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The 5 myths of the great financial meltdown


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Showing 1-25 of 58 posts in this discussion
Initial post: Jun 17, 2012 10:13:04 AM PDT
The 5 myths of the great financial meltdown

http://finance.fortune.cnn.com/2012/06/13/financial-crisis-myths/

There's a long way to go before the economy, and people, recover from wounds inflicted by the financial meltdown. The value of homeowners' equity -- most Americans' biggest single financial asset -- is down $4.7 trillion, about 41%, since June 2007, according to the Federal Reserve. The U.S. stock market has lost $1.9 trillion of value, by Wilshire Associates' count. Even worse, we've got fewer people working now -- 142.3 million -- than then (146.1 million), even though the working-age population has grown. So while plenty of folks are doing well and entire industries have recovered, people on average are worse off than they were. Bad stuff.

How should you think about the past five years? What can we learn from them? And what can we as a society do to minimize the chances of a recurrence?

I've been writing about the financial meltdown and its aftermath almost continually since I joined Fortune the month after the symptoms surfaced. Now, five years into the problem, I find myself getting increasingly angry and frustrated watching myth supplant reality about what happened, and seeing fantasy displace common sense when it comes to fixing the problems that got us in this mess.

Ready? Okay, here we go.

Myth No. 1: The government should have done nothing.

! During the dark days of 2008-09, when giant institutions like Washington Mutual and Wachovia and Lehman Brothers failed and the likes of Citigroup (C), Bank of America (BAC), AIG (AIG), GE Capital (GE), Merrill Lynch, Morgan Stanley (MS), Goldman Sachs (GS), and huge European banks were near collapse, letting them all go under would have brought on the financial apocalypse. We could well have ended up with a downturn worse than the Great Depression, which was the previous time that failures in the financial system (rather than the Federal Reserve raising rates) begat a U.S. economic slowdown.

You want to let big institutions fail? Okay, look at what happened when Lehman was allowed to go under in September 2008. (The Treasury and Fed insist there was no way to save the firm, though I wonder if they would have devised one had they not gotten tons of grief six months earlier for not letting Bear Stearns collapse.)

Lehman's collapse froze short-term money markets, making normal finance impossible. A run on money-market funds began when the Reserve Primary Fund, an industry pioneer, said it was "breaking the buck" because of losses on Lehman paper. Goldman Sachs and Morgan Stanley were about to fail because hedge funds and other "prime brokerage" customers began yanking their cash in response to prime brokerage assets at Lehman's London branch being frozen.

The federal government (including the Fed) had to front trillions of dollars and guarantee trillions of obligations -- a total I calculated last year (see "Surprise! The Big Bad Bailout Is Paying Off") at more than $14 trillion -- to stop the panic.

Lehman was a beta test for letting markets take care of problems themselves -- and it failed miserably.

Myth No. 2: The government bailed out shareholders.

It's patently unfair that lenders to these companies escaped unscathed, as did counterparties to AIG, which were paid with taxpayer money. Why did the government do the right thing at GM (GM) and Chrysler, where it forced creditors to take haircuts before financing the companies' reorganizations, and the wrong thing by bailing out creditors at financial companies?

The Treasury contends that whacking financial company creditors would have created more problems than it solved. "In a severe financial crisis," said a very senior Treasury official whom I agreed not to name, "the primary obligation is to prevent panics and the severe economic damage they cause to the innocent. In those crises, if you hair-cut the creditors of a systemically important institution, it's like adding accelerant to a burning fire."

more at link

In reply to an earlier post on Jun 17, 2012 10:20:31 AM PDT
Intrepid says:
Thought provoking article. Folks should read it objectively and consider the author's points well. It covers a lot of the suppositions that are thrown around on these boards and provides clarity on what happened and what would have happened if alternate choices were made.

Posted on Jun 17, 2012 10:37:53 AM PDT
Last edited by the author on Jun 17, 2012 11:40:20 AM PDT
Mende Mui says:
The "Hoenig Rule" would just be as ineffective; we all remember Enron right? The CEO, Lay basically created his own companies and then transferred liabilities to them just to fool investors. So in a sense, if the Hoenig Rule was indeed in place, it would just be in appearance probably because the hedge companies would be created in the same way Lay did with SPEs.

