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  1. #1
    Hang 'Em High
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    12.17.17 @ 05:24 PM
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    The real culprit for the Great Depression & The Sub-Prime Debacle

    As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.


    The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.



    Anna Schwartz wrote a seminal text
    on the causes of the Great Depression


    "They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence," she told The Sunday Telegraph. "There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.

    Schwartz remains defiantly lucid at 92. She still works every day at the National Bureau of Economic Research in New York, where she has toiled since 1941.

    Her fame comes from a joint opus with Nobel laureate Milton Friedman: A Monetary History of the United States. It revolutionised thinking on the causes of the Great Depression when published in 1965. The book blamed the Fed for causing the slump. The bank failed to use its full bag of tricks to stop the implosion of the money stock, and turned a bust into calamity by raising rates.

    "The book was a bombshell," says British monetarist Tim Congdon. "Until then almost everybody thought the free-market system itself had failed in the 1930s. What Friedman-Schwartz say was that incompetent government bureaucrats at the Fed had caused the Depression."

    "It had an enormous impact in revitalising free-market conservatism, and it broke the Keynesian stranglehold over policy," he says. Keynes himself was a formidable monetarist. He became a "Keynesian" big spender only once all else seemed to fail.

    The tale of the early 1930s is intricate, but worth rehearsing in the climate of today's credit crunch.

    The October 1929 crash did not cause the slump, it was merely a vivid detail. The US economy muddled through for another year, seemingly sound. Then it buckled as rising defaults in the farm belt set off a run on local banks.

    It was at this juncture that critics claim the Fed lost the plot. Washington prohibited the pros at the New York Fed from injecting sufficient stimulus through open market operations [buying bonds].

    Contagion spread. The Jewish-owned Bank of the United States was allowed to collapse by fellow clearing banks, for reasons of snobbery and malice.

    The Chicago Fed insisted into the depths of the deflation that inflation still lurked, that there was an "abundance of funds", that speculators had to be punished, and that bad banks should fail. The staggering blindness of Fed backwoodsmen from 1930-1933 is hard to exaggerate.

    In hindsight, it seems astonishing that the Fed raised the discount rate twice in late 1931 to 3.5 per cent even as global finance was disintegrating. It did so to halt bullion flight and defend the Gold Standard, but it failed to offset the effects with bond purchases. Britain was forced off the Gold Standard in September 1931 after the Atlantic Fleet "mutinied" at Invergordon over 10 per cent pay cuts. That proved a providential crisis - the pound fell. The Bank of England was soon able to slash rates. The slump proved less serious than in the US, and not a single bank collapsed in the British Empire.

    Schwartz warns against facile comparisons between today's world and the Gold Standard era. "This is nothing like the Depression. I don't really believe the economy as a whole is going to fall apart. Northern Rock has been the only episode of a bank failure so far," she says.

    Over 4,000 US banks - a fifth - collapsed in the 1930s. There was no deposit insurance. Real economic output fell by a third, prices by a quarter, and unemployment reached a third. Real income fell by 11 per cent, 9 per cent, 18 per cent, and 3 per cent in the years to 1933.

    According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.

    She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.

    That mistake is behind us now. The lesson of the 1930s is that swift action is needed once the credit system starts to implode: when banks hoard money, refusing to pass on funds. The Fed must tear up the rule-book. Yet it has been hesitant for three months, relying on lubricants - not shock therapy.

    "Liquidity doesn't do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt," she says. Her view is fast spreading. Goldman Sachs issued a full-recession alert on Wednesday, predicting rates of 2.5 per cent by the third quarter. "Ben Bernanke should be making stronger statements and then backing them up with decisive easing," says Jan Hatzius, the bank's US economist.

    Bernanke did indeed switch tack on Thursday. "We stand ready to take substantive additional action as needed," he says, warning of a "fragile situation". It follows a surge in December unemployment from 4.7 per cent to 5 per cent, the sharpest spike in a quarter century. Inflation fears are subsiding fast.

    Bernanke insists that the Fed has leant the lesson from the catastrophic errors of the 1930s. At the late Milton Friedman's 90th birthday party, he apologised for the sins of his institutional forefathers. "Yes, we did it, we're very sorry, we won't do it again."

    ~~8 U.S.C. § 1182(f)~~

  2. #2
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    12.17.17 @ 05:24 PM
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    Default The folly at the onset of the Great Depression


    ~~8 U.S.C. § 1182(f)~~

  3. #3
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    thankfully that asshole friedman is dead.

    one down a whole whack of idiots to go.

  4. #4
    Sinner's Swing! Bullwinkle's Avatar
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    Hee hee hee...

    ...seminal.







    Don't read this.

  5. #5
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    12.17.17 @ 05:24 PM
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    This investopedia.com article gives a nice background to the sub-primes mess in a somewhat clear and easy to understand persentantion.

    http://investopedia.com/printable.as...e-overview.asp

    Of particualr intrest is the credit ratings agencies culpability in it all.

