seeking knowledge and laughter, putting a bullseye on inaccuracy


The Great Recession was Caused by Wall Street, Not All of Us

I just finished reading the memoir, Bull by the Horns by Sheila Bair, former head of the FDIC - which insures our bank deposits and is responsible for preventing more banking crises than you can imagine. It is a very good intro to how government regulators failed to stop the incredibly stupid gambling on Wall Street by irresponsible banksters.

A shorter article that overlaps some with the book is helpfully entitled, "No, Americans Are Not All to Blame for the Financial Crisis: Exposing the big lie of the post-crash economy" by Dean Starkman. He nails it and I plan to add his book to my reading list.

In the short article, he debunks the common sentiment that we are all to blame for the Great Recession.

The alleged responsibility that the average American bears for the crisis rests largely on the notion that people knowingly (key word) took out bigger, riskier loans than they could afford—and that they all decided to do it rather suddenly around 2004. Which, see, that’s crazy right there.


In 2010, an FBI report drawing on figures from the consultancy Corelogic put total fraudulent mortgages during the peak boom year of 2006 at more than $25 billion. Twenty-five billion dollars is obviously not nothing. But here again, teasing those mortgages out of that year’s crisis-related write-downs of $2.7 trillion from U.S.-originated assets leaves our infamous “cagey” borrowers to blame for only a tiny share of the damage, especially since not all of the fraudulent mortgages were their fault.

Bair's book touches on the notion that spurred the creation of the tea party - that the crisis was created by people who bought too much house. But a stunningly high number of home owners that got into trouble were people who simply refinanced their homes with a company that lied to them and basically committed fraud.

Michelle and I bought our house almost 5 years ago and refinanced it last year. We chose banks we believed we could trust because it simply is not possible for the average home owner to understand all the forms we have to sign. We did the best we could and trusted the bank to the do the rest.

In a modern country with basic oversight, that shouldn't put anyone at risk of losing their home but it did because the regulators failed. The lesson is not to get rid of the regulators but rather to reform our government so powerful interests cannot buy the laws they want to screw us.

Something that comes in the Starkman article reminded me of just how important race still is and how disadvantaged some populations remain despite the progress we have made over the past 50 years.

At the height of the madness, when subprime made up an insane 27 percent of the multitrillion-dollar home-loan market, nearly half of new African American mortgage holders found themselves in one. Black and Latino borrowers with credit scores of more than 660 were more than three times as likely to be in a subprime loan than their white counterparts.

The article finishes strong, reminding us why the narrative that "everyone is to blame" is so powerful.

Sorry, everybody was not to blame. “We” didn’t all do it. “Main Street” didn’t succumb to a new tulip mania, and cheap credit didn’t expose anything but the corruption and immorality of a financial industry that systematically put huge numbers of even credit-worthy borrowers into defective products. Cultural theorizing—especially the evidence-free kind—should be seen for what it is: an exercise in complacency. It’s easy. And it’s what you lean on when you don’t want to take on structural problems, the kind you actually have to do something about.

We didn't all do it. The truth doesn't always lie in the middle of competing claims. Sometimes you have to work to understand something and when you don't, democracy fails.

Community Banking

Michelle and I just refinanced out home for two reasons: getting a lower rate and moving from a massive Wall Street bank to a local Main Street bank. Working at the Institute for Local Self-Reliance, I have learned a bit about banks from our Community Banking Initiative.

Bigger banks claim to be more convenient, but they hit you with higher fees and they lend far less to local businesses, which are more likely to be important to your local economy than massive corporations.

But after reading this story in The Atlantic, I was shocked at just how little we know about how big banks operate and what risks they are taking.

Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records uncovers the reason for these fears—and points the way toward urgent reforms.

The actions we take matter. When you pick a massive bank over a local bank, you are not only throwing your own money away, you are supporting the very same institutions that gave us the Great Recession and will likely lead us into the next one. They will get bailed out - and we may have only ourselves to blame for not supporting the banks in our communities that actually are responsible.

Financial Crisis and Reform

Is Timothy Geithner, head of the Treasury Department, leading a charge toward socialism, saving the banks, or setting up the next big crisis (or all three and more?)? I don't know. I feel very comfortable weighing on telecom issues, energy issues, and a variety of other policy matters that I have deeply studied. But all this financial stuff is really friggin complicated ... perhaps because the "Greed is Good" generation sent its best minds to Wall Street to make money rather than producing something of value (which can include banking services - but that wasn't what these folks were doing).

So I find it all very frustrating. I'm trying to read up on it - Michael Lewis' The Big Short is on my short list of books to read. As is Simon Johnson's 13 Bankers. What I did just read is Joshua Green's "Inside Man" and I don't quite know what to think of it. I generally find Joshua Green a pretty astute observer, so I wanted to write about it.

I agree entirely with this quote from Geithner:

“In a crisis, you have to choose,” Geithner told me. “Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.”

Nothing that I have read suggests the bank bailouts could have been avoided absent a desire to create a much bigger crisis. But I am deeply disappointed in the Obama Administration's unwillingness to pass good policy into law to limit the size of banks and crack down on shady practices that serve to enrich a few bankers but do nothing to improve the overall efficiency of the economy.

[Simon] Johnson contends that Team Obama has ignored the necessary step of breaking up the power of what he calls the “oligarchies”—the big Wall Street banks—as part of the reform process, which is what happened after the emerging-market crises. “If your banks have run themselves into the ground doing crazy things,” he told me, “you need a substantial shift in the power structure. In the ’90s view, the Geithner-Summers view, it is essential that you address that problem as part of the immediate stabilization policies.” To Johnson, as ardent a believer in regulatory capture as George Stigler ever was, it’s plain that Geithner has fallen under Wall Street’s spell, and that through him and his whole apparat, Obama has too.

I do recommend this article as a decent start in understanding why Obama's Administration has done what it has done. But it seems that we really need Congress to push good policy. Obama doesn't seem up to the task.

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