My point is, this guys find ways to manipulate the system every time... Regulation might not be the best but it's the most workable solutions yet. A very interesting article nonetheless!

In reply to an earlier post on Jun 17, 2012 7:47:50 PM PDT
The "Hoenig Rule" would just be as ineffective; we all remember Enron right? The CEO, Lay basically created his own companies and then transferred liabilities to them just to fool investors.

TS: Disagree -- there are ways to audit shell companies.

In reply to an earlier post on Jun 17, 2012 8:39:01 PM PDT
VicAriel says:
>I find myself getting increasingly angry and frustrated watching myth supplant reality about what happened, and seeing fantasy displace common sense when it comes to fixing the problems that got us in this mess.<

It's ignorance of basic economics and math that spawned the myths and fantasies about the fiscal and monetary measures required to stimulate an economy mired in a deep recession. The main-stream-media is complicit by giving credibility to the anti-government fear mongers.

>The value of homeowners' equity -- most Americans' biggest single financial asset -- is down $4.7 trillion, about 41%, since June 2007, according to the Federal Reserve. The U.S. stock market has lost $1.9 trillion of value, by Wilshire Associates' count. Even worse, we've got fewer people working now -- 142.3 million -- than then (146.1 million), even though the working-age population has grown.<

The critics have absolutely no comprehension of these numbers or their impact on GDP. When Rush tells them "If you ran your household budget the way the federal government runs their you'd be out in the street", it makes sense to them. Numbers don't.

In reply to an earlier post on Jun 17, 2012 8:50:01 PM PDT
Axiomatic!!! says:
While I rarely agree with Rush, in this case he's right. If I ran my budget the way the government does, I would be out on the street.

One of the worst things to come from this is the "too big to fail" attitude we now see. Just look at the JPMorgan fiasco. These corporations need to be cut down to size, so we can let them fail for being irresponsible.

In reply to an earlier post on Jun 17, 2012 9:23:25 PM PDT
Intrepid says:
There indeed should have been greater consequences for the greedy, incompetent *managers* e.g. GM CEO forced out for incompetence was appropriate to do.

But letting GM or AIG fail as the article points out would have resulted in a cascade of failures that conceivably could have been as bad as the Great Depression. Moreover, you would be paying for 70% of UAW pensioners Pension Fund (no thank you). Letting BofA and Citi fail would have only served to deplete FDIC and more as accounts had guarantees (no thank you). Some things were needed.

In reply to an earlier post on Jun 17, 2012 9:48:12 PM PDT
Axiomatic!!! says:
I agree.

The problem lies in allowing these entities to get so huge that they can gamble and be irresponsible without fear of failure. They know the taxpayers will pick up the tab if they're wrong.

We had CEOs cooking the books prior to the meltdown and yet not a single one is going to be brought up on charges.

Maybe a new law is in order. One that sentences them with a violent rapist as a cellmate.

Posted on Jun 17, 2012 10:28:05 PM PDT
Will the introduction of all your posts now read:

Allan Sloan ( **Not** Truthseeker and **Not** TeaPartyWoman) says:?

In reply to an earlier post on Jun 17, 2012 10:45:29 PM PDT
Grumbler says:
that article is the same as saying yes you need to put a cast on a broken arm, but without ever asking what the heck you were doing on the roof in the first place...

Posted on Jun 17, 2012 10:56:44 PM PDT
or if there IS a roof!

In reply to an earlier post on Jun 17, 2012 11:16:05 PM PDT
MisterTee says:
Or an arm !

In reply to an earlier post on Jun 17, 2012 11:18:49 PM PDT
Lientje says:
Axiomatic: "We had CEOs cooking the books prior to the meltdown and yet not a single one is going to be brought up on charges."

*****
I doubt that this is true. Just the past weekend, once again, I heard of someone going to trial - with others going to jail at other times.
The problem is that I don't names of these slimeballs so I really don't know who they are talking about it. But something is happening. I'm
also sure that not enough is happening.

