I think this is an important essay from Michael Burry, excerpted below, about the financial crisis, and so I share some extended excerpts with a link to the original. Keep in mind that this is one perspective from a particular point of view.
For a more comprehensive and balanced view of the causes and progress of the financial crisis I highly recommend Econned, by Yves Smith. I have given copies of it to some of the older children, to help them understand what has happened and what they will face in the future.
With regard to the policy stalemate, there are obvious tradeoffs between growth and taxes and spending cuts, and the ways and phases in which one introduces them. Those fortunate few, who have one point of view about reform and the distribution of losses, have a dominant voice in the mainstream media. Others are beginning to speak up and show their disgust and displeasure with the status quo.
As he points out the Greenspan decision to stimulate the economy with rates cuts, and thereby fuel the housing bubble, keep in mind that at the same time the Bush Administration was initiating two wars and providing tax cuts for their wealthy constituents. It might be considered a perfect storm if it was all accidental and coincidental. I personally think it was not.
But it does show what happens when one engages in massive stimulus after a financial crisis, Y2K and the tech bubble, without also reforming the system and prosecuting fraud. There was yet another asset bubble, further plunder taken, and greater debts left to the public.
History may very well regard both The Patriot Act and TARP as key pieces of legislation, pushed through hastily under the duress of a crisis, that proved to undermine the stability and health of the Constitution and the republic.
The intense lobbying and buying of political power that set the financial bubble in motion in the 1990's under Clinton led by team Greenspan-Rubin-Summers is still underway. Those who are sitting on large piles of loot obviously wish to keep it, and shift the blame and the pain to others. It will be a divisive time until this is resolved.
I doubt very much that the resolution will not include de facto defaults and devaluation of currency. It is only a question of how targeted they might be and who those targets are. Right now the middle class and the poor are 'not winning.'
The author acknowledges the key problem we face today, and that is the complete failure of the leaders of the system to acknowledge the problem and take the appropriate actions, because they are deeply complicit in the corruption and malfeasance that led to the crisis and a generational transfer of wealth from the many to the few.
Vanderbilt Magazine
Missteps to Mayhem
By Michael Burry
"...Our global village underestimated many risks throughout the 1990s, as is typical of a generally good economic time. As we faced 9/11, the stock market crash of 2002, the Enron and WorldCom scandals and eventually war, the Federal Reserve Board stepped in, cutting the discount rate it charged lenders from 6 percent to roughly 1 percent in order to stave off recession. Other key short-term interest rates followed.
Not coincidentally, from 2001 to 2003 we saw American home prices, which had largely moved in line with household income through the decades, suddenly accelerate up and away from the household-income trend line. Rapidly declining short-term rates hit lows not seen since the aftermath of the Great Depression, inducing a boom in adjustable-rate mortgages.
The homeowner’s dollar went further during that teaser-rate period, so home prices rose unnaturally. Risk would be low as long as home-price appreciation was strong under this paradigm, thanks to refinancing options.
It was a positive feedback loop with the full blessing of the U.S. government. Amid early fears that the housing market was getting ahead of itself in 2003, Federal Reserve Board Chairman Alan Greenspan assured everyone that national bubbles in real estate simply do not happen.
I disagreed. As I surveyed the national trends in housing, I wondered whether common sense ought to rule against the application of precedent to the unprecedented. But Greenspan went on to advise in 2004 that new types of adjustable-rate mortgages were being underutilized. In 2005 he allowed technology used by subprime lenders to get subprime borrowers into homes. Tragically for all of us, the Federal Reserve had authority to block lending activity it deemed unworthy of such treatment, but it had no will to do so...
By fall 2004, I noted for my investors that Countrywide Financial, a very large national mortgage lender, was reporting subprime mortgage originations up 158 percent year over year, despite a 24 percent decline in overall loan originations. Evidence was manifest: Banks were chasing bad credit, inclusive of housing speculators. The only question was how far they could go.
