Monday 21 December 2015

The true story of the financial crisis

This caught my attention today in the International New York Times (Paul Krugman, Sat-Sun, 19-20 December 2015, p. 7): "The true story of the financial crisis is deeply inconvenient to some very rich and powerful people."

The details: in May 2009, the US Congress created a commission to examine the causes of the financial crisis. The idea was to emulate the Pecora Commission of the 1930s, "which used careful historical analysis to help craft regulations that gave America two generations of financial stability."
But some members of the new commission had a different goal. George Santayana famously remarked that 'those who cannot remember the past are condemned to repeat it.' What he didn't point out was that some people want to repeat the past - and that such people have an interest in making sure that we don't remember what happened, or that we remember it wrong.
Sure enough, some commission members sought to block consideration of any historical account that might support efforts to rein in runaway bankers.
As one of those members, Peter Wallison of the American Enterprise Institute, wrote to a fellow Republican on the commission, it was important that what they said 'not undermine the ability of the new House G.O.P. to modify or repeal Dodd-Frank,' the financial regulations introduced in 2010. Never mind what really happened; the party line, literally, required telling stories that would help Wall Street to do it all over again.
Paul Krugman goes on to recommend a new movie, "The Big Short," based on a novel by Michael Lewis of the same name, which, according to him, has got the economic, financial and political story all right.
The film achieves this feat mainly by personalizing the tale, focusing not on abstractions but on colorful individuals who saw the rot in the system and tried to make money off that realization. Of course, this still requires explaining what it was all about. Yet even the necessary expository set pieces work amazingly well. For example, we learn how dubious loans were repackaged into supposedly safe 'collateralized debt obligations' via a segment in which the chef Anthony Bourdain explains how last week's fish can be disguised as seafood stew.
... The group of people who recognized that we were experiencing the mother of all housing bubbles, and that this posed big dangers to the real economy, was bigger than the film might lead you to believe. It even included a few (cough) mainstream economists. But it is true that many influential, seemingly authoritative players, from Alan Greenspan on down, insisted not only that there was no bubble but that no bubble was even possible.
And the bubble whose existence they denied really was inflated largely via opaque financial schemes that in many cases amounted to outright fraud - and it is an outrage that basically nobody ended up being punished for those sins aside from innocent bystanders, namely the millions of workers who lost their jobs and the millions of families that lost their homes.
[T]he true story of what happened is deeply inconvenient to some very rich and powerful people.
They and their intellectually hired guns have therefore spent years disseminating an alternative view that the money manager and blogger Barry Ritholtz calls the Big Lie. It's a view that places all the blame for the financial crisis on - you guessed it - too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor.  
So the true story is that some people saw the rot in the system and found ways of making money off that realization - e.g., by repackaging dubious loans into supposedly safe collateralized debt obligations. The blame was put on the many ordinary people who could not pay their debts. Or else on government or government agencies that gave too many loans to poor people. These people - many of them rich and powerful - have no interest in anyone truly discovering the true causes of the financial crisis, and work to block any moves to such discovery....

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