In reply to an earlier post on Jun 17, 2012 11:22:43 PM PDT
or an article!

In reply to an earlier post on Jun 17, 2012 11:23:45 PM PDT
MisterTee says:
OK you win... THIS time !

Mwahahahahahahahahaha !!!

Posted on Jun 17, 2012 11:34:43 PM PDT
We should do this on every thread - question the existence of basic facts. I'm going to the thread:

The drug dealer had a name: Trayvon Martin

In reply to an earlier post on Jun 18, 2012 5:30:18 PM PDT
While I rarely agree with Rush, in this case he's right. If I ran my budget the way the government does, I would be out on the street.

One of the worst things to come from this is the "too big to fail" attitude we now see. Just look at the JPMorgan fiasco. These corporations need to be cut down to size, so we can let them fail for being irresponsible.

TS: Rush would never agree with downsizing the banks though. Duh, the only solution here.

In reply to an earlier post on Jun 18, 2012 5:32:49 PM PDT
There indeed should have been greater consequences for the greedy, incompetent *managers* e.g. GM CEO forced out for incompetence was appropriate to do.

TS: The Obama administration has tried to sue them.

http://www.moneynews.com/StreetTalk/us-sues-Banks-Mortgages/2011/09/02/id/409634

The Republicans have SCREAMED every time.

Posted on Jun 18, 2012 5:34:46 PM PDT
"GM CEO forced out for incompetence was appropriate to do."

In a fascist state, where govt installs puppets in industry

In reply to an earlier post on Jun 18, 2012 6:04:40 PM PDT
In a fascist state, where govt installs puppets in industry

TS: Under Bush, it was industry that installed puppets in gov't, before returning at mega million salaries.

In reply to an earlier post on Jun 18, 2012 7:29:55 PM PDT
Deckard says:
Truthseeker ( **Not** TeaPartyWoman) said:
"While I rarely agree with Rush, in this case he's right. If I ran my budget the way the government does, I would be out on the street."

1) He's wrong. Government is not a household, and should not be run like one.
2) Many of you probably got a mortgage that was much larger than your income, so you did run your budget like the government in some respects.
3) Rush is a typical slimy conservative hypocrite. The deficit is due in large part to tax cuts and two wars. I don't remember him opposing the wars or the tax cuts.

In reply to an earlier post on Jun 18, 2012 11:22:29 PM PDT
VRWC says:
Borrowing money is fine if it is used to create value by investing in tangible assets.... Building infrastructure, for example, is the equivalent of a mortgage used to build home equity.

But that is not what we are doing with most of the trillions we are borrowing.

In reply to an earlier post on Jun 19, 2012 5:06:45 PM PDT
Borrowing money is fine if it is used to create value by investing in tangible assets.... Building infrastructure, for example, is the equivalent of a mortgage used to build home equity.

VRWC: But that is not what we are doing with most of the trillions we are borrowing.

TS: Exactly what I used to say when Arnold Schwarzenegger was borrowing money for the State of California.

But it doesn't apply to federal gov't:
cutting spending dramatically would have a depressive effect on the economy, and create even LARGER deficits because of the multiplier effect.

Which is why we need to cut spending AND raise taxes.
Corporations are already sitting on $2 trillion in capital they are not investing because of concern about consumer demand.

This will depress the economy, but without... the depression.

Obama's cutting taxes for the wealthy -- IS absurd.

In reply to an earlier post on Jun 19, 2012 5:07:29 PM PDT
Deckard: Truthseeker ( **Not** TeaPartyWoman) said:
"While I rarely agree with Rush, in this case he's right. If I ran my budget the way the government does, I would be out on the street."

TS: I was quoting this from the post I was replying too. Obviously I agree with you.

In reply to an earlier post on Jun 20, 2012 12:39:42 PM PDT
*One of the worst things to come from this is the "too big to fail" attitude we now see. Just look at the JPMorgan fiasco. These corporations need to be cut down to size, so we can let them fail for being irresponsible.

But Chase will still make a profit even with a bad trade.
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Discussion in:  Politics forum
Participants:  20
Total posts:  58
Initial post:  Jun 17, 2012
Latest post:  Jun 25, 2012

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