Posted on 09/25/2009 7:45:01 AM PDT by WayneLusvardi
In the current Pasadena Star News editorial “The Trouble with Indy-Mac” the editors seem certain they know why Pasadena-based Indy-Mac bank fell in July 2008. Link here: http://www.pasadenastarnews.com/ci_13413518
And the story the editors tell probably fits pretty well with what the person in the street believes, which, of course, they mainly get from newspapers and broadcast media. Newspapers always seem to gravitate to telling people what they want to hear. And the public, hearing only secular explanations of the financial crisis in the mainstream media, tend to embrace that paradigm. Round and round it goes, but nobody seems to really know including the media elites.
The conventional media explanation goes something like this: the banks that failed, like Indy-Mac, were run by greedy and reckless opportunists who exploited borrowers regardless of their ability to pay. And bank regulators, not wanting a bank failure before a national election, kept kicking the can down the road instead of confronting the precariousness of bank loan portfolios and paradoxically insecure “securitized” loans.
Interestingly, both the media’s and the man-in-the street’s understanding of the financial meltdown would resonate with the views of Karl Marx. Ersatz Marxism, not capitalism or the Protestant work ethic, seems to be the prevailing worldview of many Americans with respect to the financial crisis.
As the editor of the Pasadena Star News puts it
It's amazing how little proof was required of borrowers' ability to pay. Loan officers' income - not to mention the bonuses of their corporate bosses - were going through the roof. They had no incentive not to continue to play the scam forward.Pasadena-based IndyMac Bank was at the awful center of this confidence trick. When everything finally came tumbling down, its ordinary depositors were the victims.
But greed, recklessness, and ineffective regulatory oversight are a constant and are always with us just as is poverty. Why would the entire financial system fall and not just the corrupt banks? The media and laymen’s conventional explanation of why Indy-Mac Bank fell seems only to explain the symptoms and not the cause of something much larger. And what might that be?
The reason that banks and savings and loans frenetically all shifted to pushing risky loans was that there were, and still are, not enough young people demographically to suck up the retirement savings of older people with home, consumer and commercial loans. Where there is an oversupply of savings relative to demand, return on investment has to fall. In about 2005, the return on prime assets fell below the cost of funding (Libor rate) forcing banks to rapidly shift to sub-prime and Alternate-A loans and “force-placing” unqualified borrowers into risky loans.
Indy-Mac Bank was full of Alternate-A loans, which are not as risky as Sub-Prime loans or as secure as Prime loans. And most of the Alternate-A type loans had adjustable rates and interest-only provisions that made them explodable in the future. Indy-Mac Bank fell when they could no longer find buyers for their huge portfolio of Alternate-A loans poised to default when it was anticipated that interest rates would ratchet upward and balloon loans would come due.
The origin of the banking crisis was, and still is, demographic and cultural: too many older people, too few intact young family households that are economically productive, and too many economically dependent single-parent households. The failure of Indy-Mac, and other banks, was not necessarily due to systemic banking or regulatory failure or corrupt banking officials as much as cultural failure. And this cultural failure will loom larger when not only more of the Baby Boomers retire but when the wave of recent out-of-wedlock births requiring welfare converge.
This is why none of the CEO's of Indy-Mac, Fannie Mae, Freddie-Mac, Goldman Sachs, Bear Stearns, or Lehman Brothers are going to jail. They were only doing the politicians dirty work. And they demanded obscene compensation to sell their souls and reputations.
The Community Reinvestment Act (CRA) and ACORN contributed but were not the main cause of the collapse either. The loan pool had to expand if the excess savings of retirees were to generate an acceptable return. So low income borrowers and immigrants had to be added to the pool by politicians. This is one reason why politicians won't touch immigration.
The bankers, taking their cues from the politicians, had to create new types of loans and expand the loan pool rapidly to keep the financial system afloat and the political system stable. The politicians let the bankers roll the dice hoping that they could bail out the system from default with some sort of capitalistic magic. This effort failed and the U.S. Treasury Secretary and Fed Chairman pulled the plug right before the national election in 2008 to force a bailout of the banking system and a political sea-change which the banks could control from the politicians.
Economists failed to predict the systemic bank collapse because the origin of the crisis was not merely economic: it was and is, cultural and demographic.
The collapse looks more Machiavellian and Medici-like than Marxist except to the cognitive elites in the mainstream media. The media's need for scapegoats, the self-righteous view of the public as victims and the mass mimicry of the media and banks reads like a case study by anthropologist Rene Girard.
Today the banks won't tell depositors that they are earning a net negative return on their bank accounts. Financial markets are still out of whack. Government, whether national or local, is trying to raise taxes and redistribute income and wealth in a vain effort to fix a cultural problem. Mandatory taxation of health insurance will only result in even less money for young people to take out mortgages and consumer loans to pay for retiree investments.(Actually, letting young people opt out of health insurance, as they mostly do now, would tend to balance the problem if it were not for the numerical demographic imbalance).
Investors run to gold, to bonds, and to commodities but as they do everything turns into another bubble. Pop Marxism continues as the paradigm of media choice to explain all this. It sells newspapers and TV news. And the public apparently buys it. This is the price we pay for misunderstanding the origins of our financial crisis from newspaper and television media.
This guys argument is something like a company that has too many washing machines to sell gives them away for $5 each. No one would do that unless powerful incentives were in place.
The theory that our financial crisis has at its root cause a demographic imbalance comes from David P. Goldman, who held
senior research positions at Bear Stearns, Credit Suisse and Bank of America. At Bank of America he ran a highly rated fixed income research department between 2002 to 2005, with 120 professionals and mid-nine-figure compensation budget. David P. Goldman now blogs at Inner Workings and at First Things under the name “Spengler.”
As far as this crisis being rooted in the baby boomer demographic - I agree. There would have been a crisis even without the stupid self serving changes make to banking rules and regulations. But would the economic system have come this close to collapse with ONLY the boomer demographic? I think NOT...
Next time, WayneLusvardi, I'll be more careful and thoughtful with my comment - because you are right ( if I'm reading between the lines properly ) I was flippant - and my comment wasn't as well thought out as it could have been. The man is worthy of a better read than I gave him.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.