Worst Financial Crisis Since The Great Depression

I’ve been following the chaos in the financial markets pretty closely this week.

Anyone with half a brain knows that upward cycles do not last forever, and yet somehow the banking and real estate industries managed to convince themselves that this time it would be different, aided and abetted by a business-friendly government that didn’t care what happened so long as the economy was “strong”. On every level, from the consumer buying a house they couldn’t possibly afford to the whiz kids who turned those crappy, unsustainable mortgages into a huge stinking mass of debt and derivatives, it was about greed and the desire to have more, now, even if you weren’t sure how you could pay for it, and nobody comes out looking particularly good.

I can’t blame the government for feeling the need to step in and do something, I suppose, but I’m also not happy about their selective elimination of moral hazard from the equation.

Sat. Afternoon Update: Mark Cuban asks:

Does everyone realize how much bigger a disaster last week would have been had Social Security been privatized?

That would have been very scary indeed.

4 thoughts on “Worst Financial Crisis Since The Great Depression”

  1. Apples and oranges. No one would complain if their retirement portfolio went through the roof rather than the less than subsistence level it has always been.

    The real question about the mega-bailout is: who is accountable now and what will be done to prevent this in the future.

    A radical idea: don’t give mere 700 billion dollar handouts for worthless paper: take a piece of of each institution you help save for Joe Taxpayer AND get Uncle Sam a seat on the board of these corrupt machines to assist in regulation…before things unravel next time.

  2. The Bush administration wants 700,000,000,000 of your dollars with no acountabilty, no review and neither judicial or congressonal review/penalties.

    I’ve a bridge in Alaska to sell.

  3. At Blogworld Expo, I attended a panel discussion of financial bloggers, one of whom ran a hedge fund. They said they all knew this was happening, but no one ever gets out of a bubble on the way up. If you do, the other funds make more money than yours and your customers leave you for another fund. They can’t afford to not participate in the bubble.

    On Dennis Prager’s show, I heard a former Merril Lynch executive talk about compensation within ML. Essentially, brokers were paid for profit, but not penalized for losses. That’s fine under ordinary times, but in a bubble, it biases the thing upwards as risk is rewarded, but failure is not punished. At ML, they discussed the implications of this endlessly, but could never come to a different model because no one else was changing. Had ML changed their compensation model, they would have lost their brokers to another firm.

    Finally, this whole thing was driven by the use of Fannie Mae and Freddie Mac as instruments of social equality. In an effort to help poor people buy homes, Fannie and Freddie became enormous consumers of risky loans. They bought the lousy loans from the lenders whose brokers were rewarded to selling them. In 2005, Fannie and Freddie survived attempts at regulation when they went through sever accounting scandals by buying off the politicians in DC. It’s more than just campaign contributions, too, although those helped. Chris Dodd and Barack Obama led the list of recipients. Fannie and Freddie gave high paying jobs to politicians who had left office or political hacks who left politics. It was one big family.

    Ironically, it was a group of Republicans who tried to regulate Fannie and Freddie in 2005. Their bill made it out of the Senate committee, but never came to a vote because it was clear it wouldn’t pass. At the time, the Republicans controlled the Senate and could have passed the legislation, but did not. The bribery from Fannie and Freddie, while heavily focused on the Democrats, certainly crossed party lines. John McCain was one of the co-sponsors of that bill.

    In short, we gave lousy money managers access to easy credit, rewarded brokers for making those loans and then hid the growing problem from regulators by buying off the politicians.

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