Tuesday, July 27, 2010
Money or short-term credit???
Unfortunately, it is short-term credit which appears to have almost dried up in the financial markets of many countries; and the injections of money into the system are an attempt to oil the gears sufficiently so that somehow the markets for short-term credit get going again. Whether it works is a big question mark that everyone seems to know the answer to, but no one will admit.
Paul Krugman, the Nobel Peace winning economist, among others, has argued for a while that the crisis we are living is not a liquidity crisis, but one about lack of capital, and if that is right (and it is) the liquidity injections will not work. He has written essay after essay about the reasons the crisis has globalized so very rapidly. He concludes that the financial markets are a whole lot more global than we have thought, or at least more global in ways we did not prepare for. They allowed the exporting of the American crisis more rapidly and efficiently (I hope you are sensing my undeniable gift for sarcasm) than many economists expected.
And then there is the sad story of the Lehman Brothers' demise—the bust investment bank that triggered one of the biggest corporate debt defaults nearly two years ago in October of 2008. Prior to the hearing, Republican members of the Oversight Committee released a report in which they concluded that deregulation is not to blame for the current trouble in the financial system.
The report went on to discuss the net-capital rule, which is a regulation limiting the amount of debt that financial institutions are allowed to take on. In the report, House Republicans argued that there should be no such rule, because bankers will just find ways around it. “Banking regulations require financial institutions to limit their asset risk per unit of capital, but writing regulations that simply mandate an appropriate level is unlikely to work for very long because it is in the interest of bankers to find ways around these requirements in pursuit of profit,” one asshole stated.
Well, don’t you think it would have at least been worth a try?
The report, which I have perused but in my ignorance of economic morals (as they are aptly called) do not fully understand, completely fails to note that financial institutions carrying huge debt-to-capital ratios contributed to the recent meltdown. I’m not smart, but this is obvious. Bush (he’s not smart either) and his genius administration, through the auspices of the Securities and Exchange Commission, actively relaxed the debt-to-capital regulation.
In 2004, the Securities and Exchange Commission loosened the rule mandating that broker dealers limit their debt-to-net capital ratio to 12:1. The five investment banks that qualified for an alternative rule—Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley. Maybe you haven't noticed but you don’t see their commercials anymore do you? They were allowed to increase their debt-to-net capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40:1.
Investment banks lobbied for the rule change because it would unshackle billions of dollars held in reserve as a cushion against losses on their investments. However, when the mortgage bubble burst, the investment firms no longer had enough cash on hand to weather the storm.
Chairman of the Oversight Committee Representative Henry Waxman (or Ole Dirty Jew, as he’s known by right-wing extremist gang-bangers in the mean streets of L.A.), a democrat from California, said this lax regulation, “proved to be a temptation that the investment firms could not resist, but when asset values decline—as the market did—leverage rapidly consumes a company's capital and jeopardizes its survival.”
Waxman, in all seriousness, is a financial genius in many respects. He and many other sound-minded individuals understand that the SEC exemption was in large part responsible for the huge build up in financial leverage over the past 6 years, as well as the massive current unwind.
It's always interesting that the “law-and-order” Republicans are so very unwilling to approve any laws applied to the marketplace, and that they are able justify this by saying that those “clever swindlers” would just get around them. Reminds me a bit of how George Bush told us there's no point in trying to really tax the rich because they'll just run rings around the government and take their money abroad. As a conservative, it sickens me everyday to see what he did to this country and to think about how we just watched as he metaphorically stared into an aimless abyss when making key decisions about our future.
The financial markets fiasco happened because of improper oversight and regulatory rules. The housing market was paralleled to household income for nearly a century. At some point, around the mid 80’s, you put some recessed lighting in your family room and the asking price jumps 200k…what the fuck?! We did this to ourselves, but we didn’t know any better because we’re stupid. However, we are supposed to be stupid—that’s why we’re not the ones we rely on to make these kinds of decisions. You mean to tell me that a ten thousand dollar loan to upgrade an 80k house now makes it worth 220k—well shit, sign me up! The thing is—someone eventually had to pay for the inequality. But why would they let the forewarning economists make this available to everyone when all they had to do was hold their hands out and take part in the ridiculousness of it all themselves?
This country was founded on the idea of unity and democracy. It has unfortunately turned into a plethora of individuals and greed. Will it ever be fixed? No, not completely. But we can learn from our mistakes…
...somewhere along the line we seemed to have forgotten that.