Never before has the old warning, be careful what you wish for, because you just might get it, been so true. Lehman Brothers will announce today that it is going into bankruptcy, as seemed obvious since last March, when Bear Sterns was purchased by JP Morgan Chase. But that’s not all the news that’s fit to print.
According to the New York Times, Bank of America, which last purchased Countrywide Mortgage, is purchasing Merrill Lynch, the retail brokerage giant, while AIG facing a liquidation crunch, needs a loan from the Fed to stay afloat through the close of the day, and Washington Mutual teeters on failure. Fannie Mae and Freddie Mac were lucky to beat the rush last week.
According to the advocates of the view that business is self-regulating and doesn’t need government regulations tying its hands, or lawyers suing it into oblivion to keep it honest, we should be in the biggest economic expansion, business boom, ever in the history of mankind this morning. They got their way.
They wished for a president and congress that would understand them, and they got them. They said that tax cuts would invigorate the economy, and they got them. They said that government regulation was strangling them and they were gutted. They said that we could trust big business to do a far better job running the American economy than government ever could. They got their way.
Today, people will explain what went wrong and pin blame. The subprime mortgage crisis will be a large target, and it’s a darn good one since it makes these large financial institutions the victims rather than the predator. Remember this explanation for the crisis?
Mayor Bloomberg has canceled a trip to visit California Governor Arnold Schwarzenegger. He’s going to have his hands full figuring out what to do with Merrill’s 60,000 employees or Lehman’s 25,000 employees. Just watch what happens to the Manhattan condo market, one of the few strong real estate markets left in the country. And Ferrarri futures will tank, naturally.
For a country that was too important to maintain a working class, a manufacturing base, because each and every one of us was entitled to become a master of the universe, we are going to have one heck of a lot of hands doing the devil’s work.
It no longer matters why this happened. The time for figuring things out passed us by a while ago. Historians can someday come up with an explanation that will be taught to our grandchildren, but it’s not going to do anyone any good today. This is the aftermath of a financial hurricane, and now is the time to just try to clean up the mess.
While some very smart people squabble over whether someone is more qualified to be president if they were a mayor or a senator, the policies proffered at the top of the ticket seem pale and lifeless in the face of the storm. It is so fundamentally American to argue about the crucial issues of morality and value while the jobless wander aimlessly and the once-wealthy ponder old net worth statements and wonder where it all went.
But we do know one thing with certainty. Big business got its chance to rule, and it blew it.
Dave Hoffman at Co-Op posted about this last night, and has a quote from Alan Greenspan:
”I can’t believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.”
You see, the rest of the world, the third-world nations emerging as financial powerhouses, were dependent on us being stupid enough to keep sending them our money. But now that we’ve run dry, they are losing their market. The flip side of this, of course, is that they can’t be our market either. Deven Desai at Co-Op also recaps some thoughts on our status, apparently when he found himself unable to sleep last night.
A smart America would wake up this morning a realize that we’re screwed, stop digging and tighten our collective belts. But we haven’t been a smart America in a long time. We’ve been proud. We’ve been absolute. We’ve placed out faith in platitudes about how we can survive anything because we are the greatest nation on earth. We’ve been told that God loves us better than anyone else, and we believe it. We’ve been told that whatever we do is righteous, and whatever anybody else does, that does fit our mold, is evil. And we’ve been told that if we place our trust in the markets, the markets will save us.
Let’s see who gets saved today.
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Today would be Good Day to go Solo
As all Biglaw associates and wannabes
I fail to see how this is the result of too little regulation. The environment today exists because of regulation that favors larger banks, and these banks leverage this favor (with campaign contributions) to ensure that they are able to influence market conditions.
Bank of America and Chase and Citigroup are getting to buy all of their competitors for pennies on the dollar, financed by the Federal Reserve. The Federal Reserve is controlled by employees and associates of these banks. These banks contribute to the campaigns of government officials who make an elaborate regulation scheme that hurts small competitors and customers like you and me mroe than it does big banks. Big banks then complain about it, so that when they use their influence to cause a market downturn and buy up all their competitors, we don’t suspect what they’ve been up to.
Go check out what really happened with margin buying and the great depression. These same banks gave people loans to buy stocks, with ridiculously irresponsible requirements for assets against them. This went on for years and caused a general increase in stock prices. All of the sudden, these same banks changed the asset requirements, causing the vast majority of these loan holders to have a fire sale on stocks to pay back the loans, and to take all of their money out of the banks to pay the loans.
Naturally, stock prices fell through the floor and smaler banks didn’t have the necessary reserves, so banks and companies failed left and right. Guess who was there to buy up all the leftovers for pennies on the dollar? You guessed it, the same banks with the same financial backing with the magic money of the Federal Reserve, which they controlled back then, too.
