Basically, it boils down to what we all suspected: grossly irresponsible lending brought about by deregulation.

It seems so obvious in retrospect.

(h/t: The Crisis of Credit)

Brooks begins with the greed theory:

[T]he U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. [The] remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they can’t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.

Next, the stupidity theory:

[O]verconfident bankers didn’t know what they were doing. They thought they had these sophisticated tools to reduce risk. But when big events — like the rise of China — fundamentally altered the world economy, their tools were worse than useless.
…
The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

One of my guiding principles is never blame on malice what can be blamed on stupidity. Obviously, greed played a significant role in the crisis, but I’ve never thought it was a form of coordinated greed so much as it was a lot of individual greed that blinded most of those in the financial industry to the massive flaws in the system. Simply put, greed led to stupidity which led to the crisis.

I know it’s satisfying to blame everything on the greedy elites — populist anger is the in thing. But here’s the problem: you can’t eradicate greed. Lots of people will always act out of self interest, no matter the system and no matter if they’re in the public or private spheres. We can’t say “the system caused greed, let’s jettison the system and create a new one” because every system is susceptible to greed. What we can say is that the system, as it exists now, propagates stupidity, so let’s reform the system.

Both the greed theory and the stupidity theory lead to the conclusion that change is necessary. But how we change is predicated on where we see the faults. In the long run, I think we’re better off trying to increase smart decision making than we are trying to create a system impervious to greed.

And after the AIG mess, I say we give it to him. How we allowed one company to take down the entire system still feels unreal to me. How on earth could we allow that to go down? Crazy, crazy, crazy.

But it did happen and we are suffering massive fallout as a result, so we have to make absolutely sure we’re protected. And, like it or not, the only way to do that is give the government more power.

From Bloomberg…

The authority would allow the Treasury, in collaboration with the Federal Reserve, regulators and the president, to step in and more easily combat problems at systemically important institutions on the verge of failure, said the official, who spoke on the condition of anonymity. AIG has received $182.5 billion in government bailout funds, according to the Government Accountability Office.

“We must ensure that our country never faces this situation again,” Geithner is expected to say according to excerpts of his testimony obtained by Bloomberg News. “To achieve that goal the administration and Congress have to work together to enact comprehensive regulatory reform and eliminate gaps in supervision.”

The expanded powers, which require Congressional approval, could help monitor risk and detect problems across an array of financial-services firms to prevent shocks to the global economy such as the one caused by the collapse of Lehman Brothers Holdings Inc. in September. [...]

It would also ensure proper accountability when taxpayer funds are provided to institutions in extreme circumstances, like AIG, which is now 80 percent owned by the government. The authority would provide the government with various tools including the ability to break contracts on executive compensation commitments, like those at the center of the furor over the insurance-giant’s $165 million in bonuses.

More transparency and more accountability.

What’s not to like about this?

And remember, since global commerce is so tied to our banking system, we have a responsibility not only to our taxpayers, but also the rest of the world. Because don’t kid yourself by thinking that China’s public calls to consider replacing our currency in the reserve basket didn’t come as a direct result of letting firms like AIG overleverage themselves to the point of insolvency.

Marron makes the point that Geithner’s plan won’t solve the entire problem, but it will allow us to actually price these assets once and for all, and that will rid ourselves of the “catching a falling knife” problem that is plaguing the mortgage backed securities right now. Because they could be worth a lot more than many think, but nobody wants to put money into something that everybody knows will go down. And that will, in turn, get it all moving again. At least that’s the hope.

Take a look…

Part One

Part Two


(h/t: The Big Picture)

It is.

But $2 trillion is.. ridiculous.

This is Danielle Ivory from ANP.

Congress and the new administration have been focusing their attention on strengthening oversight for the Treasury’s TARP program, but meanwhile few are paying any attention to the Federal Reserve.

Since September, the Fed has lent out about $2 trillion (Bloomberg reported 1.2 trillion in November), but it’s keeping the names of its recipients a big secret.

