Tuesday, December 15, 2015

A summary of what the financial crisis is all about.

If you're like me, trying to understand the Fed and the obviously fixed world of investment, currency manipulation, bail outs, overspending, reckless war mongering, and suicidal immigration makes your head spin. These excerpts from an article by Jim Quinn with its insights from John Hussman are about as apt a distillation of what the heck is happening economically as I've found:
Bernanke is no hero. He did not save us. He saved his cronies on Wall Street and their captured politician lackeys in Washington DC. The unholy alliance between central bankers, corporate America, and corrupt politicians resulted in Glass Steagall being repealed and allowing Wall Street to run roughshod over our economic system, reaping riches during the good times and heaping the inevitable losses onto the backs of taxpayers. That’s the new American Dream.[1]
He then quotes from John Hussman[2] to the effect that:
The Fed caused the financial crisis, it didn't save us from it. It kept interest rates too low that made investors turn to mortgage-backed securities. Poorly-regulated financial institutions supplied huge quantities of mortgages given to higher-risk borrowers creating a housing bubble. (The federal government also pressured lenders to lend to marginal or unqualified borrowers but Hussman did not go into that here.) The repeal of Glass Steagall encouraged new lenders to jump in. (Marginal lenders did so without the benefit of the repeal.) When the mortgages turned out to be sour, banks and others were of necessity left holding the bag. Bad mortgages became liabilities when the holders thereof had to value them at their true market value ("mark-to-market') which made them (or threatened to make them?) insolvent.
Quinn continues:
The liquidation of insolvent criminal Wall Street banks would have set the country back on the path to legitimate recovery. Instead, the ruling class chose accounting fraud, QE to infinity, and screwing senior citizens with 0% interest rates.
Quoting again from John Hussman to the effect that:
The financial crisis ended in March 2009 when The Financial Accounting Standards Board changed rule FAS 157. The mark-to-market requirement was out. In was “significant judgment” regarding valuation of assets. This, Hussman says was "often called mark-to-model (or as some of us call it, mark-to-unicorn)."
Cronies rescued . . . by the regulators. Ultra-low interest rates also fuel the current stock market bubble as investors and people hitherto reliant on interest income have been forced into the stock market hoping for returns greater than virtually zero. Some investors have also sought higher yields in the junk bond market and, possibly, in investments in emerging markets (EM). I can't recall reading that ZIRP (or really low interest rates) have the same relationship to risk taking in the EM but logically the removal of any inducement to save should lead to taking higher risks in any area (with the related problem of malinvestment).

The TARP money went to bail out the banks, insurance companies, and others thereby keeping them alive and protecting them from the consequences of their errors. Free markets assume that market and business realities reward and punish as reality dictates and that the short-term pain for people affected by the failure of moribund companies is balanced by the overall benefit to everyone when resources are re-directed into the hands of more competent, more honest, and/or more innovative people with a better grasp of what will lead to growth and the creation of more wealth. But the demise of important bad market actors was averted.

There's more that's wrong with how we're handling things and the above hints at a lot of it. The income inequality that the left loves to cry about is real and a terrible problem. But it's not a manifestation of "capitalism" or free markets. If you were paying attention above, you know they are anything but free of manipulation and are under-regulated precisely where they should be regulated. (Over regulation is a problem too but it's not touched on above.)

Concentration of wealth in the hands of the few is the result of many things. I applaud anyone who can become wealthy by dint of superior judgment and skill. What is unacceptable is the enormous influence individual wealthy people now have on the electoral process. Who the hell is Sheldon Adelson? The left's fury at the Citizens United decision of the Supreme Court is well warranted precisely because it enables this electoral distortion. Two thumbs up for the left on both issues although I don't trust them on the "income inequality" issue, at least where talk of a remedy is concerned.

Ok. Back to the very entertaining theater in the Middle East where we are waging war against the sovereign government of Syria with the help of money borrowed from China and Japan. Thanks God we don't have a moron like Putin as our president and that we've got the Republican majority in Congress watching our backs.

[1] "Deja Vu All Over Again." By Jim Quinn, The Burning Platform, 12/13/15.
[2] "Deja Vu: The Fed's Real "Policy Error" Was To Encourage Years of Speculation." By John P. Hussman, Ph.D., Hussman Funds, 12/14/15 (my paraphrasing).

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