Financial Catastrophe: Here We Go Again

I mentioned earlier that I thought that looking at production and distribution of income was crucial to understanding the financial crisis.  Of course, the financial side provided the tipping point.

Some thing similar happened a few decades ago with another war, a different Bush, and John McCain.  Many years ago, Lyndon Johnson, who would have just celebrated his hundredth birthday couple days ago, found himself stuck in a war he couldn’t win.  He also knew that if he raised taxes to pay for the war, the public would demand an immediate halt with an intensity that he could not resist.  Johnson relied on borrowing, which raised interest rates.

Savings and loan institutions, like the investment banks today, borrowed short and lent long.  In this case, people put their savings in the banks and the banks lent out money on 30 year mortgages.  To prevent gouging and make mortgages affordable, the Savings and Loans were prevented from paying interest rates high enough to keep depositors from exiting, which could make them bankrupt.

The Reagan administration, including daddy Bush, moved to deregulate the Savings and Loans.  Given this newfound freedom, crooks and nincompoops (including President Bush’s younger brother) rushed in to take advantage of profiting from other people’s money.  As the scope of this disaster was becoming obvious, five senators, including John McCain along with Alan Greenspan (perhaps the Godfather of the recent financial crisis), rushed in to defend one of the more egregious Savings and Loan operations run by Charles Keating.  Oh, yes, a small savings-and-loan in Arkansas, which was connected with Bill Clinton (who allowed Congress to deregulate the current financial system, led by Senator Phil Gramm, John McCain’s chief economic adviser) also ran into difficulties.

The savings-and-loan scam crashed leaving the government to pick up the pieces at a cost that is still debated, but which was still well over $100 billion — pocket change today.

The difference today is that our  politicians will really do excellent regulation this time, just as they did with Sarbanes-Oxley in the wake of Enron.


6 comments so far

  1. Chris Baehrend on

    Every thinking person by now is chocking on the irony of republican “free-marketeers” doling out massive increases to the already bloated corporate welfare system. I have three questions.

    1) This debt must be eaten by someone, why not the rich people who ran it up? In other words, what is the risk (to ordinary Americans) of letting these huge corporations fail?

    2) If these companies really are “too big to fail,” (regarding the interests of working citizens) why not break them up, allowing just the bad bond divisions to fail?

    3) What kind of regulations are necessary to prevent this from happening again? Repeal of the Gramm-Leach-Bliley Act? A national usury law (can the federal government do that)?

  2. mperelman on

    Gee, do you think class might have something to do with this?

  3. Chris Baehrend on

    Absolutely I do! But I’m desperate to hear from a fellow Marxist (one with the pluck to read Kapital) that I might be paranoid. Bush has already given failing businesses $600 billion in his last year… and now he hands these crony scumbags another $700 billion at a go!?!?!?

    The class war has gone nuclear.

  4. mperelman on

    I guess that I would not be sad to see the whole thing fall apart, if it meant that we could put something rational together. The system might well be so fragile that it would fail without this help.

    One thing I would have done BEFORE giving anything out to the bastards would be to say that the government is going to get the funds back and more by taxing the beneficiaries.

  5. Travis Fast on

    I have a proposal. Buy toxic sub-prime at 40 cents on the dollar. Disaggregate and re-sell to home owner at 50 cents on the dollar thereby ensuring the tax payers a minimum real 5% return on 2 trillion and the bottom third of the mortgage market mortgage on a house for half the originally bloated asking price. That puts a floor in valuations and makes sure that the losses are suffered by those who took “the risks.”

  6. Mark Hansen on

    if capitalism works, then the government should let the market deal with the problem.
    if it doesn’t, then this is as good a time as any to find that out.

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