Banking Crisis

[woodchip]

When you all listen to Obama jump on Bush for the present banking crisis I refer you to the Glass-Steagall Act. You that are part of the great unwashed and uninformed masses may wonder what the Glass-Steagall Act has to do with the present day crisis. So here is a brief description:

\"In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the time, \"improper banking activity\", or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash.\"

Something sound familiar here? Yes there is:

\"Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.\"

So today the speculative investments revolve around housing loans to unqualified borrowers initiated at the behest of democrats who believed that everyone was entitled to owning a home irrespective of being able to \"Afford\" a house.

Now you may wonder at how todays banks and investment companys got around the Glass-Steagall Act. Well it is quite simple actually:

\"Consequently, to the delight of many in the banking industry (not everyone, however, was happy), in November of 1999 Congress repealed the GSA with the establishment of the Gramm-Leach-Bliley Act, which eliminated the GSA restrictions against affiliations between commercial and investment banks.\"

So in short, the act was repealed and banking was put back to kinda where it was when it created the Great Depression. And of course you won't hear Bill Clintons name mentioned as signing the repealed act into law because if you did, then George Bush couldn't be blamed for todays mess.

http://www.investopedia.com/articles/03/071603.asp

[Krom]

Doesn't change the fact that in the almost 9 years since that happened, nobody thought to revisit the idea.

[Gooberman]

And of course you won't hear Bill Clintons name mentioned as signing the repealed act into law because if you did, then George Bush couldn't be blamed for todays mess.

Lets assume everything you wrote is reality:

If the captain of a ship steers his boat towards an ice berg, and then a new captain takes charge and 8 years later it actually runs into that ice berg....

Who is to blame for the mess?

[Spidey]

The Iceberg!

[Beowulf]

In this case it boils down to American greed.

People want to buy it now and to hell with the future consequences. It has nothing to do with Democrats or Republicans for that matter. It has to do with banks trying to make money and people trying to buy things they can't afford.

It also has to do with the previously held assumption that real estate prices generally always go up. We have now learned that isn't necessarily true - especially when people keep pulling lines of equity from their houses until they're upside down on a mortgage...see current crisis.

going back to our discussion about personal responsibility - THERE IS NONE in this country and that is the cause of all of our problems.

[QuestionableChaos]

In this case it boils down to American greed.

People want to buy it now and to hell with the future consequences. It has nothing to do with Democrats or Republicans for that matter. It has to do with banks trying to make money and people trying to buy things they can't afford.

It also has to do with the previously held assumption that real estate prices generally always go up. We have now learned that isn't necessarily true - especially when people keep pulling lines of equity from their houses until they're upside down on a mortgage...see current crisis.

going back to our discussion about personal responsibility - THERE IS NONE in this country and that is the cause of all of our problems.

X2

[Jeff250]

Gramm, Leach, and Bliley of the Gramm-Leach-Bliley Act are all Republicans. The Gramm-Leach-Bliley Act was passed along party lines due to a Republican-controlled Senate. It's petty at this point to try to blame Clinton for signing it.

[Sirius]

Also, trying to put your finger on just one governmental action isn't particularly honest. You could also say it's the current government's fault for not giving the lower classes tax relief so they actually could afford those houses.

There are many things that could have been done in the last decade, but I guess nobody was really paying attention.

[Lothar]

Gramm, Leach, and Bliley of the Gramm-Leach-Bliley Act are all Republicans. The Gramm-Leach-Bliley Act was passed along party lines due to a Republican-controlled Senate. It's petty at this point to try to blame Clinton for signing it.

It also passed IIRC 90-8. Hard to blame anyone there...

I was just pointed to something interesting, though:
S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005

Sponsors: Chuck Hagel (R-NE), Elizabeth Dole (R-NC), John McCain (R-AZ), John Sununu (R-NH)

Summary
http://www.govtrack.us/congress/bill.xp ... ab=summary

Full text
http://www.govtrack.us/congress/billtex ... l=s109-190

Haven't had time to read it all, but at first glance it looks like an attempt to bring some much-needed oversight into the home loan lending business -- the exact business that's now sinking banks and the rest of the economy.

[Jeff250]

It also passed IIRC 90-8. Hard to blame anyone there...

No, the act passed 54-44, yays all Republicans, nays all Democrats, with one exception. But the Democrats are to blame for passing it, not the Republicans, of course, since Clinton didn't exercise veto power...

[Lothar]

It also passed IIRC 90-8. Hard to blame anyone there...

