The Crash, Who do I bame….

I like to start any discussion of the 2008 crash (the housing bubble crash) with the Glass-Steagall act. The reasons behind the boom and bust are many fold and really depend on perceptive, but if I were to try to pick one singular thing, which could have prevented the crisis I see regulation as a good place to start.

Getting back to the Glass-Steagall act, after the banking crashes in the 1930’s congress passed the banking act of 1933, noted within was provisions that prohibited savings institutions ( banks) from investing in a speculative manner, namely their ability to invest in a security, so their loans went to business directly, for expansion and hiring and such. In the 60’s the law as “interrupted” differently and banks started being able to buy ( still limited ) securities.  But in 1999-2000 Clinton said that “ the Glass–Steagall law is no longer appropriate.” This lead banks, that had a strong profit motive to buy securities, backed by real estate, the HUGE demand generated by the banks buying these securities made the bubble, and a lot of people rich…  Now there is something to be said about all the bottom feeding businesses that sold home loans whole sale, taking stated income as proof, but without the demand that was generated by the loss of regulation those loans would not be worth anything…

Now there is plenty of blame to go around, if interest rates were not so low there would not have been so much cheep money around for banks to loan, which would have stifled demand as well and quelled the bubble, Greenspan said in the video “we never fully understood how large that would become”  when referring to how much money homeowners were extracting from the value of there homes ( due to the low interest rates). Also at the very bottom, the people who wanted to own homes that they could not afford, most tricked or at least confused about the exact details about loans they are applying for.  They did buy things they could not afford, and it was this “default” that ultimately cause the problems, but I doubt anyone who has looked at this problem blames the home owners, you don’t blame a baby for eating something shinny, you look at who was in charge when it happened.

Un-employment is down, but the entire pace of the economy is down. This is not likely to change in the short term (or the long term for that matter). The “recovery” we have been experiencing for the last few years has been felt most keenly by those least affected by the recession that preceded it.  Not only that, but quite un-like other “recoveries” we are not making up for ground we lost, rather we are barley limping back to levels of pre-recession growth. When we were coming out of the recession of the early 80’s gdp grew at an average rate of 4.3% per year for over 5 years. This extra growth is needed to get the economy back to pre recession levels, but we are not getting back to 3% growth levels, let alone the 4+ needed to get back to pre- recession levels of GDP, so this is less of a recovery and more of a just a kind of shuffling forward for a bit…

The Moyers video interview with Paul Krugman I got a lot of good context in which to put the current debate we are having on the debt and the federal budget in general.  When he talks about GDP to debt ratio, and how it CAN have real repercussions for the value of a national currency, the U.S. is not Greece.  Because we can still print our own money, our economy is closer to japans’ who has debt to GDP levels far higher than we have ( around 214% in 2012). He goes on to point out that “we are not in the realm of rational discourse here” when talking about the real consequences of debt. He says that if you try to get a detailed explanation about how a high debt to GDP ratio will be detrimental to the people.  Which can increase interest rates, until the fed makes money more available?  He continues that default is also un-likely, as Obama has to options, and has spoken strongly on the matter, saying “We will pay the bill they have already racked up.” Krugman explained that constitutionally he has a 14th amendment requirement to pay the debts incurred by congress. Event if congress dose not vote on the debt limit he can claim that as backing to pay our outlays anyway, as for where the money will come from the treasury can mint platinum coins in any domination, it sounds silly, but we can literally print billion dollar coins and use them to pay our debts.

Lastly as far as burning questions go I would love to know who is still in congress that was instrumental to making all this happen. Also I would like to know why we are still allowing credit default swaps to be traded and enforced, as well as naked default swaps.  Obama has left large traders and hedge funds exempt from regulation on these risky ventures, I would like to know why. (Although if I had to guess I think it’s safe to assume the why is the same as it always is, there is a buck to be made…)

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