Does this sound familiar? Ridiculous asset requirements for loans? Federal Reserve bailouts? Oh yeah, that is what is going on right now. And it is all thanks to Federal regulation of the markets through the Fed, which actually is not controlled by the government at all. Truly by the people and for the people. By and for the rich people, from the little people. That is government regulation.
Corey, the lack of regulation is in reference to the derivatives markets and the MBS (mortgage-backed securities) markets that allowed junk to be sold as prime securities. You may wish to go check out Brad Delong’s blog for more info on this situation, but needless to say, some of the complex instruments created to hide the risks of the sub-prime and alt-a loans were fraudulent to say the least and would never have been allowed if there had existed a reasonable mechanism for regulation of the MBS and derivatives trade.
Regarding the following statement:
We’ve placed out faith in platitudes about how we can survive anything because we are the greatest nation on earth. We’ve been told that God loves us better than anyone else, and we believe it. We’ve been told that whatever we do is righteous, and whatever anybody else does, that does fit our mold, is evil. And we’ve been told that if we place our trust in the markets, the markets will save us.
Ah yes, this reliance upon invisible friends to save us, whether the invisible friend be called “God” or “the invisible hand of the market”. I am always skeptical when people tell me that I should take some action because of their invisible friend. Because invisible friends are, in the end, imaginary. As in, not real. And imaginary friends can no more “save” you than an imaginary banana split can “nourish” you. Call me a materialist. Call me a realist. But that’s how I see it.
Yes, the Federal Reserve is about as “federal” as Fed-X. One of the banks that makes up/controls the Fed is Morgan-Chase, which is the bank that the Fed (i.e. itself) sold Bear Sterns to for pennies on the dollar at a 3% loan, no less. The Fed is creating it’s own market immorally at best, illegally at worst, and also prints U.S. currency with no accountability, which is also responsible for the ecomonic collapse we are seeing. As for the Great Depression, the money in the banks didn’t “dissappear”, and the common folks who said “there just wasn’t any money”, were WRONG. There was money alright, it was simply consolidated by a few select Federal Reserve banks as Corey stated.
glass-steagall act. 1933-1999. rip.
The crisis in general – Doom and Gloom – Osama bin Laden WON ! – thanks to a little help by GWB and his cronies – and it was all so easy !!! Now America suffers for it’s sins – and the rest of the World ? – we’ll see !
Uhm, please look up “fractional reserve banking” and get back to us. Then you’ll have an understanding of what is going on. All banks create money via the process of lending. This is the case even under the gold standard — if you deposit $10 of bullion in the bank and the reserve requirement is 10%, the process of making loans results in $100 eventually being created.
Now, what happens if those loans get UN-created because people can no longer pay them back and the bank collapses? Yeppers, you end up with all that money being UN-created. I.e., deflation. Which, in the case of the Great Depression, definitely did result in a shortage of money to pay debts, to pay taxes, to bid on properties at auction when they were auctioned off to pay debts and taxes, and thus mass transfer of the assets of the nation from the debtor class to the creditor class during the period 1930-1932. Which the creditor class was wiping their hands with glee over, except then the food riots started as starving people saw stores stocked to the brim with food and no ability to buy it… and the collapses of industries started, as people saw car lots full of cars but had no money to buy them… etc. etc. etc.
In short, your accusations against the Federal Reserve are baseless here. The Federal Reserve did not at that time have the authority to bail out banks whose loans went bad, and there was no FDIC to re-create the money that disappeared when banks collapsed. Bank collapses caused deflation, which caused *further* bank collapses because banks still had the obligation to pay back their depositors in the old cheaper dollars but all that was available to pay them back was the new more expensive dollars, which caused *further* deflation as the entire banking system continued its collapse. And it was all because of the fundamental nature of fractional reserve lending and the fact that it creates money out of thin air and disappears it the same way, not because of a conspiracy by the Federal Reserve.
And this, BTW, is why these bailouts are happening — because otherwise the result is massive deflation. Spiraling deflation is bad for anybody who has any debt at all. If you’re a typical American, this is *you*, me bukko. And a repeat of the economic collapse that accompanied spiraling deflation in 1930-1932 frankly is a notion that scares the **** out of economists and bankers everywhere…
– Badtux the Economics Penguin
Today would be a Good Day to go Solo
As all Biglaw associates and wannabes
The Anti-Democratic Nature of US Capitalism Is Being Exposed
The Article: The Anti-democratic nature of US capitalism is being exposed by Noam Chomsky. Bretton Woods was the system of global financial management set up at the end of the second World War to ensure the interests of capital did not smother wider so…