if you make a mistake, the government can throw you a line.
Meanwhile, little business owners like me have to suffer with the consequences of our decisions, which may be a reason why we don't make such blunders in the first place.
I'm extremely worried about where the "money" is coming from in the first place. Supposedly, the country has no money. Are we going to manufacture more at the mint? Isn't this how the Depression started? (I know that is a generalization.)
19 - Dave Nalle
OMG, Homeless. Things got worse than was expected. Note the last two sentences. Those things did nothappen, hence problems continued. Do you have a point?
Dave - The unrealistic expectations of too many people in this country that they have some sort of special right to own a home a job....fixed it for ya
I agree. There is no more right to employment than there is a right to own a home.
But Fannie Mae and Freddie Mac; we had to or the small home owners would have lost everything
Wrong. We could easily have let those small home owners lose their homes. They would not lose 'everything' because at their income level and having gone into their homes with no cash up front, they HAD nothing to lose. All they have is their job and their monthly paycheck and some personal assets like a car, and none of that would have been taken away had they lost their home and had to move into the increasingly large number of inexpensive rental homes that were once foreclosed on.
Dave
20 - Cannonshop
#13
If we're discussing "The best and brightest" of the system, then maybe they SHOULD be eaten-they've found a way to short-circuit the part of Capitalism that acts as a preventative against bad behaviour-the part that involves "failure" with something quaint that the non-"best and brightest" must deal with: Consequences. People who are insulated from the consequences of their bad decisions don't learn anything, and will tend to make the same bad decisions over again-especially when they're rewarded for doing so.
and Lisa (Comment 12): I wish, but they don't exist.
21 - troll
Cannonshop - whatcha gonna do when (to misparaphrase Hegel) the rational is the bad - ?
remember that the name of the game to maximize of the intensity of the creation of surplus value
22 - Cannonshop
Well, honestly, Troll, if the intent of the game is to maximize creation of surplus value, then the rationale isn't bad-these bozos didn't maximize value in any direction-they shuffled it from investors who weren't powerful, to select cronies that were, falsely inflated the value of a commodity and then defrauded yet another investor, and were rewarded richly for it. It's one thing to take a risk, it's another entirely when the risk isn't yours to take, and while I don't believe in the equally fraudulent concept of "Social Justice", I Do believe that people should only have to pay for their OWN mistakes-and they should most definitely have to pay for those mistakes without the expectation that the rest of society be compelled to shoulder the burden INSTEAD.
23 - Lisa Solod Warren
Dave, you are woefully misguided if you think that everyone who had a Fannie or Freddie went into it with no money down and was trying to bamboozle the system. Many quite respectable and ordinary homeowners had the mortgages bought up by Fannie and Freddie. You are grossly misinformed. Plus, when homes are forclosed, whole neighborhoods go down the drain, and the rest of those who live in that neighborhood lose. It might even be, gasp, someone like YOU.
24 - Dave Nalle
Lisa, you miss the point as so often happens. I realize lots of people of different backgrounds have loans which have been taken over by Fannie and Freddie. But they're not at issue here. They aren't being foreclosed on and they aren't part of the problem. It is the sub-section of buyers who were not qualified and got bogus loan terms who can likely walk away from their mortgage with little harm done to them.
You do have a point about the neighborhoods suffering. But my observation is that the foreclosures are largely limited to specific neighborhoods, so neighborhood X will have lots of foreclosures and neighborhood Y with a slightly higher average home price will have almost none.
Dave
25 - Les Slater
Ken,
I think you correctly pinpoint the beginning of the current economic crisis to 1964. You oversimplify it though by laying it all on Johnson. The cycle, the upward part of the cycle, begins with WW-II. It is here that we find most of the industrialized world, certainly Europe, Great Britain, Japan and others pretty much economically destroyed. The U.S. post-war economic expansion was built on lending and selling the material to rebuild. This ran its course by the mid 60’s. Johnson’s ‘guns and butter’ policies could be afforded in the mid 50’s but not 10 years later.
The biggest changes taking place in the United States between the 40’s and 60’s were population migration and the civil rights movement. The peaking of the post-war economic boom coincided with a significant part of the population demanding not only legal equality but also an end to housing and job discrimination. The beginning of the Inclusion of Blacks into the working class as equals began to strengthen the working class as a whole. It meant we were in a better position to wrest a greater share of surplus value from the employers. This, of course, was at the expense of profits.
This squeeze on profits came at the time that the post-war economic boom was running its course. This made the downside from the peak all the more dramatic. This is where foreign holders of dollars saw the ‘advisability’ of converting those greenbacks into the promissory gold.
Two things happened on August 15, 1971. One, the U.S. announced it was going off the gold standard and allowing the dollar to float with respect to gold. It didn’t really float, it sank. The other thing that was proclaimed was the ‘wage/price freeze’. The latter of these was really among the opening guns of an attack on the working class to try to reverse, and then set back how much of the surplus value went to the worker. This attack has never let up and has been going on ever since at an accelerating rate.
The capitalists found themselves being squeezed by the beginnings of the drying up of their traditional markets. Europe and Japan were increasingly able to produce their own commodities while the U.S. working class was less able to afford those products. Foreign commodities began their inroads to the U.S. market.
The U.S. capitalists began to disinvest in U.S. basic industry. Their investments became more and more toward ‘developing’ economies such as ‘export platforms’. The rest of the developed countries began to compete in these areas too. Robust profits were not easy to come by. Profits did come but at increasingly sparse rates of return.
Increasing technology, especially information technology, has the potential to increase productivity, and it has for years but most of the easy gains, the low lying fruit, have already been picked. These productivity gains have been used to reduce employment rather than increase production. The surplus labor has been driven to the service economy or out of the workforce completely.
So faced with dwindling markets to sell real products at a reasonable profit the capitalists turned to ‘financial instruments’ to invest in. These, in themselves, do not produce any value. They have to depend on the sweat of workers and farmers to produce the houses, cars, food and toys of an increasingly parasitic and growing layer of these financial ‘workers’. The working class is falling further and further behind in its ability to not only afford a few small luxuries but even the necessities like food, housing, decent schools, healthcare and retirement.
So what is the poor financial capitalist to do? Blow up bubbles! These are not accidents or bad judgment. These were deliberately planned because they have no other solutions.
Les