Some Helpful Explanations

Via Br. Dave, probably the best, simplest explanation of the credit crisis I’ve seen thus far. It doesn’t go terribly deep, and leaves out a lot, but it gives a great visual summary of how the hell we ended up here. How the hell we get out of here is another question altogether.


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Elsewhere, Jack Gillis helps shed some light on the current proposed loosening of the mark-to-market rules:

The hearing ended with Kanjorski threatening to pass legislation to force Herz to loosen standards. In fact, the pressure was so intense that the FASB. The pressure was so intense that the FASB announced the new rule after only a week. The Chairman of the full committee, Barney Frank, seems to have accepted it as a foregone conclusion. This is absolutely unacceptable. Democrats pressing for this, like Paul Kanjorski and Gary Ackerman, need to stop. Go-along Democrats like Senator Christopher Dodd and Barney Frank need to stop going along. As a Democrat myself, I can complain about the Republicans all I want but the fact remains, the Democrats hold power and it is only because of pressure from Democrats that this loosening is being rushed to implementation. At the end of the day, loosening mark-to-market will only allow the fraud that is the current financial system to be perpetrated, er, I mean, perpetuated.

Go read the rest of the piece because it’s a good, easy-to-understand explanation of some of the blacker magic used to value assets and more importantly, the rule could go into effect in a week. This is one of those things I’ve previously lamented as being simply too damn complicated for the average American to comprehend – so we see very important regulations get implemented or axed with essentially no public understanding of what that means for us, for the market, etc. Quite frankly, too much wool is pulled over our eyes by both political parties in this country, acting more on behalf of the big, global institutions than the average American. I’m not trying to get my inner populist in a tizzy over all of this, but it strikes me that this current business/government partnership is basically nothing more than a fraud. As Gillis points out:

Strangely enough, this appears to be one of those issues where the wingnut right-wingers in Congress and their moonbat left-wing colleagues seem to agree. Witness lefty populist Florida Democrat Alan Grayson, on the one hand, and Senate Banking Committee Ranking Member Richard Shelby, right-wing Alabama Republican, on the other hand.  That particular strange-bedfellowing has become so much more common lately that it doesn’t seem so strange anymore. And things are getting to the point now that whenever I see the wingnut/moonbat coalition emerging I’m going to just support the wingnut/moonbats until I have reason to know different. They may have different premises but their conclusion–The System is corrupt and seeking ways to maintain its corrupt benefits—is absolutely correct.

Now, I’m not sure I’ve ever advocated siding with either Right or Left-wing moonbats on anything, but I think Gillis has a point.  Right now we are witnessing a major transferrence of wealth into the pockets of institutions and people who have seriously screwed up, and who have largely still profited enormously off of their mistakes.  This shift of wealth isn’t even from the “American tax payers” to the investment bankers and hedgefund managers – it’s from future generations of American tax payers to these “giants of industry (or, rather, finance)” and that’s simply not acceptable.  If our children have to pay for something than let it be health care or education or stimulus of some sort – not empowering the people who drove us to these depths to do it again.  And that’s where I see these sorts of rules leading us – essentially back to square one.

After all, if we allow the banks and bankers to tell us how much their bad assets are worth, and allow them to use another round of sleight of hand on the American public, all under the pretense of reviving lending and getting capital flowing, aren’t we just walking right back into the same inferno?  Won’t it all just happen all over again with the same results compacting the problems we’re facing now?

I’m not sure where all the problems lie, but this breakdown from commenter mw is helpful:

1) Free market enterprise – private capital fully accepts the risk and potential reward, government investigates and prosecutes criminal fraudulent activity (i.e. selling the Brooklyn Bridge or Credit Default Swaps without financial wherewithal to honor guarantees).
2) Regulated enterprise – Same as above, but government represents and attempts to manage private risk through enforcement of preemptive regulation.
3) Government enterprise – Government sets goals, government funds mechanism to achieve them, government is held accountable through elected representatives.
4) Unenforced regulated enterprise Government represents that it is regulating risk and fraud, but in fact does not through failure to fund enforcement or incompetence in enforcement agency or both (i.e. Bush Administration SEC)
5) Public Private “Partnerships” – Public assumes most risk, private enterprise gets most of the reward (i.e. Fannie Mae, Freddy Mac, this proposed abomination). these entities are always pregnant with possibilities for corruption wth lobbyist funneling private gains back into public pockets via contributions and bribes (i.e. – Chris Dodd, Barney Frank, etc. ) Corporate Statism at its worst.

