Greenspan to blame in banking crisis

greenspan chart 2000s

greenspan as a lizard

“Greenspan, as the macro economic parent of the US Fed’s basic approach, is the most easily visible part of the history. He’s not the sole agent, however, of a culture which was basically raised to steal and misrepresent assets” — Paul Wallis

This is all so ridiculous! Most of these people grilling Greenspan don’t even understand why the subprime meltdown occurred. As per usual the blame is placed on a “lack of regulation” which is tackling the problem in a completely backward way.

First of all, why is it that people needed as much leverage as they did to purchase homes. Could it be because home prices were too high to begin with? If so, why? It is because government subsidized the mortgage lenders which mitigated the risk usually inherent in risky lending practices, and the lenders felt empowered to grant mortgages to anyone, and everyone including many, many people who had no means of paying the lender(s) back.

greenspan chart 2000s

Do you think that the Federal Reserve encouraged people to get leveraged-up and spend money they didn’t have by artificially suppressing rates? Bingo! Do you think if the market had been allowed to function on its own, via simple supply and demand, that such bubbles would have inflated to be so large? Absolutely not.

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” A string of powerbrokers, financial celebrities, self proclaimed geniuses, and other debris has collectively produced a virtual handbook on evasion of responsibility. Alan Greenspan, the mastermind of the past, has now come under fire as ducking responsibility for his own part in the fiascoes that nearly crippled America.

There’s a cultural history here that needs to be understood. The Great Financial Cretinism is systemic. The policies and culture that created the mega train wreck are based on the financial equivalent of Manifest Destiny. The banks weren’t the only things that thought they were too big to fail. The “elites” thought they were above and beyond everyone and everything.

These were the “Masters of the Universe”, the “Conspicuous Consumers”, a collection of “smart” people. They didn’t do economics. They didn’t do basic accountancy, in some cases. This was Big Business, a self infatuated ethos with a penchant for paying itself large amounts for anything and everything. ” Source digital journal

Indeed, this whole witch-hunt looking to pin the failures of bureaucrats on a “lack of regulation” on lenders is a red herring that only serves to further fleece an otherwise ignorant public, and it’s working as evidenced by most people not having a clue — legislators included!

There were lots of economists preaching this would happen. Brooksley Born confronted Congress, the President, and Greenspan himself about the derivatives market — the only regulator to do so. Also , the man they mocked as “Dr. Doom”, Nouriel Roubini, was in fact spot on about everything. Ron Paul, a GOP Congressman, predicted it over 5 years ago. Marc Faber, Jim Rogers, Med Yones, Peter Schiff, Nassim Nicholas Taleb, Antal E. Fekete, and Darryl Schoon all predicted it accurately in both length and severity, and every single one of them was mocked heavily by CNBC or by Fox News Business. The funny thing is, most of them are predicting a much worse depression soon enough, along with most of them predicting bankruptcy for the USA, and nobody is listening, or even calling them crazy again

What’s the Canadian situation?

There was an Order in Council granted for CMHC at the beginning of this crisis which extended the CMHC coverage to include all those potential toxic mortgage assets. This was in fact the mother of all subsidies in Canadian history. The extent and therefore impact of those toxic assets is still unknown, but considered very low in comparison to the US. Thanks in large part to stronger government regulations.

It did however allow our Banks to free up staggering reserves that would otherwise have to be held to cover their obligations to those assets under Canadian regulations. The intent was to move those funds held in reserve into liquidity markets, however the banks did no such thing and simply invested it in the markets and particularly in the stocks of US banks backed by the US government. That is how they produced near record profits during the worst recession in history, all thanks to a taxpayer subsidy through CMHC.

Interestingly, in 1986, CMHC introduced Mortgaged Backed Securities and therein became the Canadian equivalent of Fanny Mae and Freddie Mac. Ultimately you need to remember that CMHC is taxpayer backed and the business model only works during normal economic times. CMHC has a huge contingency fund on paper only.

The CMHC bought $75 billion in toxic assets from the banks to inject liquidity into the credit markets based on a Government of Canada bond issuance (http://www.fin.gc.ca/n08/08-090-eng.asp) as shown in the 2009 Federal Budget (Table 4.7 Budgetary Balance, Non-Budgetary Transactions and Financial Source/Requirement (http://www.budget.gc.ca/2009/pdf/budget-planbugetaire-eng.pdf). The premise was that no debt would be incurred because it was backed by the assets, but how is that possible when the banks offloaded nothing but their worst paper?

From an accounting standpoint, the government of canada (read: CPC) saw no difference between delinquent mortgages and stable ones and did not concern themselves with analysis of the paper. From the bank’s viewpoint, this was a prime opportunity to dump troublesome paper they had incurred with (the short romance of) 35-40 year mortgages and other mortgages with high delinquency status.

The bond had a less than 1% (approximately 0.38%) 1-year maturity and less than 3% (2.83%) on 5-year maturity bonds, so no one bought them and now the GoC is stuck with that bad paper, too, having had to buy a good portion themselves to “raise” the cash. It’s sitting in limbo, a ticking time bomb, not on the books as debt but will factor in a big way if the US markets collapse again as has been predicted by many US economists.

One thought on “Greenspan to blame in banking crisis”

  1. Peter:

    Love your stuff. Pass my good wishes on to your dad when you next see him. I’m the fellow in Chicago who got him on radio WMAQ twice back in the “old days.”

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