No, the act passed 54-44, yays all Republicans, nays all Democrats, with one exception. But the Democrats are to blame for passing it, not the Republicans, of course, since Clinton didn't exercise veto power...

No, the bill passed 90-8. Quoth James Taranto,

The way the process works is that before voting on a bill, each chamber debates it separately, considering and voting on amendments (changes) introduced by members. The result in many cases is that by the time the House and Senate each vote on a bill, it become two different bills: one that passed the House and one that passed the Senate. Since each bill has passed only one chamber of Congress, neither one can become a law.

Enter the conference committee. This is a group of representatives and senators who meet to hash out the differences between the House and Senate bills. They produce a compromise: a bill on which both houses vote, so that it can become a law. The bill that actually becomes a law is known as a "conference report."

This is what happened with Gramm-Leach-Bliley. The Senate-only version of the bill did pass on May 6, 1999 by a near-party-line vote of 54-44. The House-only version passed, 343-86, on July 1. Neither of these bills, however, became a law. The bill that did become a law--the law about which Sen. Reid and others are complaining now--was the conference report, the bill the Senate approved by 90-8 on Nov. 4. The House passed it the same day, 362-57.

[Dedman]

It also has to do with the previously held assumption that real estate prices generally always go up. We have learned AGAIN that isn't necessarily true - especially when people keep pulling lines of equity from their houses until they're upside down on a mortgage...see current crisis.

There, I fixed it for you.

[Jeff250]

...

Fair enough.

[Gekko71]

Some foreign commentators are painting a very bleak picture for the future based upon this mess.

One example: http://money.ninemsn.com.au/article.aspx?id=632789

Personally I this guy's view is pretty extreme. Quote:

\"Two very powerful factors make this crisis different from the others. The US is broke – it has fiscal and current account deficits each running at greater than the size of the Australian economy. Second, economies that were emerging in the 1990s, have arrived now. China, Russia, India and Brazil, the so-called BRIC economies, are ready and willing to fill the void being left by the declining US.

As these nations exploit the US weakness to increase their own economic and miltitary power it is inevitable that the world will become more volatile and uncertain for decades to come. None of these countries will have the capacity to be a supreme military and economic power as the US was until very recently.

China, India and Russia in particular are suspicious of each other and conflict between them is entirely possible. They are all far more powerful economically, and even militarily, than they were even 10 years ago – and that includes the old Soviet Union.\"

End-Quote.

I'm curious to know - are financial / political commentators in the US making the same kind of noises, or is this guy as misguided as I believe he is?

[Cuda68]

In this case it boils down to American greed.

People want to buy it now and to hell with the future consequences. It has nothing to do with Democrats or Republicans for that matter. It has to do with banks trying to make money and people trying to buy things they can't afford.

It also has to do with the previously held assumption that real estate prices generally always go up. We have now learned that isn't necessarily true - especially when people keep pulling lines of equity from their houses until they're upside down on a mortgage...see current crisis.

going back to our discussion about personal responsibility - THERE IS NONE in this country and that is the cause of all of our problems.

X2

Very True

[Gooberman]

China is definitely a Ball'er. They are funding a significant amount of Bush's war.

[woodchip]

They are funding a significant amount of Bush's war.

Gee, and there I thought congress voted for it. Silly me.

[Dakatsu]

They are funding a significant amount of Bush's war.

Gee, and there I thought congress voted for it. Silly me.

Funding it, as they fund the US Government.

I am no expert on the economy. If there is one class I fail at, it would be that, but the problem is that we have a large defecit. Now moan about wether it was the Democrats or Republicans, but despite who caused it, that is one of the main problems we face. Currently, both major candidates have no plan to deal with this. We sadly need a tax increase to pay off our debt, but yet the American people need that money to survive. We could cut government spending, but we would have to cut a lot more than "wasteful spending" to fix this. We are down in a hole, and we really don't have many options.

I think the best thing to do is to tax the people who have benefited from capitalism (the rich) so we get a net income, and end the war so we can lower our spending on military matters. Anyone else have an idea on how we could fix this (and don't just say McCain's or Obama's plans, tell me how they would fix the deficit).

[ccb056]

The problem with that logic is increasing taxes decreases government revenues.

If we want the governemnt to get more money, we need to decrease taxes across the board.

[Sergeant Thorne]

Well first it's essential to realize that our national debt is not the problem, it is the symptom. And we should be suspicious of anyone acting like it is. The problem is the deficit (as you seem to be saying). Wanting to solve a deficit by raising taxes (increasing budget) is a sign of laziness in any management.

