Friday, February 10, 2012

Narratives: Stronger Than Facts

All of these are quotes from the same book, describing the economic and financial crisis of 2008:

"The country, relying ever more singly across three decades on unregulated markets and the 'wisdom of crowds' -- of each rational economic actor, from steelworker to housewife to CEO, acting in his or her own best interest -- was displaying dangerous imbalances." (pg. 16)

"It had been, and still was, Volcker's view that without serious 'rules of the road,' backed by the law, firms would find ways to profit that put the markets at risk. It turned out to be a prophetic stance, from the 1987 market crash on, and proved only more so in the current election year. Volcker now saw reregulation as a matter of the country's economic survival." (pg. 35)

"That's where Greenspan...established his greatest historical importance. He helped to ensure that, in each crisis, the rollover of debts -- the 'liquidity bridge' Wolf wrote of -- would be supported by the federal government [sic]: a flood of liquidity that altered the ancient, commonplace physics between price and value, confidence and pessimism. The retrenchments, with all their cleansing effects, never really occurred." (pg. 62)

"As Greenspan cut rates, and stressed that he planned to cut them further to continue to fuel America's debt-driven consumption..." (pg. 63)

"...the government's public-private mortgage banks, Fannie Mae and Freddie Mac, guaranteeing roughly 80 percent of all mortgages, and for years encouraging the extension of debt to unsteady borrowers as part of [a] national bipartisan push to spread the 'virtues' of homeownership..." (pg. 64)

"Year by year, Fannie's and Freddie's balance sheet became engorged with underpriced risk as the guarantor of nearly 80 percent of the U.S. mortgage market. Along the way, though, the GSEs -- and by association the U.S. government -- were the guarantors of Wall Street's business model and its vast profits." (pg. 68)

"...the government's role as backstop -- final recipient of the risk being passed to and fro between investors in debt -- was crucial to the equation." (pg. 69)

"Once the government business partnership was struck, with profits as a shared goal, it was just a matter of when the 'mixed ownership corporation' would explode and how costly it would be." (pg. 70)

"After many years of sustained lobbying, the financial industry pushed through a key provision in the 2005 Bankruptcy Act, which overhauled the U.S. bankruptcy system. All repos and swaps, like those soon-to-be-fatal credit default swaps, were exempt from bankruptcy's famous 'automatic stay' -- the defining provision, really, of bankruptcy, where all assets and liabilities are frozen as a company seeks the protection from creditors that bankruptcy court provides... Repos, thereby, became the cheapest, safest funding source available, and repo growth was dramatic after 2005." (pg. 88)

"That [retail wealth management] business had grown with breakneck speed over the past thirty years as millions of savers moved from traditional banks to investment funds. Driving the migration was a combination of the government's 1970s creation of tax-exempt 401(k)s and IRAs, to encourage saving, and the 1980s heady rise in stock." (pg. 99)

(And so on, for another 380 pages.)


The problem, ladies and gentlemen, is all this laissez-faire stuff, this total removal of controls from of the economy, this departure of the referee, this complete regulatory flight from involvement in the financial markets. For example, the creation of GSEs that bought up eighty percent of the extant mortgages to ensure the extension of debt to unsteady borrowers and the Fed's decision to persistently provide easy money and the bankruptcy restructuring that incentivized corporations to make heavier use of swaps and repos and the governmental backstopping of private loss and the government's creation of 401(k)s and IRAs to pull the middle class into investment funds. Oh, if only we hadn't had all that deregulation. If only, ladies and gentlemen, if only someone had thought to have some public policy of some kind.

Clearly what we need is to get government involvement back into the financial markets. For the stability.

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