Governments caused the credit crisis, but capitalism gets the blame

Telegraph ^ | 08/08/08 | Ambrose Evans-Pritchard

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Governments caused the credit crisis, but capitalism gets the blame

By Ambrose Evans-Pritchard

Last Updated: 5:42am BST 08/08/2008Page 1 of 3

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State error led banks to ignore the lessons of history and overdose on too-cheap money, writes Ambrose Evans-Pritchard

Three years ago, the world's top watchdog warned that the global economy was veering out of control. Defending orthodoxy against the easy debt policies of the Greenspan era, the Bank for International Settlements said interest rates were being held too low for safety in most of the mature economies.

Credit crisis: Swept away by a tide of debt

America had embarked on an unprecedented experiment. The US savings rate had fallen to near zero for the first time since the Slump. The current account deficit had reached levels that were incompatible with the dollar's role as the anchor of the global system.

The rising powers of Asia were preventing adjustment by holding down their currencies, and flooding the world with cheap credit in the process. Incipient bubbles were ubiquitous. "Most industrial countries are showing symptoms of over-heating in the housing market," it said.

More on the financial crisis More by Ambrose Evans-Pritchard New-fangled securities were allowing banks to take "highly leveraged positions". It was unclear how these untested inventions would "handle a string of credit blow-ups".

[TigerLikesRooster]

Ping!

[djsherin]

Unfortunately this happens a lot.
The free market caused the Depression!
The free market forced child labor!
The free market makes the rich richer and the poor poorer!
The free market caused the housing crisis!

Too bad none of these accusations hold much real substance. Too bad the government will use these accusations to increase government intervention, regulation, and taxation of the market place, the very thing that caused the problems in the first place.

[bruinbirdman]

If someone has been reading FR since 1998, they could have written this article. They would probably have made some prudent money management decisions during that time.

yitbos

[ex-Texan]

This graphic image pretty much says it all:

Click on the image to learn more enlightening information . . .

[djf]

It has zip - zero - nada to do with the “free market”.

It is because of fractional reserve banking and leverage based on interest rates.

[grey_whiskers]

One other oft-overlooked factor in this -- the government's insistence on banks not 'redlining', and the banks practice of "securitization" of the loans -- packaging the loans and selling the bundles as investments, so that the banks were not having to keep the loan on their books. Risk-aversion went out the window.

That, coupled with the greed of banks to find new markets, meant a lot of the problem is in the underclass -- and in the illegal immigrant market.

I read last week of a woman being approved for a loan for a $400,000 house with a $10/hour job.

You do the math.

Cheers!

[dennisw]

Sorry-— Plenty of crooked thieving capitalists are also to blame. Take Merrill Lynch for an example.

They enabled crappy mortgage writing by bundling them and offloading them to the Europeans. But they also kept some. They recently sold off $30 billion of them at 22 cents on the dollar

Lots of Merrill employees got rich doing the bundling and selling. Do really think these guys were stupid? Didn’t know what they were doing?

Fine.... And blame the Feds and governments too

[ex-Texan]

Fannie Mae Unveils Quarterly Loss of $2.3 Billion

Last year Fannie Mae posted a 'paper profit' of $ 1.7 Billion. Looks like they were cooking the books in addition to buying billions in tainted paper from Wall Street. Or, I may be wrong. Trillions in tainted paper may be closer to the truth.

Of course, this bankrupt enterprise hid the truth from Congress just long enough to get those yokels to vote in favor of a wholesale taxpayer bailout. The press releases claimed Congress was bailing out homeowners. Nothing could be further from the truth. Wall Street was being bailed out. 'Homeowners' were not in the equation at all. Corruption rules today in D.C.

Heads are going to roll, people . . .

[Old North State]

the government's insistence on banks not ‘redlining’...
My take is that you are exactly right, that is when this whole mess got started. Lenders were Mau-Mau’ed into making sub-prme loans to avoid disparate lending outcomes on minority communities regardless of individual credit histories. At first the race baiters and their allies in the government did this by threatening to block mergers, employ frivolous oversight and generally make life miserable for the lenders. The CRA, and allowing the Fannies to buy bundled sub-prime loans and CDO’s poured gas on the fire. The lenders hands aren't clean either, they jumped in with both feet as did the ‘private' Fannies, to boost short term income and get big bonuses. The worst offenders were Raines and the infamous J. Gorlick who was indirectly responsible for 9-11. The rest, as they say, is history.