Now, as I’ve mentioned a few times before, I think “free markets” are a beautiful, tragic theory.  Fact is, they’re never free.  Fact is, government won’t allow it – and essentially for a market to be truly, truly free the state would need to erect such a widespread and powerful welfare system and weave together so many safety nets, that no small government type would ever go for it.  This leaves us with the other options, and as we can see in my previous economic round-up and in Gillis’s post, too, the government and business leaders are in collusion – perhaps often incidentally – with one another to mutually benefit one another.  In a free market, banks that screw up fail.  In a reverse socialism model, banks that screw up are labeled “too big to fail” and get propped up ever more absurdly by the public.

Dave Ruggerio is off today.

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9 thoughts on “Some Helpful Explanations

  1. My gripe with the link Dave provided is the seeming innocuous nature of the bundling of mortgages. As I remember the video it seems to depict the various levels of risk, AAA etc., as being kept separate. But in actuality, as I understand it, solid mortgages were bundled with very risky mortgages. This subterfuge, mixing, was condoned by rating agencies. That is, the agencies provided false information to investors. The entire enterprise was designed to defraud investors. As T.R. described them, “malefactors of great wealth.”

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  2. E.D.:

    Thanks!!

    Way cool and you excerpted one of my favorite paragraphs to write. When I immersed myself in all this all week, the wingnut/moonbat coalition leapt out at me.

    And I will add by way of further exampole, the last time that coalition was so strongly in accord with each other was on the Iraq War Resolution. Remember when it was pretty much Ralph Nader and Patrick Buchanan against it while the rest of us (myself included) just kind of went along?

    Thus the wingnut/moonbat rule: When they hate each other as expected and as usual, just pick your side and fight the good fight. But when you see them agreeing with each other, back up a step and reconsider your premises.

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  3. Funny thing. I was vehemently opposed at the time both to Iraq and Afghanistan. Then, I got into a hawkish phase when I felt as though there was the potential of just abandoning Iraqis to their fate – something I still don’t particularly like the idea of though honestly, at this point I think we’ve done enough (damage) in both arenas and need to get the hell out.

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  4. Bob, I agree that there was a whole lot of shady dealings going on and the video is sparse in regards to that, but I honestly think that works. It gives a broad, almost flat (non-biased) look at what happened. If you add to much blame or insinuation or even detail to a presentation like that, you lose the effect and the simplicity of it to some degree. That’s why we bloggers need to spice up such videos with lots of opining, whining and finger pointing…

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  5. E.D., I try not to criticize, and in fact did not criticize, what might have been lacking in the cartoon video. I’m “whining and finger pointing” about what I found wrong in it, misstatements. Obviously a seven minuet cartoon can’t cover everything. On the other hand Dave did posit it as an easy answer to your lament that the situation is not easily comprehended. So if that was Dave’s purpose I think he failed, or at least the cartoon failed. I am pretty sure you still hold your original view. Right?

    Another thing, and I hope my memory is substantially correct. Towards the end of the cartoon the narrator says something along the lines, “everybody goes bankrupt” and things are turned upside down. Well that is just plain wrong. We, taxpayers, are footing a f*****g big bill, probably to be in the trillions of dollars, to keep the malefactors from bankruptcy. Sure, sure, we are told it is for our own good, save the financial institutions, but you know I’m having some doubts on that front.

    I’ve had my doubts about this administration on two counts, 1) it’s reluctance to look into Bush era crimes, oh, lets be clear, torture and illegal domestic spying and 2) AfPakistan. But I’m thinking of adding number 3) his handling of the economy.

    I’m fast getting to Peter Townsend’s position, “meet the new boss, same as the old boss.” Obama increasingly sounds like a well spoken Bush. I can’t believe I said that.

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  6. I do keep my original view, Bob, however I still like this video as I think it very nicely illustrates at least the mechanics of the collapse, if not always the intent or shadier aspects. I also think it helps illustrate one of the major flaws with supposedly free markets. Greed is good, sure, but it can also lead to disaster. So it must be limited.

    And I’m feeling fairly disappointed with Obama also. I thought he might actually I don’t know – stop bankers from profiting off of their mistakes; make substantive moves to get us out of Iraq and Afghanistan; start moving toward justice toward the Bush admin; not make really stupid jokes on late night TV….

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