And while the Treasury’s bailout package has a $700 billion cap, there’s no limit to how much money the Fed can lend.

The American News Project sat down with Washington newcomer, Congressman Alan Grayson (D-FL), who actually used his five minutes of valuable Q & A time in a Financial Services hearing to do some serious Fed fact-finding.

You can see the story or get the embed code here.

Or follow Danielle’s reporting on twitter here.

And visit Acorn Project for more music like this.

Today, Henry Paulson urged Congress to release the second half of the $700 billion of the bailout money. But no one seems know what banks have done with the first $350 billion. Despite the fact that Congress wrote more than one hundred pages about oversight in the bailout bill, they left a gaping hole.

All of the content on ANP is available for free! If you like the piece, please feel free to post it on your blog, or replay on the radio or tv.

http://americannewsproject.com/videos/186

Madoff, the former chairman on the NASDAQ, is accused of running a Ponzi scheme with his hedge fund that has cost investors as much as $50 billion in losses. This makes the case one of the largest incidents of fraud in American history.

Apparently, his firm generated very consistent, very high returns for many years in a row. That’s easy to do with a Ponzi scheme. Until, of course, you run out of suckers and the money dries up. If the allegations are true, I hope Madoff goes away for a long time. But, as always, this level of fraud is fueled not just by the huckster but by those who buy into the idea that there’s an easy way to make a buck. If the recent economic crisis has proven anything, it’s that get-rich-quick schemes never work.

We’ll see of the rally continues here in the U.S. There’s no doubt that there are and still will be numerous financial problems. But there’s at least the chance that the world has avoided an all-out panic. Let’s hope so.

It’s all about kleptocratic business leaders, weak-willed politicians and the complete absence of accountability for the empowered class.

Just a taste:

Now ask yourself another question. Has anybody resigned, from either the public or the private sectors (overlapping so lavishly as they now do)? Has anybody even offered to resign? Have you heard anybody in authority apologize, as in: “So very sorry about your savings and pensions and homes and college funds, and I feel personally rotten about it”? Have you even heard the question being posed? O.K., then, has anybody been fired? Any regulator, any supervisor, any runaway would-be golden-parachute artist? Anyone responsible for smugly putting the word “derivative” like a virus into the system? To ask the question is to answer it. The most you can say is that some people have had to take a slightly early retirement, but a retirement very much sweetened by the wherewithal on which to retire. That doesn’t quite count. These are the rules that apply in Zimbabwe or Equatorial Guinea or Venezuela, where the political big boys mimic what is said about our hedge funds and investment banks: the stupid mantra about being “too big to fail.”

Yes, it’s one of Hitchens’ polemics, but it’s worth the read.

Unfortunately, no one really knows what will calm global markets. On the heels of the United States’ $700 billion bailout package, countries from Japan to Britain to China to Iceland have made serious steps to shore up their nation’s banking system by infusing money into the system and/or cutting rates to encourage lending. So far, stock markets have shrugged off such maneuvers and continue to fall.

I keep hearing references to the Great Depression. And while I am nervous about the current situation, I also know our nation and most other nations are taking steps never even considered in 1929 and the early 1930’s. We have likely already reached or will soon reach the natural bottom of this market correction – any greater declines will be panic based. So, the key is to stop the panic before it snowballs.

Hopefully, this weekend’s meeting in Washington will come up with ways to do just that.

Another bad day for Wall Street as the Dow lost 7% and fell below 9,000.

Since a year ago today, the Dow has shed 39% of its value.

It’s not pretty out there.

Apparently, American retirement plans have lost $2 trillion over the last 15 months. That’s 20 percent of their value. And that doesn’t include what people have lost in just their regular stock portfolios.

This is going to leave a lot of people feeling poorer.

How do you feel?

