Behind The Financial Debacle: Conservative Misrule

[marmar]

from the OurFuture.org:



Behind The Financial Debacle: Conservative Misrule
By Robert Borosage

September 22nd, 2008 - 11:00am ET




How did it come to this? The banksters issue a threat: Hand over $700 billion in taxpayers’ money–on top of the $600 billion already forked over–or we’ll take down the global economy.

There will be a lot of obfuscation—fingers pointing every which way—but the story is very clear.

The immediate cause is the inflating and busting of the housing bubble. Federal Reserve chairman Alan Greenspan will be remembered for stoking a bubble economy. Coming out of bursting of the dot.com bubble, Greenspan lowered interest rates and kept them there. With his war and tax cuts, President BusAn unregulated shadow banking system began marketing exotic mortgage-backed securities across the globe. As the housing bubble grew, brokers hawked shakier and shakier Alt-A and subprime mortgages. Ninja loans—no income, no jobs, no assets—became the rage.

Since the brokers sold off the mortgages immediately, they had a stake in making the loan, not whether the loan would be repaid. The banks and investment houses sliced and diced the loans into ever more exotic securities, which got prime ratings, although no one really knew what was in them. European banks and others bought more and more of the stuff. To escape capital limits, they invented credit default swaps in which companies like AIG guaranteed the loans in case of default. That totally unregulated over-the-counter market soared to $60 trillion. Banks set up off-balance-sheet entities to evade capital limits. Investment houses like Bear Sterns and Lehman Brothers borrowed at 30 times their capital to speculate in these markets. Wall Street’s executives were pocketing tens of millions from the take.

The regulators turned their heads. Greenspan not only fueled the cheap money; he cheered on the exotic mortgages, even while refusing to acknowledge, much less limit, the housing bubble. The Securities and Exchange Commission exempted five major investment houses from their normal capital requirements. Fannie Mae and Freddie Mac’s executives profited personally as their enterprises started buying Alt-A mortgages.

Everything was great so long as housing prices went up. When they topped out, the bottom fell out. Defaults and foreclosures soared. Suddenly, no one knew what the value of the securities they held was, much less what was in the balance sheets of other banks. Much of the exotic paper turned toxic; no one wanted to buy it. As the banks slowly were forced to write down its value, they had to raise capital. With everyone trying to sell at the same time, the values went through the floor. Bear Sterns, Lehman Brothers, and Merrill Lynch collapsed into bankruptcy or fire-sale mergers. The insurance giant AIG and Fannie and Freddie were taken over by the federal government.
And now, Washington is gearing up for the largest bailout in history, throwing an estimated $700 billion more to buy up the toxic paper from the banks to keep the entire financial system from collapsing. .......(more)

The complete piece is at: http://www.ourfuture.org/blog-entry/2008093922/behind-financial-debacle-conservative-misrule

[pberq]

1. This is an outstanding article - gives the history

Just like FDR did, we need to go back to strict regulation of the financial system.

http://www.ourfuture.org/blog-entry/2008093922/behind-financial-debacle-conservative-misrule

"We need new and strict regulation on the entire financial system—no more shadow entities operating on the side. That regulation should include strict capital requirements, limits on leverage, transparency, and policing of instruments allowed and compensation schemes. We’ve got to rearm the cop on the financial beat—and elect leaders and appoint regulators who do not scorn the government they lead."