[djsherin]

I’m not saying certain people in the market shouldn’t be blamed. But not the market itself by and large. The proper role of government IMO is to enforce the contracts made in/by the free market and to punish illegal activity within the same.

[djsherin]

I agree. The central bank also has its share of blame IMO.

[dennisw]

I’m not saying certain people in the market shouldn’t be blamed. But not the market itself by and large. The proper role of government IMO is to enforce the contracts made in/by the free market and to punish illegal activity within the same.

Our financial markets are regulated
If it were up to me they would be regulated in a way to keep loony upside speculation at bay. Such as in our energy markets

Yes the oil market is correcting downward and good for that
But how would you feel if Russia and Iran are jerking around our oil futures markets. Are you OK with that?

[dennisw]

the government's insistence on banks not ‘redlining’...
My take is that you are exactly right, that is when this whole mess got started. Lenders were Mau-Mau’ed into making sub-prme loans to avoid disparate lending outcomes on minority communities regardless of individual credit histories. At first the race baiters and their allies in the government did this by threatening to block mergers, employ frivolous oversight and generally make life miserable for the lenders. The CRA, and allowing the Fannies to buy bundled sub-prime loans and CDO’s poured gas on the fire. The lenders hands aren't clean either, they jumped in with both feet as did the ‘private' Fannies, to boost short term income and get big bonuses. The worst offenders were Raines and the infamous J. Gorlick who was indirectly responsible for 9-11. The rest, as they say, is history

You will only find it in one place --Steve Sailer's blog-
http://isteve.blogspot.com/2008/07/diversity-cover-story.html|
But the top mortgage meltdown counties are high Hispanic growth counties
From Nevada to California to Florida

[djsherin]

We shouldn’t have to rely on those countries for oil in the first place. I think the biggest problems with oil are supply (or the government preventing us from accessing such supplies) and the weakened dollar. But no, I don’t like the idea of Iran or Russia having influence over the prices.

[Mr. Jeeves]

Plenty of crooked thieving capitalists are also to blame. Take Merrill Lynch for an example.

Companies like Merill and Citigroup and Boeing aren't capitalist in any way - they are mercantilist, always looking for a government-conferred advantage. The idea of a genuine free market scares them to death.

Merrill actually only got 5 cents on the dollar for that garbage - they'll only get 22 cents only if the entity they sold them to is able to turn around and resell them for more.

[dennisw]

Plenty of crooked thieving capitalists are also to blame. Take Merrill Lynch for an example.

Companies like Merill and Citigroup and Boeing aren't capitalist in any way - they are mercantilist, always looking for a government-conferred advantage. The idea of a genuine free market scares them to death.

AKA-- Rent seeking. One tip off was all the Hillary supporters on Wall Street. Remember that? The days of big old bad guy ruthless Republicans captains of industry is long dead

Merrill actually only got 5 cents on the dollar for that garbage - they'll only get 22 cents only if the entity they sold them to is able to turn around and resell them for more.

Thanks much for that info. Show those CMOs they peddled were more toxic than I thought

There is demand side to mortgages. A push side
There is also a pull side

All those mortgage making companies like Country Wide could not make mortgages without the Merrill Lynches of America pulling, creating a demand for them. They vacuumed up those residential mortgages to bundle them and make billions doing so. Their only mistake was sampling their product (like a coke dealer) and keeping some of those CMOs for themselves

Some banks also were heavily involved in making reckless mortgages and sending them to the Wall Street bundlers

[dennisw]

We shouldn’t have to rely on those countries for oil in the first place. I think the biggest problems with oil are supply (or the government preventing us from accessing such supplies) and the weakened dollar. But no, I don’t like the idea of Iran or Russia having influence over the prices.

The Russians tried to corner the world palladium market a decade ago

Give me one good reason they would not be in the oil futures market on the long side?
The investment is small and the extra billions made from 130$ is colossal
Russia went to war yesterday against Georgia
They need oil money for their wars and their vastly increased military spending