At one point today, the Dow was down 800 points, but managed to close “just” 370 points down. How bad of a day was it? Only 264 stocks rose on the NYSE. 2,986 dropped. That’s the kind of broad-based sell-off indicative of a recession.

And it’s not localized here in America. Major exchanges in Europe and Asia are also seeing large declines as the entire world is realizing that global credit markets are in bad shape and the leading economies around the world are slowing.

While we have not had the official two quarters of negative growth needed to officially declare our economy in recession, we’re clearly headed for a rough patch.

The next president has his work cut out for him – not just in managing our federal government’s reaction to a recession but in working with international partners to ensure our nascent global marketplace doesn’t collapse into a crisis.

Thirteen of the 19 most vulnerable Republicans and Democrats in an Associated Press analysis voted against the bill despite the pleas from President Bush and their party leaders to pass it.

The article doesn’t say who these 19 are but this figure tells us something about the psychology behind the vote. I had hoped that most nay votes were based on principle but, as I dig into the matter, it seems typical politics played its usual role. Apparently, Nancy Pelosi gave a very partisan speech before the vote and some Republicans claim that’s why they voted nay. First of all, if true, Pelosi was foolish to give anything other than a “I’m glad we’re all coming together” speech. Anything less would be terrible leadership. That said, any Republican who changed his or her vote just because Pelosi was less than diplomatic is a childish fool.

So, it seems as if some representatives voted no simply because they were too scared of tying their name to such major and potentially risky legislation. And some voted no because they didn’t like a speech. Given that they all probably have money in the stock market, I wonder how they feel about their less-than-principled stand now?

To be clear, I fault not a single Republican or Democrat who voted no out of a principled objection to the bill. But any representative playing politics with such an important matter should be ashamed.

As an addendum, here’s the roll call, in case you were wondering.

Thanks to reader BenG for alerting me to the Pelosi speech angle.

Victor David Hanson has it right when he lays the blame at all our feet. Yes, insufferable Wall Street greed played a major role as did incompetent, ignorant, servile and just plain corrupt Washington politicians. I’d like to lean back in my chair, point fingers and quietly absolve myself and all the rest of us who neither work on Wall Street nor in Washington. But I can’t.

A lot of us took part in the credit-shuffling game that was the real estate boom. I was even one the lucky ones who sold a property at a ridiculous profit. I didn’t intend for my home to be such a tremendous investment, but I sure as heck didn’t care what cultural forces or what financial shenanigans made my windfall possible. I took the money. Gladly.

A lot of other people did too. And many of those who eventually got caught holding the bag were not innocent victims of the system. They were players. They knew they were taking out unsustainable loans but they believed the profits they could make in the market more the justified the risk. They were stupid and wrong. Their banks were stupid and wrong. Our culture that demanded easy credit and high returns was stupid and wrong.

We took the wealth and prosperity part of the American Dream and jettisoned the hard work part. We believed that the house flippers on TV were smarter and more interesting than the people and businesses doing real work and slogging out real, if mundane and small-margined, profit. Even as many of us decried our nation’s free-spending, gilded-age ways, we grumbled when our investment accounts fell short of the high returns enjoyed by others.

Blame the Wall Street profiteers. Blame the Washington imbeciles, cowards and thieves. They deserve our scorn and whatever punishment the law allows. But $700 billion is not the indulgence that absolves the rest of us. We have much harder tasks ahead if we really want to get our nation back on track. Now, I don’t know how to change a culture. Chances are, it will take much more than a rocky autumn to make most people stop lusting after easy credit and high investment returns. These bailouts might just be postponing the needed reckoning.

But I’d like to think that these last few weeks have at least opened the eyes of enough of us – have made enough of us realize that wealth is not something that can be generated quickly if we want to generate it sustainably. That sounds like commonsense. But, apparently, most of us had, in one way or another, forgotten the realities of markets. The market has shown us our folly. Let’s see if enough of us can remember the lesson.

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The text may be hard to read, so I’d suggest just going full screen with it. It’s very easy to read at that size.