    Here's an excerpt from the Article:

    All of a sudden, even the subprime mortgage lenders had an avenue to sell their risky debt, which in turn enabled them to market this debt even more aggressively. Wall Street was there to pick up their subprime loans, package them up with other loans (some quality, some not), and sell them off to investors. In addition, nearly 80% of these bundled securities magically became investment grade ('A' rated or higher), thanks to the rating agencies, which earned lucrative fees for their work in rating the ABSs.

    ~~8 U.S.C. § 1182(f)~~

  6. #6
    Forum Frontman It's Mike's Avatar
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    Quote Originally Posted by The Rover View Post
    This investopedia.com article gives a nice background to the sub-primes mess in a somewhat clear and easy to understand persentantion.

    http://investopedia.com/printable.as...e-overview.asp

    Of particualr intrest is the credit ratings agencies culpability in it all.

    Here's an excerpt from the Article:

    All of a sudden, even the subprime mortgage lenders had an avenue to sell their risky debt, which in turn enabled them to market this debt even more aggressively. Wall Street was there to pick up their subprime loans, package them up with other loans (some quality, some not), and sell them off to investors. In addition, nearly 80% of these bundled securities magically became investment grade ('A' rated or higher), thanks to the rating agencies, which earned lucrative fees for their work in rating the ABSs.
    you can't pin the subprime mess on the agencies alone. There is so much blame to go around - they would get a bit of it but certainly not the majority. If the debt is issued by a highly rated company, it's very difficult for an agency to rate it like they would a junk bond.

  7. #7
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    12.14.17 @ 03:26 PM
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    There's plenty of blame to go around, but it starts with the Fed. Glenn Beck has been saying this for months.
    "Viking - last to sleep, first to rise, last to leave, that's how the Nords of old rocked the house." ~ timmac in the 'Texas Linkers' thread talking about yours truly. :-)

  8. #8
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    12.17.17 @ 05:24 PM
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    We're headed to one world bank and one world govt....

    Ohhh, that will work well.....

    http://michaelsavage.wnd.com/

    ~~8 U.S.C. § 1182(f)~~

  9. #9
    Forum Frontman It's Mike's Avatar
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    Quote Originally Posted by The Rover View Post
    We're headed to one world bank and one world govt....

    Ohhh, that will work well.....

    http://michaelsavage.wnd.com/
    michael savage, yeah there's the voice of reason.

    this is the same guy who said that autism was a "fraud, a racket. ... I'll tell you what autism is. In 99 percent of the cases, it's a brat who hasn't been told to cut the act out. That's what autism is."

    Right? same guy right? Michael Savage can go f--k himself. The fact he has the audience he does is truly baffling.

  10. #10
    Sinner's Swing! VH122's Avatar
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    12.15.17 @ 05:13 PM
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    Quote Originally Posted by it's me View Post
    michael savage, yeah there's the voice of reason.

    this is the same guy who said that autism was a "fraud, a racket. ... I'll tell you what autism is. In 99 percent of the cases, it's a brat who hasn't been told to cut the act out. That's what autism is."

    Right? same guy right? Michael Savage can go f--k himself. The fact he has the audience he does is truly baffling.
    The nerve of him to call you that.

  11. #11
    Atomic Punk edwardv's Avatar
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    Greed as always and the Fed.

  12. #12
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    The Bush administration backed off proposed crackdowns

    Report: U S Banks torpedoed rules that could have saved them


    http://www.usatoday.com/money/econom...-lenders_N.htm


    December 2, 2008

    By Matt Apuzzo, The Associated Press


    WASHINGTON — The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
    "Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

    Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the provisions were gone and the meltdown was underway.

    "These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.

    The administration's blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention. Its belief ironically has ushered in the most massive government intervention since the 1930s.

    "We're going to be feeling the effects of the regulators' failure to address these mortgages for the next several years," said Kevin Stein of the California Reinvestment Coalition, who warned regulators to tighten lending rules before it was too late.

    Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid. Many executives remain in high-paying jobs, even after their assurances were proved false.

    In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:

    •Regulators told bankers that exotic mortgages were often inappropriate for buyers with bad credit.

    •Banks be required to increase efforts to verify that buyers actually had jobs and could afford houses.

    •Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.

    •Banks that bundled and sold mortgages were told to be sure investors knew what they were buying.

    •Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

    Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.

    "In hindsight, it was spot on," said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.

    Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting.

    Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.

    "An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.

    Countrywide Financial, at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs.

    One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans. But in 2006, banks said they shouldn't have to double-check the brokers.

    "It is not our role to be the regulator for the third-party lenders," wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.

    California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70% of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.

    Last week, Downey Savings joined the growing list of failed banks. The problem: About 52% of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe — maybe even safer than traditional 30-year mortgages.

    "To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products," said Lillian Gavin, the bank's chief credit officer.

    ~~8 U.S.C. § 1182(f)~~

 

 

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