Best of the Week
Most Popular
1.North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - Nadeem_Walayat
2.Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - OilPrice_Com
3.Gold and Silver : The Battle for Control - Rambus_Chartology
4.Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - Nadeem_Walayat
5.Deep State Conspiracy or Chaos - James_Quinn
6.The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - Plunger
7.Gold Stocks Coiled Spring - Zeal_LLC
8.Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - John_Mauldin
9.Crude Oil Price Precious Metals Link in August - Nadia_Simmons
10.Gold and Silver Precious Metals Nearing Breakout - Jordan_Roy_Byrne
Last 7 days
The Stock Market No Longer Cares About Trump - 21st Aug 17
The Coming Boom Of Productivity Will Get Our Economy Back On Track - 21st Aug 17
Buffett Sees Stock Market Crash Coming? His Cash Speaks Louder Than Words - 21st Aug 17
This Could Be The Biggest Gold Discovery In History - 21st Aug 17
Stock Market Correction in Full Swing - 21st Aug 17
Seeking Confirmations – US Stock Market - 21st Aug 17
The changing demographic of online gamblers - 21st Aug 17
Gold is a coiled spring… the breakout is here, fundamentals are in place, technicals are compelling - 20th Aug 17
A Midsummer Night's Dream: Buy Gold and Silver - 20th Aug 17
Gold Mining Stocks 2017 Fundamentals - 20th Aug 17
EIA Weekly Report and Crude Oil - 19th Aug 17
4 Insights for Adjusting Your Portfolio in a Rate-hike Environment - 19th Aug 17
Gold Direction Indicator - 19th Aug 17
Historical Inevitability and Gold and Silver Ownership - 19th Aug 17
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Inflationary Pause Before the Deflationary Collapse

Economics / Great Depression II Dec 31, 2009 - 12:54 PM GMT

By: Janet_Tavakoli

Economics

Best Financial Markets Analysis ArticleWashington's Bipartisan Betrayal: The 2015 Global Financial Crisis - The time has come for new year's resolutions. The House passed the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) on December 11, 2009. It gives $4 trillion in "emergency funding" to our largest banks during the next financial crisis. Instead of reform, Congress offers even bigger bailouts. Unless we change direction, we will have another crisis by 2015. Congress has made all the wrong moves to guarantee it.


The economy did not just have a heart attack; we are suffering from financial appendicitis. Instead of doing the necessary surgery, Congress is prescribing potent addictive painkillers.

How did we get here? Housing is the largest component of our economy. Cheap money from the Federal Reserve, crippling of states rights to reign in mortgage lenders, and failure to enforce securities laws allowed the largest Ponzi scheme in the history of the capital markets to flourish.

Wall Street's shadow banking system gave mortgage lenders large credit lines (similar to credit card debt) and packaged the loans into private-label residential mortgage backed securitizations. Most of each deal was rated "AAA," since subordinated investors absorbed the risk of a pre-agreed amount of loan losses. But hundreds of billions of dollars in private-label deals were backed by portfolios comprising risky fraud-riddled loans. Most of the "AAA" investment was imperiled, and subordinated "investment grade" components were worthless. Wall Street disguised these toxic "investments" with new value-destroying securitizations* and related credit derivatives.

Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors (perhaps your pension fund) in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme.

The following is an April 19, 2009 C-Span Video**:


When you leverage fraud riddled fixed income securities priced at 100 cents on the dollar, there is nowhere to go but down in a hurry. Confusion after the fraud fell apart led to a vicious cycle of selling as investors and lenders shunned both good and bad assets. The deflating debt bubble was followed by a classic liquidity crunch resulting in a global crisis.

Wall Street protests that it sold toxic assets to sophisticated investors obliged to perform independent investigations of the risk. That argument no longer applies. U.S. taxpayers became unwilling unsophisticated investors funding Wall Street's bailout.

Other parties--mortgage bankers, credit rating agencies, hedge funds, credit rating agency, insurers, mortgage brokers, regulators, Congress, and the Federal Reserve Bank--were supporting actors. If Wall Street's financial meth labs had been shut down earlier, the money machine would have stopped running.

Recent arguments blame Fannie Mae and Freddie Mac, the indirect mortgage lending giants. This is misguided. The largest slug of new risky products and bad loans were created to fuel Wall Street's private-label securitizations. Fannie and Freddie were more at the effect than the cause (not blameless, but not the largest cause of the housing bubble). Now that shadow banking is dead, they are being stuffed with even more bad product to pick up the slack.

Fannie Mae and Freddie Mac are the new motor for no-money-down mortgage loans and a host of new problems. The fraudsters involved with our last crisis went unpunished, and they will help create our next crisis. This brewing fraud fest will result in greater misery and systemic risk. Instead of reform, Congress responded on Christmas Eve by agreeing to cover unlimited loan losses.

Bank depositors' money is guaranteed, if deposits are below the current FDIC deposit insurance limits. Banks did not need to be bailed out to protect depositors. We bailed out banks' other creditors with public money. We are printing so much money that now depositors should worry about inflation.

Inflation is the great destroyer. Inflation will wipe out investment gains (and more) much more quickly than taxes. If you earn, say, 5% on your deposits, 5% inflation will wipe out your gains, (and you aren't earning 5% on your deposits or treasury notes in the first place). That is worse than any current or proposed tax rate, since that would translate to a 100% tax rate.

Wall Street, Fannie Mae, and Freddie Mac supply a swinging door of jobs and paid projects for its financial regulators, Congressmen, appointed administration officials, and investigation committee staffers. Many members of Congress and our Presidents have received massive campaign contributions funded by Wall Street. This dependence is known as "capture," and the result is that instead of reigning in Wall Street, dependent thinking enables mayhem.

We have an alternative to bailouts, one that does not violate the spirit of democracy. Troubled financial entities should be put into receivership and restructured. Old shareholders will be wiped out. Debt-holders will take a haircut (discount) along with a debt for new equity swap to recapitalize the entity. But the job won't be complete until we separate high risk activities from traditional banking in return of Glass-Steagall, indict fraudsters, snuff out systemic fraud, and allow honest bankers to prosper.

After the Savings and Loan crisis of the late 1980's, there were more than 1,000 felony indictments of senior officers. Recent fraud is much more widespread and costly. The consequences are much greater. Congress needs to fund investigations. Regulators need to get tough on crime.

The fact that many U.S. banks stuck to traditional banking and protected shareholders during this crisis is under-publicized, but their prudence worked.

We have the solutions. We need the political will to implement them.

* Collateralized Debt Obligations (CDOs and CDO-squared), Structured Investment Vehicles (SIVs), Real Estate Mortgage Investment Conduits (REMICs and Re-REMICs), Asset Backed Commercial Paper (ABCP), and related credit derivatives. Wall Street also engaged in suspect securitizations of some credit card receivables, auto loans, bank trust preferred securities, commercial real estate loans, and a variety of corporate loans.

**When asked whether or not certain individuals had done anything illegal, I responded that I did "not think anyone did anything illegal, because Congress did not pass laws to make it so," because I did not want to scapegoat individuals. I should have said: "That is up to the Department of Justice to determine."

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2009 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife