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Six rightwing myths about the current financial crisis

Tuesday, September 16th, 2008

1.  This is not a crisis.  A popular mantra of the useful idiots is that the current mess is just “a few bad loans”, that it is just about a few people losing their homes.  This is not a “few bad loans”, it’s a liquidity meltdown we haven’t seen since the 1930’s.  It has rattled financial institutions so severely that the actual Federal Funds Rate is trading at three times the Fed target.  Banks are scared shitless to lend money, and our economy is based on the ability of banks to lend.  When banks stop lending, a crisis erupts.  This is a crisis – for all sectors.  The crisis is severe enough that the safest of havens, money market funds, are now displaying losses to holders for the first time in decades. More about that here:

2.  This crisis (which isn’t a crisis) was created by bad people taking bad loans.  Granted, a lot of people took loans they should have never touched.  But the current crisis isn’t about bad loans.  If this was just bad loans, the problem would be localized in a few institutions instead of creating a worldwide backlash with reaches in small towns in Norway.  The loans themselves aren’t that big of a deal – so 2% go bad, so what?  Here’s what:  The expected future income streams from those loans were monetized,and the “expectation” turned out to be off.  way off.  way, way off.  

3.  This crisis (that isn’t really a crisis) is unique, a one-time event that surely could not have been predicted.  Let me make a prediction:  Sometime in the 20-teens (2013-2019), this will happen again.  This is not a one time event.  It is not unique.  It is rather severe this time around, but these sort of crises are the natural and inevitable result of capitalism.  It happens in every expansion.  Hedge positions become speculative and when profits show the first sign of slower growth, the speculation turns sour and the markets freeze up, with the inherent interest rate increase following shortly thereafter.  This current crisis has been predicted for years – The Economist magazine predicted it in 2005, and they were behind the curve (as usual) and not ahead of it.  Barack Obama foresaw it and put forth legislation to prevent fraudulent mortgages.

Half the rightwing nuts who profess to market perfections apparently never read their own hero, Schumpeter.  Schumpeter not only addressed this problem, he gave it a name: Creative Destruction.  The process by which underperforming and obsolete modes of production are destroyed and replaced by creative new modes.  

4.  This crisis (which isn’t really a crisis, ya see) was caused by loose money policy in the government and at the Fed.  The Fed’s loose money and the Government’s fiscal disaster certainly haven’t helped the problem, but they also didn’t cause it.  The Fed was probably too slow to increase rates after 9/11.  However, it wasn’t the Fed that created the new financial derivatives that have become almost worthless.  If the Fed and the Government are too loose, we get inflation (which we have, of course), but it takes a series of actions by the private sector to make it a financial crisis where 3 of the 5 largest financial institutions in the country go belly-up.

5.  This crisis (That’s not really all that bad, mind you) resulted from government forcing banks hand.  Let’s end with this one, since it’s so easy:  This crisis has nothing to do with some boogeyman federal government policy that somehow forced banks to make bad loans.  In it’s most common rendition, this little myth usually involves claims that banks were forced to make loans to undeserving minorities. (Granted, some on the right define “undeserving” as “being a minority”  – I have no hope nor intention of speaking to those people.)  There is no legislation on the books – anywhere – that requires banks to decrease their lending standards in order to service minorities or undeserving individuals.  The legislation simply doesn’t exist.

Rightwing folks will occasionally attempt to blame the Community Reinvestment Act or its later revisions during the Clinton administration.  I’m not sure where this idea ever came from, but the CRA puts no requirements on banks to make loans to undeserving customers.  It just doesn’t.  Period.  End of story.  Ya notice how no banks blame the CRA?  There’s a reason for that.  The CRA is not the problem.

When no legislation can be found and ties to the CRA exposed as absurd, the common tactic is to blame some boogeyman “pressure” applied by congress or some mysterious threat of litigation.  For the life of me, I can’t figure out what that “pressure” might be or how people believe that congress would pressure financial institutions in the first place.  Congress loves financial institutions – to the tune of tens of millions of dollars of donations every year.

Conservatives want to take the very essence of the capitalist system, deny it exists, and then blame government for creating that essence.  It’s preposterous.  

  • Government didn’t force banks to make no-income-verification loans.  Banks did that in search of higher profits.
  • Government didn’t force banks to make interest-only loans.  Banks did that in search of higher profits.
  • Government didn’t force banks to give loans greater than 30% of income to people with sub-500 credit scores.  Banks did that in search of higher profits.  If the story ended there, we would have some very misplaced blame about a contained financial problem.  But it doesn’t.
  • Government didn’t force banks to monetize future revenue streams by creating new investment vehicles out of improperly-risked bundles of mortgages.
  • And Government didn’t force ratings companies to get caught up in the same profit motive and therefore completely miscalculate the risk involved.
6.  Doing nothing will teach these idiots a lesson.  Well, it might teach them a lesson. But there are certain institutions whose failure would create a massive worldwide backlash.   We’re not talking about the possibilty of a slightly longer or deeper recession, we’re talking about destroying more than one economy.  The GSE’s were such.  Bear was debatable but perhaps that important ( I don’t claim to know the insides of the Bear portfolio).  The Fed and Treasury clearly felt that Lehman’s failure wouldn’t create a panic or backlash.  But my guess is that they’ll decide AIG is too important to save.