Our country is in a financial crisis, and because of that I believe at least these three things need to be done:

1) We need legislation that will effectively stop the exportation of jobs. Our government is losing taxes on all of the jobs we allow to go overseas. It would be greatly in our national interest to keep them here, even if that meant significantly lowering taxes associated with business. Jobs would then be created by that business, and from that extra source of income tax revenue would be increased.

2) We need to accept nothing less than the absolute stabilization/re-valuing of our dollar--we need to let that guide reasonable and effective policy changes and implementations (which would probably include dumping the FED).

3) We need to stop trying to be optimistic, declare a state of crisis, and cut all superfluous spending--work together to tighten our [governmental] belts, nationally--until we've solved the issues and are in the clear (but not necessarily until we're out of debt).

Finally, if I were President, people would be going to jail for certain aspects of all of this. I would appoint a large committee, made up of trusted and un-invested people, with full public transparency (possibly only on finalized cases) to do it.

[Testiculese]

If I were president, I'd be running around with a noose and a shotgun on these viciously greedy criminals!

[Dakatsu]

The problem with that logic is increasing taxes decreases government revenues.

If we want the governemnt to get more money, we need to decrease taxes across the board.

Like I said, I lack expertise on economic issues, but how would lowering taxes increase revenue, and raising them decrease revenue? Wouldn't more money collected from people mean more revenue, and less money collected from people less revenue?

[Spidey]

I sympathize with you Dak, you are using normal logic when thinking about this issue, the problem is normal logic doesn’t apply here.

[Dakatsu]

I sympathize with you Dak, you are using normal logic when thinking about this issue, the problem is normal logic doesn’t apply here.

Oh, I assume you mean indirectly, like the effects of raising or lowering taxes on working people and industries, not in a direct sense of the government seizing more money from taxpayers. If that is the case, then I got it

[Dedman]

If I were president, I'd be running around with a noose and a shotgun on these viciously greedy criminals!

Does that include all of the people who borrowed money they knew they couldn't pay back?

[Lothar]

how would lowering taxes increase revenue, and raising them decrease revenue? Wouldn't more money collected from people mean more revenue, and less money collected from people less revenue? :?

Simple thought experiment:

If the government has a tax rate of 0%, what's the tax revenue? Zero, obviously.

If the government has a tax rate of 100% and pays out no benefits, what's their tax revenue? After a short time, it becomes zero, because there's no money left circulating in the economy (and people who have resources left put them to work in ways that aren't taxed.) A hundred percent of nothing is nothing.

Tax revenues increase as you raise taxes, to a certain level. Once the tax rate passes a certain level, the higher taxes actually drain the economy so badly that tax revenues start to drop. Several times in history, tax cuts have increased federal revenues (see here for a 1920s example.) Now, I don't think "high tax revenues" is the ultimate goal... but setting taxes at an appropriate, low level to generate adequate tax revenues (for an appropriately-sized government) and encourage growth is a good thing.

[Ford Prefect]

Didn't you guys do all this with Reganomics? With the result being a tripling of the national debt? (Figure debated if ratio to GDP used)
http://en.wikipedia.org/wiki/Reaganomics

1) We need legislation that will effectively stop the exportation of jobs. Our government is losing taxes on all of the jobs we allow to go overseas. It would be greatly in our national interest to keep them here, even if that meant significantly lowering taxes associated with business. Jobs would then be created by that business, and from that extra source of income tax revenue would be increased.

2) We need to accept nothing less than the absolute stabilization/re-valuing of our dollar--we need to let that guide reasonable and effective policy changes and implementations (which would probably include dumping the FED).

Those two aims are extremely difficult to achieve in conjunction. If you work to isolate your economy from the world you reduce demand for your currency so you must make your domestic production a valuable export. Since commodity costs are the same everywhere labour costs are the major source of savings in producing goods. Therefore the way to reduce the cost of your goods to make them attractive to other nations so that your dollar becomes in demand is to reduce your labour cost. That means your factory workers have to have wage packages that are competitive with Bolivian yam farmers who only work in the dry season to buy seed yams. I hope you figure out how to get the average American voter to settle for that standard of living. Let me know how it works out.

[Spidey]

Dude, the reason the debt tripled under Reagan as you say is, as I have stated before…Reagan wanted 3 things…

1. To raise the funding for the military.
2. To lower taxes.
3. To cut domestic spending.

Well, Congress only gave Reagan 2 of the 3...and that’s why it didn’t work as planned. (guess which 2?)