Ominously, fraud jumped. The point at which the provision of credit was most lax, in my mind, would mark the point of maximal price in the asset. I imagined the top end of the housing market would be marked by a climate in which borrowers of subprime quality were enticed to buy with teaser-rate monthly payments near zero. I was very aware lenders would take this to the nth degree. Banks could sell loans they did not want to keep through Wall Street, to investors who were ravenous for yield.
Importantly, because subprime mortgages were being turned into securities, there were mandatory regulatory filings—and that’s how I educated myself about the sector. At times I felt I was the only one reading these filings.
By summer 2005 these documents revealed that interest-only mortgages had taken a substantial share in the subprime market. Just a year or so after they were introduced, more than 40 percent of subprime originations were passing through Wall Street on their way to investors. This was up from 10 percent a year earlier. At the same time, second-lien mortgages ramped up significantly. Stated income options available to borrowers inspired a new vernacular: the “liar loan.” In some mortgage pools, 40 percent of subprime loans were for second or vacation homes...
Incredibly, it would be reported later that more than $60 trillion in credit derivatives were in effect at their peak. To use a bit of hyperbole: That is roughly equal to the gross product of the entire world. How could that be? Credit derivatives on an underlying asset could be worth multiple orders of magnitude more than the asset itself because all asset-backed derivative securities are settled in cash—pay as you go. That was the secret sauce of the Doomsday Machine.
And so the crisis unfolded, with the market providing a signal far too late. Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson continued to underestimate the situation. I was apoplectic.
Paulson now claims that even if he had known what was going to happen, he couldn’t have done anything about it. He had just joined the U.S. Treasury in the summer of 2006. But he came from the top job at Goldman-Sachs, and once he was treasury secretary, he orchestrated government takeovers of AIG, Fannie Mae and Freddie Mac—absolutely unthinkable actions just a few years ago. Paulson was anything but an impotent tool, but if he actually felt that way, it is a devastating commentary on how our government works.
As books and articles about the crisis proliferate, it becomes clear that at nearly every failed institution and every relevant department of government, someone had insight every bit as good as mine, and in many cases better. However, none of these people was in the top job. That our CEOs, our governors and our chairmen did not see this coming, did not adequately prepare their constituencies, is an indictment of the manner in which we choose and enable our leaders...
I worry about the future of a nation that would refuse to acknowledge the true causes of the crisis. A historic opportunity was lost. America instead chose its poison as its cure, and the second “Greatest Generation” would never be born.
Today I expect the U.S. government to attempt continuing an easy money policy into the next presidential term—past the meat of the foreclosure crisis, and past the corporate and public financing humps that are upcoming. Junk bonds, incredibly, again are at all-time highs. Quantitative easing seems to be working for now. But this is an invalid validation of what America is doing, a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money. Yet I receive an email every day from the Fed saying we just bought another $7 billion or $8 billion in treasuries, monetizing the debt. The scope and breadth of quantitative easing raise severe questions about the Treasury’s needs.
Government borrowing of money for the purpose of injecting cash into society, bailing out banks, brokers and consumers, is an easy decision for a population that has not yet learned that short-sighted easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke a deep reevaluation of our wants, needs and fears.
Importantly, the toxic twins—fiat currency and an activist Fed—remain even more firmly entrenched with the financial reforms of last year. The Federal Reserve, having acquired new powers of regulation, has insisted that nothing in the field of economics or finance was of any help in predicting the crisis—period, no more comments. It’s a worthless conclusion that guarantees we’ll make the same mistake again and again.
We need better leaders, but frankly this isn’t going to happen. A problem cannot be solved if it is never acknowledged.
Taxes need to be raised, spending needs to be cut, and loopholes need to be shut if we are to have any hope of returning to a stable base. Home ownership should not be a policy of the U.S. government. The banking system needs substantial reform and bank breakups. Glass–Steagall needs a second run in a strong form. And 22.5 million public workers have no business unionizing against the taxpayer. The list of things that won’t happen—but should happen—goes on and on.
By 2020, interest expense on our national debt could very well exceed $1 trillion. All personal income taxes collected in the U.S. in one year do not total $1 trillion. Our country’s math is scary big, but even scarier is that it simply doesn’t work...
Read the rest here.