[Ford Prefect]

And he ate babies.

[Ford Prefect]

Oh and for 8 years he kept banging away on a budget that didn't balance, kept increasing the military budget, kept cutting taxes for that trickle down effect and kept running up the debt... but it was all the fault of those damn Democrats. I can see it clearly.

[Spidey]

Errrr…I said it was the fault of Congress.

For a pretty fart smella, you don’t seem to get the subtleties of American politics. And that’s ok, because I would never pretend to understand Canada’s either

[Ford Prefect]

However, after the Democratic Party again won back control in the elections of 1954, it was the majority party in both houses of Congress for most of the next 40 years; the Republicans were only able to win control of the Senate for a six-year period (1981–87).

http://en.wikipedia.org/wiki/United_States_Congress
Okay so \"congress\" is not always shorthand for \"Democrats\" Particularly in this case where Reagan was President from 1981 to 1989 and so had a friendly Senate for most of his tenure.
The biggest problem with my understanding of the U.S. political system is that it came from reading this book.
http://en.wikipedia.org/wiki/Fear_and_L ... rail_%2772
But if you can't trust Hunter S. Thompson to give you the straight goods then what is this world coming to?

[Tunnelcat]

Two coincidental quotes that might scare you about McCain's position on the economy.

Quote from President Herbert Hoover just before the Depression:

\"...the fundamental business of the country - that is, the production and distribution of goods and services - is on a sound and prosperous basis.\"

Recent quote from McCain on the campaign stump:

\"The fundamentals of this economy are strong.\"

I hope that this isn't a harbinger of things to come.

Remember the Keating Five?

http://tinyurl.com/8nyvf Keating Five

Four of those involved were Democrats, so it shows that corruption and greed doesn't follow party lines, but Reagan WAS President during this one and he was great fan of 'small government' and 'less regulation' of the free market. The Gramm-Leach-Bliley Act in 2000 was the icing on the cake and would have been Reagan's dream, but it had to wait for that idiot of a lame duck Democratic President Bill Clinton to make the Republican wet dream come true. No more FDR impediments to the free market.

Although McCain was not charged with anything, he was admonished for \"poor judgment\" in the whole affair that brought down the bulk of Savings and Loans institutions. What about his judgment now concerning the new banking crisis? How can he say that he will bring in new regulation when he was against regulation in the past? Can you say flip-flop? How can he say that he will kick out the lobbyists in Washington when he has them on his own campaign payroll? Talk about conflict of interest here.

The taxpayers of the U.S. have become victims of the 'Moral Hazard' that resulted from UNREGULATED AND NONTRANSPARENT derivative finance schemes in the Stock Market and Mortgage Banking. I first heard the term on CNBC and it sure describes what's happened with our economy. It's like gambling with someone else's money, you get all the gain with no risk of loss. The rich get richer on the taxpayer's backs with the government bailing out all these greedy idiots! But the consequences if they HADN'T done it might have been worse for all of us in the form of a major depression, although that is STILL a possibility. The taxpayers have been seriously effed between a rock and a hard place. And now the banks and the stock market are in bed together after these new mergers! Eeeeeeeeeeeeeeek!

http://tinyurl.com/ngvq2 Moral Hazard

http://tinyurl.com/ykt7q5 Derivative Finance

Every person in the U.S. now has responsibility for $7000 dollars of national dept after the years of Bush war spending and now the bailouts so far. Will inflation be our next economic disaster? Neither presidential candidate has addressed this one.

[Spidey]

It’s ironic but, the other night on the News Hour they pointed out that the lightly regulated hedge funds are doing ok, the highly regulated investment banks are taking a hit and the most regulated Fannie & Freddie are doing the worst.

Just thought I’d throw that out there.

[Will Robinson]

I don't think Obama wants to really go down the road of who's connected to the failed institutions because his own glass house is far from stone proof.
He's been in the congress for around one twentieth the time McCain has yet he's received that many times more the contributions from those failed institutions as McCain has...he also had at least one of the top executives from Fannie Mae running his campaign so the pot is calling the kettle black....Oh Dear!!! According to Obama and Newsweek I just made a racist comment didn't I?!?

/note to self...stop talking about anything or anyone black if the sentence also criticizes Obama


Also, McCain warned of the screwed up lending situation a few years back when he helped introduce a bill to help deal with it, his warning to the other members of congress at the time sounds a bit prescient now after seeing what's gone on since then.
I expect he'll find a way to point this out in the debate, look for Obama to dance around those details if McCain does and in stead speak in generalities changing the subject to familiar demotalking points like 'repubs=bad demos=good' blah blah blah....

[Sergeant Thorne]

I don't think Obama wants to really go down the road of who's connected to the failed institutions because his own glass house is far from stone proof.

When I think about that, forget everything else I have against Obama, that would rule out a position of authority for him, in my opinion, just on principle.

[Gekko71]

The taxpayers of the U.S. have become victims of the 'Moral Hazard' that resulted from UNREGULATED AND NONTRANSPARENT derivative finance schemes in the Stock Market and Mortgage Banking.

Not just US taxpayers Tunnelcat. Australian retail banks (just one example) had exposure to this mess totalling hundreds of millions of US dollars. Many Australian local government councils bought CDOs from American investment banks and The US Fed's rescue package won't extend to Australian losses.

There's a saying / truism in my country - whenever the US markets sneeze, the Australian markets catch a cold. Recent increases in trade with China will insulate Aust. to some extent - but there's still a lot of pain to go round yet.

This isn't just an American problem anymore folks - it's global. The UK for example has a higher proportion of financial services employees than any other country worldwide - and their hitting the streets, cardboard boxes in hand right now. (The ongoing viability of 'The Coalition of the Willing' is looking particularly grim).

And if I had to guess, I'd say that US car makers will be the next to go. Don't many Americans lease their cars as opposed to buying them outright? What happens when those who can't afford to run & lease their SUVs start handing the keys back en masse? Wouldn't the default insurance on these car leases be undermined / worthless via AIG's current woes?

We appear to be living in interesting times...

[TheCope]

I actually work in the financial industry but not in a number cruncher capacity. Office ★■◆● by trade. In Minnesota there is a 6% increase in financial services hiring from last year.

I find all of this \"crisis\" to be quite hilarious as it throws a mirror in your face. If you can't pay for it with the resources you have, don't buy it. It's so damn simple. Why are people crying?

I know you all want to play your John Cougar Melloncamp songs and cry about the man but who really did this? If you work at McDonalds for $8 bux an hour why are you taking a loan you will never afford?

Over extending yourself is your problem. The nut you got with the trailer park ho that became a baby is your problem. Why does it even enter your mind that its someone elses?

It just seems so simple.

[Gekko71]

I actually work in the financial industry but not in a number cruncher capacity. Office ***** by trade. In Minnesota there is a 6% increase in financial services hiring from last year.

I find all of this "crisis" to be quite hilarious as it throws a mirror in your face. If you can't pay for it with the resources you have, don't buy it. It's so damn simple. Why are people crying?

I know you all want to play your John Cougar Melloncamp songs and cry about the man but who really did this? If you work at McDonalds for $8 bux an hour why are you taking a loan you will never afford?

Over extending yourself is your problem. The nut you got with the trailer park ho that became a baby is your problem. Why does it even enter your mind that its someone elses?

It just seems so simple.

What appalling ignorance. No offense TheCope, but in case you haven't noticed, this banking crisis has affected legitimate investors and regular people who DO live within their means - not just the greedy, the selfish and the unrealistic individuals who over-extended themselves in search of a better standard of living.


Who really did this you ask? Let's see: Firstly there were the people who over-extended their finances and applied for loans they could barely cover. Then there were the opportunistic lenders who took advantage of the financially naieve. Then there was the Management of those lenders who repackaged bad debts with good debts and sold the whole lot wholesale. Then there were the financial advisers who told their clients that these CDOs were a good buy. Then there were the legislators who made all these and other appalling financial practises legal (that includs short selling - another morally-questionable money making tactic which has been illegal in Australia and other financial markets for years) Shall I go on?

If you examine events carefully (something that - with respect - I don't think you've done yet) you'll see that this is an ongoing, international SYSTEMIC failure of the banking and finance sectors, not just a case of "McDonald workers" taking out a few bad loans.

That's the same banking and financial sector that (according to you) writes your paycheque - The same sector that has merely STARTED to rattle the skeletons in its closets. No disrespect but if I were you and working in the finance sector right now, I would be highly concerned about the subject - not merely flippant and glib.


EDIT: I must correct myself here - short selling is NOT illegal in Australia currently (even though I thought it was, and still think it should be). It HAS however recently been banned by the ASX for a period of 30 days ...and our market shot up a record 8% over two days afterwards (whether that's short sellers consolidating their positions proior to the ban, or the return of genuine investors that were put-off by short sellers preference for certain stocks remains to be seen).

[TheCope]

Watch it all just go away.